September 2, 1987
Yesterday marked the first major sale of our Federal loan portfolio. The Farmers Home Administration brought over $1 billion in community development loans to market. The investor reception has been so positive that the underwriters were able to increase the price of the loans and guarantee a very good return to the Treasury. The bonds that will be issued later this month will carry a Triple-A rating and have an effective yield of less than 1 percent over comparable U.S. Treasury bonds.
But this sale means more than the simple return to the Government. First, it proves that many Federal financial assets can be successfully sold without Federal guarantees providing for more efficient servicing of these loans in the long run. Second, and more importantly, the difference between the final price and the face value of the loans will clearly indicate the implied Federal subsidy in these credit programs.
Two additional loan sales are scheduled this month. The first, $130 million in Department of Education loans, should go to market in the next few days. Hopefully, before the end of the month, Farmers Home will receive an additional $1.7 billion for rural housing loans in the largest portfolio sale ever. The preliminary filings have been made with the SEC, and we should be able to complete this transaction by the end of September.
It is often too easy, when faced with the choice of raising taxes to directly fund a government program, to establish subsidized credit which competes with the private sector and masks true costs to the taxpayers. These three loan sales will tell us exactly how much subsidy is being provided while at the same time assist with reducing our budget deficit.