Edgar Filing: FEDERAL AGRICULTURAL MORTGAGE CORP

Unassociated Document

As filed with the Securities and Exchange Commission on

March 16, 2010

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark One)

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009.

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____.

Commission File Number 001-14951

FEDERAL AGRICULTURAL MORTGAGE CORPORATION
(Exact name of registrant as specified in its charter)

Federally chartered instrumentality of the United States		52-1578738
(State or other jurisdiction of incorporation or organization)		(I.R.S. employer identification number)

1133 Twenty-First Street, N.W., Suite 600, Washington, D.C.		20036
(Address of principal executive offices)		(Zip code)

(202) 872-7700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Exchange on which registered
Class A voting common stock		New York Stock Exchange
Class C non-voting common stock		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: Class B voting common stock

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes o No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. §229.405) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer	x	Smaller reporting company	o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

The aggregate market values of the Class A voting common stock and Class C non-voting common stock held by non-affiliates of the registrant were $3,875,733 and $41,496,245, respectively, as of June 30, 2009, based upon the closing prices for the respective classes on June 30, 2009 reported by the New York Stock Exchange. For purposes of this information, the outstanding shares of Class C non-voting common stock owned by directors and executive officers of the registrant were deemed to be held by affiliates. The aggregate market value of the Class B voting common stock is not ascertainable due to the absence of publicly available quotations or prices for the Class B voting common stock as a result of the limited market for, and infrequency of trades in, Class B voting common stock and the fact that any such trades are privately negotiated transactions.

As of March 1, 2010, the registrant had outstanding 1,030,780 shares of Class A voting common stock, 500,301 shares of Class B voting common stock and 8,612,720 shares of Class C non-voting common stock.

DOCUMENTS INCORPORATED BY REFERENCE

The definitive proxy statement relating to the registrant’s 2010 Annual Meeting of Stockholders (portions of which are incorporated by reference into Part II and Part III of this Annual Report on Form 10-K as described herein).

Table of Contents

PART I			4
	Item 1.	Business	4
		General	4
		FARMER MAC PROGRAMS	10
		Farmer Mac I	11
		Loan Eligibility	11
		Summary of Farmer Mac I Transactions	12
		Loan Purchases	13
		Off-Balance Sheet Guarantees and Commitments	13
		AgVantage Securities	16
		Underwriting and Collateral Valuation (Appraisal) Standards	17
		Portfolio Diversification	21
		Sellers	21
		Servicing	22
		Farmer Mac II	22
		General	22
		Summary of Farmer Mac II Transactions	23
		United States Department of Agriculture Guaranteed Loan Programs	24
		Rural Utilities	25
		General	25
		Summary of Rural Utilities Transactions	25
		Loan Eligibility	26
		Underwriting	26
		Collateral	28
		Servicing	29
		Sellers	29
		Portfolio Diversification	29
		Funding of Guarantee and LTSPC Obligations	29
		Financing	30
		Debt Issuance	30
		Equity Issuance	31
		FARMER MAC’S AUTHORITY TO BORROW FROM THE U.S. TREASURY	35
		GOVERNMENT REGULATION OF FARMER MAC	35
		General	35
		Regulation	36
		Office of Secondary Market Oversight (OSMO)	36
		Capital Standards	36
	Item 1A.	Risk Factors	38
	Item 1B.	Unresolved Staff Comments	45
	Item 2.	Properties	45
	Item 3.	Legal Proceedings	45
	Item 4.	(Removed and Reserved)	45
PART II			46
	Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	46
	Item 6.	Selected Financial Data	49
	Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	50

		Forward-Looking Statements	50
		Overview	51
		Critical Accounting Policies and Estimates	55
		Results of Operations	60
		Balance Sheet Review	77
		Risk Management	78
		Liquidity and Capital Resources	93
		Regulatory Matters	99
		Other Matters	99
	Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	99
	Item 8.	Financial Statements	100
		MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING	100
		REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	101
		CONSOLIDATED BALANCE SHEETS	104
		CONSOLIDATED STATEMENTS OF OPERATIONS	105
		CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY	106
		CONSOLIDATED STATEMENTS OF CASH FLOWS	107
		NOTES TO CONSOLIDATED FINANCIAL STATEMENTS	108
	Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	180
	Item 9A.	Controls and Procedures	180
	Item 9B.	Other Information	180
PART III			181
	Item 10.	Directors, Executive Officers and Corporate Governance	181
	Item 11.	Executive Compensation	181
	Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	181
	Item 13.	Certain Relationships and Related Transactions, and Director Independence	181
	Item 14.	Principal Accountant Fees and Services	181
PART IV			182
	Item 15.	Exhibits and Financial Statement Schedules	182

PART I

Item 1.

Business

General

The Federal Agricultural Mortgage Corporation (“Farmer Mac” or the “Corporation”) is a stockholder-owned, federally chartered corporation that combines private capital and public sponsorship to serve a public purpose. Congress has charged Farmer Mac with the mission of providing a secondary market for a variety of loans made to borrowers in rural America. A secondary market is an economic arrangement in which the creators or owners of financial investments, such as the originators of loans, may sell all or part of their interests or otherwise offset, for a fee, some or all of the inherent risks of holding those investments. Farmer Mac’s main secondary market activities are:

purchasing eligible loans directly from lenders;

providing advances against eligible loans by purchasing obligations secured by those loans;

securitizing assets and guaranteeing the resulting securities representing interests in, or obligations secured by, pools of eligible loans;

issuing long-term standby purchase commitments (“LTSPCs”) for eligible loans.

Securities guaranteed by Farmer Mac may be retained by the seller of the underlying assets, retained by Farmer Mac, or sold to third party investors.

These activities are intended to provide participants with an efficient and competitive secondary market that enhances the participants’ ability to offer competitively-priced financing to rural borrowers. This secondary market is designed to increase the availability of long-term credit at stable interest rates to America’s rural communities and to provide those borrowers with the benefits of capital markets pricing and product innovation. The Farmer Mac secondary market functions as a bridge between the national capital markets and the agricultural and rural credit markets by attracting new capital for financing to provide greater liquidity and lending capacity to lenders that extend credit to agricultural and rural borrowers. Farmer Mac’s purchases of eligible loans and obligations secured by eligible loans, as well as Farmer Mac’s guaranteed securities sold to third party investors, increase the capital and liquidity of primary lenders and provide a continuous source of funding for new lending. Farmer Mac’s guaranteed securities that are retained by the seller of the securitized assets, as well as Farmer Mac’s LTSPCs for eligible loans, result in lower regulatory capital requirements for assets retained by the lenders, thereby expanding their lending capacity. By thus increasing the efficiency and competitiveness of rural finance, the Farmer Mac secondary market has the potential to lower the interest rates paid on loans by rural borrowers.

Farmer Mac conducts these activities through three programs—Farmer Mac I, Farmer Mac II and Rural Utilities. The loans eligible for the Farmer Mac secondary market include:

mortgage loans secured by first liens on agricultural real estate and rural housing (encompassing the Farmer Mac I program);

certain agricultural and rural loans guaranteed by the United States Department of Agriculture (encompassing the Farmer Mac II program); and

loans to finance electrification and telecommunications systems in rural areas (encompassing the Rural Utilities program).

As of December 31, 2009, the total outstanding amount of the eligible loans included in all of Farmer Mac’s programs was $10.7 billion.

Under the Farmer Mac I program, Farmer Mac purchases or commits to purchase mortgage loans secured by first liens on agricultural real estate. Farmer Mac also guarantees securities representing interests in, or obligations secured by, pools of eligible mortgage loans. The securities guaranteed by Farmer Mac under the Farmer Mac I program are referred to as “Farmer Mac I Guaranteed Securities.” To be eligible for the Farmer Mac I program, loans must meet Farmer Mac’s credit underwriting, collateral valuation, documentation and other specified standards that are discussed in “Business—Farmer Mac Programs—Farmer Mac I.” As of December 31, 2009, outstanding Farmer Mac I loans held by Farmer Mac and loans that either back Farmer Mac I Guaranteed Securities or are subject to LTSPCs in the Farmer Mac I program totaled $7.4 billion.

Under the Farmer Mac II program, prior to January 2010 Farmer Mac purchased the portions of certain agricultural, rural development, business and industry, and community facilities loans guaranteed by the United States Department of Agriculture (“USDA-guaranteed portions”) pursuant to the Consolidated Farm and Rural Development Act (7 U.S.C. §§ 1921 et seq.) and guaranteed securities backed by those USDA-guaranteed portions (“Farmer Mac II Guaranteed Securities”). As of December 31, 2009, outstanding Farmer Mac II Guaranteed Securities totaled $1.2 billion. Since January 2010, all purchases of USDA-guaranteed portions under the Farmer Mac II program (other than purchases of USDA-guaranteed portions that back Farmer Mac II Guaranteed Securities to be sold to third parties) have been, and will continue to be, made by Farmer Mac’s subsidiary, Farmer Mac II LLC, which is now operating substantially all of the business related to the Farmer Mac II program.

Farmer Mac’s Rural Utilities program was initiated during second quarter 2008 after Congress expanded Farmer Mac’s authorized secondary market activities to include rural utilities loans. Farmer Mac’s authorized activities under this program are similar to those conducted under the Farmer Mac I program—loan purchases, guarantees of securities (“Farmer Mac Guaranteed Securities – Rural Utilities”) and issuance of LTSPCs—with respect to eligible rural utilities loans. To be eligible for the Rural Utilities program, loans must meet Farmer Mac’s credit underwriting and other specified standards that are discussed in “Business—Farmer Mac Programs—Rural Utilities.” From inception through third quarter 2009, Farmer Mac retained in its portfolio all of the rural utilities loans and Farmer Mac Guaranteed Securities – Rural Utilities under this program. During fourth quarter 2009, Farmer Mac guaranteed a general obligation secured by eligible rural utilities loans in the amount of $16.0 million, which was sold to third parties. To date, Farmer Mac has not issued any LTSPCs with respect to rural utilities loans. As of December 31, 2009, the aggregate outstanding principal balance of rural utilities loans held and Farmer Mac Guaranteed Securities – Rural Utilities was $2.1 billion.

Farmer Mac I Guaranteed Securities, Farmer Mac II Guaranteed Securities and Farmer Mac Guaranteed Securities – Rural Utilities are sometimes collectively referred to as “Farmer Mac Guaranteed Securities.” The assets underlying Farmer Mac Guaranteed Securities include (1) securitized loans or USDA-guaranteed portions eligible under one of Farmer Mac’s programs and (2) general obligations of lenders secured by pools of eligible loans. The Corporation guarantees the timely payment of principal and interest on the resulting Farmer Mac Guaranteed Securities. AgVantage® is a registered trademark of Farmer Mac used to designate Farmer Mac’s guarantees of securities related to general obligations of lenders that are secured by pools of eligible loans. Farmer Mac may retain Farmer Mac Guaranteed Securities in its portfolio or sell them to third parties.

Farmer Mac’s two principal sources of revenue are:

guarantee and commitment fees received in connection with outstanding Farmer Mac Guaranteed Securities and LTSPCs; and

interest income earned on assets held on balance sheet, net of related funding costs and interest payments and receipts on financial derivatives.

Farmer Mac funds its “program” purchases of Farmer Mac Guaranteed Securities and eligible loans primarily by issuing debt obligations of various maturities in the public capital markets. As of December 31, 2009, Farmer Mac had $2.3 billion of discount notes and $3.3 billion of medium-term notes outstanding. To the extent the proceeds of debt issuance exceed Farmer Mac’s need to fund program assets, those proceeds are invested in “non-program” investments that must comply with policies adopted by the Corporation’s board of directors and with regulations promulgated by the Farm Credit Administration (“FCA”), including dollar amount, issuer concentration, and credit quality limitations. Those regulations can be found at 12 C.F.R. §§ 652.1-652.45 (the “Investment Regulations”). Farmer Mac’s regular debt issuance supports its access to the capital markets, and Farmer Mac’s non-program investment assets provide an alternative source of funds should market conditions be unfavorable. For more information about Farmer Mac’s program assets and non-program investment assets, as well as its financial performance and sources of capital and liquidity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Farmer Mac was established, and continues to exist, under federal legislation first enacted in 1988 and amended as recently as 2008 – Title VIII of the Farm Credit Act of 1971, as amended (12 U.S.C. §§ 2279aa et seq.), which is sometimes referred to as Farmer Mac’s charter. Farmer Mac is known as a government-sponsored enterprise (“GSE”) by virtue of the status conferred by its charter. The charter provides that Farmer Mac has the power to establish, acquire, and maintain affiliates (as defined in the charter) under applicable state law to carry out any activities that otherwise would be performed directly by the Corporation. Farmer Mac established its two existing subsidiaries, Farmer Mac II LLC and Farmer Mac Mortgage Securities Corporation, pursuant to that power.

Farmer Mac is an institution of the Farm Credit System (the “FCS”), which is composed of the banks, associations and related entities, including Farmer Mac and its subsidiaries, regulated by FCA, an independent agency in the executive branch of the United States government. FCA is a federal agency, but it is not supported by federal money and is funded by assessments paid by FCS institutions. FCA policy and regulatory agendas are established by a full-time, three-person board whose members are appointed by the President of the United States with the advice and consent of the United States Senate. Although Farmer Mac (including its subsidiaries) is an institution of the FCS, it is not liable for any debt or obligation of any other institution of the FCS. None of FCA, the FCS, or any other individual institution of the FCS is liable for any debt or obligation of Farmer Mac or its subsidiaries, nor are Farmer Mac’s or its subsidiaries’ debts or obligations guaranteed by the full faith and credit of the United States.

Farmer Mac’s basic capital and corporate governance structure is prescribed in its charter, which authorizes Farmer Mac to issue two classes of voting common stock that each elects one-third of Farmer Mac’s 15-person board of directors, as well as non-voting common stock.

The charter restricts ownership of Farmer Mac’s Class A voting common stock to banks, insurance companies and other financial institutions or similar entities that are not institutions of the FCS. The charter also provides that five members of Farmer Mac’s 15-member board of directors are elected by a plurality of the votes of the Class A stockholders each year. The charter limits the amount of Class A voting common stock that may be owned by one holder to no more than 33 percent of the outstanding shares of Class A voting common stock. Farmer Mac is not aware of any regulation applicable to non-FCS financial institutions that requires a minimum investment in Farmer Mac Class A voting common stock or that prescribes a maximum amount lower than the 33 percent limit set forth in the charter. Farmer Mac’s Class A voting common stock trades on the New York Stock Exchange under the symbol AGM.A.

The charter restricts ownership of Farmer Mac’s Class B voting common stock to FCS institutions and also provides that five members of Farmer Mac’s 15-member board of directors are elected by a plurality of the votes of the Class B stockholders each year. The charter does not contain any restrictions on the maximum holdings of Class B voting common stock, and Farmer Mac is not aware of any regulation applicable to FCS institutions that requires a minimum investment in Farmer Mac Class B voting common stock or that prescribes a maximum amount. Farmer Mac’s Class B voting common stock, which has a limited market and trades infrequently, is not listed or quoted on any exchange or other medium, and Farmer Mac is not aware of any publicly available quotations or prices for that class of common stock.

