By Thomas A. Fogarty, USA TODAY
In a sign of America's changing face, giant mortgage investor Freddie
Mac this month started purchasing the home loans of Muslims who follow
the Koran's prohibition against paying or collecting interest.
"This is a growth area for us," says Freddie Mac vice president
Saber Salam. An estimated 7 million Muslims live in the USA, and their
number is growing.
For years, a small number of Islamic financial institutions have structured
mortgages to permit observant Muslims to sidestep the interest payments
that accompany conventional home financing. But the few institutions
making such loans have been hobbled by their limited access to capital.
Freddie Mac's decision to buy so-called Islamic mortgages changes that.
A private corporation chartered by the government, Freddie Mac provides
financing for about one in six home sales by channeling capital from
securities investors to mortgage lenders.
"It really opens us up to all Muslim communities in the U.S.,"
says Yahia Abdul-Rahman, adviser to American Finance House — LARIBA
of Pasadena, Calif., the first Islamic institution to sell its mortgages
to Freddie Mac. Abdul-Rahman says Freddie Mac's capital has allowed
American Finance, which is offering the mortgages in 15 states, to increase
its home loans to about 10 a week, up from about two a month
At the same time, Abdul-Rahman says, required down payments have been
halved to 20% and maximum repayment periods tripled to 30 years.
Islamic lenders such as American Finance sidestep interest by entering
a partnership with customers to buy a home. The customer acquires the
home through a lease-to-own arrangement. Their monthly payment includes
two components: repayment of the lender's contribution to the purchase
price and fair-market rent.
But the deal also gets translated into the conventional lending documents
to conform with U.S. real estate laws aimed at protecting consumers.
At that point, the numbers in the Islamic deal are translated into a
conventional house deal, interest rate and all.
Because the deal then has what Islamic lenders call "an implied
interest rate," observant borrowers have a sum that Abdul-Rahman
says may be deducted as mortgage interest for income tax purposes. An
IRS spokesman says the agency has never ruled on the legitimacy of such
Will American Muslims embrace the new option? "If it's available
and if it seems to be efficient and transparent, people will probably
take it," says Thomas Mullins, director of the Islamic finance
program at Harvard.
Freddie Mac's Salam says Islamic mortgages could produce as many as
50,000 home loans totaling $5 billion over 5 years. Freddie Mac plans
eventually to pool the loans and sell them to investors as mortgage-backed
securities, which company officials expect to have special appeal to
institutional investors in Islamic nations.