Can We Learn from the Agriculture Credit Crisis of the 1980’s?

Executive Summary Subprime Mortgage Crisis – Saving the Dream: Can We Learn from the Agriculture Credit Crisis of the 1980’s? Submitted by: Tim Watts, Watts and Associates, Inc., Jay Truitt, Policy Solutions, LLC, and Gus Schumacher, Former Undersecretary of Agriculture in the Farm and Foreign Agriculture Services The subprime mortgage crisis has threatened the dream of home ownership for many in the United States. A series of events leading to the agricultural credit meltdown in the mid-1980’s, similar to the current subprime credit crisis, was further fueled by a precipitous decline in agricultural land prices. In October of 1986, Congress enacted the Family Farm Bankruptcy Act and then, in January of 1988, passed the Agricultural Credit Act of 1987. These two Acts provided due process for borrowers exhibiting subprime characteristics and bailed out a major agricultural credit source. This legislation provided critical and timely liquidity relief, oversight, and due process that ultimately prevented a full meltdown of the agricultural credit system. Can we learn from this success? Are there lessons learned from the agricultural credit crisis of the 1980’s that can be applied to the current subprime credit meltdown? The agricultural credit crisis taught the small agricultural credit community that production agriculture real estate loans are only financially sound if the cash flow of the underlying operation supports the credit. Relying on real estate value increases to “pay” the loan was, and still is, self-deluding. Sound legislation based on economic and financial principles and an attendant liquidity infusion with “strings attached to the partakers of the bail out” allowed the market to “work itself out” of the subprime crisis in agriculture. In essence, with the liquidity infusion, the legislative mandate of “borrowers’ rights”, and the assistance of professionals, a trickle down and a bubble up synergistic relationship was deployed. Monetary assistance was not provided to farmers in terms of assistance in payments. The FDIC, the Federal Reserve, and Treasury could contract with an existing pool of professionals and potentially non-profit credit counseling to quickly and efficiently sort good loans from bad and with a national consistent comprehensive automated system that would provide an atmosphere of ground level oversight and implementation to provide the quickest and least expensive foundational piece of the subprime crisis resolution puzzle. This action, in conjunction with the liquidity infusion, could provide the trickle down and bubble up holistic solution needed to solve one piece of the subprime crisis puzzle. A quick, cogent, market driven, financially sound credit resolution process for borrowers may be the best foundational oversight possible. Recently, Democrats and Republicans teamed together and provided timely legislation that is providing a substantial liquidity infusion into the credit markets. Democrats and conservative Republicans could team together to use a very small fraction of the funds provided under the recent legislation to force oversight; national consistent guidelines for a comprehensive, consistent credit resolution process mandated before foreclosure. If the financial institution participated in the bail out, then there would be a mandated credit resolution process that provides ground level oversight. For the future, using this process (consistent analytics of net income available to service housing debt) previous to loans being sold into the secondary market will provide more sound financial pricing decisions. Perhaps the small credit crisis in agriculture can illuminate the way out of the current wilderness created by housing market subprime loans and credit swaps; if possible saving the American dream of owning a home. This material has been developed for the sole use of its recipients for use in developing progressive public policy and has exclusive ownership rights in part or all of its format and content. The content of this material, regardless of the format in which it is presented, including orally, in print, or electronically, may not be further disseminated without acknowledging the source. This material is protected by law. Copyright © 2008, 2009. All Rights Reserved.