Since it appears, as Eric pointed out, to be such a good deal for the lenders, I imagine the answer to your question will be yes.

 

 

It benefits business by putting tens of thousands of new customers in the market for loans and housing.

 

You ask a good question. I see no reason why anyone should be prevented from applying for either type of loan, just like kosher food is available to all.

 

Again I ask, how can it be such a good deal for lenders?  What criteria would be used to evaluate and determine risk and interest charges?  Would the default rate for a "sharia compliant" loan be an average of prevailing interest rates?  Would it be on the high end of the scale or the low end?

 

One question for you rollerjag, out of those tens of thousands of new customers, how many of them would be considered high risk?

---

There are 10 kinds of people in this world.  Those who understand binary and those who don't.

Again I ask, how can it be such a good deal for lenders?  What criteria would be used to evaluate and determine risk and interest charges?  Would the default rate for a "sharia compliant" loan be an average of prevailing interest rates?  Would it be on the high end of the scale or the low end?

 

One question for you rollerjag, out of those tens of thousands of new customers, how many of them would be considered high risk?

 

That's actually five questions, but it would seem the issues you raise would be considered by lenders when they decide whether or not they will offer the type loans in question. As far as I can tell, nobody is being compelled, only encouraged.

 

Out of the general population, how many would be considered high risk? Has that kept lenders out of the lending business?

---

If something can corrupt you, you're corrupted already.
- Bob Marley


 

Again I ask, how can it be such a good deal for lenders?  What criteria would be used to evaluate and determine risk and interest charges?  Would the default rate for a "sharia compliant" loan be an average of prevailing interest rates?  Would it be on the high end of the scale or the low end?

 

 

Fair questions.

 

It's a good deal for the lenders, because as I read it, the borrower would be on the hook for the entire amount of loan + reasonable interest (called a "fee").

 

Let's take the example of the 200k house.  Special Sharia rate:  20% down (40k), loan value of 312k.  Monthly payment = $1300.  If the borrower defaults 2 years in, the bank now owns a 200k house (or more, depending on appreciation) for 130k.  Banks hate owning houses, but at least they get their money back, as I imagine they'll get 150k for it by the time they pay a realtor and take their carrying costs.

 

If the borrower doesn't default, then it's really about the same as a conventional loan.  Bank gets their money, and from what I understand, they don't have to worry about losing a little bit if the borrower pays it back early.  There's no incentive to do so, since there's no interest to pay.  The borrower starts out "upside-down" on the property, while the bank is well above water.

 

As for the rate, that's usually dependent on the qualifying buyer.  I imagine because this is an exotic product, the lender would be able to charge the higher end of average.  Now, because banks compete for even these niche markets, that competition will keep the rates at least honest.

 

And to answer FSG's earlier question:  Banks right now don't have to offer any particular kind of loan to anyone.  In our free market, if Bank A doesn't want to offer, say, a 40 year loan, then Bank B or Bank C will to capture that market.  So it will be with the "Sharia" market.  There's no obligation to offer such products, it's just what the market will bear.  As for the product being unfair to the consumer, and consumers suing?  That one I don't know, but I'm pretty sure that's why they're discussing these things now instead of just rolling it out there.

---

Fair questions.

 

It's a good deal for the lenders, because as I read it, the borrower would be on the hook for the entire amount of loan + reasonable interest (called a "fee").

 

Let's take the example of the 200k house.  Special Sharia rate:  20% down (40k), loan value of 312k.  Monthly payment = $1300.  If the borrower defaults 2 years in, the bank now owns a 200k house (or more, depending on appreciation) for 130k.  Banks hate owning houses, but at least they get their money back, as I imagine they'll get 150k for it by the time they pay a realtor and take their carrying costs.

 

If the borrower doesn't default, then it's really about the same as a conventional loan.  Bank gets their money, and from what I understand, they don't have to worry about losing a little bit if the borrower pays it back early.  There's no incentive to do so, since there's no interest to pay.  The borrower starts out "upside-down" on the property, while the bank is well above water.

 

As for the rate, that's usually dependent on the qualifying buyer.  I imagine because this is an exotic product, the lender would be able to charge the higher end of average.  Now, because banks compete for even these niche markets, that competition will keep the rates at least honest.

 

And to answer FSG's earlier question:  Banks right now don't have to offer any particular kind of loan to anyone.  In our free market, if Bank A doesn't want to offer, say, a 40 year loan, then Bank B or Bank C will to capture that market.  So it will be with the "Sharia" market.  There's no obligation to offer such products, it's just what the market will bear.  As for the product being unfair to the consumer, and consumers suing?  That one I don't know, but I'm pretty sure that's why they're discussing these things now instead of just rolling it out there.

