The joke used to be “I’m from the government and I’m here to help.” But in the case of Farm Service Agency’s farm loan and guarantee program, bankers at the Ag Bankers conference last week had only glowing things to say about working with FSA.
“Currently, funding is available and FSA has worked to streamline the process,” said Mike Hein, vice president of Liberty Trust and Savings Bank in Durant, Iowa. “There was a big, big backlog for quite a few years, but the new farm bill has made funding available, and it’s helped many banks reach out to farm customers.”
Beginning farmers are the most vulnerable to an economic downturn in agriculture because they generally have little equity and work with thin profit margins. Farmers under 35 remain the highest-leveraged segment of agriculture, with an average 19% debt-to-asset ratio that hasn’t shrunk in the past 20 years. Recognizing this, Congress increased its funding in the 2014 farm bill for beginning farmer programs through FSA.
Now, beginning farmer mortgage rates run as low as 1.5% on a portion of real estate purchases. Favorable rates and terms on operating loan guarantees also keep credit more affordable.
The beauty of FSA loans is they can be structured with flexible terms — interest-only, uneven payments, balloon payments, etc. “For example, you can have a seven-year loan with interest only for two years,” explained Randi Sheffer, chief for FSA’s guaranteed loan branch. “We’ve worked hard to turn USDA into the ‘lender of first opportunity,’ rather than the ‘lender of last resort.'”
The loan maximum for a guaranteed operating or real estate loan is $1,392,000, adjusted annually for inflation. The term can be written for one to 40 years.
“Interest rates on operating loan guarantees have ranged between 5% and 6% in our office,” said Maureen Mausbach, FSA farm loan manager in David City, Neb. For example, Nebraska State Bank in Oshkosh, Neb., offers guaranteed operating loans at 4.95% for qualified farm borrowers, according to Blake Howsden with that bank.
REAL ESTATE IS REAL DEAL
Any beginning farmer who can pay a 5% down payment on a farm can borrow the remaining 95% at very favorable rates using USDA loan programs. Forty-five percent of the land value (maximum $300,000) can be provided by FSA in a second position with an interest rate of 1.5% over 20 years, with the remaining 50% loaned by the bank in a first position. The bank’s portion can be with or without an FSA guarantee.
“Farm ownership loans with a 30-year amortization generally are now running 5% to 6%, depending on the other terms (such as balloon payments and size of down payment),” explained Howsden.
Kent Ketteler with Bank of the Valley in Bellwood, Neb., promotes the FSA loan programs for fathers bringing their sons or daughters into the farm operation. “Sometimes a father will buy land at an auction and then sell it to his on-farm son or daughter who qualifies for a FSA Direct Farm Ownership loan.
“The blended interest rate of these 95%-financed farm loans when the bank works with the FSA program is very favorable to the borrower,” said Howsden.
FSA charges a 1.5% fee, but most lenders said that was not a deal breaker. “Small Business Administration charges a 3% fee, which is outrageous and makes us uncompetitive to other lenders,” observed a banker in the audience at the conference. Ketteler echoed that sentiment, “We’ve had SBA loans and that agency has been extremely difficult to work with.”
Recent regulations, effective Nov. 7, allow FSA to accept multiple entities in a farm operation to meet the farming experience requirement. This accommodates farm operations that have separate operating entities and land-owning entities.
“Many banks use the same credit analysis software as FSA, and the turnaround for approval of a loan guarantee can be overnight with our local FSA office,” said Ketteler. The bank still services the entire loan, but by passing off the risk and the need to cover the entire loan, local banks have more money to lend.
The FSA’s Mausbach advised bankers to meet their local FSA staff. “Give us a call before your put the loan package together. I can give suggestions that can make the package work,” said Mausbach. In FSA’s case, that’s no joke.