The remaining five members of Farmer Mac’s board of directors are individuals who meet the qualifications specified in the charter and are appointed by the President of the United States with the advice and consent of the United States Senate. These appointed directors serve at the pleasure of the President of the United States.

The charter does not impose any ownership restrictions on Class C non-voting common stock, and those shares are freely transferable. Holders of the Class C common stock do not vote on the election of directors or any other matter. Farmer Mac’s Class C non-voting common stock trades on the New York Stock Exchange under the symbol AGM.

The ownership of Farmer Mac’s two classes of voting common stock is currently concentrated in a small group of institutions. Approximately 97 percent of the voting power of the Class B voting common stock is held by five institutions of the FCS. Approximately 44 percent of the Class A voting common stock is held by three financial institutions, with 31 percent held by one institution. Farmer Mac believes that the concentration in such a small group of holders of Class B voting common stock is a by-product of the limited number of eligible holders of that stock under the charter and the structure of the FCS. Farmer Mac believes that the concentration in the Class A voting common stock is a by-product of trading activity in the stock over time and is not by design under the charter or any regulatory mandate.

The dividend and liquidation rights of all three classes of the Corporation’s common stock are the same. Dividends may be paid on Farmer Mac’s common stock only when, as, and if declared by the Corporation’s board of directors in its sole discretion, subject to the payment of dividends on any outstanding preferred stock issued by Farmer Mac. Upon liquidation, dissolution or winding up of the business of Farmer Mac, after payment and provision for payment of outstanding debt of the Corporation, the holders of shares of Farmer Mac preferred stock would be paid in full at par value, plus all accrued dividends, before the holders of shares of common stock received any payment. See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” for more information regarding Farmer Mac’s common stock. See “Business—Farmer Mac Programs—Financing—Equity Issuance” for information regarding Farmer Mac’s preferred stock.

The charter assigns to FCA, acting through the separate Office of Secondary Market Oversight (“OSMO”) within FCA, the responsibility for the examination of, and the general supervision of the safe and sound performance of the powers, functions, and duties vested in Farmer Mac by the charter. The charter also authorizes FCA, acting through OSMO, to apply its general enforcement powers to Farmer Mac. Farmer Mac (including its subsidiaries) is the only entity regulated by OSMO, which was created as a separate office in recognition of the different role that Farmer Mac plays as a secondary market compared to the roles of other FCS institutions as primary lenders. The Director of OSMO is selected by, and reports to, the FCA board. The FCA board approves the policies, regulations, charters, and enforcement activities applicable to other FCS institutions, which are the only eligible holders of Farmer Mac’s Class B voting common stock. FCA has no regulatory authority over the financial institutions that are the eligible holders of Farmer Mac’s Class A voting common stock.

The charter establishes three capital standards for Farmer Mac—minimum capital, critical capital and risk-based capital. Farmer Mac is required to comply with the higher of the minimum capital requirement or the risk-based capital requirement. The charter also requires an annual examination of the financial transactions of Farmer Mac and authorizes FCA to assess Farmer Mac for the cost of FCA’s regulatory activities, including the cost of any examination. Each year, OSMO conducts an examination of Farmer Mac to evaluate its safety and soundness, compliance with applicable laws and regulations, and mission achievement. The examination includes a review of Farmer Mac’s capital adequacy, asset quality, management performance, earnings, liquidity, and sensitivity to interest rate risk. Farmer Mac is also required to file quarterly reports of condition with OSMO. For a more detailed discussion of Farmer Mac’s regulatory and governmental relationships, see “—Government Regulation of Farmer Mac.” For a discussion of Farmer Mac’s statutory and regulatory capital requirements and its actual capital levels, and particularly FCA’s role in the establishment and maintenance of those requirements and levels, see “—Government Regulation of Farmer Mac—Regulation—Capital Standards,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Review—Capital,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters.”

Unlike some other GSEs, specifically other FCS institutions and the Federal Home Loan Banks, Farmer Mac is not structured as a cooperative owned exclusively by member institutions and established to provide services exclusively to its members. Farmer Mac, as a stockholder-owned, publicly-traded corporation, seeks to fulfill its mission of serving the financing needs of agriculture and rural America while at the same time providing a return on the investment of all its stockholders, including those who do not directly participate in the Farmer Mac secondary market. Farmer Mac’s policy is to require financial institutions to own a requisite amount of Farmer Mac Class A or Class B voting common stock, based on the size and type of institution, to participate in the Farmer Mac I Program. As a result of this requirement, coupled with the ability of holders of Class A and Class B voting common stock to elect two-thirds of Farmer Mac’s board of directors, Farmer Mac regularly conducts business with “related parties,” including institutions affiliated with members of Farmer Mac’s board of directors and institutions that own large amounts of Farmer Mac voting common stock. Farmer Mac has adopted a Code of Business Conduct and Ethics that governs any conflicts of interest that may arise in these transactions, and Farmer Mac’s policy is to require that any transactions with related parties be conducted in the ordinary course of business, with terms and conditions comparable to those available to any other program participant not related to Farmer Mac. For more information about related party transactions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Related Party Transactions” and Note 3 to the consolidated financial statements.

As of December 31, 2009, Farmer Mac employed 53 people, located primarily at its principal executive offices at 1133 Twenty-First Street, N.W., Washington, D.C. 20036. Farmer Mac’s main telephone number is (202) 872-7700.

Farmer Mac makes available free of charge, through the “Investors” section of its internet website at www.farmermac.com, copies of materials it files with, or furnishes to, the U.S. Securities and Exchange Commission (the “SEC”), including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports, as soon as reasonably practicable after electronically filing such materials with, or furnishing such materials to, the SEC. Please note that all references to www.farmermac.com in this Annual Report on Form 10-K are inactive textual references only and that the information contained on Farmer Mac’s website is not incorporated by reference into this Annual Report on Form 10-K.

FARMER MAC PROGRAMS

The following tables present the outstanding balances and annual activity under Farmer Mac’s three programs—Farmer Mac I, Farmer Mac II, and Rural Utilities.

Outstanding Balance of Farmer Mac Loans and Loans Underlying Farmer Mac Guaranteed Securities and LTSPCs
	As of December 31,
	2009		2008
	(in thousands)
On-balance sheet:
Farmer Mac I:
Loans	$	733,422	$	781,305
Guaranteed Securities		5,307		282,185
AgVantage		48,800		53,300
Farmer Mac II:
Guaranteed Securities		1,164,996		1,013,330
Rural Utilities:
Loans		28,644		—
Guaranteed Securities		2,087,948		1,054,941
Total on-balance sheet	$	4,069,117	$	3,185,061

Off-balance sheet:
Farmer Mac I:
Guaranteed Securities	$	1,492,239	$	1,697,983
AgVantage		2,945,000		2,945,000
LTSPCs		2,165,706		2,224,181
Farmer Mac II:
Guaranteed Securities		34,802		30,095
Rural Utilities:		14,240		—
Total off-balance sheet	$	6,651,987	$	6,897,259
Total	$	10,721,104	$	10,082,320

Farmer Mac Loan Purchases, Guarantees and LTSPCs
	For the Year Ended December 31,
	2009		2008		2007
	(in thousands)
Farmer Mac I:
Loans	$	195,318	$	196,622	$	127,709
LTSPCs		234,166		530,363		970,789
AgVantage		—		475,000		1,000,000
Farmer Mac II Guaranteed Securities		346,432		303,941		210,040
Rural Utilities:
Loans		28,644		—		—
Guaranteed Securities		1,711,009		1,560,676		—
Total purchases, guarantees and commitments	$	2,515,569	$	3,066,602	$	2,308,538

The following sections describe Farmer Mac’s activities under each program.

Farmer Mac I

Under the Farmer Mac I program, Farmer Mac assumes, for a fee, the credit risk on agricultural real estate mortgage loans by (1) guaranteeing the timely payment of principal and interest on securities representing interests in, or obligations secured by, pools of eligible mortgage loans, or (2) issuing LTSPCs to acquire designated eligible mortgage loans. Farmer Mac also may assume the credit risk on eligible mortgage loans by purchasing and retaining them.

Loan Eligibility

To be eligible for the Farmer Mac I program, a loan is required to:

be secured by a fee simple mortgage or a long-term leasehold mortgage, with status as a first lien on agricultural real estate or rural housing (as defined below) located within the United States;

be an obligation of a citizen or national of the United States, an alien lawfully admitted for permanent residence in the United States or a private corporation or partnership that is majority-owned by U.S. citizens, nationals or legal resident aliens;

be an obligation of a person, corporation or partnership having training or farming experience that is sufficient to ensure a reasonable likelihood that the loan will be repaid according to its terms; and

meet the Farmer Mac I credit underwriting, collateral valuation, documentation and other specified standards. See “—Underwriting and Collateral Valuation (Appraisal) Standards” and “—Sellers” for a description of these standards.

Eligible agricultural real estate consists of one or more parcels of land, which may be improved by permanently affixed buildings or other structures, that:

is used for the production of one or more agricultural commodities or products; and

either consists of a minimum of five acres or generates minimum annual receipts of $5,000.

Farmer Mac’s charter authorizes a maximum loan size of $9.8 million (adjusted annually for inflation) for a Farmer Mac I eligible loan secured by more than 1,000 acres of agricultural real estate. Although the charter does not prescribe a maximum loan size for a Farmer Mac I eligible loan secured by 1,000 acres or less of agricultural real estate, Farmer Mac currently limits the size of those loans to:

$22.5 million for transactions involving direct exposure to credit risk on loans (e.g., loan purchases, LTSPC transactions, and non-AgVantage Farmer Mac Guaranteed Securities, which are not backed by a general obligation of a lender); and

$50.0 million in AgVantage transactions, which involve the general obligation of a lender that is in turn secured by eligible loans, resulting in indirect exposure to credit risk on those loans.

These two maximum loan size levels were increased from $15.0 million and $35.0 million, respectively, in December 2009.

For the rural housing portion of the Farmer Mac I program, an eligible loan must be secured by a mortgage on a one- to four-family, owner-occupied, moderately priced principal residence located in a community with a population of 2,500 or fewer. The current maximum purchase price or current appraised value for a dwelling, excluding the land to which the dwelling is affixed, that secures a rural housing loan is $269,807 (effective January 1, 2010). That limit is adjusted annually based on changes in home values during the previous year. In addition to the dwelling itself, an eligible rural housing loan can be secured by land associated with the dwelling having an appraised value of no more than 50 percent of the total appraised value of the combined property. Rural housing loans do not represent a significant part of Farmer Mac’s business, with a total of $6.9 million of those loans in Farmer Mac’s portfolio as of December 31, 2009.

Summary of Farmer Mac I Transactions

During the year ended December 31, 2009, Farmer Mac purchased or placed under guarantee or LTSPC $429.5 million of loans under the Farmer Mac I program. As of December 31, 2009, loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs totaled $7.4 billion.

The following table summarizes loans purchased or newly placed under guarantees or LTSPCs under the Farmer Mac I program for each of the years ended December 31, 2009, 2008 and 2007.

	For the Year Ended December 31,
	2009		2008		2007
	(in thousands)

Loans and Guaranteed Securities	$	195,318	$	196,622	$	127,709
AgVantage		—		475,000		1,000,000
LTSPCs		234,166		530,363		970,789
Total	$	429,484	$	1,201,985	$	2,098,498

The following table presents the outstanding balances of Farmer Mac I loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs as of the dates indicated:

	As of December 31,
	2009		2008
	(in thousands)

On-balance sheet assets:
Loans	$	733,422	$	781,305
Guaranteed Securities		5,307		282,185
AgVantage		48,800		53,300
Total on-balance sheet	$	787,529	$	1,116,790

Off-balance sheet assets:
Guaranteed Securities	$	1,492,239	$	1,697,983
AgVantage		2,945,000		2,945,000
LTSPCs		2,165,706		2,224,181
Total off-balance sheet	$	6,602,945	$	6,867,164

Total	$	7,390,474	$	7,983,954

Loan Purchases

Farmer Mac offers loan products designed to increase the secondary market liquidity of agricultural real estate mortgage loans and the lending capacity of financial institutions that originate those loans. Farmer Mac enters into mandatory and optional delivery commitments to purchase loans and offers rates for such commitments daily. Farmer Mac also purchases portfolios of newly originated and seasoned loans on a negotiated basis. Farmer Mac purchases both fixed and adjustable rate loans that have a variety of maturities and often include balloon payments. Loans purchased or subject to purchase commitments may include provisions that require a yield maintenance payment or some other form of prepayment penalty in the event a borrower prepays a loan (depending upon the level of interest rates at the time of prepayment). Of the $195.3 million of loans purchased in the Farmer Mac I program during 2009, 54 percent included balloon payments and 1 percent included yield maintenance prepayment protection. By comparison, of the $196.6 million of loans purchased in the Farmer Mac I program during 2008, 59 percent included balloon payments and 2 percent included yield maintenance prepayment protection.

Off-Balance Sheet Guarantees and Commitments

Farmer Mac offers two Farmer Mac I credit enhancement alternatives that allow approved agricultural and rural residential mortgage lenders the ability to retain the cash flow benefits of their loans and increase their liquidity and lending capacity: (1) LTSPCs and (2) Farmer Mac I Guaranteed Securities. Both of these products result in the creation of off-balance sheet obligations for Farmer Mac in the ordinary course of its business.

Both types of transactions permit a seller to nominate from its portfolio a segregated pool of loans for participation in the Farmer Mac I program, subject to review by Farmer Mac for conformance with its applicable standards. In both types of transactions, the seller effectively transfers the credit risk on those loans upon Farmer Mac’s approval of the eligible loans because, through its guarantee or commitment to purchase, Farmer Mac assumes the ultimate credit risk of borrower defaults on the underlying loans and, in the case of AgVantage securities, issuer default on the underlying obligations that are backed by eligible loans. That transfer of risk reduces the seller’s credit and concentration risk exposures and, consequently, its regulatory capital requirements and its loss reserve requirements. The loans underlying LTSPCs and Farmer Mac I Guaranteed Securities may include loans with payment, maturity and interest rate characteristics that differ from the loan products that Farmer Mac offers for purchase on a daily basis, but all the loans are subject to the applicable underwriting standards described in “—Underwriting and Collateral Valuation (Appraisal) Standards.” See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans.”

