With a rapid influx of Muslims to the Twin Cities area, some private banks began offering shari’a mortgages a while back. Muslims have a strict proscription against paying or accepting interest on loans, which makes home mortgages impossible, but private lenders have created ways to satisfy both profit and religious motives. Now the state of Minnesota has jumped into the shari’a loan market with its own offering (via William Amos):
For many Minnesota Muslims, it’s been virtually impossible to buy a home, because Islamic law forbids the paying or charging of interest. To help close the home ownership gap among Muslim immigrants, the state’s housing agency has launched a new program offering Islamic mortgages. …
Sheikh is the first home buyer to get a loan through the state’s New Markets Mortgage Program. That’s because, program manager Nimo Farah said, he has all the makings of a successful homeowner.
“I had lots of applications, but he’s the first one, because really, he was ready. He has been working at the same job for quite a while; he took care of his credit; he had the right size family, and he had all his documents together,” she said. “He was basically ready to go.”
The program is targeted at low-to-moderate income families. Qualified applicants have to complete first-time home buyer education classes. The goal is to help Muslim home buyers build wealth and reap the benefits of home ownership.
How does it work? The state buys the home and then sells it to the buyer at an inflated price, more or less masking the market interest rate as principle. They they set a 30-year payment schedule where the family pays down the debt, but without any interest. The state makes a profit eventually, and people get to buy homes rather than rent.
My objections to this have less to do with the religious aspects of this than the intrusion of the state into a private lending market. Other private lenders had begun meeting the market demand by crafting shari’a loan models themselves. The state’s entry into this market will act to push others out, as the state has more lending power and more credibility than private lenders do. That essentially steals capital from the market, and it also reverses the tax flow, as profit in the private market would generate revenue to the state. Minnesota is cheating itself in this transaction.
Moreover, our state faces a $7 billion shortfall over the next two years. Why are we buying houses for people at six figures a throw in exchange for monthly payments over the next 30 years? The capital we have needs to go to more legitimate state functions, instead of distorting the lending market once again. And how well qualified are these buyers, anyway? As we discovered in the Community Reinvestment Program, when the government pushes loans to an “underserved market,” it usually means significantly increased risk. Will the state foreclose on delinquent borrowers? That’s a question the FHA faces on a federal level without the added issue of religion (via Melissa Clouthier):
But the subprime mortgage market has crashed and borrowers are flocking back to the FHA, which has become the only option for those who lack hefty down payments or stellar credit. The agency’s historic role in backing mortgages is more crucial now than at any time since its founding.
With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency’s overall growth in new loans, according to a Washington Post analysis of federal data.
Many industry experts attribute the jump in these instant defaults to factors that include the weak economy, lax scrutiny of prospective borrowers and most notably, foul play among unscrupulous lenders looking to make a quick buck.
Gee, what a surprise — government distorts the lending market again. And while I’m mainly discounting the religious angle of this story, it’s interesting to note that the usual “separation of church and state” argument from the Left has been conspicuously absent here. Is it a legitimate function of American government, at the state or federal level, to set itself up as a lender just to help a religious sect get around its own set of beliefs? I’d say no.