Federal Credit Agencies

The federal government sponsors a number of agencies that act as financial intermediaries. Altogether there are over seventy different agencies that borrow either in financial markets or from the Treasury and make loans for some special purpose. Their total outstanding loans amounted to $ 129 billion in 1978. These agencies lent $ 27 billion in 1978.

There are two types of rationale for federal agencies. First, some agencies provide an outright subsidy to an activity considered desirable by the Congress (U.S.). The Rural Electrification Administration provided 2 percent loans to rural cooperative electric utilities for many years. Second, many credit agencies were created because Congress was convinced that the private financial system was not working properly. The Farm Credit agencies (the twelve Banks for Cooperatives, the twelve Federal Intermediate Credit Banks, and twelve Federal Land Banks) were created in the 1930s when the farmers complained that they could not obtain sufficient credit from the small banks who served them. The Farm Credit agencies sell securities guaranteed by the Treasury and lend the proceeds to farmers through a complex network of local institutions. The farm borrowers pay interest rates that cover the interest on the guaranteed securities plus administrative costs. No outstanding of securities guaranteed by the U.S. Treasury. The Farm Credit agencies have over $ 40 billion of securities outstanding (in 1980s).

The most important federal credit agencies are those providing home mortgage credits. The Federal Home Loan Bank Board (FHLBB) sells its own securities in the open market and lends the proceeds to twelve regional Federal Home Loan banks, which lend in turn to savings and loan associations, which finally make mortgage loans.

The Federal National Mortgage Association (FNMA) also sells securities in the open market and buys federally insured mortgages from banks and other lenders. FNMA makes commitments to buy mortgages from three or twelve months in the future, so that developers building a large number of houses can be assured that mortgage financing will be available when the houses are completed.

The FNMA and FHLBB serve as intermediaries in drawing funds from the general credit market into the mortgage market. They help to create a unified national mortgage market. They also provide a source of funds for mortgages that is independent of the growth of deposits at the thrift institutions. Their activities have greatly expanded since 1965 when the growth of deposits at thrift institutions began to fluctuate. The large increase in agency securities has provoked some controversy. Some security analysts argue that the increase in the volume of securities of federally sponsored agencies has an adverse effect on other security issuers. Others maintain that intermediation by government agencies serves to perfect the market and to provide low-cost pooling of risks.

The Federal Financing Bank (FFB) began operations in 1974. The FFB borrows from the Treasury and in turn buys loans previously made by a variety of federal credit agencies or makes direct loans to borrowers whose obligations have been guaranteed by a government agency. The FFB reduces the cost of federal credit programs since the Treasury can borrow at lower cost than federal credit agencies.

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