Pious Property: Islamic Mortgages in the United States

6. The Securitization of Islamic Mortgages

CHAPTER SIX THE SECURITIZATION OF ISLAMIC MORTGAGES On March 8, 2004, at a conference at the Crowne Plaza Hotel in Dubai, the Guidance Financial Group launched the first American Islamic mortgage-backed security product. The Guidance Fixed Income Fund is a mutual fund that holds securities backed by Guidance’s real estate financing assets. Freddie Mac issues the securities. As a press release reported: A first rate issuer, a superior credit rating, and deep liquidity characterize the new securities held by Guidance. Most important, these securities introduce to the Islamic capital markets both investment instruments that currently trade in the U.S. mortgage-backed securities market and the benefits of those instruments. “Freddie Mac mortgage-backed securities not only provide an ef- ficient way to enhance returns with limited volatility, they also bene fit from a favorable treatment in terms of capital adequacy requirements ,” said Dr. Hasnita Hashim, a Managing Director of the Guidance Financial Group. . . . “We hope that introducing such assets would contribute to the efficiency of the Islamic banking sector.” (AME Info.com 2004) The press release also reported that Guidance had originated mortgages worth over $200 million and that, in partnership with Freddie Mac, it had developed a “soundly designed distribution process.” 85 This chapter reflects on the introduction of Islamic mortgage-backed securities (MBS). The creation of shari’a-compliant security instruments is an effort to tap into the capital of global Muslim investors who either have stayed out of securities markets because of injunctions against interest or, much more frequently, have invested in conventional securities but would choose an Islamic “brand” if one were available. The creation of Islamic mortgage-backed securities opens up new sources of capital for the Islamic mortgage market. It also leads to new questions, such as whether Freddie Mac involvement in the endeavor taints the purity of the products—since Freddie Mac is an American government-sponsored enterprise—or whether it is even permissible to create securities in mortgages in the first place. Importantly, however, securitization has meant increasing standardization and a new kind of global reach. This, in turn, has important implications for people’s everyday understandings of the market in which they are participating when they take out an Islamic mortgage, as well as for scholarly conceptions of the market itself as a social process. Recall from chapter 1 that the purpose of Freddie Mac and other government -sponsored enterprises involved in home financing in the United States is to generate liquidity for real estate lending. They do so by bundling individual mortgages together into large pools and selling shares in the pools. Investors seeking a return on their money can invest in MBS, while potential home buyers benefit from a continual flow of capital into the real estate financing market. The U.S. Securities and Exchange Commission (SEC) provides a helpful explanation: Mortgage-backed securities (MBSs) are debt obligations that represent claims to the cash flows from pools of mortgage loans, most commonly on residential property. Mortgage loans are purchased from banks, mortgage companies, and other originators and then assembled into pools by a governmental, quasi-governmental, or private entity. The entity then issues securities that represent claims on the principal and interest payments made by borrowers on the loans in the pool, a process known as securitization. Most MBSs are issued by the Government National Mortgage Association (Ginnie Mae), a U.S. government agency, or the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), U.S. government-sponsored enterprises. Ginnie Mae, backed by the full faith and credit of the U.S. government, guarantees that investors will receive timely 86 Pious Property payments. Fannie Mae and Freddie Mac also provide certain guarantees and, while not backed by the full faith and credit of the U.S. government, have special authority to borrow from the U.S. Treasury . Some private institutions, such as brokerage firms, banks, and homebuilders, also securitize mortgages, known as “private-label” mortgage securities.1 There have been a handful of Islamic security issuances globally. Guidance’s is significant because it represents the first Islamic security backed by U.S. real estate paper. Malaysia, Qatar, and the Islamic Development Bank (IDB) have each issued Islamic securities under a contractual structure called a sukuk, a very recent innovation in Islamic banking that does not predate the 2000s. The term in Arabic...