LTSPCs. An LTSPC commits Farmer Mac to a future purchase of eligible loans from a segregated pool of loans that met Farmer Mac’s standards at the time the loans first became subject to the LTSPC and Farmer Mac assumed the credit risk on the loans. The LTSPC structure, which is not a guarantee of loans or securities, permits the seller to retain the segregated loan pool in its portfolio until such time, if ever, as the seller delivers some or all of the segregated loans to Farmer Mac for purchase under the LTSPC. As consideration for its assumption of the credit risk on loans underlying an LTSPC, Farmer Mac receives commitment fees payable monthly in arrears in an amount approximating what would have been the guarantee fees if the transaction were structured as Farmer Mac I Guaranteed Securities. The loans underlying an LTSPC can be converted into Farmer Mac I Guaranteed Securities at the option of the seller, with no conversion fee paid to Farmer Mac.

Farmer Mac purchases loans subject to an LTSPC at:

par (if the loans become delinquent for at least four months or are in material non-monetary default), with accrued and unpaid interest on the defaulted loans payable out of any future loan payments or liquidation proceeds as received;

a mark-to-market price or in exchange for Farmer Mac I Guaranteed Securities (if the loans are not delinquent and are standard Farmer Mac I loan products); or

either (1) a mark-to-market negotiated price for all (but not some) loans in the pool, based on the sale of Farmer Mac I Guaranteed Securities in the capital markets or the funding obtained by Farmer Mac through the issuance of matching debt in the capital markets, or (2) in exchange for Farmer Mac I Guaranteed Securities (if the loans are not four months delinquent).

In 2009, Farmer Mac entered into $234.2 million of LTSPCs, compared to $530.4 million in 2008. In 2009, LTSPCs remained the preferred credit enhancement alternative for new off-balance sheet transactions and they continue to be a significant portion of the Farmer Mac I program. During 2009, there were no conversions of LTSPCs into Farmer Mac I Guaranteed Securities. As of December 31, 2009, Farmer Mac’s outstanding LTSPCs covered 6,766 mortgage loans with an aggregate principal balance of $2.2 billion, and outstanding off-balance sheet Farmer Mac I Guaranteed Securities were backed by 6,553 mortgage loans having an aggregate principal balance of $1.5 billion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume.”

Farmer Mac I Guaranteed Securities. In Farmer Mac I Guaranteed Securities transactions, Farmer Mac either (1) guarantees securities representing interests in, or obligations secured by, eligible loans held by a trust or other entity established by a seller or (2) acquires eligible loans from sellers in exchange for Farmer Mac I Guaranteed Securities backed by those loans. Farmer Mac guarantees the timely payment of interest and principal on the securities, which are either retained by Farmer Mac or sold to third parties. These securities are customarily issued through special purpose trusts and entitle each investor in a class of securities to receive a portion of the payments of principal and interest on the related underlying pool of loans or obligation equal to the investor’s proportionate interest in the pool or obligation as specified in the applicable transaction documents. As consideration for its assumption of the credit risk on loans underlying the Farmer Mac I Guaranteed Securities, Farmer Mac receives guarantee fees payable in arrears out of periodic loan interest payments and based on the outstanding principal balance of the related Farmer Mac I Guaranteed Securities. The Farmer Mac I Guaranteed Securities representing the general obligations of issuers secured by eligible loans are referred to as AgVantage securities. See “—AgVantage Securities.”

Farmer Mac is obligated under its guarantee on the securities to make timely payments to investors of principal (including balloon payments) and interest based on the scheduled payments on the underlying loans or obligations, regardless of whether the trust has actually received such scheduled payments. Farmer Mac’s guarantee fees typically are collected out of installment payments made on the underlying loans or obligations until those loans or obligations have been repaid or otherwise liquidated (generally as a result of default). The aggregate amount of guarantee fees received on Farmer Mac I Guaranteed Securities depends upon the amount of such securities outstanding and on the applicable guarantee fee rate, which Farmer Mac’s statutory charter caps at 50 basis points (0.50 percent) per annum. The Farmer Mac I guarantee fee rate typically ranges from 15 to 50 basis points (0.15 to 0.50 percent) per annum, depending on the credit quality of and other criteria regarding the loans or obligations. The amount of non-AgVantage Farmer Mac I Guaranteed Securities outstanding is influenced by the repayment rates on the underlying loans and by the rate at which Farmer Mac issues new Farmer Mac I Guaranteed Securities. In general, when the level of interest rates declines significantly below the interest rates on loans underlying Farmer Mac I Guaranteed Securities, the rate of prepayments is likely to increase; conversely, when interest rates rise above the interest rates on the loans underlying Farmer Mac I Guaranteed Securities, the rate of prepayments is likely to decrease. In addition to changes in interest rates, the rate of principal payments on Farmer Mac I Guaranteed Securities also is influenced by a variety of economic, demographic and other considerations, such as yield maintenance provisions that may be associated with loans underlying Farmer Mac I Guaranteed Securities. For more information regarding yield maintenance provisions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Interest Rate Risk.”

For each of the years ended December 31, 2009 and 2008, Farmer Mac sold non-AgVantage Farmer Mac I Guaranteed Securities in the amounts of $28.7 million and $143.8 million, respectively. The 2009 sales resulted in no gains or losses, and the 2008 sales resulted in Farmer Mac recognizing a gain of $1.5 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume.” See “—AgVantage Securities” for information about Farmer Mac’s AgVantage transactions, which are a form of Farmer Mac I Guaranteed Securities.

AgVantage Securities

Each AgVantage security is a general obligation of an institution approved by Farmer Mac, which obligation is also secured by a pool of eligible loans under one of Farmer Mac’s programs. Farmer Mac guarantees those securities as to the timely payment of principal and interest and may retain AgVantage securities in its portfolio or sell them to third parties in the capital markets as Farmer Mac Guaranteed Securities.

Before approving an institution as an issuer in a Farmer Mac I AgVantage transaction, Farmer Mac assesses the institution’s agricultural real estate mortgage loan performance as well as the institution’s creditworthiness. Farmer Mac continues to monitor the counterparty risk assessment on an ongoing basis after the AgVantage security is issued.

In addition to being a general obligation of the issuing institution, each Farmer Mac I AgVantage security is secured by eligible agricultural real estate mortgage loans in an amount at least equal to the outstanding principal amount of the security. In the Farmer Mac I program, Farmer Mac also requires the general obligation to be overcollateralized, either by more eligible loans or any of the following types of assets:

cash;

securities issued by the U.S. Treasury or guaranteed by an agency or instrumentality of the United States; or

other highly-rated securities.

The required collateralization level for a Farmer Mac I AgVantage security issued by an institution without a long-term debt rating from a nationally recognized statistical rating organization (“NRSRO”) ranges from 111 percent to 150 percent, depending on whether physical possession of the collateral is maintained by Farmer Mac (11 percent overcollateralization) or whether a specific pledge (20 percent overcollateralization) or a general pledge (50 percent overcollateralization) of collateral is made by the issuer. Historically, Farmer Mac I AgVantage securities of these issuers have been retained by Farmer Mac and not sold to third parties.

A Farmer Mac I AgVantage security issued by an institution with an investment grade long-term debt rating from an NRSRO requires a collateralization level of at least 103 percent of the outstanding principal amount of the security (3 percent overcollateralization), which collateralization level could be higher depending on the rating of the issuer. Historically, Farmer Mac I AgVantage securities of these issuers have been sold to third parties in the capital markets.

In all AgVantage transactions, Farmer Mac can require the issuer to remove from the pool of pledged collateral any loan that becomes more than 30 days delinquent in the payment of principal or interest and to substitute an eligible loan that is current in payment to maintain the minimum required collateralization level. As of December 31, 2009, Farmer Mac had not experienced any credit losses, nor had it been called upon to make a guarantee payment, on any of its AgVantage securities.

As of December 31, 2009 and 2008, the outstanding principal amount of Farmer Mac I AgVantage securities held by Farmer Mac was $48.8 million and $53.3 million, respectively. As of December 31, 2009 and 2008, the aggregate outstanding principal amount of off-balance sheet AgVantage securities issued under the Farmer Mac I program totaled $3.0 billion and $2.9 billion, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Business Volume” and “—Risk Management—Credit Risk – Institutional.”

Underwriting and Collateral Valuation (Appraisal) Standards

As required by Farmer Mac’s charter, Farmer Mac has established underwriting, security appraisal, and repayment standards for eligible loans taking into account the nature, risk profile, and other differences between different categories of qualified loans. These standards for agricultural real estate mortgage loans under the Farmer Mac I program at a minimum, as prescribed by the charter, are intended to:

provide that no loan with a loan-to-value ratio (“LTV”) in excess of 80 percent may be eligible;

require each borrower to demonstrate sufficient cash-flow to adequately service the loan;

protect the integrity of the appraisal process with respect to any loan; and

confirm that the borrower is or will be actively engaged in agricultural production.

Loans securing off-balance sheet Farmer Mac I AgVantage securities are required to meet these statutory standards in place of the underwriting standards set forth below.

Farmer Mac uses experienced internal agricultural credit underwriters and external agricultural loan servicing and collateral valuation contractors (under Farmer Mac supervision and review) to perform those respective functions on loans that come into the Farmer Mac I program. Farmer Mac believes that the combined expertise of its own internal staff and those third-party service providers provides the Corporation adequate resources for performing the necessary underwriting, collateral valuation and servicing functions.

Underwriting. To manage its credit risk, to mitigate the risk of loss from borrower defaults and to provide guidance concerning the management, administration and conduct of underwriting to all participating sellers and potential sellers in its programs, Farmer Mac has adopted credit underwriting standards for the Farmer Mac I program that vary by type of loan and program product under which the loan is brought to Farmer Mac. These standards were developed based on industry norms for similar mortgage loans and are designed to assess the creditworthiness of the borrower, as well as the risk to Farmer Mac as the guarantor of mortgage-backed securities representing interests in, or obligations secured by, pools of such mortgage loans. Further, Farmer Mac requires sellers of agricultural real estate mortgage loans to make representations and warranties regarding the conformity of eligible mortgage loans to these standards and any other requirements the Corporation may impose from time to time.

Farmer Mac I credit underwriting standards require that the original LTV of any loan not exceed 70 percent, with the exception that a loan secured by a livestock facility and supported by a contract with an approved integrator may have an original LTV of up to 80 percent. Rural housing loans and agricultural real estate mortgage loans secured primarily by owner-occupied residences may also have LTVs of up to 80 percent. Farmer Mac may require that a loan have a lower LTV when it determines that such lower LTV is appropriate. The original LTV of a loan is calculated by dividing the loan’s principal balance at the time of guarantee, purchase or commitment by the lower of the appraised value or the purchase price at the date of loan origination or, when available, updated appraised value at the time of guarantee, purchase or commitment.

In the case of newly-originated farm and ranch loans, borrowers on the loans must, among other criteria set forth in Farmer Mac’s credit underwriting standards, meet the following ratios on a pro forma basis:

total debt service coverage ratio, including farm and non-farm income, of not less than 1.25:1;

debt-to-asset ratio of 50 percent or less;

ratio of current assets to current liabilities of not less than 1:1; and

cash flow debt service coverage ratio on the mortgaged property of not less than 1:1.

Farmer Mac evaluates and adjusts these standards on an ongoing basis based on current and anticipated market conditions. During the latter part of 2008, Farmer Mac anticipated a change in agricultural market conditions and adjusted its loan purchase underwriting standards for loans with LTVs between 60 percent and 70 percent to require a higher total debt service coverage ratio and to not permit exceptions to any underwriting criteria based on compensating strengths for those loans. Those adjustments were in effect throughout 2009 and remain in effect as of the date of this report.

For loans secured by agricultural real estate with building improvements other than a residence contributing more than 60 percent of the appraised value of the property (referred to by Farmer Mac as facility loans), the credit underwriting standards are the same as for farm and ranch loans but more stringent with respect to two ratios, requiring:

total debt service coverage ratio, including farm and non-farm income, of not less than 1.35:1; and

ratio of current assets to current liabilities of not less than 1.25:1.

Loans secured by eligible collateral with LTVs not greater than 55 percent made to borrowers with high credit scores and adequate financial resources may be accepted without further underwriting tests being applied. Agricultural real estate mortgage loans secured primarily by owner-occupied residences and rural housing loans are underwritten to industry norms for conforming loans secured by primary residences, with fully verified repayment capacity and assets and liabilities. Applicants’ credit scores are obtained and used in the underwriting process.

In addition, Farmer Mac’s underwriting standards provide for the acceptance of a loan that, in the judgment of the Farmer Mac underwriter, is a sound loan with a high probability of repayment in accordance with its terms even though the loan does not meet one or more of the underwriting ratios usually required for loans of that type. In those cases, Farmer Mac permits exceptions to applicable underwriting standards when a loan:

exceeds minimum requirements for one or more of the underwriting standards to a degree that compensates for noncompliance with one or more other standards, referred to as compensating strengths; and

is made to a producer of particular agricultural commodities or products in a segment of agriculture in which such compensating strengths are typical of the financial condition of sound borrowers in that segment.

Despite these underwriting approvals based on compensating strengths, no loan will be approved if it does not at least meet all of Farmer Mac’s statutory underwriting standards described at the beginning of this section.

Farmer Mac’s use of compensating strengths is not intended to provide a basis for waiving or lessening the requirement that eligible mortgage loans under the Farmer Mac I program be of consistently high quality. In fact, loans approved on the basis of compensating strengths are fully underwritten and have not demonstrated a significantly different rate of default, or loss following default, than loans that were approved on the basis of conformance with all applicable underwriting ratios. Beginning in the latter part of 2008, Farmer Mac anticipated a leveling of agricultural real estate values and implemented underwriting practices that reflected that leveling, resulting in fewer approvals based on compensating strengths compared to years prior to 2008. During 2009, $69.2 million (16.1 percent) of the loans purchased or added under LTSPCs were approved based upon compensating strengths ($0.8 million of which had original LTVs of greater than 70 percent), as compared to 2008 when $51.2 million (7.0 percent) of the loans purchased or added under LTSPCs were approved based upon compensating strengths ($9.2 million of which had original LTVs of greater than 70 percent) and 2007 when $447.9 million (40.8 percent) of the loans purchased or added under LTSPCs were approved based upon compensating strengths ($49.8 million of which had original LTVs of greater than 70 percent). As of December 31, 2009, a total of $1.7 billion (38.9 percent) of the outstanding balance of loans held and loans underlying LTSPCs and Farmer Mac I Guaranteed Securities (excluding AgVantage securities) were approved based upon compensating strengths ($93.6 million of which had original LTVs of greater than 70 percent).

In the case of a seasoned loan, Farmer Mac considers sustained historical performance to be a reliable alternative indicator of a borrower’s ability to pay the loan according to its terms. A seasoned loan generally will be deemed an eligible loan if:

it has been outstanding for at least five years and has an LTV of 60 percent or less;

there have been no payments more than 30 days past due during the previous three years; and

there have been no material restructurings or modifications for credit reasons during the previous five years.

A seasoned loan that has been outstanding for more than one year but less than five years must substantially comply with the applicable underwriting standards for newly originated loans as of the date the loan was originated by the lender. The loan must also have a payment history that shows no payment more than 30 days past due during the three-year period immediately prior to the date the loan is either purchased by Farmer Mac or made subject to an LTSPC. There is no requirement that each loan’s compliance with the underwriting standards be re-evaluated after Farmer Mac accepts the loan into its program.

