Difficult Conversations
Difficult Conversations
Islamic Financing with Guidance Residential
Unlock the mysteries of Islamic mortgage and financing with our special guest, Hussam Qutub, Senior Vice President and National Sales Manager for Guidance Residential. With a passion for real estate that started in his youth, Hussam takes us on his intriguing journey into Islamic finance, sharing how it aligns homeownership with ethical and religious beliefs while tackling the complexities of the current housing market. This episode promises a wealth of knowledge on how Islamic finance institutions uniquely operate in contrast to traditional banking systems, aiming to help communities build generational wealth while staying true to their faith.
Our conversation with Hussam deepens as we navigate the principles that distinguish Islamic financing from conventional methods. We discuss the concept of riba, the challenges Muslims face when securing financing that aligns with their beliefs, and how Guidance Residential offers innovative solutions like using LLCs for property co-ownership. By the end, you’ll gain a comprehensive understanding of how these financial practices not only respect Islamic laws but also address ethical considerations in banking and investment.
Moreover, we explore the strategic efforts to ensure that Islamic financing is accessible and understandable to diverse communities across America. From multilingual support teams to educational resources tailored for all ages, the goal is clear: empower everyone with the knowledge to make informed financial decisions. Tune in to learn how Hussam and Guidance Residential are helping reshape the landscape of home financing for Muslims in America, ensuring that no one has to choose between their faith and their financial future.
Visit our IG page at https://www.instagram.com/dc_overcoffee/ to join the conversation!
Assalamu alaikum, welcome to Difficult Conversations where we tackle taboo topics in a safe space through empowerment and education. Assalamu alaikum everybody, welcome back. We are back for another season and I will be your host, abshiro, and I'm Bonnie, and I will be your host, abshiro and I'm Bonnie. Today we have an amazing guest with us to tackle a topic that you know we've been getting a lot of questions on and there's just been a general overall confusion around, and that is Islamic mortgage and financing. So, to kick us off, I want to introduce Hussam Qutub, who is the Senior Vice President and National Sales Manager for Guidance Residential In his bio. He did join the company in 2003, and he's in various other roles as well helping the company in its early stages, finding the guidance home services, creating national, which is a national referral network of real estate agents. Before guidance, hossam worked at a senior consultant in marketing and public relations. He holds a BA in international sales from George Mason University. We are really excited to have you. Welcome to our show.
Speaker 2:Thank you guys for having me.
Speaker 3:How is your flight here today?
Speaker 2:Uneventful, delayed by a couple of hours, but otherwise smooth.
Speaker 1:Alhamdulillah.
Speaker 3:Is this your? This is? Oh wait, it's not your first time in Minnesota, correct?
Speaker 2:No, no, I've been to Minnesota many, many times.
Speaker 3:You should move here.
Speaker 2:Summers are great.
Speaker 3:Summers are great. Yeah, if, yeah, I mean we only have summers or construction, those are our two seasons Construction, yeah, no, it's winter construction and then fall, yes, summers, yeah, yeah.
Speaker 1:Yeah, that's what I meant to say.
Speaker 3:So tell us a little bit about yourself, like are you, are you where? Where do you reside?
Speaker 2:And I live in Northern Virginia. That's a suburb of Washington DC. This is where I grew up. For a few years I lived in the district in the nation's capital, but then, when it was time to get married and have children, I ended up moving back out to Virginia. So it's a town called Vienna.
Speaker 1:Have you heard of it?
Speaker 2:Yeah, it's a wonderful little town. It's beautiful.
Speaker 1:Did you always want to be in this? What you're doing currently in like mortgage and finance and stuff like that?
Speaker 2:You know it's an interesting question. I honestly didn't know if I was going to be in this specific realm because I wasn't educated as a young child on this specific industry.
Speaker 2:Meaning Islamic financing isn't something they teach you in school. But real estate and housing in general I took an interest in a long, long time ago as a young child. I would go to my parents and I would say this house is for sale, that house is for sale. Everything was in newspapers back in those days, and so the Sunday paper had all these homes and I wanted them to purchase a farm. So I would literally cut these things out. Let's go to the open house.
Speaker 3:That is so beautiful Like? Or are you into farm animals and stuff? I was into horses.
Speaker 2:So, I really wanted to raise horses.
Speaker 1:Oh well, speaking of housing and housing market, um, in your opinion, how do you think the housing market is doing?
Speaker 2:well, I think in general there is a shortage of inventory. That's a fact. It's been that way for quite some time. I think it's been that way for about a decade and a half and um. But if you looking at the market, and my philosophy is owning a home. If you're moving into this market to buy, as long as you're not in it for the short term, it's never a bad decision. It's actually a very good decision. It's a decision that enables you to create generational wealth and, to me, beats renting anytime.
Speaker 1:Yeah, my dad used to say, like all the time he's like he'll always tell me, like how much do you pay in rent? And I, you know, tell him before I bought the house. And he'll be like then he'll calculate it by 12. And he's like you're just throwing that money away. You know that right. You're like you're just taking it to the garbage and you're burning it. And so he was like one of the main reasons he was pushing all of us to buy and stuff like that, which isn't always easy.
