Lender That Really Does God’s Work Is Slowed by Funding Decline

Discussion in 'Economics' started by MattF, Nov 18, 2009.

  1. MattF


    Do you bailout God now? :confused:


    Nov. 18 (Bloomberg) -- Mark Holbrook helped fuel a church construction boom by originating more than $3 billion of mortgages in the past decade, transforming a $2 million credit union he joined after Bible college into the largest U.S. evangelical lender.

    Evangelical Christian Credit Union, run by Holbrook since 1979, was the leading force behind the increase in credit flowing to churches in the form of five-year commercial mortgages with minimal monthly payments and lower initial costs than bond sales, the other widely used form of financing. Unlike the banks that joined the trend, ECCU catered exclusively to evangelical ministries, putting 83 percent of its assets in loans on churches and religious schools.

    Now, the Brea, California-based company’s delinquency rate has more than doubled since the end of 2007 and mortgage originations have slumped because of a decline in financing. Commercial church mortgages are coming due with so-called balloon payments, replacement loans have disappeared and the highest unemployment rate in 26 years has cut congregant donations. About 145 churches have gone into bankruptcy since the credit crunch accelerated in 2008, an upheaval in a lending niche that bankers once ranked among the safest in real estate.

    “We have seen more church foreclosures and bank-pressured sales, if you will, in this last year than we have seen in 20 years,” said Matthew Messier, a principal at CNL Specialty Real Estate Services Corp., a broker in Orlando, Florida, that caters to religious and educational clients. “A lot of people think commercial is going to get worse before it gets better, and it could be the same for many churches.”

    ‘Unsettling Rumors’

    Rising delinquencies have led to speculation about ECCU’s financial health, the company said. Chief Financial Officer Brian Scharkey, appearing in a video discussing the company’s third-quarter finances, said there were “some unsettling rumors floating around” among ministry leaders, including the possibility that ECCU might go bankrupt.

    “ECCU is one of the healthiest institutions in the country,” Holbrook said in the video on ECCU’s Web site, citing a capital ratio of 11 percent that he called among the highest in the industry. “We don’t see any even remote possibility of bankruptcy on the horizon.”

    Still, some ministries are having trouble repaying ECCU. As of Sept. 30, about 10.7 percent of the $943 million of first mortgages held by ECCU were more than 30 days overdue, according to a filing with the National Credit Union Association. That’s an increase from 6.9 percent a year earlier and 4.2 percent at the end of 2007.

    Losses Remain Low

    In comparison, Bank of the West, a unit of France’s BNP Paribas SA with $1.2 billion of church loans, has a 30-day delinquency rate of less than 1 percent, according to spokesman John Stafford. The delinquency rate for commercial real estate loans held by all U.S. banks was 7.7 percent at the end of June, according to data from the Federal Reserve.

    The rising delinquencies haven’t resulted in substantial write-offs, in part because ECCU loans on average equal 58 percent of underlying property values, providing a buffer against potential losses on the sale of foreclosed mortgages, according to Mark Johnson, an ECCU vice president. The company, which had never charged off a church mortgage prior to 2007, has since had about $4.3 million in losses, including $3.14 million during the first nine months of this year.

    That equals about 0.39 percent of average loans, compared with a charge-off rate of 2.24 percent for commercial lenders overall, according to Federal Reserve data for the end of June.

    “These churches are broadly and significantly keeping their commitments,” Johnson said in an interview. ECCU works with congregations to restructure their finances and avoid foreclosure, Holbrook said in the video.

    Construction Boom

    Holbrook, 59, landed a job at ECCU’s predecessor credit union in 1975, about a year after graduating from Biola University, formerly known as the Bible Institute of Los Angeles. He was running the company within four years, and positioned it to feed an expansion in which annual spending on houses of worship would rise to $6.3 billion in 2007 from $3.8 billion in 1997, according to estimates by the U.S. Census Bureau in Washington.

    Holbrook in 1987 shifted ECCU’s lending to evangelical ministries from individual customers, and in 1998 hired the lobbying firm William D. Harris & Associates to successfully obtain an exemption from legislation that bars credit unions from having more than 12.25 percent of assets in business loans. At the end of 2008, about 123 credit unions had been granted the exemption, which allows ECCU to write more loans for churches. There are about 7,770 credit unions in the U.S.

    Ministry as Bank

    “We are a ministry structured as a credit union that functions as a commercial bank” said Jac La Tour, a spokesman for ECCU.

    Lloyd Blankfein, chief executive officer of Goldman Sachs Group Inc., created a stir when he told the Sunday Times of London that he’s just a banker “doing God’s work.” Lucas van Praag, a spokesman for the New York-based bank, later said Blankfein’s comment was “an obviously ironic, throwaway response.”

    At ECCU, whose mission is to “increase the effectiveness of evangelical ministries,” first-mortgage originations soared to $661 million in 2008 from $50 million in 2000, according to company filings with the credit union administration in Alexandria, Virginia.

    Market Leader

    That’s more than half of the combined $1 billion in mortgages written annually by the top 10 church lenders, including Bank of the West in San Francisco and Bank of America Corp. in Charlotte, North Carolina, said David Dennison, principal at Church Mortgage Solutions, a Colorado Springs, Colorado, company that helps ministries obtain financing.

