Tuesday, April 17, 2007

Business Week on Equity-Sharing Mortgages

In a story this week, Business Week reports on family members helping out by taking an equity stake in their younger/poorer relatives' homes. This is a topic that I had addressed a while ago on this blog, within the context of hedging home equity risk.

The following two paragraphs appears toward the end of the BusinessWeek article:

At the moment, shared equity financings are largely ad hoc legal agreements negotiated between well-off parents and their young adult children. There was an attempt in the 1970s to popularize "shared appreciation mortgages," but they never took off because the terms were unfavorable to investors.

In the next couple of years a more formalized shared equity arrangement could get new life. At least that's the vision motivating real estate scholars like economist Andrew Caplin of New York University. He and a number of other experts are designing standardized shared equity mortgages that would allow outside investors to buy a piece of the equity gain. Caplin estimates that about 25% of first-time home buyers could find such arrangements attractive. When they do come along, investors in it for the money will extract stiffer terms than mom or dad.

Even though I had known Caplin's Psychology and Economics work, I was not aware of this literature on housing partnerships. This is of course reminiscent of some of the mutual/musharaka models such as the Islamic housing coop in Canada. I wonder if this will soon become a more viable (and more Islamic, as some would argue) alternative to the bad replication of mortgage loans currently being provided via multiple structured sales or leases.


Blogger Parvez said...

Dear Dr. Gamal

Please see my comment below posted on an earlier article that you posted. It is about Co-operative Housing in Canada (Para 4 of my comment). I feel that you should know the facts before quoting something as a viable option.

I had even sent you an e-mail on the subject but never got a response from you.



Dear Dr El Gamal

I recently completed reading your book and it was certainly an eye opener.

I have always been interested in Islamic Finance (being a Muslim although my education and training is in conventional finance). Most of the Islamic products out there somehow seemed no different than products in conventional finance except for their Arabic names and of course as you rightly said “form over substance”.

The only thing that I somehow found missing in your book with respect to modes of housing finance was the concept of Diminishing Musharika and your take on it.

You also discussed the concept of mutuality and the experience of this experiment in Canada. I am from Canada and I think you are referring to the ISLAMIC CO-OPERATIVE HOUSING CORPORATION LTD. (ICHC) operated by ISNA Canada. I would like to share with you some of my findings of this experiment (not pretty).

They use the concept of Diminishing Musharika (which is no different than a fixed rate mortgage) except that there is some profit/loss sharing (10% of Gain/Loss to ICHC and 90% of the Gain/Loss for the homeowner if the homeowner owns more than 50% share and 20% of Gain/Loss to ICHC and 80% of the Gain/Loss for the homeowner if the homeowner owns less than 50% share) at the time of the sale/last installment or the final payment for the house. There are two additional features of this scheme – first it does not have a fixed term and second it allows for prepayment (in Canada, there is a prepayment penalty on fixed rate mortgages) except in the first year where they charge a penalty.

Also, they tell you that the installments (termed as occupancy charge) would be based on the rental value of the property and it will be different for each individual property. Although the property is jointly owned, ICHC does not share property taxes and or maintenance of the property.

This scheme has been sanctioned by Justice Taqi Usmani as Sharia compliant back in 1988 (although I am sure they did not inform him how they would implement this scheme) and they have a copy of his letter in their annual report.

Now the truth about ICHC (I have several friends who fell into this trap as well as I know one of the officials at ICHC).

- ICHC does not base its occupancy charge on rental values of property. They simply base it on a rate of between 8.25% - 8.5% (whichever percentage yields a round value for the occupancy charge). Consider these rates in the light of low mortgage rates for the last few years

- ICHC has historically paid patronage dividends from a low of 6% to a high of 10% every year since its inception. They are able to pay such high rates of return because they charge so much in the name of interest free housing scheme. I have a very pious friend who fell into this trap in order to avoid riba. Now he has to borrow money from the bank to pay ICHC its occupancy charge.

- ICHC and its employees refuse to discuss/negotiate the method by which they arrive at the occupancy rate. Usually they have a “take it or leave it” attitude.

I feel the bottom line is - until the time Muslims are not willing to exchange reward (return/profit) in this world for a return in the hereafter, any kind of structure (mutuality or otherwise) or scheme (diminishing musharika, ijara etc) will not succeed in meeting the true objectives (substance) of Islamic Finance.

Your thoughts on the above.



8:59 AM  
Blogger Mahmoud El-Gamal said...

Dear Parvez:

My apologies for not responding to your earlier messages. I am quite aware of the discrepancies between theory and practice. Moreover, I make it a policy neither to condemn nor to endorse any financial providers. I thought that your comments can be interpreted in one of two ways: (1) revealing poor practices, in which case your point has been made and I neither have arguments with your views nor do I wish to reconfirm them, or (2) that you were responding to a perceived endorsement of ICHC or any other provider of financial products and services, in which case writing back simply to clear the misunderstanding would imply, again, that I agree with the criticism.