 

All well and good, but how is a "reasonable" interest rate determined?  What is assumed as "fair" when coming up with the "fee"?  If using the conventional method (credit report) as part of the loan qualification process, would it be "reasonable" to charge a much higher interest rate (fee) for a lender?  Take a look at today's interest rates.  Would it be fair for a lender to charge a 15% or 20% "fee" on a loan?

 

I see this as a high risk proposition for mortgage lenders with very little payoff.  There is no way that I can see it as "good for business".

---

There are 10 kinds of people in this world.  Those who understand binary and those who don't.

All well and good, but how is a "reasonable" interest rate determined?  What is assumed as "fair" when coming up with the "fee"?  If using the conventional method (credit report) as part of the loan qualification process, would it be "reasonable" to charge a much higher interest rate (fee) for a lender?  Take a look at today's interest rates.  Would it be fair for a lender to charge a 15% or 20% "fee" on a loan?

 

I see this as a high risk proposition for mortgage lenders with very little payoff.  There is no way that I can see it as "good for business".

Except other places have already made plenty of profit off of it.  This isn't exactly a new idea.

---

I was wrong about Trent Baalke. 

That's actually five questions, but it would seem the issues you raise would be considered by lenders when they decide whether or not they will offer the type loans in question. As far as I can tell, nobody is being compelled, only encouraged.

 

Out of the general population, how many would be considered high risk? Has that kept lenders out of the lending business?

Now that I'm back home (albeit with a sprained ankle and a mangled back--never agree to be the muscle in a move without knowing who your supporting cast will be) and at my computer, I can respond in a little more depth here. RJ, I picked your post to reply to almost at random. There are a handful of points I'd like to make, and one of them is something you've touched on here.

 

I don't know exactly how much of the general population would be considered high risk to mortgage lenders, and I also don't know how many of those are given loans anyway. I do know that lenders control for risk by placing more restrictive terms on applicants they consider to be high risk in terms of higher down payments, higher interest rates, even refusing to write a 30-year loan and insisting on a 15-year loan instead. My issue is simple: would someone applying for a sharia loan be given more favorable terms (by comparison) or underwritten for a loan that a conventional mortgage applicant would not get? If the answer to either of those question is yes, then I have a problem* with the practice.

 

Why the asterisk? Because if anyone and everyone is allowed to receive sharia-compliant loans, then it's not a discriminatory problem at all, and lenders are simply digging a hole for themselves that they'll have to figure a way out of on their own.

 

How should sharia loans be calculated to make it a fair, non-discriminatory practice? For me, it's simple. If a person seeking a sharia loan for a $200k property came to you, use the factors you otherwise would to determine the terms you'd offer them on a 30-year conventional mortgage. For reasons that are too long and complicated to go into here, the only fair way would be to use a conventional mortgage as your benchmark, not FHA or VA terms. If factors in their history would preclude you from offering them a conventional mortgage, they get turned away, period. If the underwriting decision is that they have to pay 25% down and a 5.75% interest rate for 30 years, then they need to produce 25% of what would have been the total principal amount ($200k, not the full loan including service fee) and make equal payments on the remaining 75% of principal and the service fee for the next 30 years. Again, if they can't meet these terms, turn them away.

 

My greatest concern with sharia loans is that they will be abused by those with poor credit or no credit. By their very nature, sharia loans would be subjected to increased scrutiny by the general public. Because the acronym of your choice will be watching them closely, you can bet that there will be cases shoved in front of the press (and the courts) alleging discrimination, collusion, whatever because sharia loan applicants with poor credit or no credit are turned away or given down payment and servicing fee amounts that are higher than what someone with average credit applying for a conventional loan would get. The acronym's argument, of course, would be that something other than creditworthiness is being used as the deciding factor. Do banks hold firm and insist that, based upon their internal policies, they will not adjust the playing field based upon the type of ball being thrown, or will they simply relent and approve or alter the terms of sharia loans to "open the door of home ownership to a broader population"?

 

Again, if sharia-compliant loans are offered to everyone, period, I don't have any particular problem with their being offered, or with the terms of the agreement being screwy compared to traditional loans. If one has to prove anything above and beyond what they'd need to prove for a conventional loan to get a sharia loan, however, then that's a serious problem for me.

 

Also, jagibelieve raised a question a while back about how to build credit history at all without paying interest. There are a few ways out there. The easiest one would be to simply get a credit card (I doubt sharia law envisioned credit cards) and set it to pay off the balance in full each month, thus avoiding credit. The other option, which is an extremely shady one, is to employ the services of a company that will open an interest-free "line of credit" for you. You pay them a set amount each month, and they report that amount as a payment on a line of credit to reporting agencies. It's not exactly conventional, not even entirely legal in some cases, but it's out there and it's not interest.

