Loan Loss Severity of Agricultural Mortgages

Abstract

The establishment of the Federal Agricultural Mortgage Corporation (Farmer Mac) has increased the need for detailed performance data on yield, prepayment, and default for agricultural real estate mortgages. This study derives and applies a model for estimating the loan loss severity and default premium required for underwriting agricultural real estate mortgages. The estimated loan loss severity on a nationwide pool of defaulted mortgages is 4.7 percent. On all but 6 percent of 457 defaulted mortgages, the original principal balance was recovered. Combining loan loss severity results with the frequency of default suggests that for the 20-year period from 1966 to 1985, the yield loss from defaulted agricultural mortgages was 29 basis points. For the 10-year period from 1976 to 1985, the yield impact was 46 basis points.