Church foreclosures are on the rise throughout the country.
Traditionally, churches were considered solid borrowers with a steady cash flow from donations and tithing. Now congregations are shrinking due to unemployment and the downturn in the economy. If membership is down and the church has a loan with a large balloon payment, it may be unable to pay and face foreclosure.
Some churches finance through the use of unconventional bonds rather than traditional 30 year mortgages. The bond underwriters offer up front money if the church will issue compound interest bonds. The bond option typically gives the church an extended term without a payment due. However, at the end of the term, a very large balloon payment of principal and accrued interest is due. The church may owe as much as double the original amount.
With the value of property down and cash in short supply, many churches will not have the funds to pay off the bonds and will have trouble refinancing.
Nevertheless, Scott Rolfs at Ziegler, an investment bank that helps churches obtain financing says “the easy credit in the mid-2000s” exacerbated church financial problems. “For 99% of the church-going public in America, their church is coming through the recession just fine.”