    ECCU has originated almost $3.2 billion in first mortgages overall since 2000.

    “ECCU had the largest share of the market, probably by a lot,” Holbrook said in a telephone interview.

    The credit union long prospered, according to company documents that show its return on assets averaged 1.66 percent during the past decade, compared with 0.75 percent for peers.

    Now, ECCU has curtailed lending because the credit unions that financed its operations have pulled back, according to Holbrook. Its mortgage originations fell to $130.6 million in the first nine months of 2009 from $579.1 million a year earlier, filings show. This comes at a time when many churches face balloon payments on maturing five-year mortgages provided by ECCU earlier in the decade.

    Financing Alternatives

    ECCU began considering alternative financing options earlier this year. Regulatory reports show that the credit union pledged $299 million of church loans in the first quarter to the Federal Reserve to become eligible to borrow from the Fed’s discount window as many banks do. Holbrook said in a July e-mail that the company had no plans to borrow from the Fed “in the foreseeable future.”

    In a company document dated Sept. 8, ECCU said it may raise money early next year for a private fund that would invest in its church mortgages.

    Johnson, the ECCU vice president, said that the credit union has been able to roll over all of its maturing loans to date, in part by cutting back on the origination of new mortgages.

    Churches Strained

    The rising U.S. jobless rate, which hit 10.2 percent in October, is crimping donations, the main source of income for many churches. Still, the borrowing binge of the past decade is a bigger factor in the rising number of religious foreclosures and delinquencies, said Dan Mikes, national manager of the church-and school-loan division at Bank of the West, which has recorded one loss in almost 20 years of lending to ministries.

    “The reason ministries are losing buildings is that they got into way too much debt to begin with,” Mikes said.

    Bond underwriters that also finance churches trace the current crisis to lax underwriting standards at rival commercial lenders and community banks. ECCU in particular would offer a ministry a larger loan than bond firms were willing to make based on that church’s income and property values, said Philip Myers, president of American Investors Group Inc., a Minnetonka, Minnesota, brokerage that specializes in underwriting mortgage- secured bonds for churches.

    “We were constantly being outbid on deals where they were lending far too much money,” he said.

    Strict Standards

    ECCU uses strict underwriting standards in deciding whether to lend and has thrived thanks to its knowledge of churches and the way they work, Johnson, the vice president, said.

    “I am not aware of situations in which we stood out from competitors because ECCU was willing to make larger loans than other lenders were willing to make,” he wrote in an e-mail.

    The lender has increased the amount of loans it has modified, according to financial statements. At the end of September, ECCU had modified $140 million of real estate loans for borrowers who were unable to meet the original terms of the debt, up from $3.8 million a year earlier. The credit union’s foreclosed real-estate climbed to $26.9 million as of September from $10.3 million a year earlier.

    The credit union sent seven foreclosure notices in 2008 and four this year, according to the video on ECCU’s Web site. Falling into trouble were both small borrowers and mega-churches such as Ambassadors International Ministries in Lemon Grove, California, county property records show. ECCU subsequently modified terms of a loan to another mega-church, Without Walls International Church in Tampa, Florida, after sending a foreclosure notice, according to the records.
  2. MattF


    Andrew Lord, an outside spokesman for Without Walls, and Steven Houbeck, an attorney representing Ambassadors International, didn’t return telephone calls seeking comment. Ambassadors International filed for bankruptcy protection in July.

    Understanding the Customer

    ECCU executives say the company’s understanding of faith- based finance appeals to churches when they are selecting a lender. For instance, ECCU eliminated prepayment penalties, a common feature of commercial mortgages, thereby allowing churches to retire their debts ahead of time at no additional cost.

    ECCU also set the terms of its five-year mortgages in a way that minimizes monthly principal payments, a step that helps churches qualify for larger loans.

    Hard to Compete

    In addition, commercial lenders such as ECCU charged about 0.5 percent to 1.5 percent of a loan’s face value to originate a church mortgage. Bond firms charged underwriting fees ranging from 3 percent to 7 percent of the amount raised.

    “It was very difficult” for the bond firms to compete with ECCU, said Bill Dodson, president of Ministry Partners Investment Co., an ECCU finance affiliate.

    The company financed its operations in part by selling stakes in some mortgages it originated to other credit unions that lacked the capacity or expertise to make business loans. As of Sept. 30, ECCU had sold $2.14 billion of interests in its mortgages while retaining stakes valued at $299.3 million, according to regulatory filings.

    ECCU “had these credit unions just lining up with truckloads of money because they never had a default,” said Stephen Ballas, a former president of the Ministry Partners affiliate. “Churches traditionally had been a very low-risk loan.”

    These credit unions began to cut back on their loan purchases last year as they came under government pressure to improve their own balance sheets, according to Charles Major, head of Share Financial Services Inc., a Dallas-based bond underwriter. During the third quarter, ECCU charged off $1.9 million of mortgages sold to credit unions, marking the first time this year it has disclosed losses on participation loans.

    “The Fed put the squeeze on the credit unions,” Major said. “That and changes in the credit crisis slowed down the participation of credit unions” with ECCU, he said.