Determining Default Probabilities for FSA Direct Loans

A binomial logit model was used to analyze relationships between financial characteristics and loan performance for FSA direct borrowers receiving direct FO or OL loans in fiscal 2005. Not surprisingly, the results indicate a strong and direct relationship between many key financial variables and probability of default. Production specialization, however, was indicated to have just as important an impact on probability of default as many financial variables. Other strong indicators included farm size, membership in a targeted group, and the ability to obtain credit from commercial lenders.