A Study of the Risk of Issuing FSA Guarantees on Contract Land Sales to Beginning Farmers

Risks associated with guarantees of land contracts are expected to be greater than guarantees of loans made by commercial lenders. Farmers utilizing seller-financing have greater debts, less cash flow, less equity in real estate, and less solvency than farmers utilizing regular FSA guarantees. Consequently, defaults and loan loss levels are expected to be 50 percent higher than loss rates on guaranteed loans made by commercial lenders. In addition, ambiguities in real estate laws concerning the administration of land contracts would likely result in higher servicing and liquidation costs. Therefore, if the contract land sale guarantee is structured as the current program, the costs per dollar lent would be much higher than for traditional guarantees. Guaranteeing the payment rather than the principal could reduce risks associated with guarantees of land contracts. Under this alternative FSA would make a guarantee to the seller equal to one annual installment which would be paid upon default by the buyer. Because total losses are limited to an amount equal to one or two annual installments, this alternative would greatly limit potential losses. However, the frequency of losses for seller financed loans would be greater than if this option was used on regular guarantees. In summary, FSA guarantees of land contracts should enable a limited additional number of beginning farmers to acquire farmland. As long as losses are limited, the risk associated with the issuing land contract guarantees should not be notably greater than for losses occurring in the traditional guarantee program.