"Those who benefit from interest shall be raised like those who have been driven to madness by the touch of the devil; this is because they say: 'Trade is like interest' while Allah has permitted trade and forbidden interest." The Koran, Surah Al Imran (v130-132)
Freddie Mac has launched a new program to help Michigan residents who are observant Muslims become new homeowners without violating restrictions on paying interest on mortgages. Muslims cannot pay interest and therefore, cannot use conventional mortgage products.
According to an article in Financial Times, "the words of the Koran, the holy book of Islam, revealed to the prophet Muhammad more than 1,400 years ago, speak clearly against riba - interest set in advance. Reconciling religious norms with the global, interest-based financial system is a clear challenge to millions of devout Muslims in the modern world."
Scholars explain that interest set in advance cannot predict future events and therefore, the system is unfair to both borrowers and lenders. Furthermore, any attempt to anticipate the will of Allah is blasphemous in the Islam religion.
Freddie Mac's commitment of an estimated $10 million in the purchase of these new lease-purchase mortgages is part of its "Summer of Homeownership", an effort to find new products and technologies that will contribute to the increase in homeownership. The goal is to add 250,000 to 400,000 new homeowners a year.
Developed with Standard Federal Bank and the Detroit-based United Mortgage of America, this program sets up long-term lease purchase arrangements that allow the residents to later sell the house and enjoy any home price appreciation that a traditional mortgage borrower would have earned by obtaining a traditional home loan.
A limited liability company (LLC) will be created to work with United Mortgage and homes will be purchased with conventional 30-year fixed rate mortgages from Standard Federal Bank through the LLC on behalf of the Muslim families.
Freddie Mac will purchase the mortgages from the LLC. A 10-year lease with an option to buy through the LLC will be made available to homebuyers as long as they put down 20% of the home purchase price. The monthly rent will cover mortgage, tax, and insurance payments that the LLC assumes as part of the program.
The home can be purchased at any point during the 10-year lease and the lease can be extended by an additional seven years. When selling the property to a new owner, the Muslim homeowner can first exercise the option to buy and benefit from any price appreciation that has occurred since the origination of the lease.
"Today's announcement again demonstrates Freddie Mac's commitment to help America's newest communities realize the traditional benefits of the American dream of homeownership," says Saber Salam, vice president of customer strategies and offerings at Freddie Mac. "By working together with United Mortgage and Standard Federal, Freddie Mac is realizing its promise to foster homeownership opportunities in new and exciting ways."
"Working with Freddie Mac will enable Standard Federal Bank to serve the growing demand for home financing among Michigan's observant Muslims," said Mary M. Fowlie, Group Senior Vice President, Standard Federal Bank. "Today's announcement underscores our commitment to provide our customers with the opportunity to become homeowners."
According to Scott Elia of United Mortgage, members of the Michigan Muslim community have been asking for the opportunity to finance homeownership while maintaining their religious convictions. "We have been carefully developing a residential lease and purchase option program and have consulted with the respected scholar, Dr. Muhammad Imran Usmani, our Shariah Advisor, as well as outside legal counsel to develop the model documents and specifications for this program, and to ensure that it satisfies both Islamic principals and secular laws," added Elia.
Freddie Mac's agreement to invest in the mortgages underscores its commitment to expand homeownership opportunities for all of America's households, including the nation's estimated 2.5 million Muslim households.
In March 2001, Freddie Mac became the first major U.S. mortgage investor to back Islamic homeownership when it agreed to buy housing contracts from the Pasadena, Calif.-based American Finance House -- LARIBA. Freddie Mac is also working with other lenders to meet the need for Islamic home financing in America.
LINKS:
Freddie Mac
Pat Rioux
