Minnesota Offers Islamic Mortgages -- Roadmap for More Stable Housing Market?

A reader eager for conversation directs my attention toward Minnesota, where our progressive neighbors are helping faithful Muslims become homeowners. Minnesota Public Radio reported March 1 on Minnesota's "New Markets Mortgage Program."

Apparently Muslims who take their faith seriously consider paying or charging interest a sin. (Hmm... didn't Christians have a rule like that once upon a time?) That piety makes it kind of tough to buy a house. Realtors^® like PP will tell you owning a house is good for the whole neighborhood.

So Minnesota is piloting a new program that helps Muslims get houses without paying "interest." The "Murabaha Agreement" actually sounds like just a word game: the state charges a higher upfront price and works out payments that equal what you and I would pay if we bought at the regular market price and then paid principal and interest over 30 years. but that extra money isn't "interest"; it's "profit." (Financial experts in the audience, feel free to clarify!)

So no welfare, no handouts, just play a word game, increase home ownership, benefit the community. In the middle of a recession, when everybody is desperate to reverse the housing collapse, is there a downside to a program that puts more people in houses?

This program could provoke some fundagelical readers to rediscover the value of the separation of church and state. Minnesota is essentially accommodating Shari'a law, the principles of a specific religious group. If this program favored Muslims, it would deserve a stern boot from the judiciary.

But as far as I can tell, there is no establishment of religion in the New Markets Mortgage Program. The Minnesota Housing website doesn't indicate that the program excludes non-Muslims (come on, Minnesota wouldn't be that stupid, would they?). Minnesota's not even offering a special advantage to Muslims; the state is essentially making available to Muslims a portion of the market that the rest of us carefree usurers already enjoy.

One might make a slightly firmer argument that Minnesota's NMMP violates free-market principles, but that feels thin, too. If the final sale price is equal to the principal and interest of a traditional loan, a Murabaha agreement doesn't skew the market. There's no subsidy of unfair competition. Private sellers are free to jump into the market and try cashing in on this demographic.

Promoting Muslim home ownership might even be good for the economy, immediately and in the long run:

Chicago-based Devon Bank is underwriting the loans for the New Markets program. Devon is one of the largest Islamic lenders in the country. Corporate Counsel David Loundy says he expects the demand for Islamic financing to grow as more Muslims make their home in the U.S. Loundy says Muslims tend to be good risks.

"If they worked so hard to get to this country, they don't want to screw it up now that they are here, so they tend to pay their debts pretty promptly," said Loundy. "In addition, you have a population that is religiously and culturally predisposed against having debt, so they want to pay down their debts as quickly as they can."

The numbers back this up. In its five and a half years offering Islamic lending, Loundy says Devon Bank hasn't lost a penny, though he admits the recession could make that record difficult to sustain as more borrowers face job loss.

But the bad economy is also offering opportunity. With housing prices at rock bottom, officials say the timing couldn't be better to match first time Muslim buyers with foreclosures that need new owners [Jessica Mador, "New Islamic Mortgages Now Available in Minnesota," Minnesota Public Radio, 2009.03.01].

Let's see... A group of hard-working buyers morally opposed to debt. No defaults in five-plus years. Owners eager to occupy foreclosed properties and prevent neighborhoods from falling into abandon. Sounds like America could use a whole lot more Muslim homebuyers!