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Rising delinquencies follow church construction boom

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Mark Holbrook helped fuel a church construction boom by making more than $3 billion of mortgages in the past decade.

He transformed 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 popularity of five-year commercial mortgages that had minimal monthly payments and lower initial costs than bond sales.

Unlike the banks that joined the trend, ECCU catered exclusively to evangelical ministries, making loans on churches and religious schools 83 percent of its total assets.

Now, the Brea, Calif.-based company's delinquency rate is more than double what it was at 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, Fla., 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."

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," he said.

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.

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.

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.

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

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, Va.

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. (NYSE: BAC) in Charlotte, N.C., said David Dennison, principal at Church Mortgage Solutions, a Colorado Springs, Col., company that helps ministries obtain financing.

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.

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