Speaker 3:Easy or possible for a lot of people now, especially with this economy that we have, yeah. But I wanted to ask a little bit more about, like, your journey to guidance and your journey into financing. So you said that you were into farms and you wanted to get you know a horse, and I guess. So how did you get, how did you find your way, I guess? Or your home and guidance.
Speaker 2:Well, I, you know, of course, I went to college and then after, right after at the end of college, I started looking at different career opportunities. I wasn't sure what I wanted to do. I joined a law firm for a short period of time, thinking that if I get that experience it could open a whole new world for me, to be able to maybe go back and go to law school and those kinds of things.
Speaker 2:But what I learned was enough to push me in a different direction, and that was more in the business consulting realm direction, and that was more in the business consulting realm and that opened my eyes to a variety of different clients, different industries, and through that experience I actually became a lot more aware of kind of housing and the need for home ownership.
Speaker 2:I came across some people that actually knew about guidance. It had just started about eight months prior to my meeting with them and they were the ones that really kind of influenced me to kind of make that change. I had met one individual at a business luncheon in Washington DC and he had left Morgan Stanley to join this organization and said to me that I should really take a look and learn more about it. And so I did. After several meetings I was really my intent was to try to make guidance a client of mine. Oh.
Speaker 2:But then I actually met the founder of the organization, dr Mohamed Hamour, and that had a profound impact on me and really helped me see the vision of what he had in mind. And it was a hundred year vision to create an Islamic finance institution, a global one.
Speaker 1:So at that time, how did the Muslim community look in the United States and what were they doing in terms of home ownership?
Speaker 2:Well, it was right on the heels of 9-11. So the community was kind of um in this state of fear and, um, and of course the media didn't help for the most part, Um, so there was this instability, I think unease, within the community about you know where's our place in America, especially for those who are first generation or immigrants, and so there's nothing like putting roots down and making you know your state, home and your future here, home and your future here, and so, um, understanding that and understanding kind of what is going to help American Muslims down these next few decades, and, and I think it's really kind of institutionalizing our beliefs, institutionalizing especially in the financial sector, um, and recognizing that home is here, not necessarily there yeah, yeah, putting roots down here.
Speaker 2:Um, investing here, uh, investing not just in real estate, but investing in your children's future, education, and so on and so forth, is crucial and so, um. That is tough for muslims when there's only riba-based options.
Speaker 1:It's very, very tough.
Speaker 2:I went to college and I had to take student loans. There were no options. So there's just one sacrifice after the next. But you have to get through them and you have to understand. Okay, what could be better for my children, my children's children?
Speaker 1:Go ahead have to understand, okay, what could be better for my children, my children's children. So to kind of bring us into it. You know, I know that there's a lot of confusion on the different types of, you know, home financing and what's acceptable Islamically. Can you just kind of go through what those are and what are things that guide? Where does guidance come in?
Speaker 2:Yeah, you know, prior to 2002, when guidance was launched, most Muslims in America who are paying attention, at least you know went with the fatwa that was issued by an international scholar. His name is Qardawi. That fatwa was about darura and about in times of need, when there are no options, you can pursue a conventional mortgage to own a home, but that's only if there are no options. Yes, so now, after 2002, when guidance was launched, the option became available for Muslimslims in one state or another. There's still states that don't have these options. Minnesota has the option, of course, and um, but um, the. The key differentiator now becomes okay, is it competitive? Is it I going to qualify? And if so, then why don't I pursue this and what is the difference here?
Speaker 2:So there's an education alongside this and really the biggest challenge of our last 22 years in business has been education Education in what riba is why it's haram, what are the alternatives and how are they halal? So those things are not taught.
Speaker 1:they're not taught at the masajids, unfortunately I think the only thing that is taught at the masajids is the fact that riba is haram and not necessarily like the different types, because I know, like when my husband and I were, you know, buying a home, it was a lot of self-education kind of going through. Like you know, you have the mrabahas and like the ijara types and all that stuff. So with this, I guess, lack of information, what would you? What is the first thing you know was a priority for guidance in trying to educate this community.
Speaker 2:Well, when I joined, one of the things we learned was, even within our organization, as we were hiring individuals that maybe understood the financial part of it or you know the financial qualification aspects of it, didn't quite understand how to explain or relay what is riba and why it's not permissible, and how is our structure permissible. That was a challenge. So what we did is we embarked on the creation of a white paper, a very simple white paper that had frequently asked questions, so it was a two-page, three-page summary and then about a dozen questions and we started circulating that internally and then circulating it to imams and the feedback we received from many imams was incredible. Many of them thanked me when I would visit because they needed this level of information that they did not study per se. Because an imam if you really think about their role, they are like if you compare it to, for example, a physician they're your general doctor.
Speaker 2:They know the basics, they know how to, of course, marry people, provide khutbahs, some wisdom, advice, counseling Unfortunately you know even funerals, conducting those and such. But when it gets to a discipline within Islam, like Islamic financial transaction laws, the muamalat of that type of transaction, you have to go on and study that there's a curriculum involved and there are scholars that specialize in this space globally. So educating even our imams was priority number one and then moving on to the community, of course, through those imams and community leaders, and then moving on to the community, of course, through those imams and community leaders. But it began with that simple let's create a document and then let's layer more on top, and then eventually this was 2002.
