Financial information is consolidated to include the accounts of Farmer Mac and its wholly-owned subsidiary, Farmer Mac Mortgage Securities Corporation.

This discussion and analysis of financial condition and results of operations should be read together with: (1) the interim unaudited condensed consolidated financial statements and the related notes that appear elsewhere in this report; and (2) Farmer Mac's Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the SEC on March 16, 2009.

The discussion below is not necessarily indicative of future results.

Special Note Regarding Forward-Looking Statements

Some statements made in this report are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 pertaining to management's current expectations as to Farmer Mac's future financial results, business prospects and business developments. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements, and typically are accompanied by, and identified with, such terms as "anticipates," "believes," "expects," "intends," "should" and similar phrases. The following management's discussion and analysis includes forward-looking statements addressing Farmer Mac's:

· prospects for earnings;

· prospects for growth in loan purchase, guarantee, securitization and LTSPC volume;

· trends in net interest income;

· trends in portfolio credit quality, delinquencies and provisions for losses;

· trends in expenses;

· trends in non-program investments;

· prospects for asset impairments and allowance for losses;

· changes in capital position; and

· other business and financial matters.

Management's expectations for Farmer Mac's future necessarily involve a number of assumptions and estimates and the evaluation of risks and uncertainties. Various factors or events could cause Farmer Mac's actual results to differ materially from the expectations as expressed or implied by the forward-looking statements, including the factors discussed under "Risk Factors" in Part I, Item 1A of Farmer Mac's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009, as well as uncertainties regarding:

· the ability of Farmer Mac to increase its capital in an amount and at a cost sufficient to enable it to continue to operate profitably and provide a secondary market for agricultural mortgage and rural utilities loans;

· the availability of reasonable rates and terms of debt financing to Farmer Mac;

· fluctuations in the fair value of assets held by Farmer Mac, particularly in volatile markets;

· legislative or regulatory developments that could affect Farmer Mac;

· the rate and direction of development of the secondary market for agricultural mortgage and rural utilities loans, including lender interest in Farmer Mac credit products and the Farmer Mac secondary market;

· the general rate of growth in agricultural mortgage and rural utilities indebtedness;

· borrower preferences for fixed rate agricultural mortgage indebtedness;

· increases in general and administrative expenses attributable to changes in the business and regulatory environment, including the hiring of additional personnel with expertise in key functional areas;

· the severity and duration of current economic and financial conditions generally and within the agricultural and rural utilities sectors in particular;

· developments in the financial markets, including possible investor, analyst and rating agency reactions to events involving GSEs, including Farmer Mac; and

· the willingness of investors to invest in Farmer Mac Guaranteed Securities.

In light of these potential risks and uncertainties, no undue reliance should be placed on any forward-looking statements expressed in this report. Furthermore, Farmer Mac undertakes no obligation to release publicly the results of revisions to any forward-looking statements that may be made to reflect new information or any future events or circumstances, except as otherwise mandated by the SEC.

Critical Accounting Policies and Estimates

The preparation of Farmer Mac's consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented. Actual results could differ from those estimates. The critical accounting policies that are both important to the portrayal of Farmer Mac's financial condition and results of operations and require complex, subjective judgments are the accounting policies for: (1) the allowance for losses, (2) fair value measurement, and (3) other-than-temporary impairment.

During second quarter 2009, Farmer Mac amended its critical accounting policy relating to other-than-temporary impairments upon the adoption of ASC 320-10-35-33 (formerly FASB Staff Position FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments). This guidance amended the other-than-temporary impairment guidance for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The existing recognition and measurement guidance related to other-than-temporary impairments of equity securities was not amended.

If the fair value of a security is less than its amortized cost basis as of the balance sheet date, Farmer Mac assesses whether the impairment is temporary or other-than-temporary. Other-than-temporary impairment occurs when the fair value of an available-for-sale debt security is below its amortized cost, and it is determined that management (a) has the intent to sell the debt security or (b) more likely than not will be required to sell the debt security before its anticipated recovery. In these cases, the entire difference between the amortized cost basis of the security and the fair value as of the balance sheet date is recognized as other-than-temporary impairment in earnings.

