Sharia-compliant home loans
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Thread: Sharia-compliant home loans

  1. #1
    Senior Member Gerry Clinchy's Avatar
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    Default Sharia-compliant home loans

    This is really interesting to me since I'm a Realtor®

    http://www.foxnews.com/politics/2015...financing-for/

    Here's how a Sharia-compliant sale might work between a bank and a Muslim homebuyer: The bank agrees to buy and hold clear title to the house, then enters into a contract to sell the house at an agreed-upon mark-up price that includes profit. The buyer agrees to pay the sale price in installments, or one lump sum. The markup rate is calculated to compete with prevailing interest rates, so the buyer's monthly payment is roughly equal to what a traditional lender might charge for a loan that combines principle and interest.
    While Seattle leaders want more lenders taking part in the Sharia program, there are some already offering such unconventional financing. Seattle-based Halal Inc. advertises on its website that "instead of starting with a flawed system and trying to 'make a fit,' we took the perfect system ordained by Allah and created a legal framework for it." Multiple calls to Halal Inc. by FoxNews.com for comment were not returned.
    The sector has grown to more than $1.6 trillion in assets worldwide over the past three decades. Analysts see the potential for even greater growth as the Muslim population grows in the U.S. and Europe, attracting the attention of other financial heavyweights like HSBC and Goldman Sachs.
    "Global Islamic financial assets have soared from less than $600 billion in 2007 to more than $1.3 trillion in 2012, an expansion rooted in the growing pool of financial assets in Muslim-majority countries driven by consumer demand for products that comply with religious codes," according to the 2014 report by the Council on Foreign Relations.

    If the above is the "model", I'm thinking that the banks who make these loans will then become owners of a whole lot of real estate of all types throughout the country. There has been some law that precludes banks investing in certain things that might impugn their integrity as a bank.

    Evidently, at least some of the "banks" who will make these loans are going to be foreign-based. So it would appear that such banks could be used for laundering funds for terrorist groups.

    What about legal repercussions for the individuals who are in the process of buying these homes, but don't actually own them. If a judgment were rendered against you, and you were unable to pay, the plaintiff might be able to put a lien on your home. But what if you don't own a home? Same would be true for a lien for unpaid income taxes. Would this type of financing provide legal "shelters" for individuals that they would not otherwise have?

    Suppose a Christian, Jew or atheist wants one of these financing arrangements? Will they be available without discrimination based on religion?

    Do we have any bankers on the Forum?
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    Senior Member Rose's Mom's Avatar
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    I have read this and cannot really wrap my mind around it. So the bank buys the home and then sells to the person, the final purchase price is marked up to include principal and interest, the buyer pays in monthly installments. So they still pay interest only that it is not called interest on paper. Since the bank owns the home are they also responsible for the insurance on the home? To my understanding the Muslims also do not "believe" in insurance.

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    Senior Member Richard Reese's Avatar
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    Seems like a way around taxes, insurance and law suits. It also seems very illegal when you read it. I am sure some loop hole will allow this but it sure does not pass the straight face test.
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    Senior Member Dave Farrar's Avatar
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    If you default on the loan, do they chop your head off, stone you, or burn you alive?
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    Senior Member roseberry's Avatar
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    Quote Originally Posted by Dave Farrar View Post
    If you default on the loan, do they chop your head off, stone you, or burn you alive?
    naw main,
    it can't come to that in the U.S.
    here, if they get behind all they gotta do is get a sharia compliant "title loan" on the toyota truck with the machine gun in the bed, from a sharia compliant "payday lender".
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  8. #6
    Senior Member Gerry Clinchy's Avatar
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    Quote Originally Posted by Rose's Mom View Post
    I have read this and cannot really wrap my mind around it. So the bank buys the home and then sells to the person, the final purchase price is marked up to include principal and interest, the buyer pays in monthly installments. So they still pay interest only that it is not called interest on paper. Since the bank owns the home are they also responsible for the insurance on the home? To my understanding the Muslims also do not "believe" in insurance.
    Yes, they are actually still paying interest and insurance ... but what religion doesn't have its ways of getting around its dogma? The RC won't allow divorce, but gives out annulments pretty easily if you have the $ to pay for it A 20-year marriage can be "voided"; said to never have existed. Does that make any children born fatherless? How is that really different from a divorce?