---

Now that I'm back home (albeit with a sprained ankle and a mangled back--never agree to be the muscle in a move without knowing who your supporting cast will be) and at my computer, I can respond in a little more depth here. RJ, I picked your post to reply to almost at random. There are a handful of points I'd like to make, and one of them is something you've touched on here.

 

I don't know exactly how much of the general population would be considered high risk to mortgage lenders, and I also don't know how many of those are given loans anyway. I do know that lenders control for risk by placing more restrictive terms on applicants they consider to be high risk in terms of higher down payments, higher interest rates, even refusing to write a 30-year loan and insisting on a 15-year loan instead. My issue is simple: would someone applying for a sharia loan be given more favorable terms (by comparison) or underwritten for a loan that a conventional mortgage applicant would not get? If the answer to either of those question is yes, then I have a problem* with the practice.

 

Why the asterisk? Because if anyone and everyone is allowed to receive sharia-compliant loans, then it's not a discriminatory problem at all, and lenders are simply digging a hole for themselves that they'll have to figure a way out of on their own.

 

How should sharia loans be calculated to make it a fair, non-discriminatory practice? For me, it's simple. If a person seeking a sharia loan for a $200k property came to you, use the factors you otherwise would to determine the terms you'd offer them on a 30-year conventional mortgage. For reasons that are too long and complicated to go into here, the only fair way would be to use a conventional mortgage as your benchmark, not FHA or VA terms. If factors in their history would preclude you from offering them a conventional mortgage, they get turned away, period. If the underwriting decision is that they have to pay 25% down and a 5.75% interest rate for 30 years, then they need to produce 25% of what would have been the total principal amount ($200k, not the full loan including service fee) and make equal payments on the remaining 75% of principal and the service fee for the next 30 years. Again, if they can't meet these terms, turn them away.

 

My greatest concern with sharia loans is that they will be abused by those with poor credit or no credit. By their very nature, sharia loans would be subjected to increased scrutiny by the general public. Because the acronym of your choice will be watching them closely, you can bet that there will be cases shoved in front of the press (and the courts) alleging discrimination, collusion, whatever because sharia loan applicants with poor credit or no credit are turned away or given down payment and servicing fee amounts that are higher than what someone with average credit applying for a conventional loan would get. The acronym's argument, of course, would be that something other than creditworthiness is being used as the deciding factor. Do banks hold firm and insist that, based upon their internal policies, they will not adjust the playing field based upon the type of ball being thrown, or will they simply relent and approve or alter the terms of sharia loans to "open the door of home ownership to a broader population"?

 

Again, if sharia-compliant loans are offered to everyone, period, I don't have any particular problem with their being offered, or with the terms of the agreement being screwy compared to traditional loans. If one has to prove anything above and beyond what they'd need to prove for a conventional loan to get a sharia loan, however, then that's a serious problem for me.

 

Also, jagibelieve raised a question a while back about how to build credit history at all without paying interest. There are a few ways out there. The easiest one would be to simply get a credit card (I doubt sharia law envisioned credit cards) and set it to pay off the balance in full each month, thus avoiding credit. The other option, which is an extremely shady one, is to employ the services of a company that will open an interest-free "line of credit" for you. You pay them a set amount each month, and they report that amount as a payment on a line of credit to reporting agencies. It's not exactly conventional, not even entirely legal in some cases, but it's out there and it's not interest.

 

I was told there would be no math.

 

It would seem every point you make would be addressed by common market forces. Just as in conventional lending, there will be varying risks and rewards, but when you consider the number of new opportunities on both sides - lenders and borrowers - it will be worked out.

 

What I don't fear is the sentiment expressed by the comments in the article linked in the OP, that this effort in Oregon will facilitate financing for terrorism.

---

If something can corrupt you, you're corrupted already.
- Bob Marley


 

And when, say, Wells Fargo doesn't want to offer those loans in the future, how long until the lawsuit?

You are so willfully obtuse it's borderline entertaining. You still are unable to grasp this very simple concept. If you do not sell a product, you do not have to sell a product. 

---

I was told there would be no math.

 

It would seem every point you make would be addressed by common market forces. Just as in conventional lending, there will be varying risks and rewards, but when you consider the number of new opportunities on both sides - lenders and borrowers - it will be worked out.

 

What I don't fear is the sentiment expressed by the comments in the article linked in the OP, that this effort in Oregon will facilitate financing for terrorism.

