Federal Agricultural Mortgage Corporation

Pursuant to a congressional request, GAO reviewed the: (1) issues the Federal Agricultural Mortgage Corporation (Farmer Mac) faced in facilitating the creation of a secondary market for Farmers Home Administration (FmHA) guaranteed loans; and (2) impact of such a market on the government's exposure to risk.

GAO found that: (1) Farmer Mac created the Farmer Mac II program to establish a continuing, predictable, and competitively priced secondary market in which lenders could sell the guaranteed portions of their FmHA guaranteed loans; (2) FmHA-guaranteed loans would be difficult to combine into marketable pools, since they lacked such common characteristics as loan interest rates, maturity dates, and payment dates; (3) agricultural banks are currently well positioned to extend credit and may not need additional liquidity offered by Farmer Mac II; (4) due to pooling and liquidity problems, the number of FmHA-guaranteed loans may not be large enough to support a secondary market; (5) the Farmer Mac plan to purchase loans and offer lenders a management premium may place Farmer Mac II at a competitive disadvantage with the existing ad hoc secondary market, since sellers in the ad hoc market earn a return over the life of the loan; (6) the success of Farmer Mac II will likely depend on such advantages as providing a uniform infrastructure for selling loans and securities, and a guarantee of timely payment of principal and interest to investors; and (7) such actions as lenders refinancing loans to existing customers who are financially stressed and improper FmHA management of guaranteed-loans could increase the government's risk exposure.