Speaker 2:So the internet wasn't such a big of a marketplace as it is today. So eventually we layered in videos long videos, short videos, whatever attention spans. People had to be able to absorb what we were kind of trying to educate them on, and that's key. I think that is very, very important, because I think we were talking earlier trying to explain it to even your children, for example. You cannot make them read a white paper.
Speaker 2:They won't last past the first page. Yeah, yeah, so you have to explain it in terms that are essentially simplified digestible and so it is a complex. Finance in general is complex as it is, and then you layer on islamic financial transaction laws and those become complex. But today for your, I'm going to try to simplify it to the best of my ability so that it's sound bites that they can take home and really digest.
Speaker 3:So I want to kind of step a few steps back and a step away from guidance to Islamic financing in general. If you had to, like we said like, if you had to explain islamic financing and how it's different from um, conventional financing to a fifth grader, how would you do it? And um, you know, akshar mentioned the two types and kind of, just because there are people that haven't even gotten to that level of exposure yeah yeah so um kind of to put the burden on you.
Speaker 2:Well, you know, in the Quran, this is where we are taught kind of many things but riba. It's brought up in the Quran very explicitly and there's a verse in Surah Al-Baqarah where it says those who take unlawful interest will stand before Allah on the day of judgment as those whose minds have been corrupted. They say that commerce is just like interest, but Allah has made commerce lawful and has forbidden interest, so even during the Rasul sallallahu alayhi wa sallam's time, even during his time, people were confused.
Speaker 2:So it's okay that we're confused. People were confused. They would say commerce is just like interest. There's no difference. But there is a difference, and that main difference hinges upon lending money. The loan. The loan itself in Islam, as described by many scholars in this space, is at the heart of this issue. It's a contract, and so a contractual lending agreement is permissible in Islam, but it has a place, and that place is a charitable act. Charity it's meant to help those who are experiencing hardship, so that you are able to support them, help them, but not take advantage of them.
Speaker 2:So that's where a loan contract belongs. It does not belong necessarily in investments, commerce, profit Correct, okay. And so this isn't new, by the way, the prohibition on lending money at interest spans even before Islam. It's prohibited for Christians, for Jews. It's in their books, it's clear in their books that it's prohibited. Do not lend money at interest to my people in Exodus, for example. And so there is that essential sort of key point to understand. So then, why right? The question is why, and what are our options? You mentioned some contracts. There are contracts that are permissible for facilitating a purchase or anything of that nature. They're all the common theme of Islamic financial contracts, is the cornerstone, I would say, of these contracts is ownership by the financier.
Speaker 2:Whoever the financier is, must have ownership and loss sharing of some sort in the asset, whatever it may be.
Speaker 1:Which is also. Is that the same thing as risk sharing?
Speaker 2:Yes, Okay, that is correct. Okay, and so ownership is key. Okay, if you do not own something, you cannot sell it. If you do not own something, you cannot rent it. You cannot make money off of something you do not own.
Speaker 1:Okay, so then would that be a double contract? So like you like the bank. Okay, so then would that be a double contract. So like you, like the bank, say, has the house first, has to own it and then turns around and sells it to me, so that essentially it's one transaction here and then the second transaction with me.
Speaker 2:I can go buy a car, buy it for $5,000, refurbish it and sell it for $6,000. That's halal. Yep, I could even sell it to you. On installments, let's say $1,000 for six months, that's halal. There's nothing haram about that. Okay six months. That's halal. There's nothing haram about that. But if I was to loan you $6,000 or $5,000 and charge you so you can go and buy the car and charge you interest to repay me, that's haram. So, contracts are crucial.
Speaker 2:They're crucial in this aspect. Now I'll explain why. Number one money in Islam has no intrinsic value. Value it's not regarded as something of a, of a product okay that you can sell. So money has no intrinsic value. You can't create money from money. You cannot create money from money. If you were able to create money for money, those who have will take advantage of those who don't, and the cycle of poverty and as we see now, as you see today and there's many, many problems with the world today as a result of the monetary system.
Speaker 2:You have inequality, rising inequality, rising debt, rising poverty, rising unemployment. Um, and this is a direct uh result of the way the financial system is structured, where I'll give you a simple example. Today, everybody banks. There may be people who put their money under their mattress.
Speaker 2:I understand it's not the safest route, but you take $100 and you deposit it into a bank the banks. Today there's something called fractional reserve banking and what they do is this is part of the banking system they take out 90% of that deposit. So you're depositing your money for safekeeping.
Speaker 3:So is that for savings or checkings?
Speaker 2:Savings or checkings, so you're putting it in the bank for safekeeping so that you can access it whenever you want, but the bank will tell you it's safe While you look away. They'll take 90% of it and loan it out through credit cards, car loans, business loans and so on and so forth, and then the person who receives that credit now uses it to buy something. When they use it to buy something so imagine $100, they just received $90 on their credit card.
