Modeling the Credit Risk in Agricultural Mortgages: A Critical Review of the Farm Credit Administration's Credit Risk Model for Farmer Mac

Abstract

Farmer Mac is the GSE charged with creating a secondary market in loans backed by agricultural real estate. As part of its risk based capital regulation of Farmer Mac, the Farm Credit Administration (FCA) has estimated a credit risk model for agricultural mortgages. The output of this model is a key determinant of Farmer Mac's risk based capital requirement. This paper reviews both the structure of FCA's credit risk model, and the data used by FCA's contractors to estimate the model. Serious concerns are raised about both data quality and the econometric specification in use.

Keywords: mortgage, default, credit risk, GSE, risk based capital

JEL Classification: G21, G38, Q14, C41