Community banks that make rural home loans could soon get a much-needed liquidity boost — but they might not like where it is coming from.
AgFirst Farm Credit Bank in Columbia, S.C., has received approval from its regulator to launch a three-year pilot test in which it will buy pools of rural home mortgages. It aims to create a secondary market for rural home loans where there essentially is none and, at the same time, diversify its assets and increase its own investment income.
Leon T. “Tim” Amerson, the $16.8 billion-asset AgFirst’s chief financial officer, said it hopes to start buying rural home mortgages by mid-June. He said it is in negotiations with mortgage lenders that would buy the loans from banks and other lenders, package them as securities, and sell them to AgFirst.
Rural housing advocates say AgFirst’s plan would address a liquidity need in rural America. Creating a secondary market for rural home loans would free up more funds for banks, credit unions, and other lenders to make more such loans, they say.
“Generally, anything that increases mortgage availability, including secondary-market activity, is a good thing,” said Leslie R. Strauss, a spokeswoman for the Housing Assistance Council in Washington.
Trade groups representing community bankers seem less enthusiastic about the plan, perhaps because many of the bankers view Farm Credit lenders as their archrivals.
The groups acknowledge that community banks face significant liquidity challenges — largely because their deposit base is shrinking as the rural population declines, and credit demands are increasing because of rising land costs. When asked about AgFirst’s plan, though, the Independent Community Bankers of America and the American Bankers Association both declined to comment.
Congress created the Farm Credit System in 1916 to ensure that farmers and ranchers had access to credit. Bankers have long complained that system lenders have strayed far from their mission and use their tax-exempt status to undercut banks on loan terms and cherry-pick banks’ best customers.
John Sorensen, the president and chief executive officer of the Iowa Bankers Association, questioned AgFirst’s intentions in setting up the program, because it lets AgFirst invest in loans outside of its territory.
“Our preference would be that they stay focused on assistance for small and beginning farmers,” Mr. Sorensen said.
Banks in Iowa already have secondary market outlets for loans, he said, because the Iowa Bankers Mortgage Corp., which his group established in the late 1970s, pools loans made by Iowa banks and sells them to Fannie Mae.
But rural banks in other states do not have that same option.
Joy M. Upchurch, AgFirst’s vice president of marketing, said it would not buy loans from banks directly. Instead, banks would sell the loans to a third party, which, in turn, would package the rural home loans and sell them as securities to AgFirst.
With this extra layer between banks and AgFirst, “banks don’t need to worry that Farm Credit is going to try to cross-sell to their customers,” Ms. Upchurch said.
The Farm Credit Administration, the system’s regulator, approved AgFirst’s plan May 10. Mr. Amerson said he hopes that AgFirst’s pilot test might encourage some larger lenders to take a more active interest in rural lending and thus give borrowers more options.
“What we’re trying to do is encourage the lenders who have clout in the market to pay attention to the rural market,” Mr. Amerson said.
At the same time, AgFirst is seeking to diversify its holdings. As a Farm Credit institution, it cannot lend outside its specified territory, but the program will let it buy securities backed by loans made anywhere in the county.
Still, AgFirst’s biggest challenge is finding a partner in the secondary market. Fannie Mae, Freddie Mac, and Farmer Mac all buy rural home loans, but none package and sell securities backed exclusively by those loans. And AgFirst cannot get its program up and running until a secondary-market player begins packaging these loans as securities.
Mr. Amerson said three large mortgage companies have said they are interested in assembling pools of rural home loans to sell to AgFirst, though he would not name names.
