U.S. Mortgage Lender Freddie Mac Enters Islamic Financing

By Armond Caglar
Washington File Staff Writer

Washington--One of the largest home-financing institutions in the United States, the Freddie Mac Corporation, has 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 U.S. 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 homeownership opportunities for a rapidly growing segment of the U.S. community. Studies estimate that there are 6-7 million Muslims living in the U.S.

"This is a good initiative," said American Muslim Council Executive Director Aly Abuzaakouk. "This shows the proactive side of corporations."

According to a March 28 announcement, 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 U.S. 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 homeownership 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 U.S. 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 President Maguid Abdelaaty. "This has very positive implications and will allow American Muslims to obtain the American Dream."

(Distributed by the Office of International Programs, U.S. Department of State. Website: http://usinfo.state.gov)