The business of no-interest mortgages

by Rachel.Norvell20 Oct 2014
For most of your clients, purchasing a home is the largest financial transaction they'll ever make and thus, one of their toughest decisions. A potential homebuyer has many things to consider before signing on the dotted line.
And for some religious minorities, such as Orthodox Jews, Christian Amish and Muslims who have ethical aversions to traditional home financing, the list is even longer.
For these groups, collecting or paying interest goes against their religious beliefs, making it difficult for them to borrow. In addition to trying to locate specialized no-interest financing, the groups also have trouble getting approved for government lending programs.
"Except for FHLMC [Freddie Mac], all government programs that provide guarantees for financing homes discriminate against these religious minorities who have an ethical aversion to paying or receiving any interest.," said Stephen Ranzini, president and CEO of Ann Arbor, Mich.-based University Bank.
Ranzini said programs like FNMA, FHA, VA and USDA-Rural Development discriminate against these religious minorities.  "These other government programs do not allow these religious minorities to freely exercise their religion and participate in government lending programs," he added “The FHLMC program meets some needs, but not all and the FHLMC financings cannot be securitized."
Though the concepts are centuries old, a modern version of Islamic finance has evolved in recent generations to satisfy the needs of people looking to finance or invest in a residential property without going against their religious beliefs.
At University Bank, Ranzini said the financings they provide to the groups are a variation of triple-net leasing or marked up installment sales, both of which involve profit and not interest. "The contractual principles are ancient, first innovated by Jewish scholars thousands of years ago."
University Bank either earns lease income, or earns a profit from the installment sale at a marked up price, depending on which type of financing best suits the borrower. The returns are similar to those from traditional mortgages, however, the product is manufactured with different components, he added.
The two types of financing do not include a note, personal liability or recourse like a traditional mortgage. Instead, lenders look solely to the collateral to recoup their investment in the loan in the event of a default, said Ranzini.
Currently about 20% of University Bank production is financing that meets the ethical needs of religious minorities, according to Ranzini. In Michigan, the bank is located in one of the most Muslim-populated states in the U.S.
The 10 states with the largest Muslim populations are California, New York, Illinois, New Jersey, Indiana, Michigan, Virginia, Texas, Ohio, and Maryland, according to the U.S. Embassy.


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