Battered by losses on its investments in Fannie Mae and Lehman Brothers, the Federal Agricultural Mortgage Corp. is facing a capital shortage that could force it to reduce its role in providing a secondary market for farm mortgages.
The government-sponsored enterprise better known as Farmer Mac has already taken a $44 million impairment charge on its investment in Fannie preferred shares, which have lost much of their value since the government seized the mortgage giant. And last week Farmer Mac estimated that it would have to write off $48 million on its investment in Lehman securities. The investment bank filed for bankruptcy Sept. 22.
The GSE says it is working on a plan to shore up capital, but if it fails to do so, its regulator said it could order Farmer Mac to scale back programs that help banks and Farm Credit System lenders extend credit to farmers.
Farmer Mac would not comment for this story, but in a Sept. 22 filing with the Securities and Exchange Commission, it said it could not promise it would meet regulatory capital requirements by Sept. 30.
"Farmer Mac is moving forward to implement one or more strategies to restore its capital position," the filing said. "Farmer Mac cannot give assurances that it will be in compliance with its statutory minimum capital requirement."
The GSE also said it has hired a financial adviser to explore ways to restore capital, which could include selling assets, as well as preferred and common stock.
The sharp decline in its investments has spooked shareholders. Farmer Mac's common stock has lost more than 87% of its value since Fannie and its sister company, Freddie Mac, were taken over Sept. 5.
Unlike other institutions that have taken large capital hits on investments in the mortgage giants, Farmer Mac would not be eligible to write off its losses as part of the government's $700 billion rescue of the financial industry. A provision in the bill that allows for tax writeoffs would extend only to community banks. (In a surprise, the House rejected the bill Monday.)
The Office of Secondary Market Oversight, a department of the Farm Credit Administration, regulates Farmer Mac. The office's director, Robert Coleman, said the GSE must maintain minimum capital levels equal to 2.75% of its total balance sheet and 0.75% of the loans it guarantees. At June 30 it had $260 million of capital, exceeding its minimum by $40 million.
In its second-quarter report, Farmer Mac said it had $712.4 million in cash and cash equivalents that "can be drawn upon for liquidity needs." Mr. Coleman said using the cash reserves might be its best bet.
"Cash is the easiest way for them to raise capital here," he said. "If all of those options were to fail. and they do not have sufficient capital, there are several different levels of enforcement we could take."
On the light end of enforcement, the regulator could force Farmer Mac to adopt a capital restoration plan. It could also go as far as ordering the GSE to stop paying dividends, slow its growth, or even suspend programs.
"There are several different possibilities," Mr. Coleman said. "But we certainly want Farmer Mac in good shape as quickly as possible."
Farmer Mac's main function is buying farm mortgages from banks and Farm Credit lenders and selling instruments on those loans. It also buys the guaranteed portion of loans from the Department of Agriculture.
Unlike its cousins, Farmer Mac is not having issues with the asset quality of the loans it buys. It said in its SEC filing that programs "continue to perform well, with delinquencies remaining at historically low levels consistent with the continued strength of the U.S. agricultural economy." Only $8 million of the $9.5 billion of loans and guarantees it holds were more than 90 days past due.
Farmer Mac "is a critical piece in the farm real estate lending network," said John Blanchfield, senior vice president of the American Bankers Association. "We are keeping a watchful eye on it. … Our hope and expectation is that they can get it worked out."
Ken Auer, president and chief executive of the Farm Credit Council, a trade group for Farm Credit System lenders, echoed Mr. Blanchfield's sentiments.
"Our hope is that the tools remain available," Mr. Auer said. "Everyone is watching carefully."
Mr. Blanchfield said Farmer Mac offers two other programs that could be particularly useful, given bankers' current struggle with liquidity and capital. Through its AgVantage program, the GSE guarantees payment on mortgage-backed notes issued by banks. Last month it announced it would guarantee $475 million of agricultural mortgage-backed notes issued by Marshall & Ilsley Corp.
Another program guarantees loans held by banks to lessen capital reserves on those loans. BankWest Inc. in Pierre, S.D., has used that program for four years and has $35 million of its $160 million agricultural portfolio guaranteed, said Steven Bumann, the $710 million-asset company's chief financial officer.
Though BankWest is not overly reliant on the guarantee, halting the program could "potentially hamper our ability to grow a bit," Mr. Bumann said. "It wouldn't handcuff us, but it would take a tool or two away from us that helps us be more competitive."
