The devastating impact of the subprime crisis has made many home buyers question the nature of conventional debt and interest.
Interest grows in Islamic mortgages
NEW YORK // Daoud Hawa bought a home worth US$550,000 (Dh2 million) four years ago with a Sharia-compliant mortgage because he wanted to go on the haj in a state of purity and without any debt. "I did my research on the finance company and consulted my imam before I went ahead with this mortgage," said Mr Hawa, who is 35, married with two children, and runs a marketing company. Guidance Residential, an Islamic mortgage company, undertook stringent checks of Mr Hawa's finances, including income, savings and liabilities to make sure he could afford the mortgage. By contrast, during the property boom years up until two years ago, other companies issued loans to low-income residents who relied on rising real estate values as collateral in what became the "sub-prime" crisis. Millions of US residents are now struggling with loans worth far more than their homes are worth, or are being foreclosed on after non-payment. Meanwhile, Mr Hawa's home has gone up in value to around $700,000. Interest in Islamic finance is growing beyond the American-Muslim community because the recession has forced more people to question the nature of conventional debt and interest, said Hussam Qutub, a spokesman for Guidance Residential, which is based in Virginia. The company has provided more than $1.5 billion in home financing to at least 6,000 customers in 23 states since it launched seven years ago. April was a record month. Guidance Residential, whose mortgages are backed by Freddie Mac, the government's home-financing giant, signed 150 contracts. "We were surprised because usually June is our best month because that's when kids are out of school and families look to move," said Mr Qutub, who said his company accounted for around half of the US market share of Islamic mortgages. Competitors include Lariba American Finance House in California and University Bank in Michigan. Delinquencies, where borrowers fall behind on payments, accounted for less than half the national rate of 7.8 per cent at the end of last year. The company has only served about five foreclosure notices because the majority of its clients only took on liabilities that they could afford, he said. By comparison, a record number of foreclosure actions started nationally in the first three months of this year, up 27 per cent from the same quarter last year, the Mortgage Bankers Association said last week. "We have to give credit to the American Muslim community, who are conservative in the way they handle money and make sure to have savings for times of financial hardship," Mr Qutub said. "We really take our hat off to the community." Under Islamic law, Muslims are prohibited from riba, often translated as interest, and are encouraged to make financial transactions tied to concrete goods or services rather than make money out of money. The US Islamic finance market is not as developed as in Europe, where more companies have ties to Islamic institutions in leading finance centres in the Middle East and Malaysia. More Sharia-compliant products are being developed for American Muslims, but Mr Hawa said he tried to be cautious, given the wide array of often conflicting interpretations given by different Islamic boards, which are assembled by companies to get their Islamic stamp of approval. Islamic laws related to finance are widely interpreted across and within the Islamic world. Muslim investors generally try to avoid any transactions related to interest, alcohol, gambling, pork and other haram activities. "An Islamic tag doesn't necessarily mean anything, so I'm doing careful research into an Islamic home insurance product that I've seen," he said. "I do use credit cards, but I never carry any balance and I pay them off. I don't have any debt [with interest] and bought my car at zero per cent financing." Guidance Residential's mortgage model requires the company to take an ownership stake in the home along with the customer, who pays a rental fee as well as monthly payments to buy the company's share in the home. If a customer falls behind on payments, the company charges a $50 fee, rather than the compound interest usually imposed by traditional companies. If a home is foreclosed, losses are borne according to the ownership stakes of the customer and company, which does not then pursue the customer to regain its financial stake. Some critics say a rental fee is akin to interest on a mortgage loan. But Mr Hawa said it was the joint ownership contract that made him feel religiously comfortable with the product, just as a legal contract distinguishes and defines marriage from other partnerships. The chairman of Guidance Residential's Sharia supervisory board is Muhammad Taqi Usmani, a leading Islamic scholar who last year declared many sukuk, or Islamic, bonds to be scarcely better than traditional interest-bearing instruments. His standing meant his ruling carried weight throughout the Islamic financial world, although debate continues to swirl in the absence of a uniform regulatory framework. "We were lucky to get scholars like Muhammad Taqi Usmani because when we started out, there was not as much demand and it would be impossible to get them today," Mr Qutub said. "Their involvement is not as great as in the early days, but they continue to conduct regular audits." Guidance Residential is hoping to develop other products, such as deposit and chequing accounts and commercial financing. The combined buying power of American Muslims has been estimated at $170bn annually by JWT, an advertising agency. Meanwhile, Guidance Financial Group, the parent company, has helped companies in Saudi Arabia and Malaysia offer mortgages modelled on its product. Mr Qutub said he does not know how many of its customers are non-Muslim because the company does not ask and religious affiliation is not a prerequisite for qualification, but he said interest was growing. An employee in Chicago told him about a friend who was a Jewish lawyer who conducted thorough due diligence of the mortgage model before signing on. "Our conservatism has kept us out of the current financial mess because we never put people in homes who didn't qualify and couldn't afford it," Mr Qutub said. firstname.lastname@example.org