UNDER SECRETARY

DEPARTMENT OF THE TREASURY                         WASHINGTON                        July 17, 1997

The Honorable Ted Stevens
Chairman
Committee on Appropriations
United States Senate
Washington, D.C., 20510-6025

Dear Mr. Chairman:

I understand that Senator Bennett plans to introduce an amendment to the Department of Agriculture's appropriations bill that would expand the eligible activities of the Federal Agricultural Mortgage Corporation (Farmer Mac). I am writing to express the Administration's opposition to this amendment.

Congress established Farmer Mac in 1988 primarily to provide a secondary market for agricultural real estate loans. Since its inception, Farmer Mac has struggled to fulfill its public purpose. Last year, Congress enacted significant changes to Farmer Mac's charter that were designed to enhance its ability to satisfy its public purpose.

The expansion envisioned by the amendment would take Farmer Mac farther afield from its original purpose and engage it in activities totally unrelated to agricultural real estate loans. As we understand it, the proposal would permit Farmer Mac to purchase (for its own portfolio or to securitize):

• loans to a rural small business concern for a purpose specified under section 7(a) of the Small Business Act;

• small business loans as defined by the bank regulatory agencies and for a rural area; and

• rural business loans eligible for guarantee by the Secretary of Agriculture under section 310B of the Consolidated Farm and Rural Development Act.

The program would terminate on October 1, 1998 and the total amount of loans purchased under the program may be as much as $1 billion.

The proposal directs Farmer Mac, not its regulator or some other federal entity, to determine eligibility criteria for loans purchased. In implementing these new powers, the proposal would also waive certain requirements imposed on Farmer Mac's existing activities, including requirements to register with the Securities and Exchange Commission debt issued to fund these loans, or securities issued representing an interest in these loans. It also appears that, for business added under this program, Farmer Mac would not have to meet risk-based capital requirements established by the Farm Credit Administration.

Farmer Mac is a government-sponsored enterprise (GSE), and like other GSEs receives valuable benefits from the federal government in exchange for engaging in activities thought to meet a specific public purpose. The subsidies it receives from its GSE status should be directed at areas where it has been demonstrated that private capital markets fail to adequately supply credit.

We strongly oppose the amendment because it:

• puts Farmer Mac directly in competition with private sector firms establishing secondary market activity for small business loans;

• redirects Farmer Mac into lines of business for which it has no expertise, and which are unrelated to its current activities of purchasing agricultural real estate loans, rural housing loans, and certain loans guaranteed by the Department of Agriculture; and

• increases the distribution of federal subsidies through Farmer Mac's GSE status without adequate focus, limit, or controls.

Such a dramatic change in Farmer Mac, at a minimum, deserves a full public hearing and debate. Because of the federal subsidies involved, the implications for taxpayers must be carefully considered before any expansion of Farmer Mac's activities be enacted. Therefore, I urge the Committee not to expand Farmer Mac's activities until such proposals may be carefully and fully considered.

I am sending an identical letter to Senator Byrd.

Sincerely,

/s/

John D. Hawke, Jr.
Under Secretary for Domestic Finance

cc: Senator Robert F. Bennett