    I'd guess that the taxes and insurance are included in the loan payment amount as well.

    There are bound to be some problems. Remember the banks did robo-signing for foreclosures. They messed that up. Will the banks be reliable in paying the taxes and insurance? A couple of real stories come to mind:
    1) In "regular" mortgages, the owner receives the tax bill, and sends the bill to the bank for payment from their escrow fund. In this case, the bank sent the payment to the wrong township! So, the owner got a late notice from the township. Of course, the owner took that up with the bank, and the problem got sorted out. But in the Sharia loan, the bill will go to the bank (the owner). If somebody misplaces it, who will be the one to alert that the home could go to tax sale?

    2) In other cases, when involved in selling a foreclosure property, neither the bank nor the attorneys handling the foreclosure realized the property in question was up for tax sale. Literally, an attorney representative was making payment in the 11th hour. Our title search had revealed the problem. Had we not been doing the transaction, who would have alerted the bank?

    3) Where do the banks get the capital to purchase the homes? There's where the money-laundering can enter the picture. Does ISIS oil money (perhaps sold on a black market) enter into the funding? Heck, "shell" banks could be set up directly by ISIS. I'm sure while our Consumer Protection agency is busy working on payday loans, they'll miss the important stuff ... as so often has happened with govt agencies that become so huge as to become unwieldy. How will the banks account for their source of funds? How effective will that be? Will banks be out on a limb by borrowing in order to buy these homes? What happens if the banks fail? (more bailouts?)

    Just as mortgage servicing is "sold" today, I'd imagine the same companies that do that servicing for "regular" mortgages will be able to provide the same service for the Sharia mortgages. They'll just have to make some changes in the printed materials to conform to an installment sale rather than a mortgage.

    Down East, I don't think it is a way around taxes or insurance. Somebody always has to pay the taxes. However, since the owner is a bank, they could decide to "self-insure" the properties (could be very risky). If banks do purchase insurance, what will it cost?

    Some years ago when I had a car loan and changed my car insurance, the paperwork got fouled up with the bank, they sent me a letter saying that if I didn't get insurance they would buy it for me. The price quoted was about 5X what I was paying on my own policy! Could be some big bucks involved in this part of the scheme as well.
    [email protected]
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  9. #7
    Senior Member Rose's Mom's Avatar
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    Quote Originally Posted by Gerry Clinchy View Post
    Yes, they are actually still paying interest and insurance ... but what religion doesn't have its ways of getting around its dogma? The RC won't allow divorce, but gives out annulments pretty easily if you have the $ to pay for it A 20-year marriage can be "voided"; said to never have existed. Does that make any children born fatherless? How is that really different from a divorce? - yup - I agree with you completely on that.

    I'd guess that the taxes and insurance are included in the loan payment amount as well. Me too

    There are bound to be some problems. Remember the banks did robo-signing for foreclosures. They messed that up. Will the banks be reliable in paying the taxes and insurance? A couple of real stories come to mind:
    1) In "regular" mortgages, the owner receives the tax bill, and sends the bill to the bank for payment from their escrow fund. In this case, the bank sent the payment to the wrong township! So, the owner got a late notice from the township. Of course, the owner took that up with the bank, and the problem got sorted out. But in the Sharia loan, the bill will go to the bank (the owner). If somebody misplaces it, who will be the one to alert that the home could go to tax sale?

    At least in VA the tax bills go to the mortgage companies electronically. And since the owner is the bank I guess it will be on them.

    2) In other cases, when involved in selling a foreclosure property, neither the bank nor the attorneys handling the foreclosure realized the property in question was up for tax sale. Literally, an attorney representative was making payment in the 11th hour. Our title search had revealed the problem. Had we not been doing the transaction, who would have alerted the bank?

