For observant Muslims who own their homes, paying for them with a conventional mortgage that uses interest is haraam, or forbidden.
While several forms of Islamic mortgages offer acceptable forms of home financing without interest, New York’s large Muslim population hasn’t taken up these options on the scale many observers hoped for after programs were introduced here in the late 1990s. The city’s Muslim population was estimated at about 600,000 in late 2001, according to researchers at Columbia University, but demographers agree that tracking religious populations is an inexact science. The national Muslim population estimates range between 3 and 7 million.
What numbers do show is that consumer interest in mortgages that comply with sharia, or Islamic law, first jumped in 1997 after the U.S. Office of the Comptroller of the Currency concluded that the product was an equivalent alternative to conventional mortgages.
But despite the fact that internationally, sharia-compliant financial products are one of the fastest-growing sectors of the banking industry, Islamic mortgages remain only a tiny fraction of the more than $2 trillion annual U.S. residential mortgage market.
The specialty mortgage was created in Egypt in the 1960s. Instead of using riba, or interest, which is prohibited for Sunni Muslims by sharia (Shiites permit conventional mortgages), financial institutions rely on the buyer and the company to share the risk as partners.
In other Western countries, the product is profitable, such as in the United Kingdom, a country with far fewer Muslims than the U.S.
But here, demand was so small that HSBC Bank USA, which wrote about $50 million in Islamic mortgages since 2001, stopped offering them in December. Two new companies, Devon Bank of Chicago and American Finance House Lariba of Pasadena, Calif., that started issuing them here recently have only written a handful of loans each. The United Bank of Kuwait left the marketplace after a merger with Al-Ahli Commercial Bank of Bahrain in 2000, having written only about 50 mortgages.
There were about 1,200 Islamic mortgages originated and refinanced in 2005 by the two largest financiers, Lariba and Guidance Financial, according to the most recent data available on the federal Home Mortgage Disclosure Act’s Web site. In comparison, Wells Fargo alone originated and refinanced about 670,000 conventional loans that year. Alburaq, the leading sharia-compliant financial services provider in the U.K., reported sales of about $200 million in Islamic mortgages for the six months ended Feb. 28.
Real estate professionals who have worked with Islamic mortgages say the hurdles in the U.S. are a combination of added costs, poor marketing and ambivalence in a post-Sept. 11 environment.
Perhaps the biggest barrier to success has been that Islamic mortgages often cost more than conventional mortgages. That’s because financial institutions must conduct additional transactions and maintain a board of religious scholars who oversee and review the mortgages.
Mahmoud El-Gamal, a professor of economics at Rice University in Houston and an authority on Islamic banking, said homeowners pay up to a 40-basis-point premium for the specialty mortgages. That can mean as much as $1,000 per year in additional payments on a $300,000 mortgage.
Queens real estate broker Moustafa Elshiekh expressed the doubts many in the Muslim community feel toward the halal mortgage.
“If you think about it, they are doing the exact same thing but charging extra to make it halal,” he said. Elshiekh, a devout Muslim and leader in the Islamic community in Astoria, added, “I am not an authority if it is right or wrong for the religion. If it makes you feel better, then do it, but personally I don’t.”
Another factor has been the high cost of homes in New York, which are keeping Muslims in traditional mortgages or renting. Freddie Mac and Fannie Mae buy sharia-compliant mortgages nationally from select originators, but cap the amount for all mortgages on single-family homes at $417,000.
In 2005, GMAC Financial Services began buying mortgages originated by Guidance Financial with a cap of $2 million, allowing the company to finance homes in the higher price range.
Guidance is one of the small success stories.
In the first six months of 2007, Virginia-based Guidance Financial, the nation’s largest provider of Islamic mortgages, has written 60 such mortgages in the New York City area totaling about $20 million, with the greatest number in Brooklyn, Queens and Nassau County. Nationwide, the company passed the $1 billion mark in June in mortgages sold since its founding in 2002. The company is on track to double the number of mortgages written in New York compared to last year.
“I think it will continue to increase from here, but there are perhaps a number of factors like education. It takes a while to educate the consumer to the difference between us and a conventional mortgage,” said Hussam Qutub, a spokesman for Guidance.
Guidance Financial uses a declining balance co-ownership program, known in Arabic as mushakara, in which the buyer pays a monthly fee similar in cost to conventional interest charges, as well as payments on the principal. As payments are made, the buyer’s share in the ownership increases until the property is paid for and owned in full. In effect, these mortgages operate more like leases than loans.
Other New York lenders with sharia-compliant programs use other methods of financing. Devon Bank uses a system called murabaha, in which the bank buys the home and immediately sells it to the new buyer. The owner then pays the cost plus charges equivalent to a conventional mortgage. Lariba uses a lease-to-purchase program in which the bank and buyer purchase the property, giving title to the homeowners, but giving Lariba a financial claim on the home. The buyers pay the purchase price and a rental fee until the total cost is paid off.
A former Islamic mortgage officer at HSBC USA said their product was competitively priced with conventional mortgages, but the products never took off with HSBC USA due to a combination of geopolitical anxiety and bad marketing to New York’s Muslim community.
“When we first started, it was just me pushing the product. We hired another person, but it just wasn’t enough manpower,” said Hanis Shakir, a former senior Islamic finance officer at HSBC USA. Shakir, who left HSBC in 2005 after five years with the bank, said his employer backed away from the product, particularly after the terrorist attacks of Sept. 11.
“When Sept. 11 occurred, a lot of people did not really want to push this Islamic finance,” he said.