Share this article

print logo

LOOSE U.S. FARM LENDING LEADS TO A HARVEST OF HEARTBREAK POLICIES WASTE BILLIONS; FARMERS LOSE THEIR LAND

Alan Slater was New York's Farmer of the Year in 1974. Now he lives in a hillside trailer off a dirt road in Cattaraugus County and hauls wood for a living.

Slater lost his farm in 1988.

The same year, the agency that gave Slater the award -- the Farmers Home Administration -- lost $13.8 billion.

That's a greater loss than any other government lending agency suffered that year, and more than twice what was lost in the much publicized scandal at the federal Department of Housing and Urban Development.

There's a direct connection between Slater's problems and the troubles at the Farmers Home Administration.

A six-month Buffalo News probe found that the agency -- created in 1935 to help struggling farmers -- has in many cases done just the opposite while losing billions of taxpayers' dollars. "We made money too available to too many people at too good a rate, and now we're paying for it," said Vance Clark, the agency's administrator from 1985 through 1988. "It's a hell of a big problem that Congress has not yet been willing to face up to."

Government audits paint a picture of an agency lending too much cash to too many farmers, leaving farmers burdened with crushing debts and taxpayers with losses approaching $40 billion. Those audits and interviews with dozens of Western New York farmers found that the agency:

Established loose lending standards that, for one group of borrowers studied, overestimated their ability to repay by 24 percent.

Encouraged Western New York farmers to borrow more money than they wanted in the late 1970s, sometimes to buy equipment that they didn't need. One farmer, for example, was encouraged to buy a sprinkler system to cool his cows.

Rescheduled thousands of its bad loans on terms that in many cases only delay the farmers' failure. The Farmers Home Administration's plight has attracted little attention in Washington thus far, but that could change soon. Congress is working quietly on some reforms, and President Bush has proposed a major revision of the program in his 1990 Farm Bill.

Congressional leaders -- who in the past have fought for loose lending standards at the agency -- now say a major overhaul could be in the works next year. They say the Farmers Home Administration issue is so sticky that they probably won't be able to address it in the same year that they pass the huge Complex Farm Bill, which will set farm price supports for the next five years.

But in New York, where farming remains the largest single industry, the Farmers Home Administration is already the talk of the barnyard. The talk is angry.

"At one time, they had this big push on for cheap money," said Slater, who lost his farm 33 years after he started farming. "They came to me and wanted my business, so I gave it to them. And I ended up with 100 percent of nothing."

That's what taxpayers are ending up with, too, said Danny Pepper, an Eden farmer and another borrower.

"The system just plain stinks," he said. "It's hard to believe. Millions of dollars of taxpayers' money are being squandered."

The Farmers Home Administration expects some of its loans to go bad and some of its farmers to fail. After all, the agency is the farmer's lender of last resort, where farmers go for a low-interest loan when all the banks turn him down. But recent lending figures at the agency are the worst in its history.

In the 2 1/4 years ending the last day of March, 6,519 farmers who borrowed from the farm agency have left farming for financial reasons.

A much larger number of the agency's 218,000 remaining farm borrowers are struggling. The General Accounting Office reported that, as of Sept. 30, delinquent borrowers owed 48 percent of the agency's $23.3 billion in outstanding loans.

"In many cases, the Farmers Home Administration has only delayed bankruptcy, rather than staved off bankruptcy," said Eddy LaDue, professor of agricultural finance at Cornell University. "All they've done is put farmers through one, two, five or 10 more years of hell."

The agency also has put the federal government further and further into debt. A General Accounting Office (GAO) audit found the fund that finances the agency's farm loans has lost $39.6 billion since its inception. And new Farmers Homes Administrator La Verne Ausman said the agency is seeking $5 billion from Congress this year to cover remaining deficits.

The root of the agency's problem is its lending standards.

A 1989 GAO study of 100 borrowers found that the agency had overestimated those farmers' ability to repay by 24 percent. And Inspector General audits found that of 88 agency borrowers studied, 43 would not have qualified for their loans if their real income and expenses had been taken into account.