If management does not intend to sell the security and it is not more likely than not that it will be required to sell the security before anticipated recovery, Farmer Mac determines whether a credit loss exists. Many factors considered in this determination involve significant judgment, including recent events specific to the issuer or the related industry, changes in external credit ratings, the severity and duration of the impairment, recoveries or additional declines in fair value subsequent to the balance sheet date, and other relevant information related to the collectability of the security. If Farmer Mac determines that the present value of the cash flows likely to be collected from the security is greater than the amortized cost basis of the security, the impairment is deemed to be temporary. Conversely, if the present value of the expected cash flows is less than the amortized cost basis of the security, a credit loss has occurred and the security is deemed to be other-than-temporarily impaired and the amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income, net of applicable taxes.

For a discussion of Farmer Mac's critical accounting policies related to the allowance for losses and fair value measurement and the related use of estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and related notes for the periods presented, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies and Estimates" in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC on March 16, 2009.

Results of Operations

Overview. Farmer Mac's net income available to common stockholders for third quarter 2009 was $17.9 million or $1.74 per diluted common share, compared to a net loss of $106.1 million or $10.55 per diluted common share for third quarter 2008. Net income available to common stockholders for the nine months ended September 30, 2009 was $76.8 million or $7.54 per diluted common share, compared to a net loss of $93.0 million or $9.33 per diluted common share for the nine months ended September 30, 2008. Farmer Mac's results for both the three and nine month periods ended September 30, 2008 were severely adversely impacted by losses on investment securities that were subsequently liquidated during 2009. Subsequent to those events and a change in management, Farmer Mac revised its investment portfolio guidelines and revamped its funding strategies with the intent to reduce Farmer Mac's exposure to adverse financial market volatility and to preserve and rebuild capital. Farmer Mac's excess capital above its statutory minimum capital requirement, which had fallen to as low as $13.5 million as of December 31, 2008, was $126.3 million as of September 30, 2009.

Farmer Mac's non-performing assets were $84.8 million (1.94 percent) as of September 30, 2009, compared to $97.1 million as of June 30, 2009 (2.17 percent). This decrease was due to the third quarter sale of three of Farmer Mac's four ethanol facilities that had been classified as REO as of June 30, 2009 (the fourth facility was sold in October 2009). REO properties are included in Farmer Mac's non-performing assets but not in 90-day delinquencies. Farmer Mac's 90-day delinquencies increased from $42.3 million (0.95 percent) as of June 30, 2009 to $59.4 million (1.36 percent) as of September 30, 2009.

As of September 30, 2009, Farmer Mac's ethanol exposure, which includes loans, loans subject to LTSPCs and REO, was $275.8 million, with exposure to 29 different plants, and an additional $35.8 million of undisbursed commitments. Other than the undisbursed commitments, Farmer Mac is not seeking to add more ethanol loan exposure to its portfolio. See "-Risk Management-Credit Risk - Loans" for more detail about Farmer Mac's ethanol portfolio.

During third quarter 2009, Farmer Mac recorded a provision to its allowance for losses of $3.2 million, compared to a provision of $0.6 million during third quarter 2008. For the nine months ended September 30, 2009, offsetting provisions and releases related to the allowance for losses resulted in net provisions of $3.0 million, compared to net provisions of $0.6 million for the nine months ended September 30, 2008. As of September 30, 2009, the total allowance for losses was $12.5 million, compared to $16.4 million as of December 31, 2008.

