U.S.
Mortgage Lender Freddie Mac
enters
into Islamic Financing
One
of the largest home-financing institutions in the United States, the Freddie Mac
Corporation, recently announced it is launching a mortgage partnership with
American Finance House LARIBA in accordance with Islamic prohibitions against
the payment of interest.
The
“Islamic Mortgage” system, or LARIBA model (Los Angeles Reliable Investment
Bankers Associates), is an alternative to the current home-finance system in the
United States. The most popular US mortgage is a 30-year loan in which payments
during the first 6-7 years of the loan are applied principally to interest.
The
partnership, seen as an unprecedented milestone for American Muslims, expands
home ownership opportunities for a rapidly growing segment of the US community.
There are about 6-7 million Muslims living in the US.
“This
is a good initiative,” said American Muslim Council Executive Director Aly
Abuzaakouk. “This shows the proactive side of corporations.” According to an
announcement in March this year, Freddie Mac will invest an estimated $1 million
in contracts from American Finance House LARIBA, a Pasadena, California-based
Islamic lending institution that has instituted similar home finance instruments
to accommodate the burgeoning Muslim-American community in California.
The
partnership supplies American Finance House LARIBA with the needed capital to
meet the growing demand for a specifically tailored housing contract or
“Islamic mortgage.” Some
members of the US Muslim community have chosen to stay out of the home mortgage
market because of religious proscriptions against the payment, receipt, or
application of interest.
“Observant
Muslims were disenfranchised by the American Dream of home ownership because the
interest charged on conventional mortgages is in conflict with Islamic law,”
said Saber Sala, Vice President of Customer Strategies for the Freddie Mac
Corporation. “Our initiative with American Finance House LARIBA underscores
Freddie Mac’s commitment to foster homeownership for all of the communities
that make
America their home.”
LARIBA
financing arrangements are based on a shorter 7-10 year term, and require that
lender remuneration amount to no more than 65 to 70 percent of the original
price of the home. Proponents of the LARIBA model argue that the average
American family changes mortgages once every 5 or 6 years, which results in
constant payment of interest on debt.
The
LARIBA financing agreement consists of two parts. The first is a loan agreement
in which the client returns the capital to the company (Return-of-Capital). The
second is a lease agreement based on an agreed lease rate, calculated on the
declining equity stipulated by the Return-of-Capital pay back agreement.
The
client receives immediate title to the property, with LARIBA serving as lien
holder. The lease value is based on fair and comparable lease rates of
equivalent properties in the area, and is negotiated on a case by case basis
between LARIBA and the client.
American
Finance House LARIBA currently serves the US Muslim community with “Islamic
mortgage” systems in 15 states, and is the first Islamic financial institution
in the United States to achieve status as an official Freddie Mac Seller/Service
provider.
“This
initiative facilitates the large number of principled individuals who choose
strict adherence to their religion,” said American Finance House LARIBA's
President. Maguid Abdelaaty. “This has very positive implications and will
allow American Muslims to obtain the American Dream.”
(Source:
Office of International Programs, US Department of State.)