More Dollars For Loan Guarantees

By | April 23, 2014

Many bankers realize that their otherwise creditworthy borrowers are suffering through financial strains that may be only temporary. But the lenders insist they may have choice but to liquidate or foreclosure on the loans. In that event, a farmer could be forced to sell his farmland on an already depressed market in order to meet his scheduled loan payments.

But if the U.S. Department of Agriculture pledges to cover losses on farm loans through federal guarantees, bankers migth be more willing to furnish farmers with easier loan terms untill the agricultural economy improves.

“The loan guarantees are not a bailout for banks or farm producers,” Thomas H. Olson, president of the IBAA’s agricultural section, told members of Congress last month. He said the guarantees can often keep bankers in the business of financing farmers who are “financially strained but have the apparent capacity to survive if givn time.”

The program is by no means a permanent cure-all, but its supporters view U.S. loan guarantees are as low-cost method for surviving a temporary crunch in the farm sector.

When the government guarantees a farm loan, it generally commits itself to covering 90% of a loan’s face value if the debt proves uncollectible. $1 Billion Goal

But supporters of the program say its actual costs to the government amount to far less than total available loan guarantees. Based on recent history, the IBAA projects that $1 billion in farm production loans would cost the government only $55 million in losses over three years.

The indepedent bankers set out to win legislation that would provide agricultural bankers with $1 billion in federal loan guarantees for 1985 and the balance of this year. And at the moment, IBAA officials say they’re on the verge of a “majority victory.”

Here are three reasons why Washington is likely to pump about $900 million into the farm loan guarantee program over the next year and a half:

* The Senate is widely expected to approve an agricultural appropriations bill (H.R. 5743) that would arise the level of available federal loan guarantees for fiscal 1985 to $650 million. Earlier this summer, the House passed its own version of the bill, which would provide only $150 million in the farm loan guarantees in 1985. The two chambers must now iron out their differences in an upcoming conference committee.

* The House last Tuesday approved a supplemental funding bill (H.R. 6040) that would provide, among other things, another $150 million in federal farm loan guarantees for the rest of this year. The Senate is expected give its okay to that measure soon.

* The Departmen of Agriculture last month decided to transer $100 million from another program into the federal loan guarantee program.

The Reagan administration does not support an expanded loan guarantee plan, but the measures are likely to pass anyway because they are supported by both banking and farm interests. Thus far, the White House has not actively fought the measure. FHA Lending

The independent Bankers Association of America and the American Bankers Association — two influential bank lobby groups — both support the expanded loan guarantee program, but they disagree on whether the government should continue its current involvement in direct farm lending.

The IBAA argues vehemently in favor of more direct lending by the Farmers Home Administration in addition to the loan guarantees for private lenders. Direct U.S. loans, the IBAA says, can provide badly needed lower interest rates and other advantages not available from guaranteed loans.

But the ABA, which generally represents larger banks, favors a decrease in FHA direct lending as a means of cutting the government’s budget deficit. The group believes the lower interest rates resulting from a balanced budget would be the greatest blessing to farmers.

Kenneth Lee, the ABBA’s agricultural specialist, acknowledged that direct credit should continue to be employed for “those who can’t get credit from private sources but have a reasonable chance of surviving.”

But the trade group believes much of the direct government lending is excessive, amountng to nothing more than “throwing good money after bad.” Said Me. Lee: “We cannot save all farmers in this country, just like we cannot save all banks in this country.” Support from Both sides

Weldon V. Barton, the IBAA’s agricultural specialist, said his group expects both houses of Congress to adopt the $650 million loan guarantee program — or something similar — before they begin their week-long recess Friday for the Republican nominating convention in Dallas.

In both the House and Senate, the loan guarantee program has drawn support from both sides of the political aisle.

“These guarantees will enable commercial lenders, in many cases, to continue forebearance and refinance loans to farmers who cannot service their debt as presently structured, “said a bipartisan group of 17 senators in a recent letter to Sen. Thad Cochran, who heads the subcommittee on an agriculture appropriations. The first signature on the letter was that of Sen. Walter D. Huddleston, a Kentucky Democrat, who has led the push for the guarantee program in the Senate.

The lawmakers pointed out that the federal guarantees can reduce the number of farm loans that bank examiners might otherwise adversely classify as problem loans.

In recent months, members of Congress and state officials have urged commercial lenders not to take strong steps against financially strapped borrowers in the farm region. And in turn, Federal reserve Chairman Paul A. Volcker has asked his field examiners to show mercy, at least for the moment, on banks lending to hard-pressed farmers.