Callahan & Associates' Blog
Off The CUFFRSS
Feb 07, 2012
Some underserved consumers feel doomed to rent forever. But it doesn’t have to be that way.
By Aaron Pugh
More By Aaron Pugh
While mainstream mortgage offerings are a perfect solution for many home buyers, a large body of potential borrowers don’t fit into that status quo.
It is important to note that fringe institutions becoming overly creative or overreaching with financing has hurt borrowers, businesses, and marketplaces in the past. Yet offering fiscally responsible solutions tailored to an underserved market’s needs can set you apart, if it makes sense for both membership and the institution.
According to the Islamic Information Center, the Muslim population of the United States is somewhere around 8 million. Yet many in this growing segment face a unique challenge to homeownership due to a desire to stay compliant with Sharia law, which considers paying interest tantamount to usury.
Now, the interest-free mortgages that are common overseas and in Canada are starting to appear in the United States, allowing Muslims to achieve homeownership with a clear conscience.
North Jersey Federal Credit Union ($200M, Totowa, NJ) was the first to offer these loans in the U.S. through its Islamic banking division, says NorthJersey.com. The division also offers other Sharia compliant products and accounts, and avoids investments that deal in alcohol or other prohibited items.
Most Sharia loans are traditionally structured as either Murabaha (deferred sale finance) or Ijara (lease-to-own) situations, says PrimeLocation.com. At North Jersey, the borrower and institution buy the house together and the borrower buys out the credit union’s portion of the loan over time. They also pay a predetermined fee roughly equal to what the total interest would be over a loan term.
The recession seemingly put a hold on the migratory American, as just 11.6% of the population changed residences between 2010 and 2011, says the U.S. Census Bureau. But as the economy picks up and unemployment rates decrease, we could see a resurgence in activity.
Portable mortgage products can be moved from residence to residence and allow the borrower to keep their original low rate as they move to a smaller or larger home.
These loans are not without their challenges, says the CUNA Lending Council, citing factors like the lack of a secondary market. But portable mortgages can also create long-term relationships and help keep buyers flexible, no matter how their economic situation changes.
Provident Credit Union ($1.5B, Redwood City, CA) currently offers its members 5/25, 7/23, 5/5, or 10/10/10 portable options, which can be moved between residences within the state.
Only 66% of American’s own their home, and despite the rapidly increasing rent prices in metro areas, 2012 is becoming what a Morgan Stanley analyst called “The Year of the Landlord," says The Huffington Post. Like the flexibility offered by portable mortgages, rent-to-own scenarios operated in a non-predatory way can help low-to-no credit members get on their feet, build solid relationships with the credit union, and when they are ready, make the next step to homeownership.
Perfect Circle Credit Union ($48M, Hagerstown, IN) is currently offering its revamped REO properties in a rent-to-own program for a few qualified burrowers undergoing a specific hardship. The applicants can rent the home for $350 a month for two years and after that, the payment shifts towards the mortgage instead.
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