The Federal Agricultural Mortgage Corporation, commonly known as Farmer Mac, is a federally chartered instrumentality of the United States. It was established in 1988 to create a secondary market for mortgages secured by agricultural real estate and rural housing. It is owned by financial institutions, insurance companies and the Farm Credit System. Farmer Mac’s corporate head office is located in Washington, D.C.
Farmer Mac purchases Qualified Loans secured by agricultural real estate or rural housing or guaranteed by the Farmers Home Administration, groups them together to form pools of mortgage loans, and issues securities against these pools (Farmer Mac I Program). These securities represent undivided ownership interests in pools of mortgage loans meeting its standards. In addition, Farmer Mac guarantees the timely payment of principal and interest to the investors in its securities. This helps to attract new capital for financing of agricultural real estate and rural housing. By doing this, Farmer Mac serves to create a secondary mortgage market for agricultural and rural housing loans in a manner similar to that performed by FNMA, GNMA, and Freddie Mac for residential housing loans.
Loans eligible for the Farmer Mac I program must meet Farmer Mac's underwriting standards and borrower and property characteristics. The originators of these loans traditional are agricultural real estate and rural housing lenders and financial institution who own the required amount of Farmer Mac voting common stock. The lender, who originates the loan, usually continues to service it after it has been sold to a Farmer Mac pool. The Farmer Mac program enables a lender to act as a mortgage banker and to create an ongoing servicing fee in addition to an origination fee.
In the Farmer Mac II Program, Farmer Mac guarantees the timely payment of principal and interest of securities backed by pools of portions of agricultural and certain other loans. Farmer Mac buys Guaranteed Portions of mortgage loans guaranteed by the Farmers Home Administration (the FmHA) and Rural Development Administration (RDA) Business & Industry (B&I) loans. It groups them into pools, and issues securities backed by these pools. The original lenders continue to hold the unguaranteed portions of these loans and to service the loans. Any participating lender in the FmHA guaranteed loan program or subsequent holder of Guaranteed Portions is eligible to pool loans and to issue securities. Unlike the Farmer Mac I Program, the Farmer Mac II Program has no Farmer Mac stock ownership requirement for participation.
Lenders may sell Guaranteed Portions to Farmer Mac for cash or exchange them for a Farmer Mac II Guaranteed Security. In either case, sellers may receive a Management Premium, as well as earn a servicing fee on the Guaranteed Portion sold. Lenders remit the payments, which they collect on the Guaranteed Portions sold, net of their servicing fee, to Farmer Mac's trustee, who pays the investors.
In the Farmer Mac II program, the mortgage originator contacts a Farmer Mac certified Pooler in order to obtain an advance commitment to purchase the loan. The originator then makes the loan to the borrower and sells the mortgage to the Pooler. The Pooler combines many such Qualified Loans to form a pool meeting Farmer Mac standards. Then, he applies to Farmer Mac for a guarantee on "senior" securities backed by the pool. If Farmer Mac is satisfied with the quality of the pool and the structure of the securities, it provides a guarantee. This is a guarantee of timely payment of principal and interest to the investors, who purchase the senior securities, which have been issued by the Pooler.
The Farmer Mac guaranteed mortgage-backed securities issued by the Pooler have a total value equal to 90% of the value of the pool. The remaining 10% of the pool is represented by a "subordinated interest" or a cash reserve held by the Pooler or the Originators. Both the 90% senior portion of the loan guaranteed by Farmer Mac and the 10% subordinate interest are sold to institutional investors. Payments from the mortgage loans in the pool are allocated first to pay the investors, who own Farmer Mac guaranteed senior securities, and secondly to the subordinated interest. The subordinated interest bears the first risk of any loss on any delinquent loans in a pool, up to 10% of the original principal balance of the pool. If mortgage payments do not fully cover payments to the investors, who purchased the guaranteed senior securities, and the subordinated interest has been exhausted, Farmer Mac may be required to intervene to ensure that the purchasers of the guaranteed securities receive their principal and interest in a timely fashion.
