For five years after moving to Houston, Pakistani immigrant Abdul-Jabbar Khan rented an apartment even though he had saved enough money to make a down payment on a house.
The 43-year-old kidney specialist at Methodist Hospital is a devout Muslim, and worried that a conventional mortgage would violate his faith’s prohibition against paying interest on loans.
“For a long time I kept on saving money,” Khan said. “I kept thinking I would buy a house with cash, but it just never happened.”
The doctor feels like he found the literal answer to his prayers in the form of a “lease to own” agreement from American Finance House Lariba of Pasadena, Calif., one of a handful of Islamic mortgage companies in the U.S.
“It made me more comfortable,” said Khan, who financed a four-bedroom house near Rice University with Lariba. “I was happy to pay even more because I was abiding by the rules of Islam, but it turned out to be comparable.”
At a time when most of the mortgage industry is still reeling from the real estate crisis, alternative home financing arrangements designed to adhere to Islamic principles are thriving.
Guidance Residential, which conducted a recent series of seminars at Houston-area mosques and restaurants, is recording its best quarter ever so far this year, with business up 45 percent over the same period last year. The Virginia company has closed more than 6,300 contracts and provided $1.4 billion in financing nationwide since its inception in 2002.
“People are realizing Islamic financing is here to stay, and it is a viable option right now, and it is competitive,” national sales manager Aijaz Hussain said.
Alternative structure
Because Islam forbids interest payments on monetary loans, or riba, Islamic mortgages are advertised as alternatives to the borrower-lender structure of conventional mortgages.
In Guidance’s model, the home buyer forms a limited liability entity with the mortgage company. The entity purchases the home and splits shares in the property according to the percentage paid by each partner. For a $100,000 home, for example, the buyer might put down $20,000, while the mortgage company pays the remaining $80,000. The buyer then pays a monthly “rental fee” for unrestricted use of the home, as well as a monthly “acquisition” payment to buy out the mortgage company’s shares over time until the buyer has full ownership.
Since the “rental fee” is fixed to the market interest rate, the costs are roughly the same as a conventional mortgage, Hussain said. However, the buyer pays an additional $18.75 per month to maintain the limited liability entity.
“If your ultimate goal is to find the cheapest possible payment, then you should consider another lender,” Hussain said. “A customer is buying the peace of mind that when he moves into his home it will be financed in a proper Islamic way.”
Under sharia, or Islamic law, Guidance cannot profit off a customer’s financial distress, so the company does not charge interest or percentage-based fees on late payments, only a fixed amount of $50 to cover processing costs. A “non-recourse” clause protects the customer’s other assets beyond the house in the event of foreclosure.
Hussain said that Islamic mortgage companies fared well during the economic downturn because they eschewed subprime loans in favor of co-ownership agreements that required customers to go through extensive pre-purchase counseling. Guidance boasts a delinquency rate at less than half the industry standard, he said. “Because we are partners, we choose carefully who we want to work with,” he added.
Like Lariba and other Islamic mortgage companies, Guidance has boards of Muslim scholars to supervise its financial arrangements and issue fatwas, or legal rulings, to certify that its mortgages comply with sharia.
Risk of IRS audits
But Mahmoud Amin el-Gamal, chair of the Rice University economics department, isn’t convinced. El-Gamal says Islamic mortgage companies use “smoke and mirrors” to entice pious Muslims into paying more for less.
“All they sell them is holy water sprinkled over the mortgage,” he said.
El-Gamal believes Islamic mortgages are “grossly inefficient replications” of conventional mortgages with more legal and tax risks. The structure has not been tested in bankruptcy court, he said, and the Internal Revenue Service has yet to rule whether the “rental fees” are a legitimate tax deduction, so buyers could expose themselves to the risk of being audited.
El-Gamal, a Muslim, holds a conventional mortgage on his own home. He sees no problem with the arrangement because it’s tied to the purchase of a physical asset and isn’t an interest-bearing loan in the traditional sense.
“It’s a whole new transaction that did not exist in ancient times,” el-Gamal said.
Khan has no regrets about his Islamic mortgage. He said he would happily pay more to satisfy his conscience.
“I’m sure there’s a difference of opinion,” the doctor said. “It’s hard for me to say if it was completely halal or not, but I felt it was closer to what I wanted to do.”
