Ever wonder how microcredit works under Islamic law?

How does finance work when falling Islamic law (Shariah)?

A longstanding problem in the adoption of microfinance in the Arab world is adapting the programs to work for followers of Islam. Muslim Law (also called Shariah) has several tenets that contradict traditional financial systems including:

• Payment of zakat (charity)
• No riba (interest) paid or earned
• Socially-responsible investing/saving (Gharar)

In order for microloans (or any loan product) to be Shariah-compliant, it is generally structured through a trust-sale known as a murabaha—a negotiation of profit margin, rather than interest—into the final price. It’s sort of like paying your mortgage in all points, without annual interest. This sort of loan is called a Qard al-Hassan, or benevolent loan.

Naturally, this format is difficult to translate into microfinance, but many organizations and banks which cater to Muslim borrowers are springing up. Currently there are 265 banks operating in 40 countries with assets in excess of $262 billion USD. Even commercial giants such as CitiGroup are adapting to reach this growing population.

Similar to debt, interests are also structured to be socially-conscious and non-interest bearing, looking more like leases of capital.

I hope you’ve enjoyed learning this different financial paradigm. It sure has been an education for me.

Jessica Ward is a freelance writer and blogger in Seattle. She also writes at www.pennywisefamily.blogspot.com.

Mortgage and Refi Solution: SmartHippo.com

Another participant at the Finovate 2009 conference in April is the Montreal-based SmartHippo.

Smart Hippo is a smart idea indeed. It is an innovative combination of social network and search engine, specific to mortgage lending. SmartHippo does for mortgage shopping, what Travelocity does for vacation planning.

A SmartHippo user can search mortgage rates that came from banks, from web bots that crawl for additional rates, and even from customers who post the rates that they’ve received. Users (called “hippos”) can also post comments about the service they’ve received from lenders or how their closing process went.

One of the greatest benefits that I’ve observed is that you can “window shop” for rates before supplying identifying information about yourself. If you went “shopping” for a loan with a mortgage broker, your FICO score would show an inquiry made, and it would cost you points on your score.

SmartHippo allows you to “look before you leap” so to speak. Also, the SmartHippo search engine shows you the available ranges for closing costs as well as interest rates, so you have a clearer idea of what you’re getting into. You won’t be lured by low rates only to be surprised with astronomical closing costs.





SmartHippo began operations in September of 2007, but only really began marketing in October of 2008. Marketing consists of viral and Internet efforts. Blogging, contests and Twitter (you can follow @SmartHippo along with me). Right now the South By South West conference is running, and they’re holding a “Hide the Hippo” contest via Twitter, encouraging participants to locate the hippo around Austin, TX.

Jessica Ward is a freelance writer and resident of not-so-sunny Seattle. She also blogs about frugality and family at The Pennywise Family. You can follow her on Twitter at @Jessc098.

Virgin Money Enters US Mortgage Market

Some might call Sir Richard Branson crazy. Others call him crazy successful. In his latest US financial adventure, he may be both.

At a time when all the banks are leaving the mortgage market like rats from a sinking ship, Virgin Money USA is jumping in the water. Last year, the UK based Virgin Corporation acquired Lendia, a US mortgage originator and processor and is now offering wholesale mortgages to broker in the USA.



With sales slogans like “Kiss Me I’m Loan-y” and “Loan Brokers Do It Better,” it’s certainly the first mortgage wholesaler I’ve ever noticed. Further proof marketing works I guess, even Virgin’s shocking brand of marketing. Only Virgin can try to make a mortgage sexy.

That said, they shouldn’t need it at all. This is a company that on all levels is famed for customer service and for championing its customers. They’ve actually entered this market due to the lack of service-oriented wholesalers. Asheesh Adveri told the media in a company press release that “Virgin Money sees a growing service gap in the mortgage industry which we plan to close and own.”

They’re offering some innovative features including real time status updates, rate quotes, paperless underwriting, and the ability to import loan applications directly via the broker’s loan origination system—novel and efficient characteristics in this industry that is traditionally slow to innovate.

Virgin Money is already approved in 35 US states for both conventional and FHA loans and they expect to be fully licensed by the end of 2009. More than 150 mortgage brokers have joined their network. For more info see www.virginmoneyus.com.

Jessica Ward is a freelance writer based in Seattle who enjoys writing on business and finance topics as well as humanitarian topics.

Insider: Mortgage loan modification advice

This post was contributed anonymously to Prosper Lending Review in an effort to warn homeowners of the unethical behavior of some mortgage loan modification companies. The author has stopped assisting with loan modifications pending more information from the office of the Attorney General.

I own a small notary signing service. I’m frequently called upon by out-of-state banks to be their witness to their clients signing loans or financial documents. Likewise, I witness signatures on powers of attorney, wills and other legal documents. In recent weeks, almost all of my work has been on loan modifications.

First things first: What is a loan modification? A loan modification is an agreement between lender and borrower to adjust the terms of a mortgage. This is generally only done on primary residences for borrowers who are considered to be at risk of foreclosure. A loan modification is not a refinance. It is a not a new loan—it is modified terms to the original loan—generally at a loss to the lender. The lender’s two opportunities are to cut you a deal, or to take the house and risk the already flooded market with the home.

