"Credit Market Crunch - Impacts on the Ministry Lending Environment"
In recent months, economists have begun to speculate that the, so called, “Credit Crunch” that has been wreaking havoc throughout the US economy has begun to correct itself after much intervention by the Federal Reserve Bank. Although the “Credit Crunch” is the result of other macroeconomic forces, it has resulted in much devaluation in the US economy. The US residential market has experienced record levels of property foreclosures resulting in not only a decrease in property values, but the failure and subsequent acquisition of large mortgage servicers such as Countywide Financial and large mortgage purchasers such as Fannie Mae, Freddie Mac & the Wall Street investment bank Bear Stearns. The troubles of the US market have been perpetuated by the devaluation of the US Dollar and record high prices for crude oil.
We all know that the troubles of the US economy have impacted the real estate market, but how does the “Credit Crunch” impact not just the mortgage market as a whole, but more specifically the ministry lending environment?
The ministry lending environment has been both positively and negatively impacted by the “Credit Crunch” that has been so devastating to the US economy. A national decrease in property values has been one of the most obvious impacts of the “Credit Crunch” perpetuated by record high levels of sub-prime loan foreclosures. Most properties foreclosed were residential & investment properties, although the effect has been felt amongst all property types. This has also been true of ministry properties in both rural and urban areas.
Typically, church & ministry properties are considered “special use” properties which inherently bring additional risk to lending sources. Mortgage lenders across the United States have been feverishly tightening lending standards in an attempt to reduce any additional and unnecessary risk. This tightening of underwriting criteria has resulted in many local & national ministry lending sources limiting the number of new mortgages offered. In some cases, national ministry lenders have gone out of business or temporarily ceased all lending activities to ministries until they are able to obtain capital to lend once again.
Construction financing has also become more difficult to obtain and when offered by lending sources, the conditions have increasingly become more restrictive. For instance, many national ministry lenders have ceased or reduced the amount of construction loans offered and when offered, the ministry must be considered “A” credit. Typical conditions associated with construction loans now being offered include; required Guaranteed Maximum Price Contract vs. Construction Management, 5% minimum (10% preferred) contingency & Payment Performance Bonds or adequate financial strength of the builder necessary to enforce the Guaranteed Maximum Price Contract. Needless to say, with the current turbulence in construction cost inflation, ministry lenders are implementing more stringent underwriting criteria & conditions for construction financing in an attempt to reduce the inherent risk found in construction financing.
How about the good news… The “Credit Crunch” has also helped to improve the ministry lending environment, resulting in many ministries receiving much better financing terms then they would have in during 2007. Many would agree that the greatest improvement to the ministry lending environment came in the form of multiple rate reductions over the past twelve months by the Federal Reserve Bank to Fed Funds Rate. The Fed Funds Rate has been reduced by 3.00% (300 bps) since September 18, 2007 with the most aggressive reductions taking place in 2008. Although ministry mortgage rates have not decreased by as much the Fed Funds Rate over the past few months, just by 1.00% - 1.75% over the same period of time, they are directly impacted by movements of the Fed Funds Rate resulting in significant reductions to ministry mortgage rates. There have been significant reductions to ministry mortgage rates every month that the Federal Reserve Bank has decided to reduce the Fed Funds Rate, but how many more reductions will we see?
Most economists believe that the Federal Reserve Bank will most likely not reduce the Fed Funds Rate any more this year unless another financial crisis impacts the market. After the national election cycle is concluded in November, most economists feel that the Fed will refocus their attention on their primary concern, inflation. In 2009, the Fed is expected to raise rates aggressively in order to hedge against their already high concern of long-term inflation. Market economists believe that the “Credit Crunch” will be just a memory by the end of 2008 or early 2009 and that Ben Bernanke & the Federal Reserve Bank will be forced to fully combat their long-term inflationary adversary.
The rest of 2008 should prove to be an interesting year for the ministry lending environment with unusually low interest rates but higher then normal lending guidelines. Now is an excellent time to refinance your mortgage or secure development financing while interest rates remain low during 2008.
Posted: July 31, 2008
By: David Dennison |
