Church foreclosures growing

This post comes from Marilyn Lewis at MSN Money.

Foreclosures are growing among churches across the country. A spate of recent stories examine why the problem is surfacing now and how some churches -- once considered reliable borrowers because of their steady streams of income from tithing and weekly donations -- fell into trouble.

The number of churches facing foreclosure is hard to pin down. Reuters quotes real-estate information company CoStar Group:

Since 2010, 270 churches have been sold after defaulting on their loans, with 90% of those sales coming after a lender-triggered foreclosure.  

In 2011, 138 churches were sold by banks, an annual record, with no sign that these religious foreclosures are abating, according to CoStar. That compares to just 24 sales in 2008 and only a handful in the decade before.

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Unconventional financing

The Wall Street Journal accompanied its article "Churches find end is nigh" with a video report describing how some troubled churches used unconventional bonds rather than traditional 25- or 30-year church mortgages:

Just as homeowners borrowed too much or built too big during boom times, a number of churches did the same and now are struggling to hold on as their congregations shrink and collections fall off due to rising unemployment and a weak economy.

During the real-estate boom a number of banks lured churches with lower interest rates on shorter term loans. . . .  At the same time, aggressive bond underwriters began offering churches more money up front if they issued so-called 'compound-interest' bonds. Many of these bonds are set to come due over the next few years. But with values down and cash in short supply, many churches won't have the funds to pay off the bonds and will have trouble refinancing.

The bond option often means no payments for years. Eventually, though, huge balloon payments come due for both principal and accrued interest, often double the loan amount.

Small evangelical churches hit harder

All denominations have taken a hit from declining donations. But foreclosures most affect small, independent evangelical churches that lack financial oversight from a church hierarchy, says Religion News Service, which wrote about the origins of the problem two years ago. The subscription-only RNS article is reposted here.

RNS quotes banker Dan Mikes, a church-loans specialist for 18 years at Bank of the West in Walnut Creek, Calif. Historically, Mikes said, bankers considered church loans a good investment because donations provided a steady stream of cash.

That all changed in the late 1990s, bankers say, around the same time subprime mortgages and McMansions became hot. Churches competed to keep up with Pastor Jones across the street. They have a café, we want a café. They have a 1,000-seat auditorium, we want a 2,000-seat auditorium.

New banks heard churches were a safe market to dabble in. They overestimated churches' growth projections and threw money at them, said Mikes.

Valerie Munson, church property law expert at the University of St. Thomas School of Law in Minneapolis, said Roman Catholic parishes are owned by dioceses, which assert financial control and hold deeds in the bishop's name.

Mainline Protestants refrain from mortgaging sanctuaries, considering the space holy and belonging to God, says RNS. Mainline denominations usually exert firm control, typically requiring local congregations to put real estate in a trust.

In contrast, evangelicals don't think about their relationship to God in terms of space itself being dedicated to the Almighty, Munson said. "They are more likely to think in terms of their worship and their mission -- if mortgaging a building will serve their mission (how they are using their lives for God), then they are living faithfully."

Distressed markets

"Most of the distressed churches are in the hardest hit real-estate markets, such as California, Michigan and Florida," reports National Public Radio.

Scott Rolfs at Ziegler, an investment bank that helps churches obtain financing, told NPR that "the easy credit in the mid-2000s" exacerbated church financial problems. He had words of comfort for the religious, though: "For 99% of the church-going public in America, their church is coming through the recession just fine."

NPR adds:

After all, there are more than 300,000 houses of worship in the U.S., so a few dozen foreclosures does not spell the End of Times. In fact, mega-churches, which like large companies have bigger reserves, saw their income increase 3% last year.

Another comfort: Church defaults can't touch individual congregants "unless membership requires that you personally sign a document accepting responsibility for loans to the church," writes San Francisco attorney Michael Hassen in response to a question at Avvo.com, an expert advice site.

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