Blame for the bad loans can be pinned on both government and borrowers.

The farm agency's lending standards allow farmers to obtain loans even if payments will stretch them so tight they won't have enough income to cover equipment replacement costs and emergency expenses. As a result, farmers can continue to borrow for crop expenses while their equipment falls apart, and one bad break can wipe out farmers.

The agency is now suggesting legislation that would force its farm borrowers to have a contingency reserve built into their business plans. Ausman, the agency's new administrator, said such a set-aside is necessary.

"You never know when the weather is going to go bad or when your cattle might get sick and start dying," he said.

Slater learned that lesson himself. In the early 1970s, he decided to follow the government experts' suggestion to modernize. He built two barns -- replete with skylights -- with the aid of the Farmers Home Administration and became so successful that he agency gave him its top award for New York farmers in 1974.

Slater's farm continued to do well until the early 1980s, when he borrowed another $100,000 to buy another 50 cows. As it turns out, those cows were infected with a virus, and 38 of them died.

Slater was left paying for them even though they were dead.

"There wasn't enough money to go around," he recalled.

Other debt-laden farmers make matters worse through their own deceit. That 1989 study of 100 borrowers found they overstated their farm income by an average of 18 percent and underestimated their family expenses by 10 percent.

One longtime Farmers Home Administration borrower in Chautauqua County, who is in danger of losing his farm through foreclosure, explained why farmers use faulty figures.

"Say you need a loan for operating expenses," said the farmer, who asked not to be identified by name. "This could be the only way to get it done."

The only other choice would be to do without and close the farm, and few farmers can bring themselves to do that.

"When you go out in those fields and look around, you realize that you've got your whole life tied up in the damned place," said the farmer, who has been farming for 25 years.

"When this is all you know, it's hard to walk away."

Just as desperation drives some longtime farmers to lie, naivete drives some honest beginners into debt.

Lee Milliman of Cherry Creek turned to the Farmers Home Administration after other prospective borrowers turned him down in 1984. At the time, Milliman figured, the agency wouldn't lend money to him if he were likely to have trouble paying it back. But as it turns out, the agency will lend money to farmers so long as their expenses (including repayments) don't exceed their income.

In other words, you don't have to show that you can make a profit to qualify for a Farmers Home loan.

That's a stupid policy, Milliman said.

"They shouldn't start a person out and give him loans right up to the point where he can't make it," he explained.

Milliman started his dairy farm with a debt of almost $5,000 per cow, and that's where his troubles began. Six years later, he now is struggling to get out from under a load of Farmers Home Administration debts that tops $300,000.

In retrospect, Milliman acknowledged that he shares some of the blame.

"We all make mistakes," he said. "Anyone who is in business has made mistakes."

But the Farmers Home Administration has made mistakes, too, he said.

"They should have made sure that I had a farm set up right, or they shouldn't have loaned me a nickel," he said. "As it stands, it's going to take me 10 years to get out of the hole they dug me in five years."

Farmers Home Administration officials now acknowledge that they've been too loose with their loans. They said the easy-money policies stem from the 1970s, when farm policy experts urged small farmers to build bigger and better farms. The reasoning was simple: Family farms had to be big to enjoy the same economies of scale that gave corporate farms a big advantage.

"Back then, everyone in agricultural economics -- the bankers, lawyers, accountants and Ag schools -- advised farmers to mortgage out as much as possible," explained Pierre Labourdette, the agency's New York State director. "Everybody was anxious to make loans, and Farmers Home was just as guilt as everybody else."

The agency's purse strings were especially loose on its economic emergency and emergency disaster loan programs, which set no limits on the amount a farmer could borrow. Those programs have since been curtailed, but they remain responsible for the agency's largest individual loan losses.

Back in the 1970s, when those loan programs were operating at full tilt, "(federal) money was just flying around ad-lib across the country," said Tom Waring, manager of the Agway store in North Collins. "I know of a couple individuals who didn't take the money because, when they went in looking for $20,000, they'd be turned down unless they borrowed $50,000 or $60,000."