Farmer Mac performs due diligence before purchasing, guaranteeing securities backed by, or committing to purchase seasoned loans, including:

evaluating loan database information to determine conformity to the criteria set forth in the preceding paragraphs;

confirming that loan file data conform to database information;

validating supporting credit information in the loan files; and

reviewing loan documentation and collateral valuations.

Farmer Mac performs these and other due diligence procedures using methods that give due regard to the size, age, leverage, industry sector, and nature of the collateral for the loans.

Required documentation for all Farmer Mac I loans includes a first lien mortgage or deed of trust, a written promissory note and assurance of Farmer Mac’s lien position through either a title insurance policy or title opinion from an experienced real estate attorney in geographic areas where title insurance is not the industry practice.

As Farmer Mac develops new Farmer Mac I credit products, it establishes underwriting guidelines for them. Those guidelines result in industry-specific measures that meet or exceed the statutory underwriting standards and provide Farmer Mac the flexibility to deliver the benefits of a secondary market to farmers, ranchers and rural homeowners in diverse sectors of the rural economy.

Collateral Valuations (Appraisals and Evaluations). Farmer Mac has adopted collateral valuation standards for newly originated loans purchased or placed under a Farmer Mac I Guaranteed Security or LTSPC. Those standards require, among other things, that a current valuation be performed, or has been performed within the preceding 12 months, independently of the credit decision-making process. In addition, Farmer Mac requires appraisals to conform to the Uniform Standards of Professional Appraisal Practice promulgated by the Appraisal Standards Board.

Farmer Mac’s collateral valuation standards require that the valuation function be conducted or administered by an individual meeting specific qualification and competence criteria who:

is not associated, except by the engagement for the collateral valuation, with the credit underwriters making the loan decision, though the appraiser or evaluator and the credit underwriter may be directly or indirectly employed by a common employer;

receives no financial or professional benefit of any kind by virtue of the report content, valuation or credit decision made or based on the valuation report; and

has no present or contemplated future direct or indirect interest in the property serving or to serve as collateral.

Farmer Mac’s collateral valuation standards require uniform reporting of reliable and credible opinions of the market value based on analyses of comparable property sales, including consideration of the property’s income producing capacity and, if relevant, the market’s response to the cost of improvements, as well as information regarding market trends. For seasoned loans, Farmer Mac obtains collateral valuation updates as considered necessary in its assessment of collateral risk determined in the due diligence process. If a current or updated collateral valuation is required for a seasoned loan, the collateral valuation standards described above would apply.

Portfolio Diversification

It is Farmer Mac’s policy to diversify its portfolio of loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs, both geographically and by agricultural commodity/product. Farmer Mac directs its marketing efforts toward agricultural lenders throughout the nation to achieve commodity/product and geographic diversification in its exposure to credit risk. Farmer Mac evaluates its credit exposure in particular geographic regions and commodities/products, adjusted for the credit quality of the loans in those particular geographic regions or commodity/product groups relative to the total principal amount of all outstanding loans held and loans underlying Farmer Mac I Guaranteed Securities and LTSPCs.

Farmer Mac is not obligated to purchase, or commit to purchase, every loan that meets its underwriting and collateral valuation standards submitted by an eligible seller. Farmer Mac may consider other factors, such as its overall portfolio diversification, commodity and farming forecasts and risk management objectives, in deciding whether to accept the loans into the Farmer Mac I program. For example, if industry forecasts indicate possible weakness in a geographic area or agricultural commodity or product, Farmer Mac may decide not to purchase or commit to purchase an affected loan as part of managing its overall portfolio exposure to areas of possible heightened risk exposure. Because Farmer Mac effectively assumes the credit risk on all loans under an LTSPC, Farmer Mac’s commodity/product and geographic diversification disclosures reflect all loans under LTSPCs and any loans that have been purchased out of LTSPC pools. For information regarding the diversification of Farmer Mac’s existing portfolio, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans” and Note 8 to the consolidated financial statements.

Sellers

As of December 31, 2009, Farmer Mac had 307 approved loan sellers eligible to participate in the Farmer Mac I program, ranging from single-office to multi-branch institutions, spanning community banks, FCS institutions, mortgage companies, commercial banks and insurance companies. The increase in the number of approved Farmer Mac I loan sellers from 256 as of December 31, 2008 is principally the result of Farmer Mac’s alliance with the American Bankers Association, as well as lender informational seminars Farmer Mac conducts in key regional locations and through the internet. In addition to participating directly in the Farmer Mac I program, some of the approved loan sellers facilitate indirect participation by other lenders in the Farmer Mac I program by managing correspondent networks of lenders from which the approved loan sellers purchase loans to sell to Farmer Mac. As of December 31, 2009, 202 lenders were participating in one or both of the Farmer Mac I or Farmer Mac II programs.

To be considered for approval as a Farmer Mac I seller, a financial institution must meet the criteria that Farmer Mac establishes. Those criteria include the following requirements:

own a requisite amount of Farmer Mac Class A or Class B voting common stock according to a schedule prescribed for the size and type of institution;

have, in the judgment of Farmer Mac, the ability and experience to make or purchase and sell loans eligible for the Farmer Mac I program and service such loans in accordance with Farmer Mac requirements either through its own staff or through contractors and originators;

maintain a minimum adjusted net worth; and

enter into a Seller/Servicer agreement to comply with the terms of the Farmer Mac Seller/Servicer Guide, including representations and warranties regarding the eligibility of the loans and accuracy of loan data provided to Farmer Mac.

Servicing

Farmer Mac generally does not directly service loans held in its portfolio, although it does act as “master servicer” for loans underlying Farmer Mac I Guaranteed Securities. Farmer Mac also may assume direct servicing for defaulted loans. Loans held by Farmer Mac or underlying Farmer Mac Guaranteed Securities are serviced only by Farmer Mac-approved entities designated as “central servicers” that have entered into central servicing contracts with Farmer Mac. Sellers of eligible mortgage loans sold into the Farmer Mac I program have a right to retain certain “field servicing” functions (typically direct borrower contacts) and may enter into contracts with Farmer Mac’s central servicers that specify such servicing functions. Loans underlying LTSPCs and AgVantage securities are serviced by the holders of those loans in accordance with those lenders’ servicing procedures, which are reviewed and approved by Farmer Mac before entering into those transactions.

Farmer Mac II

General

The Farmer Mac II program was initiated in 1992 and is authorized under sections 8.0(3) and 8.0(9)(B) of Farmer Mac’s statutory charter (12 U.S.C. §§ 2279aa(3) and 2279aa(9)(B)), which provide that:

USDA-guaranteed portions of loans guaranteed under the Consolidated Farm and Rural Development Act (7 U.S.C. § 1921 et seq.) are statutorily included in the definition of loans eligible for Farmer Mac’s secondary market programs;

USDA-guaranteed portions are exempted from the credit underwriting, collateral valuation, documentation and other standards that other loans must meet to be eligible for Farmer Mac programs, and are exempted from any diversification and internal credit enhancement that may be required of pools of other loans eligible for Farmer Mac programs; and

Farmer Mac is authorized to pool and issue Farmer Mac Guaranteed Securities backed by USDA-guaranteed portions.

Until January 1, 2010, all USDA-guaranteed portions held by Farmer Mac were held in the form of Farmer Mac II Guaranteed Securities. Since January 2010, all purchases of USDA-guaranteed portions under the Farmer Mac II program (other than purchases of USDA-guaranteed portions that back Farmer Mac II Guaranteed Securities to be sold to third parties) have been, and will continue to be, made by Farmer Mac’s subsidiary, Farmer Mac II LLC, which is now operating substantially all of the business related to the Farmer Mac II program. In the future, Farmer Mac will operate only that part of the Farmer Mac II program that involves the issuance of Farmer Mac II Guaranteed Securities, and only to the extent that Farmer Mac is approached or referred by an investor. Farmer Mac will not issue Farmer Mac II Guaranteed Securities to Farmer Mac II LLC.

Summary of Farmer Mac II Transactions

Farmer Mac guarantees the timely payment of principal and interest on Farmer Mac II Guaranteed Securities backed by USDA-guaranteed portions. Farmer Mac does not guarantee the repayment of the USDA-guaranteed portions, only the Farmer Mac II Guaranteed Securities that are backed by USDA-guaranteed portions.

During the years ended December 31, 2009, 2008 and 2007, Farmer Mac issued $346.4 million, $303.9 million and $210.0 million, respectively, of Farmer Mac II Guaranteed Securities, most of which were retained by Farmer Mac rather than sold to lenders or other investors. As of December 31, 2009, 2008 and 2007, $1.2 billion, $1.0 billion and $946.6 million, respectively, of Farmer Mac II Guaranteed Securities were outstanding. The following table presents Farmer Mac II activity for each of the years indicated:

	For the Year Ended December 31,
	2009		2008		2007
	(in thousands)

Purchased and retained	$	336,963	$	291,335	$	204,931
Purchased and sold		9,469		12,606		5,109
Total	$	346,432	$	303,941	$	210,040

The following table presents the outstanding balance of Farmer Mac II Guaranteed Securities as of the dates indicated:

	Outstanding Balance of
	Farmer Mac II Guaranteed
	Securities as of December 31,
	2009		2008
	(in thousands)

On-balance sheet	$	1,164,996	$	1,013,330
Off-balance sheet		34,802		30,095
Total	$	1,199,798	$	1,043,425

As of December 31, 2009, Farmer Mac had experienced no credit losses on any of its Farmer Mac II Guaranteed Securities. As of December 31, 2009, Farmer Mac had outstanding $0.6 million of principal and interest advances on Farmer Mac II Guaranteed Securities, compared to $0.3 million as of December 31, 2008 and $0.4 million as of December 31, 2007.

United States Department of Agriculture Guaranteed Loan Programs

The United States Department of Agriculture (“USDA”), acting through its various agencies, currently administers the federal rural credit programs first developed in the mid-1930s. The USDA makes direct loans and guarantees portions of loans made and serviced by USDA-qualified lenders for various purposes. The USDA’s guarantee is supported by the full faith and credit of the United States. USDA-guaranteed portions represent up to 95 percent of the principal amount of guaranteed loans. Through its Farmer Mac II program, Farmer Mac is one of several competing purchasers of USDA-guaranteed portions of farm ownership loans, farm operating loans, business and industry loans, community facilities loans and other loans that are fully guaranteed as to principal and interest by the USDA.

USDA Guarantees. Each USDA guarantee is a full faith and credit obligation of the United States and becomes enforceable if a lender fails to repurchase the USDA-guaranteed portion from its owner within 30 days after written demand from the owner when:

the borrower under the guaranteed loan is in default not less than 60 days in the payment of any principal or interest due on the USDA-guaranteed portion; or

the lender has failed to remit to the owner the payment made by the borrower on the USDA-guaranteed portion or any related loan subsidy within 30 days after the lender’s receipt of the payment.

If the lender does not repurchase the USDA-guaranteed portion as provided above, the USDA is required to purchase the unpaid principal balance of the USDA-guaranteed portion together with accrued interest (including any loan subsidy) to the date of purchase, less the servicing fee, within 30 days after written demand upon the USDA by the owner. While the USDA guarantee will not cover the note interest to the owner on USDA-guaranteed portions accruing after 90 days from the date of the original demand letter of the owner to the lender requesting repurchase, Farmer Mac has established procedures to require prompt demand on the USDA to purchase USDA-guaranteed portions that have not been repurchased by the lender.

If, in the opinion of the lender (with the concurrence of the USDA) or in the opinion of the USDA, repurchase of the USDA-guaranteed portion is necessary to service the related guaranteed loan adequately, the owner will sell the USDA-guaranteed portion to the lender or USDA for an amount equal to the unpaid principal balance and accrued interest (including any loan subsidy) on such USDA-guaranteed portion less the lender’s servicing fee. Federal regulations prohibit the lender from repurchasing USDA-guaranteed portions for arbitrage purposes.

Lenders. Any lender authorized by the USDA to obtain a USDA guarantee on a loan may be a seller in the Farmer Mac II program. During 2009, 158 sellers, consisting mostly of community and regional banks, sold USDA-guaranteed portions to Farmer Mac under the Farmer Mac II program, as compared to 187 sellers that did so during 2008. In the aggregate, 202 sellers were participating directly in one or both of the Farmer Mac I or Farmer Mac II programs during 2009.

Loan Servicing. The lender on each guaranteed loan is required by regulation to retain the unguaranteed portion of the guaranteed loan, to service the entire underlying guaranteed loan, including the USDA-guaranteed portion, and to remain mortgagee and/or secured party of record. The USDA-guaranteed portion and the unguaranteed portion of the underlying guaranteed loan are to be secured by the same security with equal lien priority. The USDA-guaranteed portion cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion.

Rural Utilities

General

In May 2008, Congress expanded Farmer Mac’s authority to permit purchases, and guarantees of securities backed by, rural electric and telephone loans made by cooperative lenders to borrowers who have received or are eligible to receive loans under the Rural Electrification Act of 1936 (“REA”). The REA is administered by the Rural Utilities Service (“RUS”), an agency of the USDA. None of Farmer Mac’s business to date under the Rural Utilities program has involved telecommunications loans. Farmer Mac’s Rural Utilities program encompasses loan purchases, Farmer Mac Guaranteed Securities – Rural Utilities, and issuance of LTSPCs, in each case with respect to eligible rural utilities loans, although no LTSPCs have been issued to date under the Rural Utilities program.

Summary of Rural Utilities Transactions

During the year ended December 31, 2009, Farmer Mac added $1.7 billion of new business under the Rural Utilities program. As of December 31, 2009, the aggregate outstanding principal balance of rural utilities loans held and of Farmer Mac Guaranteed Securities – Rural Utilities was $2.1 billion.

The following table summarizes new business activity under Farmer Mac’s Rural Utilities program for each of the years ended December 31, 2009, 2008 and 2007.

	For the Year Ended December 31,
	2009		2008		2007
	(in thousands)

On-balance sheet:
Loans	$	28,644	$	—	$	—
Guaranteed Securities		—		430,676		—
AgVantage		1,695,000		1,130,000		—
Off-balance sheet:
AgVantage		16,009		—		—
Total	$	1,739,653	$	1,560,676	$	—

The following table presents the outstanding balances of rural utilities loans held and of Farmer Mac Guaranteed Securities – Rural Utilities as of the dates indicated:

	As of December 31,
	2009		2008
	(in thousands)

On-balance sheet:
Loans	$	28,644	$	—
Guaranteed Securities		412,948		424,941
AgVantage		1,675,000		630,000
Total on-balance sheet	$	2,116,592	$	1,054,941

Off-balance sheet:
AgVantage	$	14,240	$	—
Total	$	2,130,832	$	1,054,941

All of the Farmer Mac Guaranteed Securities – Rural Utilities in the Rural Utilities program consisted of securities representing either (1) direct interests in eligible rural electric loans or (2) general obligations of the National Rural Utilities Cooperative Finance Corporation (“National Rural”) secured by eligible rural electric loans. As of December 31, 2009, National Rural held 7.7 percent of Farmer Mac’s outstanding Class A voting common stock (5.2 percent of total voting shares) and 100 percent of Farmer Mac’s outstanding Series C preferred stock.

