Federal Farm-Lending Policies Questioned : Agriculture: General Accounting Office says that forgiven or reduced loans to farmers cost taxpayers $7.6 billion from October, 1988, through June, 1992.

Few things are more politically popular than stopping the auctioneer’s gavel so family farmers can stay on the land, even though the gesture can cost taxpayers billions of dollars.

Most people respond to images of struggling families losing not only their livelihoods, but the roofs over their heads. So it wasn’t hard for Agriculture Secretary Mike Espy, new on the job, to announce last March he would block foreclosures that had not yet gone to court.

Economically strapped farmers complained they were not being treated “by the book,” as Espy had put it. A good number weren’t.

Of 1,090 potential foreclosure cases that farmers had asked to be reconsidered during the moratorium, 398 were handled incorrectly, the Farmers Home Administration says. Farmers did not appeal 1,800 more potential cases.

“A 35% overturn is very high and it means that there’s real problems with the agency decision-making,” said Tim Sullivan, staff attorney with the Farmers Legal Action Group, an advocacy group in St. Paul, Minn.

Michael V. Dunn, the new head of the FmHA, said the bulk of errors came from a misunderstanding of the 1987 law that liberalized how the agency handles delinquent loans. Dunn cited a lack of training for the county officers and supervisors who deal with farmers.

Those cases were returned to the states. Still, a procedural flaw doesn’t mean that the outcome will be any different.

“At least we will have given them the benefit of the law,” said Dunn.

That could be the only benefit for a while if the cost-cutting mood in Washington prevails.

As lender to beginning farmers and other high-risk borrowers, the agency’s generosity, encouraged by Congress, has proven costly. The General Accounting Office says that forgiven or reduced loans cost taxpayers $7.6 billion from October, 1988, through June, 1992.

The GAO says the law lets farmers take on more debt even if they are behind on what they already owe.

Reporting on Vice President Al Gore’s proposals to reinvent government, the GAO said the lending policies were one of the “fundamental issues” the Administration failed to address.

FmHA has more than 225,000 outstanding direct loans worth nearly $14 billion. Of that amount, $4.2 billion is delinquent, representing one-fourth of the loans as of Sept. 30, 1993.

Dunn says information acquired during the moratorium will make it easier to administer the lending program.

“One thing that screamed at me is we have to do a better job of providing supervised credit,” he said. That means sitting down with borrowers, working with them to design an operation that they can reasonably manage, looking at sources of profit and loss.

“Am I making money on the hog operations? Am I losing it on the cattle operation? How much does it really cost me to produce a bushel of corn? What’s my best market strategy for that?” Dunn explained.

Sullivan, of the Farmers Legal Action Group, said that supervision would go a long way. Previously, agency officials urged farmers to take on larger loans and build bigger, more diversified operations than they asked for.

Natural disasters also helped push farmers over the financial edge, Dunn said. In 404 of the cases reviewed, hail, drought, flooding or another local catastrophe caused the hardship.

“This means a great deal to us with the drought in the Southeast and the floods in the Midwest,” he said. “We’re giving directions to our people out there that we have to get out in front of these natural disasters and work with these borrowers.”

Still, even with reforms, the FmHA portfolio will always look worse than what commercial banks can offer, said Dunn.