..And Allah hath permitted trade and forbidden usury...
(Al Quran 2:275)

To help make the American Dream possible for Muslim families in the U.S., Freddie Mac is investing in home financing contracts acceptable under both Islamic and U.S. law.

Islamic teachings prohibit followers from paying or receiving interest -- a reality of almost every financial transaction in American society -- from paying for gas to buying a home.

For those who follow the teachings, the price of piety can be a lifetime of renting.

"Many American-Muslim families have stayed out of the housing market for years because they are not allowed by Islamic jurisprudence to pay, receive or be charged interest," said Dr. Yahia Abdul- Rahman, founder of Pasadena, CA-based American Finance House -- LARIBA.

Freddie Mac has invested an estimated $1 million in contracts from American Finance House under an agreement that makes it the nation's first Islamic financial institution to achieve Freddie Mac Seller/Servicer status.

"Working with Freddie Mac will provide American Finance House - LARIBA with much needed liquidity to meet the growing demand for Islamic Home Financing in the American-Muslim community. This also will provide, in the near future, members of the community who want to invest their savings according to Islamic law, with proper Islamically-sanctioned investment instruments."

The Islamic housing finance model uses standard real estate financing documents, in accordance with state and local law, and is serviced like a conventional Freddie Mac mortgage. The key to the model is an agreement between American Finance House - LARIBA and the prospective homeowner that establishes jointly negotiated maximum monthly payments based on the property's sale price and fair rental value in a lease-to-purchase program.

American Finance House financing is currently available in 15 states: Arizona, California, Colorado, Florida, Georgia, Illinois, Maryland, Massachusetts, Michigan, Minnesota, New Jersey, Oregon, Texas, Virginia and Washington. Financing is pending in six more states: Alabama, Connecticut, Nevada, North Carolina, Pennsylvania, and Ohio.

Despite it's reach, American Finance House doesn't have sufficient capital to meet the demand and the Fannie Mae-LARIBA agreement joins a growing number of other programs designed to serve Muslims' special home purchase needs.

The Ameen Housing Co-op in Palo Alto, CA, for example, helps Muslims buy or refinance homes with creative financing that circumvents interest-based payments.

Here's how it works.

Members have to buy at least $1,000 worth of shares in Ameen every year. Those who qualify first are allowed to buy first.
1. Home buyers must use their shares for a down payment of at least 30 percent of the home's value. Ameen will provide the rest, up to $300,000, if it agrees the house is a good investment.

2. Ameen and home buyers calculate an ad hoc fair rental value for the home, based on rents or mortgage payments of comparative homes in the area. Home buyers pay a percentage of the rent, depending on how much equity they own. They also pay $50 a month for administrative costs.

3. If home buyers pay any more than required, that money goes toward the purchase of the remaining equity, thus eventually reducing their rent payments.

4. Rent paid to Ameen is divided among co-op members, earning them 6 to 8 percent annual returns.

5. If the home buyer sells the house, Ameen shares in profit or loss by up to 30 percent, in slight proportion to the home buyer's initial down payment.

Other Islamic financing institutions that help Muslims make real estate and other transactions, sans interest, include:

• Dow Jones Islamic Market Index

• MSI Financial Service Corp.

• Islamic Banking Network

• Islamic Banking and Finance Network

• Muslim-Investor.com

Published: April 6, 2001

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