Speaker 2:They go to buy something with that $90. The person who sells them the service or the product deposits that $90. Where did they deposit it? In the bank.
Speaker 2:The bank takes that 90 and takes again 90% of the 90 and circulates it out again and again, and this cycle continues and continues, by the way, to the point where if everybody went to the bank today to pull their cash out, it wouldn't be there. We know this. This is the vicious cycle of the fractional reserve banking cycle. Now, the problem with that is this First, they're loaning that money out to someone and charging them interest. Haram number one there's riba based on that contractual relationship. Yeah, and now you're, you're party to that because it's your money so sorry can I go ahead?
Speaker 3:yeah, I just want to ask because, um, like, um, I'm just going to talk about myself. So for us, um, me and my husband had made a decision not to put any money in our savings because we are. We didn't want to get interest, so we thought like we would be safe, which is the reason why I asked the first question if is it savings and checking is the same thing, and most people, I feel like, do the same thing, which is they put whatever money, that they want in their checking account so that they don't get interest on it.
Speaker 3:But then yeah.
Speaker 2:We do the same thing. I do the same thing. I tell the teller if I ever go to the bank um don't bother pitching me on savings on an account that's supposed to give me returns. I know you may think I'm crazy, but I don't want the returns yeah and a lot of muslims, I'm sure, do this. Um, because, number one, it is returns based on lending at interest. Number one and number two, you really don't know what they loan the money to, who they loan the money to, and for what?
Speaker 2:because assume, assume the worst, because it can't happen. The bank lends it to a liquor store.
Speaker 1:The bank lends it to a casino the bank lends it to some dealer, the bank lends it to something Arms dealer or whatever.
Speaker 2:Whoever can qualify from a credit profile perspective will receive those funds. I mean as long as they're legal. Yeah. But I wouldn't want to be party to some things. These are my hard-earned funds that I put in the bank. So there's ultimately a problem with that, and so one of the things about our organization is we're not a bank and we're not a subsidiary bank. We're not owned by any banks and we're the only Islamic finance institution in the United States that is not owned by a conventional bank.
Speaker 1:So where does the funding, the capital, come from?
Speaker 2:So our founders are a 60-year-old private equity group. Two Muslim families, namely a Syrian family from Syria, originally started the organization in Syria and Lebanon and is headquartered now, today, in the United States, in Washington DC. So these investors, these Muslim investors, made a conscious decision in 1999 to back one of the investors' sons, dr Mohamed Hamor, to back him in this new venture. And it was going to be a monumental feat, because there wasn't such a thing at the time where there was a standalone Islamic finance institution not tethered to a bank. And so it took three years, millions of dollars, 18 different law firms law firms in the housing industry of the United States, working with Freddie Mac and Fannie Mae's legal divisions because they needed to understand that if we're going to do this, we want them to securitize these musharaka structures. And so, after three years and after all that painstaking work, we're able to launch the first musharaka, which is a declining balance co-ownership program for american muslims to purchase.
Speaker 1:Can you explain that a little bit, because I think, um, yeah, what, what the musharaka is, and yeah so so there's Musharraqah is an Arabic word for partnership, and traditionally people think of Musharraqah, or partnership, as joint enterprise.
Speaker 2:But there's actually two types of partnerships in Islamic financial transaction laws. There's joint enterprise and joint ownership for the purpose of transferring ownership. So joint enterprise is very simple enterprise and joint ownership for the purpose of transferring ownership. Okay. So joint enterprise is very simple. It's if you open up a business together, whatever that business may be, you share equally 50, 50 or 75, 25 in the expenses and in the profits. It's not that type of partnership. Why.
Speaker 2:Because we wanted to have Muslims be able to take advantage of all the appreciating value that real estate has to offer over time. We wanted that to go 100% to them when they purchase a house. So the scholars at the time, the board of scholars that worked on this project for three years, went with something called Shirkat al-Milk, which is a form of musharaka that is joint ownership. It comes from inheritance laws.
Speaker 2:So if parents pass, the children become partners in the assets that the parents leave behind, Automatically partners and now have to make a decision of who wants to be liquidated, who wants to keep the property live in it, and so on and so forth, and those decisions are done over a period of time or a term where one occupies and is responsible for the costs, but the other one's being bought out and also compensated for having a portion of their inheritance used by the other person inheritance support used by the other person.
Speaker 2:So in this case we purchase properties together with our customers through what's called a co-ownership commitment agreement. That's the difference. There is no lender agreement, so we actually bring our money by the creation of an LLC for each property and that establishes our ownership. So let's say it's $90,000 for $100,000. I know finding $100,000 is the most impossible in the US today.
Speaker 2:But let's take that as a simple example. So you bring $10,000 of your own money and we bring $90,000. We can go up to, by the way, $97,300. So 3% down and so on and so forth. But if we do $90,000, we bring $90,000 and we establish our ownership in the property through the creation of an LLC. So the LLC owns 90%. It's a guidance LLC and the customer owns 10. Now the agreement, the co-ownership commitment agreement. It's very simple you pick the term 30 years.