Loan Eligibility

To be eligible for Farmer Mac’s Rural Utilities program, a rural utilities loan (or an interest in such a loan) is required to:

be for an electric or telephone facility by a cooperative lender to a borrower that has received or is eligible to receive a loan under the REA;

be performing and not more than 30 days delinquent; and

meet Farmer Mac’s rural utilities underwriting standards described in more detail below.

Underwriting

In order for Farmer Mac to manage its credit risk, to mitigate the risk of loss from borrower defaults and to provide guidance concerning the management, administration and underwriting to all participating sellers in its programs, Farmer Mac has adopted credit underwriting standards that vary by type of loan, be it to electric distribution cooperatives or electric generation and transmission (“G&T”) cooperatives, and program product under which the loan is brought to Farmer Mac. These standards are based on rural utility industry norms for similar loans and are designed to assess the creditworthiness of the borrower, as well as the risk to Farmer Mac either as the direct purchaser of rural utilities loans or as the purchaser of or the guarantor of securities representing interests in those loans or in obligations secured by pools of those loans. Farmer Mac reviews sellers’ credit submissions and analyzes borrowers’ audited financial statements and financial and operating reports filed with RUS and the Federal Energy Regulatory Commission to confirm that the Corporation’s underwriting standards for rural utilities loans are met. Further, Farmer Mac requires sellers of rural utilities loans to make representations and warranties regarding the conformity of eligible loans to these standards and any other requirements the Corporation may impose from time to time.

Farmer Mac has developed different underwriting standards for rural utilities loans that depend on whether direct or indirect credit exposure is assumed on a loan and whether the borrower is an electric distribution cooperative or a G&T cooperative. Farmer Mac’s credit underwriting standards for all rural utilities loans on which it assumes direct credit exposure (i.e., with no general obligation of a lender involved in the transaction) through the Rural Utilities program require:

each electric or telephone cooperative to have received or be eligible to receive a loan under the REA;

each borrower to demonstrate sufficient cash-flow to adequately service the loan; and

each borrower’s leverage position to be adequate based on industry standards.

In the case of a newly-originated loan to a distribution cooperative on which Farmer Mac assumes direct credit exposure, the borrower must, among other criteria set forth in Farmer Mac’s credit underwriting standards, meet the following ratios based on the average of the most recent three years:

the ratio of long-term debt to “net utility plant” does not exceed 90 percent;

the modified debt service coverage ratio equals or exceeds 1.35; and

the ratio of equity to total assets equals or exceeds 20 percent.

The “net utility plant” means the real and tangible personal property of a rural utilities borrower constituting the long-term assets of property, plant, and equipment (PPE), less depreciation computed in accordance with applicable accounting requirements.

In the case of a newly-originated loan to a G&T cooperatives on which Farmer Mac assumes direct credit exposure, the borrower must, among other criteria set forth in Farmer Mac’s credit underwriting standards, meet the following ratios (based on the average of the most recent three years):

the equity to total assets ratio equals or exceeds 10 percent;

the modified debt service coverage ratio equals or exceeds 1.15;

the debt to EBITDA ratio does not exceed 12; and

the equity to total capitalization ratio equals or exceeds 25 percent.

Farmer Mac’s credit underwriting standards for all AgVantage transactions under the Rural Utilities program, in which Farmer Mac has indirect credit exposure on loans securing the general obligation of a lender, require:

the credit rating of the counterparty issuing the general obligation to be at least investment grade as determined by an NRSRO, or equivalent as determined by Farmer Mac analysis;

the collateral to be comprised of loans, or interests in loans, for electric or telephone facilities by a cooperative lender to a borrower that has received or is eligible to receive a loan under the REA;

the collateral to be performing and not more than 30 days delinquent; and

the collateralization (consisting of current, performing loans) to be maintained at the contractually prescribed level, in an amount at least equal to the outstanding principal amount of the security.

In addition, the same underwriting standards that apply to loans made to distribution cooperatives on which Farmer Mac assumes direct credit exposure also apply to loans made to distribution cooperatives that secure the general obligation of the lender in AgVantage transactions (based on the average of the most recent three years):

the ratio of long-term debt to net utility plant does not exceed 90 percent;

the modified debt service coverage ratio equals or exceeds 1.35; and

the ratio of equity to total assets equals or exceeds 20 percent.

For loans made to G&T cooperatives that secure the general obligation of the lender in AgVantage transactions, the G&T cooperative must either (1) have a rating from an NRSRO of BBB- (or equivalent) or better or (2) meet the following underwriting standards (based on the average of the most recent three years):

the equity to total capitalization ratio equals or exceeds 25 percent;

the modified debt service coverage ratio equals or exceeds 1.10; and

the equity to total assets ratio equals or exceeds 10 percent.

The due diligence Farmer Mac performs before purchasing, guaranteeing securities backed by, or committing to purchase rural utilities loans includes:

evaluation of loan database information to determine conformity to Farmer Mac’s underwriting standards;

confirmation that loan file data conforms to database information;

validation of supporting credit information in the loan files; and

review of loan documentation.

Farmer Mac is not obligated to purchase, or commit to purchase, every rural utilities loan that meets it underwriting and collateral valuation standards submitted to Farmer Mac. Farmer Mac may consider other factors, such as portfolio diversification, in deciding whether to accept the loans into the Farmer Mac Rural Utilities program.

Collateral

It is customary in loans to distribution cooperatives and G&T cooperatives for the lender to take a security interest in substantially all of the borrower’s assets. In cases where Farmer Mac purchases a loan and another rural utility lender has a lien on all assets, Farmer Mac verifies that a lien accommodation results in either a shared first lien or a first lien in favor of Farmer Mac. In cases where debt indentures are utilized, Farmer Mac determines if available collateral is adequate to support the loan program and Farmer Mac’s investment.

Servicing

Farmer Mac generally does not directly service the rural utilities loans held in its portfolio or the loans underlying Farmer Mac Guaranteed Securities – Rural Utilities. Those loans are serviced by a servicer designated by Farmer Mac. Rural utilities loans pledged to secure AgVantage securities are serviced by the holders of those loans in accordance with those lenders’ servicing procedures, which are reviewed and approved by Farmer Mac before entering into those transactions. National Rural currently services all of the rural utilities loans in Farmer Mac’s portfolio.

Sellers

The statutory authorities that authorize Farmer Mac to become involved in rural utilities lending specify that the loans be sourced from a cooperative lender. Currently the the only two rural utilities lenders that are cooperatives are National Rural and CoBank, ACB (“CoBank”), an institution of the FCS. As of December 31, 2009, these cooperatives had approximately $17.8 billion in loans outstanding to distribution cooperatives and $6.1 billion in loans outstanding to G&T cooperatives.

Portfolio Diversification

It is Farmer Mac’s policy to diversify its rural utilities portfolio of loans held and loans underlying Farmer Mac Guaranteed Securities – Rural Utilities geographically. National Rural and CoBank each lends throughout the entire United States. Farmer Mac analyzes the geographic distribution of loans to cooperatives and considers regional concentration levels in connection with its business activities under the Rural Utilities program.

The maximum cumulative direct credit exposure on eligible rural utilities loans (e.g., purchases of loans or securities representing interests in loans) to any one borrower or related borrowers is $22.5 million. For indirect credit exposures on rural utilities loans (e.g., AgVantage transactions) the maximum loan exposure to any one borrower or related borrowers is $50.0 million, with the amount of any direct exposure to a borrower also counting toward the $50.0 million limit. Farmer Mac’s cumulative exposure to loans to electric G&T facilities, whether through direct or indirect credit exposure, is limited to no more than 20 percent of Farmer Mac’s cumulative direct and indirect exposure to all rural utilities loans. Additionally, Farmer Mac’s cumulative direct credit exposure to G&T facilities is limited to no more than 10 percent of Farmer Mac’s cumulative direct and indirect exposure to all Rural Utilities loans.

Funding of Guarantee and LTSPC Obligations

The principal sources of funding for the payment of Farmer Mac’s obligations under its guarantees and LTSPCs are the fees for its guarantees and commitments, net interest income and the proceeds of debt issuances. Farmer Mac satisfies its obligations under LTSPCs and its guarantees by purchasing defaulted loans out of LTSPCs and from the related trusts for Farmer Mac Guaranteed Securities. Farmer Mac typically recovers a significant portion of the value of defaulted loans purchased either through borrower payments, loan payoffs, payments by third parties or foreclosure and sale of the property securing the loans. Ultimate losses arising from Farmer Mac’s guarantees and commitments are reflected in the Corporation’s charge-offs against its allowance for losses and gains and losses on the sale of real estate owned (“REO”), which consists of real estate acquired through foreclosure. During 2009, Farmer Mac’s net charge-offs were $7.5 million, compared to $5.3 million during 2008.

Farmer Mac’s charter requires Farmer Mac to set aside in a segregated account a portion of the guarantee fees it receives from its guarantee activities. That segregated account must be exhausted before Farmer Mac may issue obligations to the U.S. Treasury against the $1.5 billion that Farmer Mac is statutorily authorized to borrow from the U.S. Treasury to fulfill its guarantee obligations. That borrowing authority is not intended to be a routine funding source and has never been used. As of December 31, 2009, the amount in that reserve account was $64.6 million. Farmer Mac’s total outstanding guarantees and LTSPCs exceed the cumulative amount (1) held as an allowance for losses, (2) the amount in the segregated account, and (3) the amount Farmer Mac may borrow from the U.S. Treasury; however, Farmer Mac does not expect its obligations under its guarantees and LTSPCs to exceed amounts available to satisfy those obligations. For information regarding Farmer Mac’s allowance for losses, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Risk Management—Credit Risk – Loans” and Note 2(j) and Note 8 to the consolidated financial statements. For a more detailed discussion of Farmer Mac’s borrowing authority from the U.S. Treasury, see “Business—Farmer Mac’s Authority to Borrow from the U.S. Treasury.”

Financing

Debt Issuance

Section 8.6(e) of Farmer Mac’s statutory charter (12 U.S.C. § 2279aa-6(e)) authorizes Farmer Mac to issue debt obligations to purchase eligible loans, USDA-guaranteed portions and Farmer Mac Guaranteed Securities and to maintain reasonable available cash and cash equivalents for business operations, including adequate liquidity. Farmer Mac funds its purchases of program and non-program assets primarily by issuing debt obligations of various maturities in the public capital markets. Debt obligations issued by Farmer Mac include discount notes and fixed and floating rate medium-term notes, including callable notes. Farmer Mac also issues discount notes and medium-term notes to obtain funds to finance its investments, transaction costs, guarantee payments and LTSPC purchase obligations.

The interest and principal on Farmer Mac’s debt are not guaranteed by and do not constitute debts or obligations of FCA or the United States or any agency or instrumentality of the United States other than Farmer Mac. Farmer Mac is an institution of the FCS, but is not liable for any debt or obligation of any other institution of the FCS. Likewise, neither the FCS nor any other individual institution of the FCS is liable for any debt or obligation of Farmer Mac. Income to the purchaser of a Farmer Mac discount note or medium-term note is not exempt under federal law from federal, state or local taxation. The Corporation’s discount notes and medium-term notes are not currently rated by an NRSRO.

Farmer Mac’s board of directors has authorized the issuance of up to $7.0 billion of discount notes and medium-term notes (of which $5.6 billion was outstanding as of December 31, 2009), subject to periodic review by Farmer Mac’s board of directors of the adequacy of that level relative to Farmer Mac’s borrowing needs. Farmer Mac invests the proceeds of such issuances in loans, Farmer Mac Guaranteed Securities, and non-program investment assets in accordance with policies established by its board of directors that comply with its Investment Regulations, including dollar amount, issuer concentration and credit quality limitations. Farmer Mac’s regular debt issuance supports its access to the capital markets, and Farmer Mac’s non-program investment assets provide an alternative source of funds should market conditions be unfavorable. Farmer Mac’s current policies authorize non-program investments in:

obligations of the United States;

obligations of government-sponsored enterprises (“GSEs”);

municipal securities;

international and multilateral development bank obligations;

money market instruments;

diversified investment funds;

asset-backed securities;

corporate debt securities; and

mortgage securities.

For more information about Farmer Mac’s outstanding investments and indebtedness, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Balance Sheet Review” and Note 4 and Note 7 to the consolidated financial statements.

Equity Issuance

Farmer Mac’s charter authorizes the Corporation to issue voting common stock, non-voting common stock and non-voting preferred stock. Only banks, other financial entities, insurance companies and institutions of the FCS eligible to participate in one or more of Farmer Mac’s programs may hold voting common stock. No holder of Class A voting common stock may directly or indirectly be a beneficial owner of more than 33 percent of the outstanding shares of Class A voting common stock. There are no restrictions on the maximum holdings of Class B voting common stock. No ownership restrictions apply to Class C non-voting common stock or preferred stock, and they are freely transferable.

Upon liquidation, dissolution or winding up of the business of Farmer Mac, after payment and provision for payment of outstanding debt of the Corporation, the holders of shares of preferred stock would be paid in full at par value, plus all accrued dividends, before the holders of shares of common stock received any payment. The dividend rights of all three classes of the Corporation’s common stock are the same, and dividends may be paid on common stock only when, as, and if declared by Farmer Mac’s board of directors in its sole discretion, subject to the payment of dividends on outstanding preferred stock.

As of December 31, 2009, the following shares of Farmer Mac common and preferred stock were outstanding:

1,030,780 shares of Class A voting common stock;

500,301 shares of Class B voting common stock;

8,610,918 shares of Class C non-voting common stock;

150,000 shares of Series B non-voting redeemable cumulative preferred stock; and

57,578 shares of Series C non-voting redeemable cumulative preferred stock.

Farmer Mac may obtain additional capital from future issuances of voting and non-voting common stock and non-voting preferred stock.

The following table presents the dividends declared on the common stock during and subsequent to 2009:

Date	Per		For
Dividend	Share		Holders Of	Date
Declared	Amount		Record As Of	Paid

March 11, 2009	$	0.05	March 24, 2009	April 3, 2009
June 3, 2009		0.05	June 15, 2009	June 30, 2009
August 6, 2009		0.05	September 15, 2009	September 30, 2009
December 2, 2009		0.05	December 15, 2009	December 31, 2009
February 4, 2010		0.05	March 15, 2010	*

* The dividend declared on February 4, 2010 is scheduled to be paid on March 31, 2010.

Farmer Mac’s ability to declare and pay common stock dividends could be restricted if it were to fail to comply with its regulatory capital requirements. See Note 9 to the consolidated financial statements and “Business—Government Regulation of Farmer Mac—Regulation—Capital Standards—Enforcement Levels.”