Farmer Mac's non-performing assets were down slightly from higher levels reported earlier during the year. Those reductions are in part a result of the reclassification of certain ethanol loans from "in bankruptcy" during second quarter 2009 to REO and having been sold with subsequent loans to the purchasers classified as current as of September 30, 2009. Much of the remainder of the portfolio continues to benefit from the cumulative strong performance of the U.S. agricultural economy over the past several years, which has enabled most agricultural producers in stressed industries to manage current economic pressures and meet their obligations on mortgage loans. However, based on the potential decline in the profitability of certain agricultural industries, Farmer Mac expects that delinquencies are likely to increase during the remainder of 2009 and beyond, although any such delinquencies and related credit losses are expected to remain within Farmer Mac's historical experience but likely greater than the historical average. See "-Results of Operations-Outlook" and "-Risk Management-Credit Risk - Loans" for more detail about the outlook for certain agricultural industries.

Changes in the fair values of financial derivatives and trading assets have historically contributed significant volatility to Farmer Mac's periodic earnings. Consistent with that trend, Farmer Mac's third quarter loss on financial derivatives was $7.7 million, compared to a loss of $19.0 million during third quarter 2008. For the nine months ended September 30, 2009, the gain on financial derivatives was $15.5 million, compared to a loss of $29.7 million for the nine months ended September 30, 2008. Fair value gains on trading assets totaled $25.0 million for third quarter 2009, compared to losses of $14.5 million for third quarter 2008. For the nine months ended September 30, 2009, the gains on trading assets totaled $56.7 million, compared to losses of $21.7 million for the nine months ended September 30, 2008. While these volatile changes in fair values may at times produce significant income, as has been the case in 2009, they may also produce significant losses, as has been the case in previous reporting periods. Future changes in those values cannot be reliably predicted; however, as of September 30, 2009 the cumulative fair value after-tax losses recorded on financial derivatives was $69.2 million. Over time, Farmer Mac will realize in earnings the net effect of the cash settlements on its interest rate swap contracts, which may on its own produce either income or expense, but is expected to generate positive effective net spread when combined with the interest earned and paid on the assets and liabilities Farmer Mac holds on its balance sheet. This positive effective net spread will continue to build retained earnings and capital over time. Although the unrealized fair value fluctuations experienced throughout the term of the financial derivatives will temporarily impact earnings and capital, those fluctuations will have no permanent effect upon maturity.

During third quarter 2009, Farmer Mac recorded an other-than-temporary impairment loss of $1.6 million to write down the Corporation's $49.9 million investment in the unsecured debt of HSBC Finance to its fair value of $48.3 million as of September 30, 2009. Subsequent to September 30, 2009, Farmer Mac sold $20.0 million of the HSBC Finance debt for $19.5 million. That sale resulted in a loss of $0.5 million on Farmer Mac's initial investment, but a gain of $0.1 million during fourth quarter 2009 because the sale proceeds exceeded the carrying value that reflected the other-than-temporary impairment loss recorded during third quarter 2009. To mitigate the credit exposure related to Farmer Mac's remaining $28.9 million investment in HSBC Finance debt, during fourth quarter 2009 Farmer Mac entered into a credit default swap covering the balance. The credit default swap protects Farmer Mac against any future default by HSBC Finance and provides an offset to further fluctuations in the fair value of the remaining investment.

Farmer Mac's year-to-date 2009 results benefited from two first quarter transactions. The first was the conversion of certain Farmer Mac Guaranteed Securities into loans and the subsequent sale of a pool of loans consisting of a portion of the loans previously underlying those securities and other loans previously classified on the balance sheet as loans. The total principal balance of loans sold was $354.5 million. The sale resulted in a gain of $1.6 million and a recovery of previously charged off losses of $0.8 million. The second transaction was the sale of Lehman Brothers Holdings Inc. senior debt securities that had been written down to $5.4 million as of December 31, 2008. The sale of the securities during first quarter 2009 for $8.6 million resulted in a $3.2 million recovery of previously written off losses.

To assist in the comparison of results to prior periods, the table below summarizes many of the items discussed above as they relate to Farmer Mac's results of operations for the three and nine month periods ended September 30, 2009 and 2008 and reconciles those items as separate components of net income available to common stockholders, distinct from the recurring items during the periods presented.