Speaker 2:You want to buy us out in 30, 20, or 15, you decide. You can buy us out in shorter periods of time at any time, but you want to establish a timeline because we don't want to be co-owners for life, and so in that term, you agree to buy us out each month while also paying us for using the portion of the property that we've given you exclusive use and enjoyment of.
Speaker 1:So is that one contract between you or two separate contracts?
Speaker 2:One contract Okay.
Speaker 1:Because I know that that's been a little bit of a confusion versus if it's one contract just between you and guidance, or two separate contracts where we are partners but then at the same time there's also a separate rental agreement as well.
Speaker 2:No, the co-ownership commitment agreement is the sole contract. It is the heart of that stack of documents that you have to sign at closing. If you've ever been to a closing and the majority 95% of the documents are government, required disclosures Okay, have nothing to do with the relationship, it's just mandated disclosures. But, when you get to the heart of what really counts, it's the co-ownership commitment agreement, which is completely different than if you were to sit at a Wells Fargo or traditional banks closing.
Speaker 2:The heart of their agreement is called the lender agreement, where they're affronting you, the funds, and they're not taking any ownership.
Speaker 1:They're stepping back from that the other aspect of it is the whole risk sharing that we talked about earlier, and so, in this regard then, how would guidance share in the risk with me as the borrower?
Speaker 2:That's a great question. So we just, you guys didn't experience it here in Minnesota, so we just you guys didn't experience it here in Minnesota but we just had a hurricane event recently come hit the US through the southeast. Many homes were destroyed by floodwaters and so on and so forth. So that's a trigger event to potentially having the contract dissolve because there's no more home.
Speaker 2:If it's destroyed, we don't co-own anything together anymore, right? Except whatever's left the parcel In those situations natural disasters or eminent domain. Eminent domain is if the government decides they want to expand a highway, a school, and they take, so you're being forced. So these are trigger events that are not caused by either one of us in this partnership. If there's loss due to these instances, we share pro rata equally in that loss.
Speaker 2:So if it's a $100,000 loss and let's say the example is we're 90% owners, again 10% is the customer and the insurance company after the loss says well, you didn't have flood insurance because it wasn't a flood zone, but the house was destroyed by a flood and they cut you a check. The proceeds equal $60,000 or $70,000. Less than we would take that amount and divide it 90%, 10%, okay, 90% 10% Okay.
Speaker 2:There is no other financial institution in the United States, no other, even Islamic institution in the United States that would do such a thing.
Speaker 1:So then, sorry, go ahead. So then so in the contract the customer is still required to take out the insurance on their behalf, or does guidance carry that insurance?
Speaker 2:So property insurance taxes, as well as maintenance, is all the responsibility of the consumer. Okay. Reason being based on the scholars' evaluation of the contract is Wouldn't that be an unfair risk sharing model?
Speaker 2:Well, so the consumer number one benefits personally from, let's say, maintaining the property and the actual taxes. Taxes go to local municipalities, schools and law enforcement, paving of the roads, shoveling the snow and so on and so forth. The person occupying the property benefits from that Maintaining the property. You're living in the property to maintain it, you benefit. You maintain the property, the property value increases, you receive the full amount of the increase. So in both cases, yes, I think the benefit goes directly to the customer.
Speaker 2:With the case of insurance it's good that you asked we actually do share in one portion of that insurance cost and that's up to the customer to actually select the program where we share versus the program where they take it on themselves. There is the brick and mortar itself, the house itself, and then there's personal possessions. When you take out homeowner's insurance, you really have an. You have essentially a, a, um, a bundle package of things. You have the uh hazard insurance, which is the case of people slip and fall on your property. You have the actual brick and mortar and then you have the actual brick and mortar.
Speaker 2:and then you have personal possessions which is your, you know, your tv, your couch.
Speaker 2:So guidance does offer the ability to take on one of those insurance with you the brick and mortar.
Speaker 2:So you have an option at the time to actually pick one of the programs that shares and one of the program that is priced a little bit differently, that does not share.
Speaker 2:The reason why we gave the option to the consumer is because if you take an insurance policy and you begin to unbundle it, insurance companies will raise their prices, making it extremely expensive. So what we learned is it's not advantageous necessarily for a consumer to unbundle these and say, okay, I just want my personal possessions and hazards separately and the brick and mortar part of the insurance I'm going to share with guidance. Well, your premium skyrockets at that point. So we've had to create a workaround to try to help the customer make the decision on their own. To create a workaround to try to help the customer make the decision on their own, you can select one program that actually does that, unbundled it, or a program that has it all where it's bundled and you pay for it, but you're saving significant amounts of money on that insurance policy, and what we're doing is we're essentially lowering by a bit our pricing our pricing for utilization.
Speaker 3:I like to do comparisons because I feel like conventional, like financing, is so much common now and people are so familiar with it, right, and I'm asking this like because I don't know exactly, and if you don't it's fine, let's say, cause we were talking about how, like, let's say, there's a flood and then you know, because the person didn't have flood insurance, they got only, you know, a portion of their money to cover. In conventional, the bank still expects you to pay for the amount that you owe, correct that?
Speaker 2:is correct.
Speaker 3:Regardless of how much the insurance is covering or not. Yeah, so you might end up with no home. Half the insurance covers for you and then the rest will come out of your pocket. Is that my understanding of conventional ways?