Series B Preferred Stock

On September 30, 2008, Farmer Mac issued 60,000 shares of its newly issued Series B-1 Senior Cumulative Perpetual Preferred Stock (“Initial Series B-1 Preferred Stock”) and 5,000 shares of its newly issued Series B-2 Senior Cumulative Perpetual Preferred Stock (“Series B-2 Preferred Stock”), each having a par value and initial liquidation preference of $1,000 per share (collectively, the Initial Series B-1 Preferred Stock and Series B-2 Preferred Stock, the “Initial Series B Preferred Stock”) for an aggregate purchase price of $65.0 million, or $1,000 per share. Farmer Mac incurred $4.0 million of direct costs related to the issuance of the Initial Series B Preferred Stock, which reduced the amount of mezzanine equity recorded as of September 30, 2008.

On December 15, 2008, Farmer Mac issued 70,000 shares of its newly issued Series B-3 Senior Cumulative Perpetual Preferred Stock (“Series B-3 Preferred Stock”) having a par value and initial liquidation preference of $1,000 per share for a purchase price of $70.0 million and an additional 15,000 shares of Series B-1 Preferred Stock (the “Supplemental Series B-1 Preferred Stock”) for a purchase price of $15.0 million. Farmer Mac incurred $1.8 million of direct costs related to the issuance of the Series B-3 Preferred Stock and Supplemental Series B-1 Preferred Stock, which reduced the amount of mezzanine equity recorded as of December 31, 2008. The Initial Series B Preferred Stock, the Supplemental Series B-1 Preferred Stock and the Series B-3 Preferred Stock are together referred to as the “Series B Preferred Stock.”

On January 25, 2010, Farmer Mac used part of the proceeds from the sale of $250.0 million of Farmer Mac II LLC’s preferred stock to repurchase and retire all $150.0 million of the outstanding Series B Preferred Stock. After consideration of the consolidated tax benefits to Farmer Mac, the net effective cost of the new $250 million of preferred stock is 5.77 percent per year, which is $3.6 million less per year than the cost of the $150 million of Series B Preferred Stock based on its 2010 dividend rate of 12 percent, which was scheduled to increase to 14 percent at the end of 2010 and 16 percent in 2011. Prior to its retirement in January 2010, the Series B Preferred Stock ranked senior to Farmer Mac’s outstanding Class A voting common stock, Class B voting common stock, Class C non-voting common stock and Series C Preferred Stock with respect to dividends, distributions upon a change in control, liquidation, and dissolution or winding up of Farmer Mac. Each series of Series B Preferred Stock ranked pari passu with the others. See Note 15 to the consolidated financial statements for more information regarding the private offering and terms of the preferred stock issued by Farmer Mac II LLC.

The following table presents the dividends declared on Series B preferred stock during and subsequent to 2009:

Per

Date

For

Dividend

Amount

Period

Date

Declared

Series B-1

Series B-2

Series B-3

Beginning

Ending

Paid

February 28, 2009

25.00

January 1, 2009

March 31, 2009

June 3, 2009

25.00

April 1, 2009

June 30, 2009

August 6, 2009

25.00

July 1, 2009

September 30, 2009

December 2, 2009

30.00

25.00

October 1, 2009

December 31, 2009

January 1, 2010

January 25, 2010

* On January 25, 2010 all of the outstanding Series B Preferred Stock was retired. The price paid for the Series B Preferred Stock included accrued dividends of $8.33 per share through the purchase date.

Series C Preferred Stock

In fourth quarter 2008, Farmer Mac began to require its business partners to purchase an equity interest in Farmer Mac in the form of shares of Farmer Mac’s Series C Non-Voting Cumulative Preferred Stock (“Series C Preferred Stock”) in connection with transactions involving pools of loans in excess of $20.0 million. The amount of the required investment was equal to 1.25 percent greater than the Corporation’s required statutory minimum capital for the pool of loans being accepted by Farmer Mac. The requirement was instituted to ensure that Farmer Mac had adequate capital to support new business in fulfilling its mission, In December 2009, Farmer Mac eliminated the requirement to purchase Series C Preferred Stock in connection with new business. With the additional regulatory capital resulting from the issuance of preferred stock by Farmer Mac II LLC on January 25, 2010, Farmer Mac believes it currently has sufficient capital to support new business without requiring further purchases of equity by its customers.

Series C Preferred Stock has a par value of $1,000 per share, an initial liquidation preference of $1,000 per share and shall consist of up to 75,000 shares. Series C Preferred Stock ranks senior to Farmer Mac’s outstanding Class A voting common stock, Class B voting common stock, Class C non-voting common stock and any other common stock of Farmer Mac issued in the future. Series C Preferred Stock ranked junior to Farmer Mac’s Series B Preferred Stock until the Series B Preferred Stock’s retirement in January 2010.

Dividends on Series C Preferred Stock compound quarterly at an annual rate of 5.0 percent of the then-applicable Liquidation Preference per share. The annual rate will increase to (1) 7.0 percent on the January 1st following the fifth anniversary of the applicable issue date and (2) 9.0 percent on the January 1st following the tenth anniversary of the applicable issue date. Dividends on Series C Preferred Stock will accrue and cumulate from the applicable issue date whether or not declared by the board of directors and will be payable quarterly in arrears out of legally available funds when and as declared by the board of directors on each dividend payment date—March 31, June 30, September 30 and December 31 of each year, beginning March 31, 2009. Farmer Mac may pay dividends on Series C Preferred Stock without paying dividends on any outstanding class or series of stock that ranks junior to Series C Preferred Stock.

Farmer Mac has the right, but not the obligation, to redeem some or all of the issued and outstanding shares of Series C Preferred Stock at a price equal to the then-applicable Liquidation Preference beginning on the first anniversary of the applicable issue date and on each subsequent dividend payment date. Farmer Mac’s redemption right with respect to Series C Preferred Stock is subject to receipt of the prior written approval of FCA, if required. The following table presents the dividends declared on Series C preferred stock during and subsequent to 2009.

Date	Per		For	For
Dividend	Share		Period	Period	Date
Declared	Amount		Beginning	Ending	Paid

February 28, 2009	$	12.50	January 1, 2009	March 31, 2009	March 31, 2009
June 3, 2009		12.50	April 1, 2009	June 30, 2009	June 30, 2009
August 6, 2009		12.50	July 1, 2009	September 30, 2009	September 30, 2009
December 2, 2009		12.50	October 1, 2009	December 31, 2009	December 31, 2009
February 4, 2010		12.50	January 1, 2010	March 31, 2010	*

* The dividend declared on February 4, 2010 is scheduled to be paid on March 31, 2010.

During 2009, Farmer Mac sold 48,378 shares of Series C Preferred Stock resulting in 57,578 shares of Series C Preferred Stock outstanding as of December 31, 2009.

Common Stock Repurchases

There were no common stock repurchases during 2009. During 2008 and 2007, Farmer Mac repurchased 31,691 and 1,086,541 shares, respectively, of its Class C non-voting common stock at an average price of $26.13 and $26.61 per share, respectively, pursuant to the Corporation’s stock repurchase programs. These repurchases reduced the Corporation’s stockholders’ equity by approximately $0.8 million and $29.0 million, respectively. The aggregate number of shares purchased by Farmer Mac under the stock repurchase programs reached the maximum number of authorized shares during first quarter 2008, thereby terminating the program according to its terms. All of the shares repurchased under Farmer Mac’s stock repurchase programs were purchased in open market transactions and were retired to become authorized but unissued shares available for future issuance.

FARMER MAC’S AUTHORITY TO BORROW FROM THE U.S. TREASURY

Farmer Mac may issue obligations to the U.S. Treasury in a cumulative amount not to exceed $1.5 billion. The proceeds of those obligations may be used solely for the purpose of fulfilling Farmer Mac’s guarantee obligations under the Farmer Mac I, Farmer Mac II, and Rural Utilities programs. Farmer Mac’s charter provides that the U.S. Treasury is required to purchase those obligations of the Corporation if Farmer Mac certifies that:

a portion of the guarantee fees assessed by Farmer Mac has been set aside in a segregated account as a reserve against losses arising out of Farmer Mac’s guarantee activities in an amount determined by Farmer Mac’s board of directors to be necessary and such reserve has been exhausted (that amount was $64.6 million and $63.2 million as of December 31, 2009 and 2008, respectively); and

the proceeds of such obligations are needed to fulfill Farmer Mac’s guarantee obligations.

Such obligations would bear interest at a rate determined by the U.S. Treasury, taking into consideration the average rate on outstanding marketable obligations of the United States as of the last day of the last calendar month ending before the date of the purchase of the obligations from Farmer Mac, and would be required to be repurchased from the U.S. Treasury by Farmer Mac within a “reasonable time.” As of December 31, 2009, Farmer Mac had not utilized this borrowing authority and does not expect to utilize this borrowing authority in the near future.

The United States government does not guarantee payments due on Farmer Mac Guaranteed Securities, funds invested in the equity or debt securities of Farmer Mac, any dividend payments on shares of Farmer Mac stock or the profitability of Farmer Mac.

GOVERNMENT REGULATION OF FARMER MAC

General

In 1987, Congress created Farmer Mac in the aftermath of the collapse of the agricultural credit delivery system. Farmer Mac’s primary committees of jurisdiction in the U.S. House of Representatives and the U.S. Senate—the Agriculture Committees—added requirements for Farmer Mac that had not been included in any of the other statutes establishing other GSEs.

Unlike the other existing GSEs at the time, Farmer Mac’s initial 1987 legislation required the Corporation to be regulated by an independent regulator, the Farm Credit Administration, which has the authority to regulate Farmer Mac’s safety and soundness. The statute creating Farmer Mac expressly requires that qualified loans meet minimum credit and appraisal standards that represent sound loans to profitable farm businesses. The enabling legislation also required Farmer Mac to comply with the periodic reporting requirements of the SEC, including quarterly reports on the financial status of the Corporation and interim reports when there are significant developments. Farmer Mac’s statutory charter also requires offerings of Farmer Mac Guaranteed Securities to be registered under the Securities Act unless an exemption for an offering is available.

Since Farmer Mac’s creation, Congress has amended Farmer Mac’s charter four times:

in 1990 to create the Farmer Mac II program;

in 1991 to clarify Farmer Mac’s authority to purchase its guaranteed securities, establish OSMO as Farmer Mac’s financial regulator and set minimum regulatory capital requirements for Farmer Mac;

in 1996 to remove certain barriers to and restrictions on Farmer Mac’s operations to be more competitive (e.g., allowing Farmer Mac to buy loans directly from lenders and issue guaranteed securities representing 100% of the principal of the purchased loans and modifying capital requirements); and

in 2008 to authorize Farmer Mac to purchase, and guarantee securities backed by, loans made by cooperative lenders to borrowers to finance electrification and telecommunications systems in rural areas.

Farmer Mac’s authorities and regulatory structure were not revised by subsequent legislation adopted in 2008 to regulate other GSEs.

Regulation

Office of Secondary Market Oversight (OSMO)

As an institution of the FCS, Farmer Mac (including its subsidiaries) is subject to the regulatory authority of FCA. FCA, acting through OSMO, has general regulatory and enforcement authority over Farmer Mac, including the authority to promulgate rules and regulations governing the activities of Farmer Mac and to apply its general enforcement powers to Farmer Mac and its activities. The Director of OSMO, who is selected by and reports to the FCA board, is responsible for the examination of Farmer Mac and the general supervision of the safe and sound performance by Farmer Mac of the powers and duties vested in it by Farmer Mac’s charter. The charter requires an annual examination of the financial transactions of Farmer Mac and authorizes FCA to assess Farmer Mac for the cost of its regulatory activities, including the cost of any examination. Farmer Mac is required to file quarterly reports of condition with FCA.

Capital Standards

General. Farmer Mac’s charter establishes three capital standards for Farmer Mac:

Statutory minimum capital requirement – Farmer Mac’s minimum capital level is an amount of core capital (stockholders’ equity less accumulated other comprehensive income/(loss) plus mezzanine equity) equal to the sum of 2.75 percent of Farmer Mac’s aggregate on-balance sheet assets, as calculated for regulatory purposes, plus 0.75 percent of Farmer Mac’s aggregate off-balance sheet obligations, specifically including:

the unpaid principal balance of outstanding Farmer Mac Guaranteed Securities;

instruments issued or guaranteed by Farmer Mac that are substantially equivalent to Farmer Mac Guaranteed Securities, including LTSPCs; and

other off-balance sheet obligations of Farmer Mac.

Statutory critical capital requirement – Farmer Mac’s critical capital level is an amount of core capital equal to 50 percent of the total minimum capital requirement at that time.

Risk-based capital – The charter directs FCA to establish a risk-based capital stress test for Farmer Mac, using specified stress-test parameters.

Farmer Mac is required to comply with the higher of the minimum capital requirement or the risk-based capital requirement.

The risk-based capital stress test promulgated by FCA is intended to determine the amount of regulatory capital (core capital plus the allowance for losses, but excluding the valuation allowance for REO) that Farmer Mac would need to maintain positive capital during a ten-year period in which:

annual losses occur at a rate of default and severity “reasonably related” to the rates of the highest sequential two years in a limited U.S. geographic area; and

interest rates increase to a level equal to the lesser of 600 basis points or 50 percent of the ten-year U.S. Treasury rate, and interest rates remain at such level for the remainder of the period.

The risk-based capital stress test then adds an additional 30 percent to the resulting capital requirement for management and operational risk. FCA promulgated a revised risk-based capital stress test that became effective July 25, 2008.

As of December 31, 2009, Farmer Mac’s minimum and critical capital requirements were $217.0 million and $108.5 million, respectively, and its actual core capital level was $337.2 million, $120.2 million above the minimum capital requirement and $228.7 million above the critical capital requirement. Based on the risk-based capital stress test, Farmer Mac’s risk-based capital requirement as of December 31, 2009 was $35.9 million and Farmer Mac’s regulatory capital of $351.3 million exceeded that amount by approximately $315.4 million. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Capital Requirements” for a presentation of Farmer Mac’s current regulatory capital position.

Enforcement Levels. Farmer Mac’s charter directs FCA to classify Farmer Mac within one of four enforcement levels for purposes of determining compliance with capital standards. As of December 31, 2009, Farmer Mac was classified as within level I—the highest compliance level.

Failure to comply with the applicable required capital level in the charter would result in Farmer Mac being classified as within level II (below the applicable risk-based capital level, but above the minimum capital level), level III (below the minimum capital level, but above the critical capital level) or level IV (below the critical capital level). In the event that Farmer Mac were classified as within level II, III or IV, the charter requires the Director of OSMO to take a number of mandatory supervisory measures and provides the Director with discretionary authority to take various optional supervisory measures depending on the level in which Farmer Mac is classified. The mandatory measures applicable to levels II and III include:

requiring Farmer Mac to submit and comply with a capital restoration plan;

prohibiting the payment of dividends if such payment would result in Farmer Mac being reclassified as within a lower level and requiring the pre-approval of any dividend payment even if such payment would not result in reclassification as within level IV; and

reclassifying Farmer Mac as within one level lower if it does not submit a capital restoration plan that is approved by the Director, or the Director determines that Farmer Mac has failed to make, in good faith, reasonable efforts to comply with such a plan and fulfill the schedule for the plan approved by the Director.