The purpose of this as well as the earlier posting was mainly to point to the fact that much of what is considered "Islamic" finance is in fact a poor replication of what is already available in the conventional marketplace. Finance is finance, and Islamicity is *not* a function of certification by self-styled, banker-hand-picked and well-compensated "scholars".

I was also very busy over the past few months, so I apologize again for not following up on your posting. No disrespect or disagreement was intended.

Best, wa s-Salam,


10:17 AM  
Anonymous Anonymous said...

Wholesale Nike Shoes, Wholesale Jordans, Wholesale handbags, Cheap Jordan shoes Jordan shoes Cheap Jordans for sale

: JORDAN SHOES WHOLESALE AIR JORDAN WHOLESALE WHOLESALE AIR JORDAN CHEAP NIKE SHOES CHEAP AIR JORDAN SHOES wholesale all jordan shoes,cheap jordan shoes ,We Wholesale Cheap Jordan Shoes, Michael Jordan Shoes, Nike Jordan Basketball shoes, Nike Air Jordan.Wholesale Air Jordans, Custom Jordans, Nike Air Jordan Shoes, Air Jordan shoes, Wholesale Air Jordans, Custom Jordans, Nike Air Jordan Shoes, Air Force ones. wholesale nike jordan shoes,nike air jordan shoes,sell nike shoes max,nike air force 1 shoesWholesale Nike Shoes, Wholesale Jordan, Air Jordan Air Jordans Nike shoes Jordan Shoes wholesale Jordan wholesale Jordans wholesale Nike wholesale Air jordans Air Jordan Shoes Wholesale Air Jordan cheap Jordan shoes Cheap air JordanWholesale handbags, Cheap Jordan shoes.Nike wholesale - Nike shoes wholesale. Wholesale Jordans, Cheap Air Jordans, Jordan Shoes, wholesale jordan shoes,wholesale ugg boots, cheap ugg boots, discount ugg boots.We wholesale jordan shoes and designer handbags

Jordan Shoes, New Jordan Shoes, all Air Jordans from Men and Women ...

we offer cheap Wholesale Ugg bootAir Jordans shoesUgg boot and new Air ...Air Jordan Air Jordans wholesale nike Air Jordan shoes,air jordans,nike dunks,air force ones ... shox oz shoes,nike shox nz shoes,Duck shoes,puma shoes,james lebron shoes ...Nike shoes Jordan Shoes wholesale Jordan wholesale Jordans holesale Jordans, Jordan Shoes, Air Max, Max 95, Max 90, Shox R4, Max TN, Goach Gucci LV chanelwholesale Nike jordan sneakersjordan retroUgg boots - cheap Jordan shoes Cheap air Jordan women Jordan shoesNike ugg boots - jordan air force air force onewholesale air force oneWomen's Training Shoes: ...Wholesale Jordans, Jair force one wholesale Air Jordans Shoes - Nike air force 1 shoes - Nike ... cheap nikecheap jordan- Job Searching: Technicalcheap jordanscheap jordan shoes air jor nike air jordan shoes -e ... nike air max 1 shoes, nike shox turbo sh ...dan retro Air Jordan shoes, Air Force Ones,nike air maxnike air force 1 Bagssell cheaperJORDAN SHOES WHOLESALE AIR JORDAN WHOLESALE WHOLESALE AIR JORDAN nike shox max jordan puma sneaker includes:air jordansnike air jordan Viii nike air force 1 shoes - air forcair jordan Xiii Verified Company, The most trustworthy Wnike air force oneJordan Shoes, Air Jordan, Air Jordans, Nike Shoes are cheap to buy ... - 5 visits - Nov 1Air Jordan retro shoes oes, ordan Shoes, Air Max, CHEAP NIKE SHOES CHEAP AIR JORDAN SHOES Max 95, Max 90, Shox R4timberland boot We specialize in selling Nike Shoesprada shoes Nike Shox and Air Max online since 2003, we offer cheap Air Jordans shoes and new Air ...

Nike Jordan, Air Jordan Shoes, Nike Air Jordan Shoes, Air Max Shox

Jordan Shoes : Nike Wholesale Jordans, Air Jordan Shoes and Nike Dunks are on sale here today; Wholesale Ugg Boots Nike Shoes you are looking for are availabe. Basketball Shoes include: Cheap Jordan Shoes, Nike Jordan Shoes, Wholesale air jordan Nike Air Jordans Shoes,Jordan Shoes Wholesale

Buy Nike Shoes: Wholesale Shoes like Air Force Ones Shoes, Cheap Air Jordan, Wholesale Nike Jordan Shoes, Nike Air Jordans Shoes, Jordan shoes, and many other Nike Shoes are reviewed, listed.

1:59 AM  
Blogger Unknown said...

Nice Post
article rewrite

2:48 AM  

Post a Comment

<< Home