Well that's just stupid.

---

What terms?

 

By simple definition a person sincere in their convictions about sharia and interest wouldn't have a credit history and as you put it so well a normal person would have their application tossed in the recycle bin. 

---

Well that's just stupid.

 

Then you assume terrorists are stupid. Do you think they will choose the most obvious method for raising cash? More to the point, do you think they are held back because they must currently hold to Sharia law?

 

I will agree my statement appeared naive, what I meant is the effort on Oregon, if successful, makes it no more easier for terrorists than what's already available, and therefore does not increase my fears.

---

If something can corrupt you, you're corrupted already.
- Bob Marley


 

Then you assume terrorists are stupid. Do you think they will choose the most obvious method for raising cash? More to the point, do you think they are held back because they must currently hold to Sharia law?


I will agree my statement appeared naive, what I meant is the effort on Oregon, if successful, makes it no more easier for terrorists than what's already available, and therefore does not increase my fears.

Nor does it increase mine. My main concerns are making some people more equal than others when it comes to getting a home loan, and to a much lesser extent that loosening requirements for sharia loans could create an unsustainable housing bubble. Terrorists have plenty of ways to finance their activities without creating a paper trail leading right back to others within the organization.

---

What terms?


By simple definition a person sincere in their convictions about sharia and interest wouldn't have a credit history and as you put it so well a normal person would have their application tossed in the recycle bin.

There are several ways to determine a person's credit worthiness... owning a credit card is not the only way. The more you know...

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No one who has never borrowed and repayed a loan in their life is going to be seriously comsidered for a mortgage... The more you know.

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No one who has never borrowed and repayed a loan in their life is going to be seriously comsidered for a mortgage... The more you know.

Not true. Someone with no credit who can prove stable employment and income will always be considered. They'll just be required to bring much more up front in the down payment, pay a much higher interest rate, and possibly be required to take a 15-year loan instead of a 30-year. The banks are in the business of making money, and they don't make money by turning away someone who has the ability to pay down a home loan.

---

Now that I'm back home (albeit with a sprained ankle and a mangled back--never agree to be the muscle in a move without knowing who your supporting cast will be) and at my computer, I can respond in a little more depth here. RJ, I picked your post to reply to almost at random. There are a handful of points I'd like to make, and one of them is something you've touched on here.

 

I don't know exactly how much of the general population would be considered high risk to mortgage lenders, and I also don't know how many of those are given loans anyway. I do know that lenders control for risk by placing more restrictive terms on applicants they consider to be high risk in terms of higher down payments, higher interest rates, even refusing to write a 30-year loan and insisting on a 15-year loan instead. My issue is simple: would someone applying for a sharia loan be given more favorable terms (by comparison) or underwritten for a loan that a conventional mortgage applicant would not get? If the answer to either of those question is yes, then I have a problem* with the practice.

 

Why the asterisk? Because if anyone and everyone is allowed to receive sharia-compliant loans, then it's not a discriminatory problem at all, and lenders are simply digging a hole for themselves that they'll have to figure a way out of on their own.

 

How should sharia loans be calculated to make it a fair, non-discriminatory practice? For me, it's simple. If a person seeking a sharia loan for a $200k property came to you, use the factors you otherwise would to determine the terms you'd offer them on a 30-year conventional mortgage. For reasons that are too long and complicated to go into here, the only fair way would be to use a conventional mortgage as your benchmark, not FHA or VA terms. If factors in their history would preclude you from offering them a conventional mortgage, they get turned away, period. If the underwriting decision is that they have to pay 25% down and a 5.75% interest rate for 30 years, then they need to produce 25% of what would have been the total principal amount ($200k, not the full loan including service fee) and make equal payments on the remaining 75% of principal and the service fee for the next 30 years. Again, if they can't meet these terms, turn them away.

 

My greatest concern with sharia loans is that they will be abused by those with poor credit or no credit. By their very nature, sharia loans would be subjected to increased scrutiny by the general public. Because the acronym of your choice will be watching them closely, you can bet that there will be cases shoved in front of the press (and the courts) alleging discrimination, collusion, whatever because sharia loan applicants with poor credit or no credit are turned away or given down payment and servicing fee amounts that are higher than what someone with average credit applying for a conventional loan would get. The acronym's argument, of course, would be that something other than creditworthiness is being used as the deciding factor. Do banks hold firm and insist that, based upon their internal policies, they will not adjust the playing field based upon the type of ball being thrown, or will they simply relent and approve or alter the terms of sharia loans to "open the door of home ownership to a broader population"?