If Farmer Mac were classified as within level III, then, in addition to the foregoing mandatory supervisory measures, the Director of OSMO could take any of the following discretionary supervisory measures:

imposing limits on any increase in, or ordering the reduction of, any obligations of Farmer Mac, including off-balance sheet obligations;

limiting or prohibiting asset growth or requiring the reduction of assets;

requiring the acquisition of new capital in an amount sufficient to provide for reclassification as within a higher level;

terminating, reducing or modifying any activity the Director determines creates excessive risk to Farmer Mac; or

appointing a conservator or a receiver for Farmer Mac.

Farmer Mac’s charter does not specify any supervisory measures, either mandatory or discretionary, to be taken by the Director in the event Farmer Mac were classified as within level IV.

The Director of OSMO has the discretionary authority to reclassify Farmer Mac to a level that is one level below its then current level (for example, from level I to level II) if the Director determines that Farmer Mac is engaging in any action not approved by the Director that could result in a rapid depletion of core capital or if the value of property subject to mortgages backing Farmer Mac Guaranteed Securities has decreased significantly.

Item 1A. Risk Factors

Farmer Mac’s business activities, financial performance and results of operations are, by their nature, subject to a number of risks and uncertainties. Consequently, the Corporation’s net interest income, total revenues and net income have been, and are likely to continue to be, subject to fluctuations that reflect the effect of many factors, including the risk factors described below. Other sections of this Annual Report on Form 10-K may include additional factors that could adversely affect Farmer Mac’s business and its financial performance and results of operations. Furthermore, because new risk factors likely will emerge from time to time, management can neither predict all such risk factors nor assess the effects of such factors on Farmer Mac’s business, operating results and financial condition or the extent to which any factor, or combination of factors, may affect the Corporation’s actual results and financial condition. If any of the following risks materialize, Farmer Mac’s business, financial condition or results of operations could be materially and adversely affected.

An inability to access the debt capital markets could have a material adverse effect on Farmer Mac’s business, operating results, financial condition and capital levels.

Farmer Mac’s ability to operate its business, meet its obligations, grow its assets and fulfill its statutory purpose depends on the Corporation’s ability to issue substantial amounts of debt frequently and at favorable rates. The issuance of short-term and long-term debt securities in the U.S. financial markets is the primary source of funding for Farmer Mac’s purchases of program and non-program assets and for repaying or refinancing existing debt. Moreover, one of the primary sources of the Corporation’s revenue is the net interest income earned from the difference, or “spread,” between the return received on assets held and the related borrowing costs. Farmer Mac’s ability to obtain funds through the issuance of debt, and the cost at which these funds may be obtained, depends on many factors, including:

Farmer Mac’s corporate and regulatory structure, including its status as a GSE and perceptions about the viability of stockholder-owned GSEs in general;

compliance with regulatory capital requirements and any measures imposed by Farmer Mac’s regulator if the Corporation were to fail to remain in compliance with those requirements;

Farmer Mac’s financial results and changes in its financial condition;

the public’s perception of the risks to and financial prospects of Farmer Mac’s business;

prevailing conditions in the capital markets;

competition from other issuers of GSE debt; and

legislative or regulatory actions relating to Farmer Mac’s business, including any actions that would affect the Corporation’s GSE status or add additional requirements that would restrict or reduce its ability to issue debt.

Farmer Mac’s business, operating results, financial condition and capital levels may be materially and adversely affected by external factors that may be beyond its control.

Farmer Mac’s business, operating results, financial condition and capital levels may be materially and adversely affected by external factors that may be beyond its control, including, but not limited to:

disruptions in the capital markets, which could adversely affect the value and performance of Farmer Mac’s program and non-program assets, the Corporation’s liquidity position and Farmer Mac’s ability to fund assets at favorable levels by issuing debt securities and to raise capital by selling equity securities;

legislative or regulatory developments or interpretations of Farmer Mac’s statutory charter that could adversely affect Farmer Mac, its ability to offer new products, the ability or motivation of certain lenders to participate in its programs or the terms of any such participation, or increase the cost of regulation and related corporate activities;

Farmer Mac’s access to the debt markets at favorable rates and terms;

competitive pressures in the purchase of agricultural real estate mortgage loans and the sale of Farmer Mac Guaranteed Securities and debt securities;

changes in interest rates, agricultural land values, commodity prices, export demand for U.S. agricultural products, general economic conditions, and other factors that may affect delinquency levels and credit losses on agricultural real estate mortgage loans;

protracted adverse weather, animal and plant disease outbreaks, costs of agricultural production inputs for farmers and ranchers, availability and cost of agricultural workers, market or other conditions affecting particular geographic regions or particular agricultural commodities or products related to agricultural real estate mortgage loans backing Farmer Mac I Guaranteed Securities or under LTSPCs;

the effects of any changes in federal assistance for agriculture on the agricultural economy;

energy policy changes that adversely affect the loan repayment capacity of ethanol plants;

public policy changes that adversely affect rural electric cooperatives, including carbon capture or limitation on coal-fired power generation and other initiatives designed to promote the shift to clean or “green” energy, which may require utilities to raise rates to customers to pay for new generation sources;

restrictions on water supply in agricultural production due to adverse weather conditions, legal disputes or other causes;

depressed real property values that may impact the value of agricultural real estate; and

decreases in demand for agricultural commodities and/or increases in production costs, in each case within a particular industry, that may affect delinquency levels and credit losses on agricultural real estate mortgage loans within that industry.

Farmer Mac’s business development, profitability and capital depend on the continued growth of the secondary market for agricultural real estate mortgage loans and for rural utilities loans, the future for both of which remains uncertain.

Continued growth in Farmer Mac’s business and future profitability may be constrained by conditions that limit the need or ability for lenders to obtain the benefits of Farmer Mac’s programs, including, but not limited to:

reduced growth rates in the agricultural mortgage market due to the slowdown of the overall economy;

the availability of other sources of capital for customers of Farmer Mac, including through federal programs;

the acceptance by Federal Home Loan Banks of agricultural real estate mortgage loans as collateral;

the historical preference of many agricultural lending institutions to retain loans in their portfolios rather than to sell them into the secondary market;

the small number of business partners that currently provide a significant portion of Farmer Mac’s business volume, resulting in vulnerability as existing business volume pays down or matures and the status of these business partners evolves;

expanded funding available from the federal government for rural utilities lenders; and

legislative and regulatory developments that affect the agricultural and rural utilities sectors.

Farmer Mac is a GSE whose continued growth may be materially and adversely affected by legislative and regulatory developments.

Farmer Mac is a GSE that is governed by a statutory charter controlled by the U.S. Congress and regulated by governmental agencies. Although Farmer Mac is not aware of any pending legislative proposals which would adversely affect the Corporation at this time, Farmer Mac is subject to risks and uncertainties related to legislative, regulatory or political developments. Such developments could affect the ability of lenders to participate in Farmer Mac’s programs or the terms on which they may participate. Further, from time to time, legislative or regulatory initiatives are commenced that, if successful, could result in the enactment of legislation or the promulgation of regulations that could affect negatively the growth or operation of the secondary market for agricultural mortgages and rural utilities loans. For example, the costs related to any potential climate change legislation costs could be significant to the electric utility industry, which could dramatically increase the cost of energy from thermal generation sources and have a particularly damaging effect on rural G&T cooperatives, which generally have a higher reliance on fossil-fueled resources and are more dependent on coal-fired generation than the electric industry as a whole. Any of these political or regulatory developments could have a material and adverse effect on Farmer Mac’s business, operating results, financial condition and capital levels. See “Government Regulation of Farmer Mac” in Item 1 of this Annual Report on Form 10-K for additional discussion on the rules and regulations governing Farmer Mac’s activities.

Farmer Mac is subject to statutory and regulatory capital requirements that are subject to change, and failure to meet those requirements could result in supervisory measures or otherwise materially and adversely affect Farmer Mac’s business, operating results or financial condition.

Farmer Mac is required by statute and regulation to maintain certain core capital levels. Any inability by Farmer Mac to meet these capital requirements could result in supervisory measures by FCA or could otherwise materially and adversely affect Farmer Mac’s business, operating results or financial condition. Factors that could adversely affect the adequacy of Farmer Mac’s capital levels in the future, and which may be beyond Farmer Mac’s control, include:

the potential for any other-than-temporary impairment charges;

adverse changes in interest rates or credit spreads;

the potential need to increase the level of the allowance for losses on program assets in the future;

legislative or regulatory actions that increase Farmer Mac’s applicable capital requirements; and

changes in generally accepted accounting principles.

Farmer Mac Guaranteed Securities and LTSPCs expose Farmer Mac to significant contingent liabilities, and its ability to fulfill its obligations under its guarantees and LTSPCs may be limited.

Farmer Mac assumes the ultimate credit risk of borrower defaults on the loans it holds as well as the loans underlying Farmer Mac Guaranteed Securities and LTSPCs. In the Farmer Mac I program, repayment of eligible loans typically depends on the success of the related farming operation, which, in turn, depends on many variables and factors over which farmers may have little or no control, such as weather conditions, animal and plant disease outbreaks, economic conditions (both domestic and international) and political conditions.

In the Rural Utilities program, eligible utilities operations include the distribution of electricity, the generation and transmission of electricity, and telecommunications. Each type of utility operation has different inherent risks associated with it, but all share a common risk posed by potential changes in public and regulatory policies. Business cash flows can be disrupted as a result of storms, though distribution cooperatives have in place cost-sharing arrangements with providers in other regions that mitigate this exposure. Historically, natural disasters have often resulted in disaster area declarations and financial aid to utilities providers through the Federal Emergency Management Agency and other conduits, although there can be no assurance that any such aid would be available in the event of any future natural disaster. The electrical distribution and generation sectors can be adversely affected by changes in fuel costs and prices received from consumers, as well as by contractual power obligations that do not match up with supply or demand. The depth and pace of technological change in the telecommunications industry can also provide significant challenges, as the industry requires heavy capital investment and correct judgments about the sustainability of new technologies in an area with many competitors.

Widespread repayment shortfalls on loans in the Farmer Mac I program or Rural Utilities program could require Farmer Mac to pay under its guarantees and LTSPCs and could have a material adverse effect on the Corporation’s financial condition, results of operations and liquidity.

Farmer Mac Guaranteed Securities and LTSPCs are obligations of Farmer Mac only, and are not backed by the full faith and credit of the United States, FCA or any other agency or instrumentality of the United States other than Farmer Mac. Farmer Mac’s principal source of funds for the payment of claims under its guarantees and purchase commitments are the fees received in connection with outstanding Farmer Mac Guaranteed Securities and LTSPCs. These amounts are, and will continue to be, substantially less than the amount of Farmer Mac’s aggregate contingent liabilities under its guarantees and LTSPCs. Farmer Mac is required to set aside a portion of the fees it receives as a reserve against losses from its guarantee and commitment activities. Farmer Mac expects that its future contingent liabilities for its guarantee and commitment activities will continue to grow and will exceed Farmer Mac’s resources, including amounts in the Corporation’s allowance for losses and its limited ability to borrow from the U.S. Treasury.

Farmer Mac is exposed to credit risk and interest rate risk that could materially and adversely affect its business, operating results, financial condition, capital levels and future earnings.

Farmer Mac’s earnings depend largely on the performance of its program assets and non-program investments, and the spread between interest earned on such assets and investments and interest paid on Farmer Mac’s obligations and liabilities. As a result, Farmer Mac’s earnings may be adversely affected by its exposure to credit and interest rate risks, including:

credit risk associated with the agricultural mortgages and rural utilities loans that Farmer Mac purchases or commits to purchase or that back Farmer Mac Guaranteed Securities;

interest rate risk on interest-earning assets and related interest-bearing liabilities due to possible timing differences in the associated cash flows;

credit risk associated with Farmer Mac’s business relationships with other institutions, such as counterparties to interest rate swap contracts and other hedging arrangements; and

risks as to the creditworthiness of the issuers of AgVantage securities and the Corporation’s non-program investments.

Farmer Mac may be adversely affected by weak economic conditions and market turmoil.

The recent significant disruptions in world financial markets, and resulting economic downturn, may have an adverse effect on the value and performance of Farmer Mac’s assets. The possible duration and severity of the adverse economic cycle is unknown, as the efficacy of legislative and regulatory efforts and programs to stabilize the economy are uncertain. Furthermore, there can be no assurance that economic conditions will improve in the near future. To the extent that economic conditions, such as high unemployment or decreases in agricultural real estate values, negatively impact agricultural production or demand, Farmer Mac’s business, operating results or financial condition could be adversely affected.

Farmer Mac may experience writedowns of its investments in future periods, which could adversely affect the Corporation’s business, operating results, financial condition and capital levels.

Deterioration in financial and credit market conditions could reduce the fair value of Farmer Mac’s investment securities, particularly those securities that are less liquid and more subject to volatility.

Recent events in the credit markets have also necessitated an increase in the amount of judgment required to be exercised by management to value certain securities. Furthermore, Farmer Mac relies on internal models to determine the fair value of certain investment securities, and those models could fail to produce reliable results. Subsequent valuations of investment securities, in light of factors then prevailing, may result in significant changes in the value of the Corporation’s investment securities in the future. If Farmer Mac decides to sell any of the securities in its investment portfolio, the price ultimately realized will depend on the demand and liquidity in the market at that time and may be materially lower than their current fair value.

Changes in interest rates may cause volatility in financial results and capital levels.

Farmer Mac enters into financial derivatives transactions to hedge interest rate risks inherent in its business and applies fair value accounting to its financial derivatives transactions pursuant to guidance from the Financial Accounting Standards Board (“FASB”) on accounting for derivatives; it does not apply hedge accounting to those derivatives. Although Farmer Mac’s financial derivatives provide highly effective economic hedges of interest rate risk, the FASB guidance requires the losses on financial derivatives to be reflected in net income, while a majority of the offsetting economic gains on the hedged items are not. In addition to volatile earnings under accounting principles generally accepted in the United States (“GAAP”), another consequence of the changes in the fair values of financial derivatives being accounted for in earnings is the resulting effect on Farmer Mac’s regulatory core capital that is available to meet the Corporation’s statutory minimum capital requirement.

Farmer Mac relies on information systems and other technology in its business operations, and any failure or interruption in those systems could adversely affect Farmer Mac’s business, operating results or financial condition.