    I would assume that the title insurance would also be under the bank's name.

    3) Where do the banks get the capital to purchase the homes? There's where the money-laundering can enter the picture. Does ISIS oil money (perhaps sold on a black market) enter into the funding? Heck, "shell" banks could be set up directly by ISIS. I'm sure while our Consumer Protection agency is busy working on payday loans, they'll miss the important stuff ... as so often has happened with govt agencies that become so huge as to become unwieldy. How will the banks account for their source of funds? How effective will that be? Will banks be out on a limb by borrowing in order to buy these homes? What happens if the banks fail? (more bailouts?)

    hahaaha - yeah, more than likely oil money.

    Just as mortgage servicing is "sold" today, I'd imagine the same companies that do that servicing for "regular" mortgages will be able to provide the same service for the Sharia mortgages. They'll just have to make some changes in the printed materials to conform to an installment sale rather than a mortgage.

    Down East, I don't think it is a way around taxes or insurance. Somebody always has to pay the taxes. However, since the owner is a bank, they could decide to "self-insure" the properties (could be very risky). If banks do purchase insurance, what will it cost?

    Some years ago when I had a car loan and changed my car insurance, the paperwork got fouled up with the bank, they sent me a letter saying that if I didn't get insurance they would buy it for me. The price quoted was about 5X what I was paying on my own policy! Could be some big bucks involved in this part of the scheme as well.

    As far as your car loan as well as those mortgages the force placed insurance is astronomical; I am sure that for themselves the banks are going to get cost effective coverage. BTW - what happens when you change carriers on your insurance. The new policy is being sent to the bank but since they already have the old policy on record they do not process your new policy; then they get the cancellation from on the old policy and they turn around and scream at you that you do not have coverage and they will be "forced" to buy insurance for you which by the way does not give you any liability coverage it only covers the amount of the loan.

  10. #8
    Senior Member Ron in Portland's Avatar
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    It's my understanding that it's done this way becuase the Muslim religion forbids paying interest, correct? Does that mean, when processed this way, they are not able to claim the home loan interest deduction on income taxes (not insignificant)? Or is there a way around that too? Just curious.
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    Senior Member Gerry Clinchy's Avatar
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    Quote Originally Posted by Rose's Mom View Post

    As far as your car loan as well as those mortgages the force placed insurance is astronomical; I am sure that for themselves the banks are going to get cost effective coverage. BTW - what happens when you change carriers on your insurance. The new policy is being sent to the bank but since they already have the old policy on record they do not process your new policy; then they get the cancellation from on the old policy and they turn around and scream at you that you do not have coverage and they will be "forced" to buy insurance for you which by the way does not give you any liability coverage it only covers the amount of the loan.
    When I changed my insurance for home, we had to send it to the bank twice for the bank to take notice that the property was, indeed, still insured. However, they didn't jump immediately to the forced placement the way the car loan people did, so I never saw what the insurance would have cost for the home.
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  12. #10
    Senior Member Gerry Clinchy's Avatar
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    Quote Originally Posted by Ron in Portland View Post
    It's my understanding that it's done this way becuase the Muslim religion forbids paying interest, correct? Does that mean, when processed this way, they are not able to claim the home loan interest deduction on income taxes (not insignificant)? Or is there a way around that too? Just curious.
    I'd guess that is something that the IRS would have to rule on As long as the IRS is under the WH's direction, I'd be pretty sure it would be favorable to the Muslim homeowner.

    OTOH, if there REALLY is no interest taking place, which is what this "installment purchase" is "replacing", and the bank actually owns the home, logic would say that property taxes are deductible to the owner (the bank); and if no interest is being paid, then there should be no deduction for that. That would be logical, but that doesn't mean that's how the IRS will decide to treat it.

    For example, for a LONG time mortgage loan insurance was NOT deductible. Depending on the size of the mortgage that could be a big number. I think some changes have been made by the IRS (or by legislation?) that now allows at least some portion of PMI to be tax-deductible ... but I'm not 100% sure about whether there was a change in that.
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