 

Again, if sharia-compliant loans are offered to everyone, period, I don't have any particular problem with their being offered, or with the terms of the agreement being screwy compared to traditional loans. If one has to prove anything above and beyond what they'd need to prove for a conventional loan to get a sharia loan, however, then that's a serious problem for me.

 

Also, jagibelieve raised a question a while back about how to build credit history at all without paying interest. There are a few ways out there. The easiest one would be to simply get a credit card (I doubt sharia law envisioned credit cards) and set it to pay off the balance in full each month, thus avoiding credit. The other option, which is an extremely shady one, is to employ the services of a company that will open an interest-free "line of credit" for you. You pay them a set amount each month, and they report that amount as a payment on a line of credit to reporting agencies. It's not exactly conventional, not even entirely legal in some cases, but it's out there and it's not interest.

 

Regarding the part in bold, while that makes good financial sense, it does not develop a positive credit history.

---

There are 10 kinds of people in this world.  Those who understand binary and those who don't.

My thoughts while waiting for a flight in Dallas (i.e., brief and disorganized):


1. I would anticipate that their credit be checked before extending the loan offer, and their interest rate figured accordingly. If they have no credit, I would hope (though I know there will be those who push to not make this the case) that the lender would have the right to turn the applicant away. Try and apply for a conventional loan with no credit and see how far you get in the process. Hint: they won't even take your application fee.


As to how the applicants build credit history, that's no one's problem but their own to figure out.


 

 

 

Not true. Someone with no credit who can prove stable employment and income will always be considered. They'll just be required to bring much more up front in the down payment, pay a much higher interest rate, and possibly be required to take a 15-year loan instead of a 30-year. The banks are in the business of making money, and they don't make money by turning away someone who has the ability to pay down a home loan.

 

see, even you know better.  

 

And do we really think that the person who is making 200k a year and has 25% to put down on a house is the person that we are talking about?

 

I still haven't heard anyone mention why we should be subsidizing a belief system that calls for our democracy being turned into a muslim theocracy by force if need be?

---

For all those worrying yourselves about how you would get someone with no credit history to qualify for a conventional loan i can save you the time, you can't.  And in the wonderful world of liberal affordable housing policy you don't have to.  When you look at the moves made by this administration and down the rank and file of the left, extending lines of credit to people based on ethnic or religious background instead of ability to by a home on their own or qualify for credit has been part of their dogmatic march towards a perverse brand of egalitarianism for a while.  

 

The sad part is that in the end, the bad risk is pushed off the short term lenders books into the dark and murky underworld of derivatives and mortgage backed securities.  We see how well that worked out the last time right?

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see, even you know better.  

 

And do we really think that the person who is making 200k a year and has 25% to put down on a house is the person that we are talking about?

 

I still haven't heard anyone mention why we should be subsidizing a belief system that calls for our democracy being turned into a muslim theocracy by force if need be?

 

Nobody is requesting anyone to subsidize anything.

---

If something can corrupt you, you're corrupted already.
- Bob Marley


 

see, even you know better.  

 

And do we really think that the person who is making 200k a year and has 25% to put down on a house is the person that we are talking about?

 

I still haven't heard anyone mention why we should be subsidizing a belief system that calls for our democracy being turned into a muslim theocracy by force if need be?

I referred to a conventional loan initially, and loans in general with my second example. There are programs out there linked to FHA and VA loans in which someone with no credit can receive a mortgage. Those programs generally do not exist with conventional loans, so good luck to someone with no credit who wants one of those.

 

It's not subsidizing a belief system if everyone, regardless of beliefs, is eligible for sharia-compliant loans. It would just be a new home loan product.

 

That said, I just thought of a potentially fatal flaw for sharia-compliant loans as we've envisioned them here. Typical loans have their outstanding value figured only by principal, with interest not factored in. That's how you can refinance or sell your home long before the 30 years are up; the amount in principal that you still owe on the house is probably much lower than the sale price or refi value of the home.

 

Take that over into a sharia-compliant loan, and you're underwater from day one through the final years of the loan. Because all the interest is figured up front into the principal, a bank would essentially be writing you a $350k loan for a $200k house. It's all principal, not just the value of the home. With that dynamic in play, the homeowner would never be able to sell the home because of the massive disparity between what they owe and what the house is worth, and refinancing would also be almost impossible. The refi lender would have to write the bank a check for far, far more than the house is worth to buy out the loan, and that's corporate suicide in the making. Based upon the problem of turning all the interest into principal, I now believe that sharia-compliant loans are impossible unless lenders are forced to fundamentally rethink how home mortgage loans are handled. I don't think that's time and money worth wasting, tbqh.

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