Farmer Mac relies heavily on information systems and other technology, including from third parties, to conduct and manage its business. If Farmer Mac experiences a failure or interruption in any of these systems or other technology, including as a result of any actions or failures of third parties, it may be unable to conduct and manage its business effectively. Although Farmer Mac has implemented a business continuity plan, Farmer Mac may not be able to prevent, address on a timely and adequate basis, or mitigate the negative effects of any failure or interruption. Furthermore, any breach or loss of sensitive or confidential information could cause Farmer Mac to suffer reputational harm with respect to its business partners. As a result, any failure or interruption of these information systems or other technology could adversely affect Farmer Mac’s business, operating results or financial condition.

If Farmer Mac’s management of risk associated with its program and non-program assets is not effective, its business, operating results, financial condition and capital levels could be materially adversely affected.

Recent events in the financial markets relating to volatility, liquidity and credit have challenged financial institutions, including Farmer Mac, to adapt and further develop profitability and risk management models adequate to address a wider range of possible market developments. Farmer Mac’s techniques and strategies may not be effective in mitigating its risk exposure in all economic market environments or against all types of risk, including risks that Farmer Mac fails to identify or anticipate. Some of Farmer Mac’s qualitative tools and metrics for managing risk are based upon its use of observed historical market behavior. Farmer Mac applies statistical and other tools to these observations to quantify its risks. These tools and metrics may fail to predict future risk. Such failures could, for example, arise from factors Farmer Mac did not anticipate or correctly evaluate in its models. In addition, Farmer Mac’s quantified modeling does not take into account all risks. Its more qualitative approach to managing those risks could prove insufficient, exposing it to material unanticipated losses. The inability of Farmer Mac to effectively identify and manage the risks inherent in its business could have a material adverse effect on its business, operating results, financial condition and capital levels.

Farmer Mac’s ability to repay its obligations and/or raise capital through issuances of debt or equity may be adversely affected by the operating results of its subsidiary Farmer Mac II LLC.

In January 2010, Farmer Mac contributed substantially all of its Farmer Mac II program business to Farmer Mac II LLC, including USDA-guaranteed portions having an aggregate principal amount of $1.1 billion and the primary intangible assets related to the operation of the Farmer Mac II program. As a result, the assets of Farmer Mac II LLC are not directly available to satisfy the claims of Farmer Mac’s creditors or stockholders. In the event of an insolvency, bankruptcy, liquidation, reorganization, dissolution or winding-up of Farmer Mac II LLC, Farmer Mac, as the holder of the common equity interest, may lose all or some of its investment in Farmer Mac II LLC, which event likely would adversely affect Farmer Mac’s ability to raise capital, issue new debt and repay outstanding debt as it comes due. If Farmer Mac is a creditor to Farmer Mac II LLC, the value of Farmer Mac II LLC’s assets may be insufficient to repay amounts due to Farmer Mac, which also could adversely affect Farmer Mac’s ability to raise capital, issue new debt and repay outstanding debt as it comes due. In addition, the ability of Farmer Mac II LLC to successfully operate the Farmer Mac II program will impact its ability to pay dividends on the common equity interest owned by Farmer Mac. If Farmer Mac II LLC cannot pay dividends to Farmer Mac or repay or refinance obligations owed to Farmer Mac, Farmer Mac’s liquidity and ability to raise additional capital also may be adversely affected, which could adversely affect the Corporation’s operating results and financial condition.

Any of these risks could materially and adversely affect Farmer Mac’s business, operating results, financial condition, capital levels and future earnings. For additional discussion about the Corporation’s risk management, see “Management’s Discussion and Analysis of Financial Conditions and Results of Operation—Risk Management” in Item 7 of this Annual Report on Form 10-K.

Item 1B. Unresolved Staff Comments

None.

Item 2. Properties

Farmer Mac currently occupies its principal offices, which are located at 1133 Twenty-First Street, N.W., Washington, D.C. 20036, under the terms of a lease that expires on November 30, 2011 and covers approximately 13,500 square feet of office space. Farmer Mac also maintains an office located at 1517 North Ankeny Boulevard, Ankeny, Iowa 50021, under the terms of a lease that expires on November 14, 2010 and covers approximately 1,358 square feet of office space. Farmer Mac’s offices are suitable and adequate for its current and currently anticipated needs.

Item 3. Legal Proceedings

On December 5, 2008, a lawsuit was filed in the United States District Court for the District of Columbia against Farmer Mac and certain of its present and former officers and directors on behalf of purchasers of the securities of the Corporation between March 15, 2007 and September 12, 2008. The lawsuit alleges, among other things, violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder by all defendants and violations of Section 20(a) of the Exchange Act by the individual defendants in relation to statements and omissions concerning the financial condition of the Corporation alleged to be materially false or misleading. The complaint alleged that Farmer Mac made false and misleading statements that had the effect of artificially inflating the price of its securities during the period referenced above. The complaint also alleged that Farmer Mac failed to disclose material information relating to impairment costs and/or depreciation expenses and that Farmer Mac used overly optimistic assumptions with respect to asset valuations and investments, the size of Farmer Mac’s exposure to Lehman Brothers Holdings Inc. and Fannie Mae, and its performance relative to estimates of future performance. The December 5, 2008 complaint requested class certification, compensatory damages, and other remedies, but did not specify the amount of damages sought. On February 23, 2009, the Court appointed lead plaintiffs for the litigation. On February 26, 2010, the Court entered a stipulation of voluntary dismissal between the parties pursuant to which the lead plaintiffs voluntarily dismissed their case and agreed not to further pursue or assert any claims against the parties that were asserted, or could have been asserted, in the action or otherwise relate to the subject matter of the action.

Item 4. (Removed and Reserved)

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a) Farmer Mac has three classes of common stock outstanding. Ownership of Class A voting common stock is restricted to banks, insurance companies and other financial institutions or similar entities that are not institutions of the FCS. Ownership of Class B voting common stock is restricted to institutions of the FCS. There are no ownership restrictions on the Class C non-voting common stock. Under the terms of the original public offering of the Class A and Class B voting common stock, the Corporation reserved the right to redeem at book value any shares of either class held by an ineligible holder.

Farmer Mac’s Class A voting common stock and Class C non-voting common stock trade on the New York Stock Exchange under the symbols AGM.A and AGM, respectively. The Class B voting common stock, which has a limited market and trades infrequently, is not listed or quoted on any exchange or other medium, and Farmer Mac is unaware of any publicly available quotations or prices for that class of common stock.

The information below represents the high and low closing sales prices for the Class A and Class C common stocks for the periods indicated as reported by the New York Stock Exchange.

	Sales Prices
	Class A Stock				Class C Stock
	High		Low		High		Low
	(per share)
2010
First quarter (through March 1, 2010)	$	8.85	$	6.18	$	9.15	$	6.79

2009
Fourth quarter	$	7.58	$	5.29	$	9.63	$	6.11
Third quarter		8.12		2.99		11.49		4.11
Second quarter		6.16		2.00		8.38		2.62
First quarter		3.50		1.81		4.47		2.40

2008
Fourth quarter	$	9.14	$	1.25	$	10.99	$	2.38
Third quarter		22.06		2.25		32.25		2.28
Second quarter		22.05		14.75		33.85		24.52
First quarter		20.15		15.50		29.92		21.63

As of March 1, 2010, Farmer Mac estimates that there were 1,181 registered owners of the Class A voting common stock, 89 registered owners of the Class B voting common stock and 1,109 registered owners of the Class C non-voting common stock.

The dividend rights of all three classes of the Corporation’s common stock are the same, and dividends may be paid on common stock only when, as, and if declared by Farmer Mac’s board of directors in its sole discretion. From fourth quarter 2004 through fourth quarter 2008 and from first quarter 2009 through fourth quarter 2009, Farmer Mac paid a quarterly dividend of $0.10 per share and $0.05 per share, respectively, on all classes of the Corporation’s common stock. On February 4, 2010, Farmer Mac’s board of directors declared a quarterly dividend of $0.05 per share on the Corporation’s common stock payable on March 31, 2010. The board reduced the quarterly dividend in 2009 compared to 2008 to preserve capital based on its assessment of the uncertain outlook for capital market conditions and to ensure that Farmer Mac had adequate capital to meet its statutory capital requirements and support new business. Farmer Mac’s ability to pay dividends on its common stock is subject to the payment of dividends on its outstanding preferred stock. Farmer Mac’s ability to declare and pay dividends could also be restricted if it were to fail to comply with regulatory capital requirements. See “Business—Government Regulation of Farmer Mac—Regulation—Capital Standards—Enforcement Levels.”

Information about securities authorized for issuance under Farmer Mac’s equity compensation plans appears under “Equity Compensation Plans” in the Corporation’s definitive proxy statement to be filed on or about April 28, 2010. That portion of the definitive proxy statement is incorporated by reference into this Annual Report on Form 10-K.

Farmer Mac is a federally chartered instrumentality of the United States and its common stock is exempt from registration pursuant to Section 3(a)(2) of the Securities Act. Two types of transactions related to Farmer Mac common stock occurred during fourth quarter 2009 that were not registered under the Securities Act and not otherwise reported on a Current Report on Form 8-K:

On October 7, 2009, Farmer Mac granted stock appreciation rights under its 2008 Omnibus Incentive Plan with respect to an aggregate of 45,000 shares of Class C non-voting common stock, at an exercise price of $7.78 per share, to nine non-officer employees as incentive compensation.

On October 22, 2009, pursuant to Farmer Mac’s policy that permits directors of Farmer Mac to elect to receive shares of Class C non-voting common stock in lieu of their cash retainers, Farmer Mac issued an aggregate of 1,685 shares of its Class C non-voting common stock to the five directors who elected to receive such stock in lieu of their cash retainers. The number of shares issued to the directors was calculated based on a price of $7.50 per share, which was the closing price of the Class C non-voting common stock on September 30, 2009 as reported by the New York Stock Exchange.

Performance Graph. The following graph compares the performance of Farmer Mac’s Class A voting common stock and Class C non-voting common stock with the performance of the New York Stock Exchange Composite Index (the “NYSE Comp”) and the Standard & Poor’s 500 Diversified Financials Index (the “S&P Div Fin”) over the period from December 31, 2004 to December 31, 2009. The graph assumes that $100 was invested on December 31, 2004 in each of: Farmer Mac’s Class A voting common stock; Farmer Mac’s Class C non-voting common Stock; the NYSE Comp; and the S&P Div Fin. The graph also assumes that all dividends were reinvested into the same securities throughout the past five years. Farmer Mac obtained the information contained in the performance graph from SNL Financial.

This performance graph shall not be deemed to be “soliciting material” or to be “filed” with the SEC, and such performance graph shall not be incorporated by reference into any of Farmer Mac’s filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing (except to the extent Farmer Mac specifically incorporates this section by reference into such filing).

(b)

Not applicable.

(c) Farmer Mac did not repurchase any shares of its common stock during 2009. See “Business—Farmer Mac Programs—Financing—Equity Issuance—Common Stock Repurchases” for information regarding Farmer Mac’s repurchases of its Class C non-voting common stock during 2008 and 2007.

Item 6.

Selected Financial Data

The selected consolidated financial data presented below is summarized from Farmer Mac’s consolidated balance sheet data as of December 31, 2009 and the five-year period then ended, as well as selected results of operations data for the five-year period then ended. This data should be reviewed in conjunction with the audited consolidated financial statements and related notes and with “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K.

	As of December 31,
Summary of Financial Condition:	2009			2008			2007			2006			2005
	(dollars in thousands)
Cash and cash equivalents	$	654,794		$	278,412		$	101,445		$	877,714		$	458,852
Investment securities		1,131,895			1,235,859			2,624,366			1,830,904			1,621,941
Farmer Mac Guaranteed Securities		3,398,996			2,451,244			1,298,823			1,330,418			1,330,976
Loans, net		753,720			774,596			766,219			775,421			799,516
Total assets		6,138,813			5,107,307			4,977,613			4,953,673			4,341,445
Notes payable:
Due within one year		3,662,898			3,757,099			3,829,698			3,298,097			2,587,704
Due after one year		1,908,713			887,999			744,649			1,296,691			1,406,527
Total liabilities		5,798,406			4,947,743			4,754,020			4,705,184			4,095,416
Mezzanine equity		144,216			144,216			-			-			-
Stockholders' equity		196,191			15,348			223,593			248,489			246,029

Selected Financial Ratios:
Return on average assets (1)		1.46	%		-3.06	%		0.09	%		0.64	%		1.15	%
Return on average common equity (2)		113.70	%		-158.24	%		2.20	%		14.03	%		22.87	%
Average equity to assets (3)		1.88	%		2.37	%		4.75	%		5.32	%		5.88	%
Average total equity to assets (4)		4.45	%		3.80	%		4.75	%		5.32	%		5.88	%

	For the Year Ended December 31,
Summary of Operations:	2009			2008			2007			2006			2005
	(in thousands, except per share amounts)
Interest Income:
Net interest income after (provision)/recovery for loan losses	$	83,055		$	74,184		$	44,668		$	40,686		$	50,689
Non-interest income/(loss):
Guarantee and commitment fees		31,805			28,381			25,232			21,815			19,554
Gains/(losses) on financial derivatives and trading assets		64,570			(141,042	)		(40,274	)		1,617			11,537
Other-than-temporary impairment losses		(3,994	)		(106,240	)		-			-			-
Gains on asset sales and debt repurchases		4,934			2,689			288			1,150			116
Gains on the sale of real estate owned		-			-			130			809			34
Representation and warranty claims income		-			-			-			718			79
Other income		1,439			1,413			1,411			1,001			1,872
Non-interest income/(loss)		98,754			(214,799	)		(13,213	)		27,110			33,192
Non-interest expense		29,692			32,612			24,877			23,094			11,518
Income/(loss) before income taxes		152,117			(173,227	)		6,578			44,702			72,363
Income tax expense/(benefit)		52,517			(22,864	)		(83	)		12,689			23,091
Net income/(loss)		99,600			(150,363	)		6,661			32,013			49,272
Preferred stock dividends		(17,302	)		(3,717	)		(2,240	)		(2,240	)		(2,240	)
Net income/(loss) available to common stockholders	$	82,298		$	(154,080	)	$	4,421		$	29,773		$	47,032

Allowance for Losses Activity:
Provision/(recovery) for losses	$	5,242		$	17,840		$	(142	)	$	(3,408	)	$	(8,777	)
Net charge-offs/(recoveries)		7,490			5,292			526			690			(329	)
Ending balance		14,187			16,435			3,887			4,555			8,653

Earnings Per Common Share and Dividends:
Basic earnings/(loss) per common share	$	8.12		$	(15.40	)	$	0.43		$	2.74		$	4.14
Diluted earnings/(loss) per common share		8.04			(15.40	)		0.42			2.68			4.09
Common stock dividends per common share		0.20			0.40			0.40			0.40			0.40

Regulatory Capital:
Statutory minimum capital requirement	$	216,959		$	193,476		$	186,032		$	174,539		$	142,439
Core capital		337,153			206,976			226,386			243,533			244,792
Minimum capital surplus		120,194			13,500