Second: Who provides loan modification services? Practically anyone. This is the latest craze in the financial and real estate world, and a service called “loan modification assistance” is being provided by practically any kind of real estate or financial organization for a fee. However, in the purest and truest form of the matter, a loan modification is only performed between the borrower and lender.

Loan modifications can be performed by individuals, working direct with their lenders or a non profit debt relief agency or a government lending or housing agency (such as HUD, Fannie May or Freddy Mac or Indy Mac).

Several major mortgage providers including CitiGroup, JP Morgan Chase, Countrywide, Nationwide and Bank of America have launched “homeowner retention” programs on their Web sites.

Attorneys and firms calling themselves “legal services” or “real estate services” (which in my experience are sometimes neither) may offer to do this service for a fee ranging from $100 to $5000, and often the fee is collected up-front without a guarantee of services to be provided. Their only guarantee is that they will contact the lender on behalf of the borrower, and they will not guarantee the result.

Whether you choose to pursue a mortgage loan modification yourself, or use a fee-based service, you should know in advance that there are likely to be some requirements:

1. You must be in arrears and unable to pay your debt but showing good faith effort to do so.
2. You must be able to demonstrate a hardship. Owning a home in excess of your ability to pay isn’t a hardship. Sudden disability or loss of employment or a serious illness is a hardship.
3. You’re going to have to show that you will be able to meet the financial obligation in the future.
4. You’re going to have to show your cards. And your budget, the good the bad and the ugly. They’ll want to see your bank statements too. If you bought Superbowl tickets or just took a cruise—you don’t have a hardship—you’ve got a bad case of confused financial priorities.
   

If you find yourself in a position where you fear the loss of your home, I encourage you to work directly with your lender first—or with a government program like HUD. A good second step may be to have an experienced mortgage attorney look at your existing loan documents to see what opportunities you have. If, for instance, you did not receive truth in lending documents or the notice of right to cancel you may have some grounds to get a better term from your lender.

If you feel like you need to use professionals, you should contact your state attorney general’s office to see if the provider you would like to use is licensed in your state or if any complaints have been made against them. Likewise, check with the Better Business Bureau at www.bbb.org. Licensing rules for these modification companies ranges wildly from state to state, so the Attorney General’s office will be able to tell you if there are actions pending on the issue and or what agency in your state regulates this practice.

Several states, including Washington and California have issued warnings about fraudulent practices in the loan modification business. The Federal Trade Commission has published a warning about foreclosure rescue scams. As with any other service, be a smart consumer and know your provider.

Using Prosper for a small mortgage

Today there is all sorts of interesting news about unusual uses of peer to peer lending. The Wall Street Journal published an article about using P2P lending to fund a startup. I just came across an article on Mortgage 101 about using Prosper to fund small mortgages - Why mortgages under $50,000 are hard to find. The author, a professor of finance emeritus at the Wharton School of the University of Pennsylvania, explains that the minimum amount for mortgages is usually $50,000 to $75,000, but there are some communities where smaller loans are necessary.

"The town is Winters, Texas, population about 3,000, most of whom are retirees. There are no jobs there or anywhere very close. Houses in Winters sell for less than $60,000.

Mortgage loans are not available in Winters. In part, this is because the town is so isolated and the demand so small that it can't support a lending facility. There are no appraisers, for example; if one is needed the cost will be double the cost in a larger center because of the time it takes for the appraiser to get to Winters and back.

But the major problem is that the loans are too small to justify the cost of originating them. A mortgage origination cost of $5,000, which is a very modest number, is 10 percent of a $50,000 loan, though only 1.7 percent of a $300,000 loan."

In addition, some people have paid off most of their loan and would like to refinance a small amount (less than $50,000) to take advantage of lower interest rates. That is hard to do unless your new loan includes a cash-out. Due to the high fees refinancing a small loan is often not worth the cost even if it can be done.

"The great majority of loans for amounts of less than $50,000 are second mortgages or unsecured. The development of the Internet has widened borrower choice in the unsecured market enormously -- at least among those who use computers. (For the others, small-loan offices are still found in many shopping centers.) Residents of Winters, Texas, should forget about getting mortgages and shop for unsecured loans on the Internet."

Unfortunately the outlook for those living in Winters, TX may not be as promising as it first appears. Interest rates vary by state and Texas caps the maximum interest rate at 10% APR (business loans can be up to 18%). Lenders are unlikely to fund such a large loan at an interest rate that low. The average rate offered to $25,000 loans is 12.76% for lenders with the best credit.

From what I see on Prosper, loan listings for real estate are usually for investment purposes instead of personal mortgages. Here are two open listings where someone is trying to use Prosper to assist with a real estate deal:

Real estate bargain - currently 100% funded with 4 days left at 9.79%. The borrower is requesting $10,000 and says, "I've got a great chance to snap up a 3/2 condo with a 6% fixed rate assumable mortgage. The seller is willing to carry a 2nd on the property for a portion of the difference (I'll still be putting money down), but the rate he wants on the 2nd is a little high and I feel I can get a better rate here on Prosper."

Buying a rental house - currently 100% funded with 2 days left at 14.80%. The borrower is requesting $5,000 and says, "I need your help to put some of 20% of down payment on a mortgage loan for a rental property."

For more information, or to start borrowing on Prosper go here.