Cost of Cash at Historic Lows

February 7, 2012 01:46 AM

Take advantage of low interest rates and creative financing options before it’s too late

Community and agricultural banks are flush with cash, which is allowing them to offer creative loan products and once-in-a-lifetime opportunities to lock in low interest rates.

The federal funds rate—the rate banks charge other banks—has been between 0 and 0.25 basis points since December 2008. Banks use the federal funds rate as a benchmark for short-term interest rates.

"Short-term rates, anything under two years duration, are very low," says Mark Hancock, vice president of finance for Farm Credit Services of Mid-America, Louisville, Ky. "I find it hard to believe short-term rates will go lower. We truly are in a once-in-a-lifetime rate environment."
The last time interest rates were this low was in the 1930s and 1940s.

Long-term rates, however, could drift lower under what’s been called Operation Twist. In an effort to drive long-term interest rates down, the Federal Reserve announced in September a plan to reinvest maturing short- and medium-term bonds to purchase longer-term bonds, such as 10-year Treasury notes, which are used to set long-term rates. Operation Twist has driven rates on these notes below 2%, and 30-year Treasury bonds have dropped below 3%.

"It is a great time for farmers to lock in fixed-rate loans," says Mark Scanlan, senior vice president of agriculture and rural policy for the Independent Community Bankers of America, Washington, D.C. Unlike the situation in the residential housing market, underwriting regulations for farm loans have not been substantially tightened—thanks to a healthy agricultural economy.

"More farmers are becoming depositors than in the past, and many farmers are paying down
their loans more quickly, which can mean they’re borrowing less," Scanlan notes. "Ag loans are a profitable part of banks’ portfolios, so banks are trying not to be too strict with the underwriting."

Financing Land. When making land loans, however, rural lenders are being more conservative when calculating land values, requiring more cash down and valuing cropland at levels seen a couple of years ago, not 2011 levels.

"Producers are snapping up any opportunity they can find to expand their land holdings at record-low rates," Hancock says. Farm Credit Services of Mid-America is offering 25-year, fixed-rate loans for land.

"We consider cash to be one of the cheapest inputs for our agricultural customers," Hancock adds. Thirty-year home mortgages are also at or near record lows.

Creative Banking. Like other banks in the Farm Credit System, Mid-America is offering low-cost, no-hassle conversions to existing customers for a $350 fee. These popular conversions allow producers to reduce their interest rate on both long- and short-term loans. Almost 25% of Mid-America’s customers took advantage of conversions in 2011; interest rates were lowered
on 23,900 loans representing more than $4 billion in loan volume.

A growing number of community banks are offering a popular blended-rate product through Farmer Mac. For example, a producer needing a $2 million farm loan in early January could have locked in a 10-year fixed rate of 4.25% amortized over 15 or 20 years on one loan and received a variable rate based on the one-month LIBOR of 2.25% on a second loan to produce a blended rate of 3.25%, not including lender fees. While the interest rate on the variable loan can increase, half the financing is locked in at a fixed rate.

"A blended rate of 3% or 4% is very attractive," says Patrick Kerrigan, director of business development for Farmer Mac. The less expensive variable rate reduces loan payments, allowing producers to apply any additional funds to whichever of the two loans they choose.

"Community banks have plenty of liquidity and are looking to increase their loan portfolios," Scanlan says. "The Federal Reserve has said interest rates will remain low through 2013. The window to lock in historically low rates is open, but eventually it will start to close."

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