Pub. 6 2011-2012 Issue 4

www.nebankers.org 24 Extraordinary Service for Extraordinary Members. Bert Ely’s FARM CREDIT WATCH ® Shedding Light on the Farm Credit System, America’s Least Known GSE © 2011 Bert Ely Will “Operation Twist” Further Advantage FCS? O N SEPT. 21, THE FEDERAL RE- serve launched “Operation Twist” to bring down longer- term interest rates. Lower rates will enable the Farm Credit System (FCS) to refinance more of its debt at record-low rates, increasing its competitive edge over tax-paying banks and other private-sector lenders, espe- cially on real estate loans. Although longer-term rates, as evidenced by the yield on five-year and 10-year Trea- suries, have risen since shortly after Operation Twist was announced, the average yield on 10-year Treasuries in the third quarter of this year dropped to 2.41 percent from 3.20 percent in the second quarter and 3.46 percent in the first quarter. Five-year Treasuries showed a smaller but still significant decline, dropping to 1.80 percent in the third quarter from 2.06 percent in the first quarter and 2.14 percent in the second quarter. I fully expect the FCS to report substantial debt refinancing during the second half of this year as a result of these low rates. FCS Fails to Use Existing USDA Home Loan Program On Aug. 26, the Department of Housing and Urban Development (HUD) issued a proposed rule that would authorize “direct lending insti- tutions” of the FCS “to seek approval to participate in the Federal Housing Administration (FHA) mortgage insur- ance programs as approvedmortgagees and lenders” even though FCS now makes rural home loans that it holds in portfolio. As of June 30, the FCS had $5.63 billion of rural home loans on its books, about 3.2 percent of its total lending. Of course, as approved FHA lenders, FCS institutions would be able to shift the credit risk for such loans to the FHA. Most puzzling in the FCS’ pursuit of FHA lending authority is that the FCS barely utilizes a long-standing USDA rural-housing finance program, the Single-Family Housing Loan Guarantee Program (SFHLGP). Just three FCS institutions—two associa- tions and one Farm Credit bank—are approved SFHLGP lenders while hun- dreds of banks and thrifts participate in the program. None of the three FCS institutions were among the 146 lenders that have originated the most loans under this program. The FCS’ interest in becoming an FHA direct lending institution is espe- cially puzzling since the SFHLGP has very flexible lending criteria. In par- ticular, homebuyers financed under the SFHLGP can have incomes up to 115 percent of the area’s median income; they do not have to make a down pay- ment; and, there is no purchase-price limit and no mortgage insurance or minimum credit-score requirements. Of course, when FCS institutions hold in portfolio rural home loans they make, they can avoid the lending and documentation requirements estab- lished by USDA and FHA. However, the FCS bears the full credit risk for loans held in portfolio, which raises this question: Why is FCS trying to shift the credit risk of its rural home lending to the FHA when it seems unwilling to shift that risk to the USDA under its SFHLGP? Does the Farm Credit Administration (FCA) believe a larger amount of housing-finance risk can be driven out of the FCS through FHA lending rather than SFHLGP lending? FCS’ Growing Point-of-Sale Lender Hard to Find Where is AgDirect hiding? AgDi- rect is a limited liability partnership, or LLP, that is the successor to an initiative launched by FCS of America (FCSA), the Omaha-based FCS associa- tion that provides retail farm equip- ment financing outside of its four-state territory of Iowa, Nebraska, South Dakota, and Wyoming. The financial and operating structure of AgDirect comes into clearer focus when read- ing the second-quarter 2011 financial reports for FCSA and for AgriBank, the FarmCredit bank that funds FCSA. However, many questions remain about howAgDirect fits into the overall FCS picture and whether it is financing equipment purchases for borrowers who are not eligible to borrow directly from the FCS. According to AgriBank’s second quarter report: “We purchase 100 percent loan participation inter- ests in retail equipment financing from AgDirect LLP...which is cur- rently owned by three of our district associations and one association from outside our district. An association in the AgDirect program first purchases a participation interest in a retail in- stallment sales contract originated by an equipment dealer at the point of sale. AgriBank ultimately acquires a