In 1908, President Theodore Roosevelt commissioned a study of agricultural product providers’ access to capital. As a result, the 12 Federal Land Banks were created, thus forming the first government-sponsored entity (GSE) in 1916. GSEs are targeted financial organizations designed to promote credit access where it otherwise may be lacking. Other GSEs are the Federal Home Loan Bank System (FHLB), Fannie Mae and Freddie Mac. Originally Sallie Mae, designed to fund education, had been a GSE, but lost that status when it was fully privatized in 1995.
Three of the remaining GSEs deal with residential mortgage lending. Only the Federal Land Banks, now known as the Farm Credit System (FCS), is not exclusively dealing with housing finance. The three housing-only GSEs — FHLB, Fannie Mae and Freddie Mac — have remained true to their mission. They do not lend directly to consumers. They lend only to or through other retail institutions, including banks, thrifts, credit unions, insurance companies and independent mortgage companies. In other words, they are wholesale providers of capital to those aforementioned retail lenders. They serve a unique, noncompetitive, partnership relationship that finances the bulk of the housing mortgage market.
The Farm Credit System, by contrast, is a retail competitor to companies that lend to the end user, in this case farmers and ranchers. The FCS enjoys the same kind of access to the capital markets as do the three housing GSEs, but it does not use this market advantage to support the for-profit lending marketplace. Consequently FCS is a formidable competitor to banks and other retail lenders. And, as if the access to capital were not enough of an advantage, the Farm Credit System, as a GSE, enjoys a tax rate on its profits equal to about one-tenth that paid by banks!
I do understand that FCS is a member-owned cooperative whose owners are the farmers and ranchers it lends to. But the purpose of GSEs is to create credit access where it might otherwise not be available. That could be done much more efficiently by working with and through traditional financing institutions, such as banks.
The problem has been exacerbated in the past few years, as FCS has expanded its rules and is now making rural mortgages, plus commercial and retail loans for shopping centers and multifamily apartment complexes.
Congress is charged with overseeing all laws it passes. It does a poor job of it. FCS would be a good place for Congress to start. FCS has outlived its intended purpose and should, as Sallie Mae was, be separated from GSE status and subjected to the same regulatory and tax structure as banks.