Speaker 2:That's correct.
Speaker 3:And then with guidance, whatever the insurance decides, you guys do those and then wash your hands and walk away.
Speaker 2:I mean, it's not a theory, it's actually been practiced for us. We had a hurricane hit Houston years ago, devastating hurricane, and many of these homes were not even in flood zones, they didn't require flood insurance. But the stormwaters came in and they were such where they destroyed the homes using flood. We took the loss alongside with them, pro rata. Now, the reason why conventional mortgages don't function the way we function is based on one thing the contract they use. They use a loan agreement, so when you're using a lender agreement, it's very simple, right.
Speaker 2:I'm loaning you $90,000. You just pay me back at interest. What happens between? You and the property. It's none of my business. It's not my problem.
Speaker 2:It's not my problem and that's the danger of lending money at interest. I mean, in 2007, the mortgage crisis, what we had on our hands was a record amount of deficiency judgments to people who were underwater, to people who basically couldn't afford to make their mortgage payments, and they turned in their keys their keys to the bank and said it's yours, I can't make the payments anymore and I can't sell it because it's. The price got reduced to a point where it's below, below what I originally borrowed from you. That didn't go away. What happened after that? There's a. There's a.
Speaker 2:There's a great article in the wall street journal about this, where, in the state of Florida, for example, there's such a thing called recourse and it's in many, many states around the country. The majority of states have the ability for lenders to have recourse should you default the courts and had deficiency judgments issued against all of these folks who turned in their keys, maybe even left the state, started their lives over, where, at that point, a year, two, three years later, a sheriff showed up, knocked on the door, served them with this deficiency judgment that said you still owe the bank on the home from three years ago and there's compounding interest, late payments accrued. So this is devastating for many people, but it's the long arm of the of the lending game and so, islamically, we have not no recourse. Uh, in all 50, in all 34 states that we operate in, we would if we went to 50, because the contract inherently doesn't have a lending borrowing relationship built into it and if, if something that happens, we would walk away with a loss as well.
Speaker 3:So so I was cause I the whole time you were speaking, I was thinking about okay, let's say, for example, um, one of the big um, I guess, deterrents for people is that you know, now that you said, okay, so this is a pro of guidance, or not just guidance, but maybe like um fine and islamic finance, and then this is the con of um, conventional finance, correct. But one of the things is that I feel like, to a certain degree, maybe this is a myth and if it is, please dispel that there's a lot more options for people in different credit brackets when they go through conventional, for example, fha and so on and so forth. So how does Islamic financing, or even specifically guidance, how does that accommodate people that might have, you know, the capital but not necessarily the credit?
Speaker 2:It's a great question. So people ask us do you check my credit rating, do you check my obligations, my debts and so on and so forth? And we say, yes, what is credit? For example, it's basically a number. Right now, we know it as a number, right. For example, it's it's it's basically a number right now, we know it as a number, right.
Speaker 2:But even during the time of the rasul sallallahu alayhi wa sallam, people, before they did business with anybody, they would ask the community about that person and whether or not they met their obligations. So, um, it's credibility. So are you credible in meeting your obligations? So today we have a number on it, but back in those days they would ask the community and you'd have, essentially, a reputation. And so, for us, we do look at credit. We do have to understand we take on more risk than conventional banks and even we take on more risk than other Islamic banks because they are subsidiaries of banks and so they are resolved to that essentially.
Speaker 2:For us, we do have sort of options based on your credit rating. We try to work with you. So if your credit is so far below it, it doesn't even meet the minimum requirement. We have essentially an educational process where you will receive from us, month in and month out, education around how to improve your credit without taking on debt, without going and actually paying it about. So there's all kinds of things you can do to improve, but we would need you at a certain minimum threshold, which is.
Speaker 2:Which is it varies depending on also it's not just your credit score, but it varies on how much debt you also have. Your debt to income ratio. I think what?
Speaker 3:I sorry. What I was going to say was that one of the cons, the catch-22s for most Muslims that are very strict on ruba is that sometimes they don't even have credit right Because they don't have credit cards, they don't have any mortgages, and so on and so forth. So I guess I ask you it's like a cycle You're trying to avoid, the interest. You're trying to avoid the interest and therefore, you don't have credit, but you need credit to be able to get it.
Speaker 2:It's a misconception. It is a big misconception that you can't build your credit because you don't want to participate in a Dibba. Explain that. Yeah, understand, getting a credit card and actually swiping it for your groceries that you would normally pay cash for. Swiping it for gas that you would normally pay cash or through a debit card.
Speaker 1:Using it for your daily expenses and then, before the month is over, paying it all off builds your credit yeah, I will say that, um, some people like will even say the fact that, because I've had these conversations with people and there'll be, like, even the mere fact of having a credit card, because you're signing a contract saying if I don't pay within the 28 day cycle, I will pay the interest Just that fact, you know, kind of discourages them from getting a credit card period which is kind of yeah.
