Much has been written in the press the last few months about government-sponsored enterprises or GSEs. What are they? And how do they relate to Farm Credit?
A GSE is a financial institution created by Congress to serve a specific sector of the economy that Congress believes is underserved. The Farm Credit System was the first GSE, created in 1916, to aid farmers and ranchers.
Congress created three subsequent GSEs to aid home buyers: the Federal Home Loan Bank System (FHLB) in 1932; the Federal National Mortgage Association (Fannie Mae) in 1938; and the Federal Home Loan Mortgage Corporation (Freddie Mac) in 1970. The three housing GSEs have grown much larger than Farm Credit. In fact, this graph shows their total assets as of the end of 2007:
GSEs have been in the news because the federal government placed Fannie Mae and Freddie Mac into conservatorship on September 7, 2008. The government took this action because of the weakening financial condition of Fannie and Freddie, which resulted from the bursting of the housing bubble and the subsequent mortgage financial crisis. Fannie and Freddie are now owned and operated by the government.
The FHLB, a system of 12 institutions, is also showing signs of stress, and at least three of its institutions have indicated possible problems with meeting capital standards.
What about Farm Credit?
The Farm Credit System required government assistance in the 1980s, but reported profits every year since 1988. The System recently reported 2008 earnings of $2.9 billion. Capital, as a percentage of total assets, declined in 2008 from 14.2 percent to 12.7 percent due to loan growth. But compare the System’s capital position to the 4.2 percent capital position for the FHLB, the strongest of the housing GSEs, at the end of 2007.
Although Congress created these four GSEs, it did not give each the same oversight and regulation.
- Congressional oversight of the Farm Credit System is by the House and Senate agriculture committees and regulatory oversight is delegated to the Farm Credit Administration (FCA). FCA is an independent federal agency, which was given strong regulatory authorities — such as the authority to place a regulated entity into conservatorship or receivership — as a result of the System’s federal bailout in the 1980s.
- Congressional oversight of the housing GSEs is by the House and Senate banking committees. Before July 2008, two separate entities had regulatory oversight: one for the FHLB and one for Fannie and Freddie. And neither had strong regulatory authorities. In July 2008, due to the worsening financial condition of the housing GSEs, Congress combined regulatory oversight of the three housing GSEs into the Federal Housing Finance Agency (FHFA) and gave the new agency strong regulatory authorities. Less than six weeks later, the FHFA placed Fannie and Freddie into conservatorship.
We in the Farm Credit System believe that the current regulation of the System is effective and does not need to be changed. If proposals come about in Congress to change our regulation, we may ask for your support to keep congressional oversight with the agriculture committees and regulatory oversight with the Farm Credit Administration.
UPDATE: Please see this post for 2008 financial results for these GSEs.