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Type: Bookletter

Rural Housing Mortgage-Backed Securities
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November 12, 2009

To: Chairman, Board of Directors
Chief Executive Officer
All Farm Credit System Banks

From: Leland A. Strom
Chairman and Chief Executive Officer

Subject: Rural Housing Mortgage-Backed Securities

The Farm Credit Administration (FCA) authorizes Farm Credit System (System) banks to hold rural housing mortgage-backed securities (RHMS) as mission-related investments under 615.5140(e) of FCA’s regulations, subject to the conditions specified below.

System associations may originate rural home loans (RHLs) that meet certain criteria under 613.3030 of FCA’s regulations.1 Under 613.3030(d)(1), a System bank is authorized to purchase and hold RHLs in an amount not to exceed 15 percent of its total outstanding loans at any one time. Under existing authorities, a System bank may opt to hold the RHLs until maturity. In addition, if the RHLs qualify, a System bank has the authority to take one of three other actions with respect to the RHLs. First, the System bank can have its RHLs securitized into RHMS that are guaranteed by Farmer Mac for the purposes of managing credit and interest rate risk and furthering its mission of financing agriculture, up to 100 percent of its total outstanding loans, pursuant to 615.5174.2 Second, a System bank can have its RHLs securitized into RHMS that are guaranteed by Ginnie Mae,3 Fannie Mae, or Freddie Mac as eligible investments pursuant to 615.5140.4 Third, the System bank can enter into a long-term standby commitment to purchase (standby agreement) with one of the government-sponsored enterprises (GSEs). Under a standby agreement, a System bank can opt to (1) sell the RHLs to the GSE for cash or (2) have its RHLs securitized into RHMS that are guaranteed by the GSE.

Under 615.5132 and 615.5140(a)(5) of FCA’s regulations, a System bank may hold any government- or GSE-guaranteed RHMS for the purpose of complying with its liquidity reserve requirement, managing surplus short-term funds, and managing interest rate risk. The FCA is issuing this bookletter to authorize System banks to also hold RHMS as mission-related investments under 615.5140(e) for the purpose of addressing liquidity needs in the rural housing mortgage market, subject to the following conditions:5

In implementing this authority to hold RHMS as mission-related investments, we expect each System bank to follow prudent risk management practices such as establishing appropriate board approved exposure limits to the housing GSEs and the housing sector. We also expect each System bank to monitor these exposures through its ongoing credit oversight program. If you have any questions regarding this bookletter, please contact Andrew D. Jacob, Director, Office of Regulatory Policy, at 703-883-4356 or via email at or Laurie Rea, Associate Director, Office of Regulatory Policy, at 703-883-4232 or via email at

1Section 613.3030 implements the rural housing financing provisions at sections 1.11(b) and 2.4(b) of the Farm Credit Act of 1971, as amended.

2RHMS guaranteed by Farmer Mac are not within the scope of this bookletter.

3Ginnie Mae (Government National Mortgage Association) is a wholly owned U.S. government corporation.

4Fannie Mae (Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation) are housing GSEs.

5All references to RHMS in these conditions refer to RMHS that are backed by rural home loans originated by System associations and are held as mission-related investments.

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