Speaker 2:I think it's a discipline issue. So as long as you're disciplined with your expenses, you can even set it on a timer. Like you can make sure that you avoid the interest by making sure you have payments going from your checking to that credit card automatically for the exact amount yeah, because look um borrowing, you're essentially borrowing the money at zero interest. Yeah it's within 30 days yeah, so keeping that in mind, we also take into consideration, of course, you know, leases so if you're leasing a vehicle that helps build your credit because you're meeting an obligation and leasing is halal.
Speaker 2:There's nothing wrong with leasing a vehicle um so I think I want to um.
Speaker 1:We're kind of running um kind of low on time as well, but I want to transition into um. Earlier we talked about, you know, credit rates and stuff like that for the for the muslim customer, and also um. The down payment, which is a lot of feedback that I've gotten, is that it's a lot higher than conventional banks, which might require like 5% versus 20% that the Islamic financing requires. Why is that? And the other thing is the overall loan or amount that the customer pays back to these Muslim companies are a lot higher than a conventional bank. Is that true or is that a myth? Okay, yeah.
Speaker 3:Sorry, it's a lot We've heard. You know Islamic financing is a lot more expensive, and why does it feel that way to certain people?
Speaker 2:So number one, the minimum down payment requirement for guidance. I won't speak on behalf of anyone else here, For us it's 3%.
Speaker 2:Okay so it's not 20% that some people think, or 15% or anything like that, so it's 3%. And we even have we work with down payment assistant programs throughout the country. Okay, we work with many here in Minneapolis. In fact, we just launched new relationships with new down payment assistant program providers that we're unveiling today as we speak. So I would encourage engagement to learn more and understand, and I have to say we are again not a bank, not a subsidiary of a bank. The reason I make that point is we're always going to be limited to certain things by design and by choice. So we're not apologetic for it, because if we were to affiliate or tether ourselves to a bank just to open up the options, the dilemma with that is, once I do that, I'm engaging in some sort of riba or another.
Speaker 2:There's no way around it. When you are a subsidiary of one of those banks, you actually are governed by banking laws number one, and that means banks are prohibited from owning real estate, and so you become prohibited from actual ownership.
Speaker 1:I didn't know that.
Speaker 2:They are prohibited from owning real estate in the United States, with the exception of two scenarios For their branches, they can own their branches and when they foreclose on your home, they can own it for a short period of time and that's all. So co-owning with you in the onset of an agreement is prohibited and if you are a subsidiary of one of these banks, you essentially have given up the one of the two major cornerstones of islamic finance, which is ownership. And I will say to a lot of muslims out there, muslim americans who want to make an a conscious effort to learn more and understand be vigilant because, um, if you ask the question, are you?
Speaker 2:owned by a bank. To many of our competitors out there, the answer will likely be yes, and that puts into question whether or not they meet that criteria of ownership first. And then comes the criteria of risk sharing, and in many cases we've looked at those contracts with lawyers because you have to go into the minutiae and unfortunately the loss sharing isn't quite there as well. So by design, we have chosen not to affiliate or tether ourselves to banks, because it would result in the removal of what we're trying to actually remove.
Speaker 1:Yeah, yeah.
Speaker 3:I have so many questions.
Speaker 1:I know we need like two hours, oh my gosh, so I guess.
Speaker 3:So we've been talking a lot about the new homeowner, right, let's say, for example. Now my question goes for the homeowner that kind of went with the conventional way or with another finance Islamic financing I noticed on your website, um, on guidance's website, that there is the refinance option. Can you tell us a little bit more how that works exactly in the Islamic financing context?
Speaker 2:absolutely so. Uh, if you're currently with a conventional mortgage, um, we can absolutely help you get out of that mortgage. We've done it for thousands and thousands of muslims. Um, it works this way. So you currently have a debt obligation to a bank. Let's say, and let's say that debt is ninety thousand dollars on a hundred thousand dollar house, right?
Speaker 2:Um, just to keep it simple, so we would come in and we would actually pay that off with the funds that we're bringing our funds, and with those funds, well, first we would actually appreciate the house. We need to get a proper appraisal of the house value at that time so it could have appreciated. So maybe that hundred is now all of a sudden, uh, 200 or 110 or whatever, but that establishes now the baseline value of the home. And then, if the debt is $90,000, that establishes the percentage of ownership now in the home. We would essentially pay that off. So that goes away, making us now owners in the house at that dollar amount, which may represent 90% or less if the house appreciated, right. So then that creates the contract with us, establishes our percentage of ownership at that time, the term you'd want to buy us out for 30 years or 15 or 20, and your monthly payments based on the rate, and I'm sorry to cut you off, but is the percentage of ownership?
Speaker 3:is that dependent on anything that's going on in the housing market? Like you know how it says currently the interest rate is six percent, seven percent or whatever. Is it dependent on that or is is it stagnant in a specific like you guys make a decision every year to have this kind of percentage of ownership. Therefore, that's how you, or if let's let's say, for example, someone that has now, it seems like, 5% of the low interest rate, like, let's say that someone that has a home mortgage with a 5% interest rate when they want to refinance with you guys, how would that work? Like, I guess, in a way.
Speaker 2:I think you're referring more to the cost. Yeah. The ownership is established with our cash coming in and establishing.