Dean Mount, who blames the government's loans in part for the failure of his farm in Cherry Creek three years ago, remembers a visit from an agency official during that free-spending era.

"He said: 'You need to install a sprinkler system to cool your cows,' " Mount recalled. "I laughed. That's an unheard-of-thing around here."

Mount didn't buy that sprinkler system, but Ed Abbey took all the money Farmers Home Administration was willing to give. He borrowed $700,000 from the agency in 1979 to start his farm in Cherry Creek even though an Alfred University student did a research paper indicating that Abbey didn't have the financial means to survive.

Abbey recalled those first three years on his farm.

"Anything I wanted from Farmers Home, I got," he said.

But before long, he started having trouble making his payments.

By the mid-1980s, the stress that farmers such as Slater and Abbey were feeling also was appearing at the Farmers Home Administration.

The agency suddenly found itself faced with a farm crisis that had resulted from increased worldwide competition. American farm exports were dropping rapidly, and Farmers Home was shelling out money to keep American farmers in business. That policy, combined with the late-1970s lending spree, resulted in the agency's farm loan portfolio more than quadrupling -- from $6 billion in 1978 to almost $28 billion by 1985.

The next year, the General Accounting Office issued the first of several studies exposing the financial troubles in the Farmers Home Administration. That watchdog arm of the federal government surveyed about half of the farm loans made in 1983 and 1984, and found that 20 percent of the borrowers had more debts than assets.

The bottom line: those farmers were insolvent. The average borrower's expenses exceeded his income by $56,000.

The Farmers Home Administration didn't rush out and close on those insolvent borrowers, however. Thanks to a court order in the mid-1980s that prevented the agency from foreclosing in most cases, and a policy of avoiding foreclosure in favor of other options, the Farmers Home Administration rarely closes farms itself. In fact, the agency only foreclosed on two New York State farm between October 1984 and October 1989.

Instead, under a 1987 congressional mandate to try to keep farmers on their farms at all costs, the agency tries to restructure loans whenever possible. Since that legislation was passed, the agency has partially forgiven 4,608 of its loans by a total amount of $796 million. In addition, 5,029 borrowers have been allowed to "buy out," or settle, their loans at a cut rate, leading to a $1.03 billion write-off.

The agency can stretch out loan repayments or forgive parts of some loans, but that doesn't always help the farmer, said John W. Harman, director of food and agricultural issues at the General Accounting Office.

"These actions help temporarily but frequently result in heavier debts and reduced borrower equity, which in the long run weaken the borrower's financial condition," he said last January.

Harman said in a recent interview that a farmer can have his debt restructured and still be left with three times as much in debts as he has assets. In other words, he can be insolvent and go on his merry way -- until other lenders catch up.

Farmers frequently turn to the Farmers Home Administration after other lenders refuse to give them any more money. And while the Farmers Home Administration often won't begin foreclosure when its loans go bad, other lenders will. The farm agency then joins the foreclosure to protect its own loans.

"That happens all the time," he said.

In fact, government records show that other lenders have foreclosed on nearly 3,000 Farmers Home Administration borrowers in the past 5 1/4 years.

That's what happened to both Slater and Abbey.

Slater said Farmers Home did nothing to forestall the foreclosure.

"It's funny," he said. "When you're on top of the heap, you're a great guy. But when the going gets tough, they don't know you. We lost everything we had."

Now, Slater avoids even driving by his old farm.

"I lived a lot of my life there," he said. "I've gone by there a couple times, but it's just too hard."

As for Abbey, he now lives above a bar that he co-owns in Cassadaga. His wife has left him, and his farm is idle. The calendar on the wall in his barn shows the month of July 1988 -- when the first mortgage holder on the property foreclosed.

"I know now they never should have given me the money in the first place," he said. "There's no way in hell that I could have made it."

MONDAY: A failure of three branches of government.

There are no comments - be the first to comment