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| Financial Freeze Hits Farm Loans
By Marcia Zarley Taylor
Raising Wall Street money to fund farm mortgages is a lonely job, but Jamie Stewart knows someone's got to do it.
Eighteen months ago, the CEO of the Federal Farm Credit Banks' Funding Corporation said his Jersey City office routinely sold $1.5 billion worth of 10-year bonds with just a few phone calls to its favorite investment bankers. Terms could be drawn up in 24 hours, and the money would be flowing into the Farm Credit System's pipelines in three days. Now Stewart can't muster the nerve to ask, let alone close the deal.
Though trillions of dollars of federal aid have helped thaw Wall Street funds for home mortgage markets, investors continue to shy away from the AAA-rated, long-term bonds needed to fund real estate mortgages, grain bins and machinery loans. In reality, the federal government's extraordinary intervention in bond markets the past few weeks competes with those private or cooperative lenders who sell bonds without federal assistance.
Stewart supplies a network of AAA Farm Credit lenders with $72 billion of farm real estate mortgages, plus another $90 billion in other credits. But institutional investors have been spooked after taking losses in supposedly low-risk securities like Fannie Mae preferred stock and don't know where the economy is headed, he said. Before their trade surpluses crashed, China and other Asian countries had been the biggest buyers of 10-year or longer debt, but no longer.
"Foreign central banks, insurance companies and pension funds are keeping their money short-term," Stewart said. "They don't want to lock in."
Trouble selling its portfolio of long-term farm loans on Wall Street prompted Farmer Mac, another government-sponsored agency, to announce a $354 million portfolio sale to Rabobank on Monday. Tom Stenson, chief operating officer of Farmer Mac, told DTN that the move was meant to increase the agency's liquidity and that "the securitization market has just frozen up."
While the Federal Reserve has announced plans to address Small Business Administration loans, auto loans and leases under the so-called Term Asset-Backed Securities Loan Facility (TARP), none of it is aimed to help farm credit. Virtually all farm mortgage lenders from Farmer Mac to insurance companies like Metropolitan Life and John Hancock just "can't get parties interested in lending long-term money at reasonable rates," Stenson said.
"It's the old flight to quality," Stenson explained. "People are nervous, and they're headed to Treasury bonds. They're looking for safety and sanity" even though the yields on government issues are near zero.
Rabo AgriFinance CEO John Ryan, who manages a farm real estate and operating loan portfolio of about $5 billion, feels the pinch of the higher cost of Wall Street funding too. The Fed hopes its actions will lower 30-year, fixed-rate home mortgages to about 4.5 percent, but Ryan doubts farm real estate rates can follow suit. For example, qualified Rabobank borrowers pay about 6 to 7 percent for 10- to 15-year mortgages today.
Those rates reflect that Rabobank's real cost of funds in global financial markets have climbed since last fall.
"No industry has escaped" the financial market's instability, Ryan said. Early on, some farm lenders might have mistakenly believed that the mortgage crisis would bypass Main Street and rural America. "But we have all have been impacted by various degrees," he said.
For the time being, if you're seeking a farm mortgage or long-term farm business loan, your best bet is to go short. "I can't give you a 20-year fixed rate mortgage right now, but I can give you a plenty of attractive five-year fixed rates," said Farm Credit's Stewart. | |
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