                                                     For the Three Months Ended                For the Nine Months Ended
                                                 September 30,         September 30,      September 30,         September 30,
                                                     2009                  2008                2009                 2008
                                                                                (in thousands)
Recurring items:
Guarantee and commitment fees                   $         8,168       $         7,281     $       23,486       $        20,574
Net interest income including realized
gains/(losses) on financial derivatives                  10,737                11,455             31,038                43,332
Other income                                                874                   192              1,209                 1,315
Credit related charges                                   (3,390 )                (655 )           (3,226 )                (742 )
Operating costs                                          (5,840 )              (8,322 )          (20,362 )             (21,196 )
Related tax expense                                      (3,176 )              (3,137 )           (9,963 )             (13,984 )
Preferred stock dividends                                (4,368 )                (578 )          (12,434 )              (1,698 )
Subtotal                                                  3,005                 6,236              9,748                27,601
Items resulting from fair value fluctuations:
Fair value changes in financial derivatives               1,327                (9,153 )           47,606                (9,404 )
Fair value changes in trading assets                     25,047               (14,507 )           56,707               (21,664 )
Related tax (expense)/benefit                            (9,231 )               8,281            (36,510 )              10,874
Subtotal                                                 17,143               (15,379 )           67,803               (20,194 )
Other items:
Other-than-temporary impairment losses                   (1,621 )             (97,108 )           (3,994 )            (102,452 )
Gains on asset sales and debt repurchases                    63                 2,286              4,494                 2,436
Related tax expense                                        (690 )              (2,171 )           (1,248 )                (353 )
Subtotal                                                 (2,248 )             (96,993 )             (748 )            (100,369 )
Net income available to common stockholders     $        17,900       $      (106,136 )   $       76,803       $       (92,962 )

Set forth below is a more detailed discussion of Farmer Mac's results of operations.

Net Interest Income. For third quarter 2009, net interest income was $19.8 million, compared to $21.3 million for third quarter 2008. For the nine months ended September 30, 2009, net interest income was $63.1 million, compared to $63.6 million for the nine months ended September 30, 2008. During 2009, Farmer Mac has maintained uninterrupted access to the capital markets at favorable rates, though the Corporation's short-term borrowing costs relative to LIBOR returned to historical levels during third quarter 2009. Toward the end of 2008 and into 2009, Farmer Mac reduced the size of its liquidity investment portfolio as it positioned the portfolio to preserve capital and reduce risk. The reduced level of investment has decreased the net interest income earned from that portfolio compared to earlier periods. The net interest yield was 169 basis points for the nine months ended September 30, 2009, compared to 150 basis points for the nine months ended September 30, 2008.

The following table provides information regarding interest-earning assets and funding for the nine months ended September 30, 2009 and 2008. The balance of non-accruing loans is included in the average balance of interest-earning loans and Farmer Mac Guaranteed Securities presented, though the related income is accounted for on the cash basis. Therefore, as the balance of non-accruing loans and the income received increases or decreases, the net interest yield will fluctuate accordingly. The average rate earned on cash and investments reflects lower short-term market rates during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. The lower average rate on loans and Farmer Mac Guaranteed Securities during the nine months ended September 30, 2009 reflects the decline in market rates reflected in the rates on loans acquired or reset during the past year. The lower average rate on Farmer Mac's notes payable due within one year is consistent with general trends in average short-term rates during the periods presented. The downward trend in the average rate on notes payable due after one year reflects the retirement of older debt and the issuance of new debt at lower market rates during the latter part of 2008 and 2009.

