Pious Property: Islamic Mortgages in the United States

1. What Is a Mortgage? The History of a Religious Concept

CHAPTER ONE WHAT IS A MORTGAGE? THE HISTORY OF A RELIGIOUS CONCEPT Mention mortgages and most people’s minds turn to homeownership and interest rates. In the early 2000s many Americans may not have associated mortgages with buying property so much as with generating extra income by refinancing their existing mortgages and cashing out the equity they had built up in their house to use for home improvements or other consumer spending. In 2002 and 2003 combined, Americans filed almost three times as many applications for refinancing loans as for conventional mortgages (see table 1.1). The idea that a mortgage can become a source of wealth for the borrower (the mortgagor) in addition to a source of profit for the lender (the mortgagee) is the result of a relatively recent historical shift in the understanding of debt, equity, interest, and property. It partly has to do with the U.S. government policy since the Great Depression of encouraging homeownership through incentives like the home mortgage interest deduction for federal income taxes: the deductibility of interest on a home mortgage from reported income for the purpose of figuring yearly income taxes is a prime motivator for many first-time home buyers. This policy puts renters at a double disadvantage. First, renters never build an ownership interest in the property on which they live, no matter how many improvements they might make to it, and second, renters do not reap the tax benefits of homeownership. Disadvantaging renters often 14 translates into disadvantages for densely populated urban areas, which often have higher proportions of renters. Scholars and activists have long noted the relationship between the home mortgage interest deduction, the rise of suburbanization, and inner-city blight (see, for example, Jackson 1987; Marshall 2000). The interest deduction has had other effects as well. In an essay on mortgage interest and government policy, Arthur C. Holden (1966, 105), an architect and planner in New York City, worried that the home mortgage interest deduction would encourage people to maintain rather than reduce their indebtedness and lead borrowers to understand amortization not as the gradual reduction and “killing” of the mortgage debt but as the gradual “increase in the owner’s ‘investment.’” Indeed, mortgagors today often consult amortization tables not just to figure out when they will fully own their house but to calculate when they will have enough equity built up in it to secure a second loan and “cash out” their investment . Yet amortization itself is an expense, since one has to pay a portion of the loan’s principal each month from one’s other sources of income. And even a house owned outright, after the complete payment of the mortgage, can be considered a liability, not an asset, since it requires continual additional payments of property taxes, maintenance costs, and so on. A house cannot become an asset unless it is made liquid—hence arguments from financial planners that houses should be placed in a trust (see, for example, Kiyosaki and Lechter 2000). Thus, in a simple household What Is a Mortgage? 15 Table 1.1 U.S. Conventional Mortgage and Refinancing Applications, 2002 and 2003 Year Mortgage Type 2002 2003 Total Conventional Number 4,522,973 5,503,469 10,026,442 Percentage within year 30.1 24.1 26.5 Refinance Number 10,480,495 17,286,896 27,767,391 Percentage within year 69.9 75.9 73.5 Total 15,003,468 22,790,365 37,793,833 Source: Author’s compilation from Home Mortgage Disclosure Act data. budget, Holden believed, amortization should be considered a liability, not an asset. Holden worried that the home mortgage interest deduction sacrificed long-term stability in the form of freedom from debt for shortterm gain; far better, in his opinion, to offer an income tax deduction for the expense of amortization—for paying down the principal—than for the interest. Holden’s essay was little noticed. Yet it contained a peculiar reference to a feudal form of loan called a vif-gage, which Holden saw as morally superior to the mortgage and which I discuss here because it provides insight into contemporary Islamic mortgages. The vif-gage, Holden (1966, 105) wrote, “called for gradual payments for the reduction of the principal of the loan, similar to what we recognize today as amortization”; he underscored the point that “a continuous and understanding...