What happens when religious practices forbid some potential homeowners from traditionally entering the housing market and keep their properties? Fannie Mae [1] reports on how some lenders are taking creative approaches to help these homeowners access the market without compromising their practices.
According to the report from Fannie Mae, certain religious groups including Orthodox Jews, Members of the Hmong community, and some Muslim borrowers are not able to pay interest due to their religious practices. Because of this, lenders have found alternatives to help them purchase and keep home. University Bank for example has made roughly $850 million worth of loans in 16 states that are acceptable for particularly the Muslim borrowers, according to the report.
Additionally, American Finance House LARIBA, a Whittier, CA-based financial institution, has worked to finance and refinance non-interest or “riba free” (RF) faith-based mortgages since 1987. Fannie Mae reports that LARIBA and other community shareholders own the full-service RF bank, Bank of Whittier, which provides retail banking services to all 50 states like checking and savings accounts, and offers non-interest financing, including home financing and refinancing.
As Paul Barretto, a product development manager with Fannie Mae, says, the arrangement fits the conventional secondary market: “Homebuyers are making a down payment as part of a sound financial transaction that aligns with their beliefs. There’s no special instrument or documentation needed for Fannie Mae to make it acceptable to the secondary market.”
“The value is their approach — the due diligence they conduct makes certain that the buyer’s income can support the monthly payments, the property itself is a good investment, and the customer understands the responsibilities of homeownership. The riba-free philosophy promoted by LARIBA is to live responsibly within your means, which is a universal concept,” Barretto says.
The report also cites Dr. Abdul-Rahman who shares that the culturally sensitive approach used by LARIBA and Bank of Whittier has enabled the companies to weather the worst of the housing crisis. Their nonperforming loans are “essentially zero,” and their due diligence — assessing the value of the home based on comparable rental amounts — enables the homeowner to rent the property if they lose their income, he says.
These RF programs consist of the bank first determining whether the value of the property accurately reflects the value of other home prices in the area. Next Fannie Mae reports that, rather than relying on traditional appraisals by comparing other home sale prices (or “comps” in industry parlance), LARIBA and the customer collaboratively research the prevailing monthly rents for similar properties in the same neighborhood.
Despite the fact that conventional and other Islamic banks use interest as an index and calculate the monthly payment, LARIBA uses a different technique of applying comparable rent payments. The report says that the finance model is based on renting properties, not money, and renting of money via interest is prohibited by traditional Judeo-Christian-Islamic values. Likewise, if the rate of return on investment (ROI) is high, then it’s reported that LARIBA invests in the property by lowering the market monthly rent to make the monthly payment competitive with other banks. In contrast, Fannie Mae reports that if the ROI is very low, that signals an overpriced home (a bubble), and because of this, LARIBA will not invest.
If LARIBA and the buyer then agree to continue on in the process, they follow a procedure in which LARIBA creates a lien with the customer that will progressively apply rent payments to ownership of the property. The buyer then pays a monthly rent payment that includes the repayment of part of the full cost of the home and a percentage of the rent that reflects the payback of the house principal. The report then states that over a period of time, the buyer will begin to hold a greater percentage of ownership in the property until the buyer fully owns the home.
According to the report, this arrangement pleases a buyer who religiously cannot pay interest. Fannie Mae is an investor in the property, and LARIBA acts as a representative to close the deal, fund it from its own funds on behalf of Fannie Mae, and then delivers it to Fannie Mae for warehousing. Fannie Mae states that the instrument can still be delivered to an investor — including Fannie Mae — allowing LARIBA to fund more home purchases.