FAMC Comment Letter Clarification response 8-13-10.pdf by vbd19928

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									Federal Agricultural Mortgage Corporation
1133 Twenty-First Street, N.W. ■ Washington, D.C. 20036
202-872-7700 ■ FAX 202-872-7713
800-879-FARM ■ www.farmermac.com


                                                          August 13, 2010

   Via Electronic Mail to reg-comm@fca.gov
   Mr. S. Robert Coleman
   Director, Office of Secondary Market Oversight
   Farm Credit Administration
   1501 Farm Credit Drive
   McLean, VA 22102-5090

   Re:        Proposed Rule: “Federal Agricultural Mortgage Corporation Funding and Fiscal Affairs;
              Risk-Based Capital Requirements” 12 CFR Part 652, RIN 3052-AC51, January 22, 2010

   Dear Mr. Coleman:

           The Federal Agricultural Mortgage Corporation (“Farmer Mac”) is pleased to have this
   opportunity to respond to questions raised by the Farm Credit Administration (“FCA”) in
   response to Farmer Mac’s letter dated April 22, 2010 (the “April 22 Letter”) regarding the
   proposed amendments to the risk-based capital stress test (“RBCST”) applicable to Farmer Mac.
   In correspondence from FCA on July 29, 2010, 1 FCA requested additional clarification regarding
   Farmer Mac’s statement in the April 22 Letter, “[f]urther, it seems incongruous that there would
   be different credit loss expectations depending on whether Farmer Mac accounted for the same
   loan as being on- or off-balance sheet because the fundamental credit risk exposure would be
   identical regardless of the accounting treatment for the loan.” Specifically, FCA requested that
   Farmer Mac clarify and provide additional information regarding the differences between the
   pricing structure and guarantee fee structure of assets accounted for as on-balance sheet and off-
   balance sheet, respectively, which differences Farmer Mac had suggested in the April 22 Letter
   could result in different capital requirements for similarly situated assets under the proposed
   amendments to the RBCST.

       The statement in question in the April 22 Letter was intended to highlight the fact that simply
   multiplying the total spread or guarantee fee by a factor could result in a disparate application of
   the RBCST to loans of comparable credit quality, and furthermore could distort transaction
   economics and incentives, at least from a RBCST credit loss perspective. The balance sheet
   classification of a program asset is relevant from the perspective of the pricing (i.e., the
   guarantee fee or spread earned) primarily due to return on equity requirements. For a given loan,
   the credit risk component of the pricing would be identical regardless of the balance sheet

   1
           Email from Joseph T. Connor, Associate Director for Policy and Analysis, Office of Secondary Market
   Oversight, Farm Credit Administration, to Timothy L. Buzby, Senior Vice President – Chief Financial Officer,
   Federal Agricultural Mortgage Corporation, dated July 29, 2010.
Mr. S. Robert Coleman
Director, Office of Secondary Market Oversight
Farm Credit Administration
August 13, 2010
Page 2

classification because the credit risk assumed is the same. If the return on equity pricing is
determined using current statutory minimum capital requirements (or any other capital
requirements set using a differential approach to capital allocation) and an identical return on
equity target is the goal, then the portion of the pricing attributed to the return on equity
component is necessarily larger for an on balance sheet loan than for an off balance sheet loan.
Using the proposed approach of using current guarantee fees or spread to determine RBCST
credit losses, it is possible that two loans with similar credit risk to Farmer Mac would have
unequal capital requirements in the RBCST due solely to the accounting treatment of the loans.
In addition, if a loan is held on-balance sheet for a period of time and later securitized (off-
balance sheet) it would change the capital requirements in the RBCST due solely to the changing
accounting treatment – notwithstanding that the loan had not otherwise changed.

    Currently, the vast majority of the rural utilities business is held by Farmer Mac on-balance
sheet. However, future improvement in the securitization markets or changes in the products
offered by Farmer Mac to its customers could create real economic incentives – to Farmer Mac
and the banks and lenders to whom Farmer Mac provides liquidity, lending capacity, and capital
and risk management – to move rural utilities business off-balance sheet. From a credit risk
perspective, the capital impact in the RBCST should not favor one rural utilities transaction
structure over another when the credit risks assumed by Farmer Mac are the same.

        Farmer Mac appreciates FCA’s thoughtful consideration of the comments and proposals
that Farmer Mac has presented in this letter and in the April 22 Letter and would be pleased to
provide further detail or explanation at your request.


                                            Very truly yours,




                                            Michael A. Gerber
                                            President and Chief Executive Officer

								
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