Source: HOUSTON CHRONICLE
The 43-year-old kidney specialist at Methodist Hospital is a devout Muslim, and worried that a conventional mortgage would violate his faith’s prohibition against paying interest on loans.
“For a long time I kept on saving money,” Khan said. “I kept thinking I would buy a house with cash, but it just never happened.”
The doctor feels like he found the literal answer to his prayers in the form of a “lease to own” agreement from American Finance House Lariba of Pasadena, Calif., one of a handful of Islamic mortgage companies in the U.S.
“It made me more comfortable,” said Khan, who financed a four-bedroom house near Rice University with Lariba. “I was happy to pay even more because I was abiding by the rules of Islam, but it turned out to be comparable.”
At a time when most of the mortgage industry is still reeling from the real estate crisis, alternative home financing arrangements designed to adhere to Islamic principles are thriving.
Guidance Residential, which conducted a recent series of seminars at Houston-area mosques and restaurants, is recording its best quarter ever so far this year, with business up 45 percent over the same period last year. The Virginia company has closed more than 6,300 contracts and provided $1.4 billion in financing nationwide since its inception in 2002.
“People are realizing Islamic financing is here to stay, and it is a viable option right now, and it is competitive,” national sales manager Aijaz Hussain said.
Alternative structure
Because Islam forbids interest payments on monetary loans, or riba, Islamic mortgages are advertised as alternatives to the borrower-lender structure of conventional mortgages.
In Guidance’s model, the home buyer forms a limited liability entity with the mortgage company. The entity purchases the home and splits shares in the property according to the percentage paid by each partner. For a $100,000 home, for example, the buyer might put down $20,000, while the mortgage company pays the remaining $80,000. The buyer then pays a monthly “rental fee” for unrestricted use of the home, as well as a monthly “acquisition” payment to buy out the mortgage company’s shares over time until the buyer has full ownership.
Since the “rental fee” is fixed to the market interest rate, the costs are roughly the same as a conventional mortgage, Hussain said. However, the buyer pays an additional $18.75 per month to maintain the limited liability entity.
“If your ultimate goal is to find the cheapest possible payment, then you should consider another lender,” Hussain said. “A customer is buying the peace of mind that when he moves into his home it will be financed in a proper Islamic way.”
Under sharia, or Islamic law, Guidance cannot profit off a customer’s financial distress, so the company does not charge interest or percentage-based fees on late payments, only a fixed amount of $50 to cover processing costs. A “non-recourse” clause protects the customer’s other assets beyond the house in the event of foreclosure.
Hussain said that Islamic mortgage companies fared well during the economic downturn because they eschewed subprime loans in favor of co-ownership agreements that required customers to go through extensive pre-purchase counseling. Guidance boasts a delinquency rate at less than half the industry standard, he said. “Because we are partners, we choose carefully who we want to work with,” he added.
Like Lariba and other Islamic mortgage companies, Guidance has boards of Muslim scholars to supervise its financial arrangements and issue fatwas, or legal rulings, to certify that its mortgages comply with sharia.
Risk of IRS audits
But Mahmoud Amin el-Gamal, chair of the Rice University economics department, isn’t convinced. El-Gamal says Islamic mortgage companies use “smoke and mirrors” to entice pious Muslims into paying more for less.
“All they sell them is holy water sprinkled over the mortgage,” he said.
El-Gamal believes Islamic mortgages are “grossly inefficient replications” of conventional mortgages with more legal and tax risks. The structure has not been tested in bankruptcy court, he said, and the Internal Revenue Service has yet to rule whether the “rental fees” are a legitimate tax deduction, so buyers could expose themselves to the risk of being audited.
El-Gamal, a Muslim, holds a conventional mortgage on his own home. He sees no problem with the arrangement because it’s tied to the purchase of a physical asset and isn’t an interest-bearing loan in the traditional sense.
“It’s a whole new transaction that did not exist in ancient times,” el-Gamal said.
Khan has no regrets about his Islamic mortgage. He said he would happily pay more to satisfy his conscience.
“I’m sure there’s a difference of opinion,” the doctor said. “It’s hard for me to say if it was completely halal or not, but I felt it was closer to what I wanted to do.”
Source: HOUSTON CHRONICLE
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