                                                       For the Nine Months Ended
                                    September 30, 2009                           September 30, 2008
                           Average        Income/       Average         Average        Income/       Average
                           Balance        Expense         Rate          Balance        Expense         Rate
                                                        (dollars in thousands)
Interest-earning
assets:
Cash and investments     $ 1,457,216     $  22,303         2.04%      $ 3,218,258     $  97,305         4.03%
Loans and Farmer Mac
Guaranteed Securities      3,527,656       109,428         4.14%        2,430,259       102,199         5.61%
Total interest-earning
assets                     4,984,872       131,731         3.52%        5,648,517       199,504         4.71%

Funding:
Notes payable due
within one year            3,109,850        20,306         0.87%        3,824,478        81,287         2.83%
Notes payable due
after one year             1,662,863        48,287         3.87%        1,589,692        54,598         4.58%
Total interest-bearing
liabilities                4,772,713        68,593         1.92%        5,414,170       135,885         3.35%
Net
non-interest-bearing
funding                      212,159             -                        234,347             -
Total funding            $ 4,984,872        68,593         1.83%      $ 5,648,517       135,885         3.21%
Net interest
income/yield                             $  63,138         1.69%                      $  63,619         1.50%

The following table sets forth information regarding the changes in the components of Farmer Mac's net interest income for the periods indicated. For each category, information is provided on changes attributable to changes in volume (change in volume multiplied by old rate) and changes in rate (change in rate multiplied by old volume). Combined rate/volume variances, the third element of the calculation, are allocated based on their relative size. The decreases in income due to changes in rate reflect the reset of variable-rate investments and adjustable-rate mortgages to lower rates and the acquisition of new lower-yielding investments, loans and Farmer Mac Guaranteed Securities, as described above. The decreases in expense reflect the decreased cost of funding due to lower interest rates in the debt markets.

                                                   For the Nine Months Ended September 30, 2009
                                                        Compared to the Nine Months Ended
                                                                September 30, 2008
                                                            Increase/(Decrease) Due to
                                                  Rate                Volume               Total
                                                                  (in thousands)
Income from interest-earning assets:
Cash and investments                         $      (35,577 )     $      (39,425 )     $      (75,002 )
Loans and Farmer Mac Guaranteed Securities          (31,262 )             38,491                7,229
Total                                               (66,839 )               (934 )            (67,773 )
Expense from interest-bearing liabilities           (52,686 )            (14,606 )            (67,292 )
Change in net interest income                $      (14,153 )     $       13,672       $         (481 )

Farmer Mac's net interest yield excludes income and expense related to financial derivatives and includes yield maintenance payments received upon the early payoff of certain borrower's loans. The following paragraphs describe the effects of these items on the net interest yield and the table below presents them as adjustments to reconcile to the net effective spread Farmer Mac earns on the difference between its interest-earning assets and its net funding costs, including payments for income and expense related to financial derivatives.

Farmer Mac accounts for its financial derivatives as undesignated financial derivatives. Accordingly, the Corporation records the income or expense related to financial derivatives as gains and losses on financial derivatives. For the three months ended September 30, 2009, this resulted in an increase of the net interest yield of $7.8 million (61 basis points), compared to an increase of the net interest yield of $8.8 million (63 basis points) for the three months ended September 30, 2008. For the nine months ended September 30, 2009, this resulted in an increase of the net interest yield of $28.4 million (76 basis points), compared to an increase of the net interest yield of $18.9 million (45 basis points) for the nine months ended September 30, 2008.

Farmer Mac's net interest income and net interest yields for the three months ended September 30, 2009 and 2008 included the benefits of yield maintenance payments of $0.1 million (0 basis points) and $0.2 million (2 basis points), respectively. The net interest yields for the nine months ended September 30, 2009 and 2008 included the benefits of yield maintenance payments of $0.4 million (1 basis point) and $3.2 million (7 basis points), respectively. Yield maintenance payments represent the present value of expected future interest income streams and accelerate the recognition of interest income from the related loans. As these figures demonstrate, the amounts of these payments, which are largely the result of borrower refinancing, were greatly reduced in 2009 compared to 2008. Because the timing and size of these payments vary greatly, variations do not necessarily indicate positive or negative trends to gauge future financial results.

The following table presents the net effective spread between Farmer Mac's interest-earning assets and its net funding costs. This spread is measured by . . .