What it means
FmHA grew out of earlier federal programmes designed to help farmers during hard times. Its mission was to lend to people who could not obtain credit from banks on reasonable terms, such as beginning farmers and those hit by bad weather.
It offered direct loans, loan guarantees and, in some cases, subsidised interest rates. The agency lent for a wide range of purposes.
These included buying farmland, financing equipment and operating costs, building rural homes and water systems, and supporting small rural businesses. Rural housing and community loans meant it was involved far beyond farming alone.
Financially, the agency was a source of subsidised credit. Because the borrowers were riskier and the rates sometimes below market, it carried significant loan losses.
In periods of farm stress, many borrowers fell behind, and the government had to write off or restructure large amounts of debt. Following a reorganisation of the Department of Agriculture in 1994, the agency was closed.
Its farm lending was taken over by the Farm Service Agency, and its rural housing, business and utility work went to Rural Development agencies. Older documents, however, still refer to FmHA loans, and some loans made under it remain outstanding.
For a finance reader, FmHA is a case study in the trade-offs of government lending. Such lending can support people the market ignores, but it also blurs the line between credit and subsidy and can create a large hidden cost for taxpayers.
Modern programmes put more emphasis on guarantees, which share risk with private lenders, than on direct loans. When you see FmHA in an old loan document or a historical article, treat it as a reference to the predecessor of today's agencies.
Check which agency now holds or services the loan, since the right contact and rules will be those of the successor.
In practice
Real-world examples.
Example
A young farmer with little credit history wants to buy his first 100 acres. Banks decline him, but a government lender agrees to finance part of the cost at a lower rate. The loan lets him start farming on his own.
Example
A rural family needs to replace a failed well and septic system. A government agency lends them the money at a low rate, with repayments spread over many years. Without it, the home would be unusable.
Example
A historian studying farm debt in the 1980s finds that many family farms were behind on loans from the agency. She uses its records to understand the scale of the crisis and the policy response that followed.
Formula
Calculation
Annual interest subsidy = loan principal x (market interest rate - subsidised interest rate)
Suppose a farm family receives a $100,000 loan at a subsidised rate of 4% when the market rate for a similar borrower is 8%. Annual interest at the market rate = 100,000 x 0.08 = $8,000. Annual interest at the subsidised rate = 100,000 x 0.04 = $4,000. The yearly subsidy = 8,000 - 4,000 = $4,000, or 100,000 x (0.08 - 0.04) = $4,000. Over a 10-year period with no repayment of principal, the subsidy would total $40,000.Case study
Seen in the real world.
Pinewood Farm is an illustrative, fictional family farm that borrowed $150,000 from a government rural lender after a severe drought wiped out one season's income. The loan carried a subsidised rate of 5% when banks were charging 9%.
The family used the money to buy feed and replant, and repaid in full over 15 years. The yearly interest saving compared with a bank loan was 150,000 x (0.09 - 0.05) = $6,000 in the first year, declining as the principal was repaid.
In this fictional story the farm returned to profit and later qualified for a normal bank loan. The lesson is that lender-of-last-resort credit can bridge a bad period, provided the underlying business is viable and the borrower graduates to commercial finance when it can. The family's accountant also noted that the subsidised rate made it easier to plan, since repayments were fixed and affordable even in a poor harvest year. When the loan was finally cleared, the farm used its clean repayment record to negotiate a bank loan at a competitive rate for new machinery.
Watch out
Common mistakes.
- Assuming FmHA still exists, when its functions were moved to successor agencies in the mid-1990s.
- Confusing it with the Farm Credit System, which is a network of borrower-owned lenders rather than a government agency.
- Treating subsidised government loans as costless, when the subsidy is paid by taxpayers and the losses can be large.
Questions
People also ask.
What replaced FmHA?
Its farm lending went to the Farm Service Agency, and its housing, business and utilities lending went to Rural Development agencies.
Who was eligible for FmHA loans?
Mainly farmers and rural residents who could not get credit on reasonable terms from private lenders.
Do FmHA loans still exist?
Some loans made under the agency remain outstanding and are serviced by its successors, so borrowers should check the current servicing agency named on their statements.
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