Churches emerged from previous economic downturns relatively unscathed, lenders noted. But the recent recession was preceded by an unusual boom in church building.
Spending on construction of religious buildings rose sharply in the late 1990s, climbing 70 per cent from 1995 to 1999 to an annual rate of $7.3-billion. New building continued to tick up, eventually reaching an annual rate of nearly $9-billion in 2003 before levelling off, according to data from the U.S. Census Bureau.
As was the case in the residential housing market, the church property boom was accompanied by the rise of more specialized lending. Church lending was historically done by community banks, which sometimes have ties through a member of a congregation. Loans were often set at a fixed rate and for a set term.
The emergence of larger congregations and the rush to build venues to accommodate them encouraged specialized lending that grew more aggressive.
Evangelical Christian Credit Union, America's Christian Credit Union and Strongtower Financial began to expand rapidly and compete for new business. Some regional and community banks that were nudged out of residential lending by Wall Street banks also discovered lending to churches as a relatively fragmented and inviting business with a history of low defaults.
"They entered the business with an absolute vengeance," said Phil Myers, president of the American Church Mortgage Co. "Five or six years ago there may have been two or three lenders competing on a deal. Now there were five. Those loans are coming home to roost."
Traditional church lenders such as American Church Mortgage Co and Bank of the West found themselves struggling to compete as competitors stretched lending guidelines and dangled ever larger loans in front of church administrators and pastors.
"We often lost business when offering $8-million and someone else would come in and offer $10-million," said Dan Mikes, who heads church lending for Bank of the West.
Bank of the West has zero nonperforming loans to churches, which the bank attributes to its prudent lending guidelines.
Many of the loans made in recent years contained many of the same features that exacerbated the residential real estate crash, such as low-interest teaser rates, securitized loans and balloon payments.
As a result, bad loans are rising rapidly for those lenders that pushed aggressively into church finance. Delinquent loans at the Evangelical Christian Credit Union, which expanded its loan portfolio from about $225-million to more than $1-billion over the last decade, have risen to 7.4 per cent of their loans from 3.6 per cent a year ago. Until 2007, the lender did not have a loan in foreclosure.
Ministry Investment Partners Co, which finances evangelical churches and purchases loans from the Evangelical Christian Credit Union, reported 13.3 per cent of its loans were nonperforming, up from 1.9 percent a year ago.
And in 2008, the Church Mortgage and Loan Co filed for bankruptcy after a third of its outstanding loans were in foreclosure.
As these lenders struggle or disappear, many churches are finding their lifeline of credit has dried up. What is more, the value of many of the buildings and properties owned by churches has fallen sharply, sometimes even below the mortgage used to finance a project, making refinancing almost impossible.
"It's an unprecedented time," Mr. Mikes said.
Cutting staff and reducing programs
Even the richest, most established churches have not been immune to this economic downturn. A study by the researcher Barna Group found more than half of U.S. churches said they have been hurt by the recession, with one church in six cutting staff.
The Episcopal Church in the United States, one of the wealthiest U.S. denominations, is feeling the pinch from a $1-billion loss in the combined investment portfolio for 2008, according to Kirk Hadaway, the head of congregational research for the Episcopal Church.
Yet the financial woes appear to be the most severe among nondenominational churches which were also among the fastest growing over the past decade. Many churches attracted younger members and families by offering an array of activities and events, and began building centres with health clubs, meeting rooms, cafes and sports fields.