In the realm of government-sponsored enterprises (GSEs), the Farm Credit System (FCS) rarely finds itself in controversy's spotlight. And it is too easy for mortgage lenders to overlook this GSE: Its 1971 Congressional mandate limits its home mortgage lending activities to towns with populations of 2,500 or less, thus keeping it fixed in the tiniest corners of rural America.Impac
Â Â Â However, the FCS is seeking a new mandate. But this proposed change is raising a storm with many bankers, who see the GSE's actions as a major disruption of the current marketplace.
Â Â Â The crux of the controversy is HORIZONS, a three-part initiative that the FCS is seeking to incorporate into the 2007 Farm Bill currently being hammered on in Congress. The new bill will replace the current federal legislation that is set to expire on September 30.
Â Â Â Two of the three HORIZONS initiatives have not raised an ounce of complaint among residential mortgage lenders: a proposal to increase competitive credit options for farm- and fishing-related businesses and a request to readjust the FCS' minimum stock purchase requirements. The third part, however, is stirring a brouhaha: allowing the FCS to make mortgage credit available in communities with populations up to 50,000.
Â Â Â For Ken Auer, president and chief executive officer of the Farm Credit Council, HORIZONS addresses a much-needed updating of what constitutes rural America. He cites the U.S. Department of Agriculture as an inspiration for the change.FannieMac
Â Â Â "The system's housing authority that was put in place in 1971 is the same definition which we operate with today on rural home mortgage lending," he says. "Over that period of time, multiple statutory changes have been made on what is a rural area. Even the USDA's own rural housing definition has changed."
Â Â Â Auer adds this aspect of HORIZONS fits into the FCS' mission. "The Farm Credit System is not now and never has been a lender of last resort," he says. "It is our view that there is a growing need for competitive mortgage products and we have a role to play in that."
Â Â Â However, at least two national banking associations have openly questioned Auer's assertions regarding the need for competition – particularly the brand of competition presented by the FCS.
Â Â Â "HORIZONS is about expanding the powers of the FCS," says Mark Scanlan, director of the Office of Agriculture and Rural Policy at the Independent Community Bankers Association (ICBA). "FCS is unique in that it is the only GSE that competes against the private sector in the retail market. And they're very aggressive in the ag markets."Â Scanlan worries the HORIZONS proposal will create a new playing field that is anything but level. "FCS will be competing against banks for mortgage loans, but they'll be using their GSE tax advantages. This could force a lot of banks out of business, resulting in fewer sources of credit for people in rural America."
Â Â Â Scanlan also questions whether there is even a call for the expansion of FCS' lending range.
Â Â Â "There is simply not a lack of mortgage lenders for cities of up to 50,000," he says.
Â Â Â John Blanchfield, director of the Center for Agricultural and Rural Banking at the American Bankers Association (ABA), echoes Scanlan's concerns. "We don't think Congress ever intended Farm Credit to be doing those things," he says. "Other GSEs go through the private capital business, but Farm Credit is the only one that's a direct lender. But they have tax and funding advantages that banks don't. What if Fannie Mae were to become a direct lender?"
Â Â Â Blanchfield also points out that under HORIZONS, FCS has no restrictions on the size of the mortgages it can originate. "Farm Credit's lending limit is $750 million," he says. "So Donald Trump could get his damn house financed through Farm Credit!"
Â Â Â For Ken Auer at the Farm Credit Council, the response by the banking associations was not unexpected.
Â Â Â "They are not enthused about anything we do," he says, with a laugh. "They are the competition of the Farm Credit System. If we say something is black, they'll say it's white. It's not a surprise to us that they're saying everything is working hunky-dory."
Â Â Â As of this writing, the 2007 Farm Bill is still being pieced together. Auer is hopeful that the HORIZONS proposals will be part of the final legislation.
Â Â Â "I think it's been well received," he says of the congressional response to the proposals. "Folks recognize that statutory provisions that are 36 years old ought to be provided greater flexibility under the law to serve their communities."
Â Â Â However, ICBA's Scanlan is confident HORIZONS will stay on the horizon and not intrude closer to today's marketplace. "This will not be in the new Farm Bill," he says. "It's going to be a fight and we're going to try to get Congress to work against it."
Â Â Â And ABA's John Blanchfield sees the inclusion of HORIZONS in the Farm Bill in somewhat fatalistic terms: "It will be over a lot of dead bodies – including mine!"