Speaker 1:It's like decreasing yeah, the more payments you make, their ownership goes down, your ownership goes up. That's different than I feel like the profit rate and that's the confusion a lot of people have. Is that, just because you call it a profit rate, what's the difference between an interest rate and that?
Speaker 2:Yeah, that's a great question. We get that question all the time. Well, so our profit is made from the customer using, actually having exclusive use and enjoyment of our portion, not the whole house, the portion of the house that we own yes which is declining each month. So actually you're paying each month less and less of a utilization fee we call it profit, but equates to a utilization fee for usage.
Speaker 2:Now what's the difference between that and a conventional loan? So just because the numbers might equal the same amount doesn't mean they represent the same thing. Meaning, if our rate today for utilization is 6% and the banks are charging 6% on money that they actually loan out, it doesn't make our contract all of a sudden a riba contract. This is an important aspect to, I think.
Speaker 3:It's a different paradigm. It's a completely different paradigm.
Speaker 2:So it's a great question. So when we were developing the program during the R&D phase, when we finished structuring the Musharrak Motalaqasa and ownership declining and their ownership increasing, we asked the Sharia board what should we charge for usage for them using our portion of the property? And the response was this is not a Sharia question. You can charge whatever you want to charge. If you charge too much, you go out of business. If you charge too low, you go out of business. If you charge too low, you go out of business. So you need to be competitive.
Speaker 2:So they mentioned something called benchmarking. It's traditionally approved in Islamic financial transaction laws from the Sharia perspective and all it says is you can look at who is facilitating homeownership in the marketplace and these are the lenders. They're facilitating homeownership through the marketplace and these are the lenders. They're facilitating homeownership through a lending agreement and charging a cost to loan money. That's a cost and you can benchmark your rental payment right or whatever you're going to charge for rent in this case, against that cost. So benchmarking is acceptable. A simple example to benchmarking is this this was brilliant. I heard it that I'm gonna regurgitate if I was to go out to a you know grocery store and I see a bag of potato chips and you know we can eat potatoes as Muslims, no problem. But if you read the ingredients, and they're fried in lard, no, no we can them.
Speaker 2:No, we can no longer eat them. We have to put that bag down, no matter what the cost is. It's 99 cents a bag. Whatever. Tomorrow somebody comes into the market and produces potato chips that are fried in vegetable oil. Now they have a predicament what are they going to price at? They're going to look across the shelf and see that most potato chips fried and lard, are selling for 99 cents a bag. So if they sell at 99 cents a bag, does that automatically make them haram? No no.
Speaker 2:No, so it's not about the price. It's about the contract and what you're paying for the process.
Speaker 3:Yeah, I feel like most of the reasons just to go back to that simple potato chip comparison is that sometimes for most people and I don't know necessarily if it's true but it feels like that potato chip if it's 99 cents for the large one, of course, taking into account that's haram right.
Speaker 3:The vegetable potato chips feels like it's a lot more expensive than it's like compared to that. I guess in a way is that like if the goal is to make it easier for the Islamic community to and I'm not saying you guys shouldn't make profit, I want to make a business major, so you know I'm a business major.
Speaker 3:So I you know, makes sense. But if the goal at the end of it all is to make financing and home ownership easier for um for the islamic community, how come it feels like that? You know, there's a big discrepancy, um between the lard and the vegetable.
Speaker 2:Yeah, in most cases we find ourselves right there in line with what's out there. From a pricing perspective, we literally have a department, a pricing department, that monitors rates three times a day and then adjusts our pricing against usage. So the usage fee gets adjusted and gets alerted to the account executives that work for us about two or three times a day, and from my vantage point I know there's myths out there, but from my vantage point the reality is we're very competitive, we're extremely competitive. Now you may pay an extra for got with guidance uh fee, which is you may or may not have heard of it it's our llc fee.
Speaker 2:So we created an llc for every single property that we finance in the united states to establish true ownership in that l, in that property. Through that llc there's a cost to actually run an. Llc, manage it, administer it once a year. The state of Delaware is probably wondering who in the world is this Muslim owned company buying?
Speaker 2:tens of thousands of LLCs right, but the LLC is actually not just establishing our ownership, it's actually establishes protections for our consumers. If you think about it, if I co-own with you and I co-own with you and I co-own with 40,000 Muslims and someone slips and falls in your home and sues you and recognizes that they have a partner, you have a co-owner. They can come after me and all of our co-owners around the country.
Speaker 2:So, it's actually protections for all of our co-owners and it's also protections for you, because if someone was to take on a frivolous lawsuit against guidance, they'll be able to maybe go further and go after the homes.
Speaker 1:So to kind of pivot a little bit so after you've been living in the home, you know you're in a partnership with guidance. Does Guidance ever sell that debt? Because I know that some of our friends have said after they've gone through some of these Islamic banks, after a couple of years they'll receive a letter saying this is a notice that your debt has been sold to Freddie May Is that ever the case?
Speaker 2:First of all, based on the contractual agreement between us and all of our consumers, this isn't a debt.
Speaker 3:Okay, or they're part of the ownership, so it's financing that's in the property.
Speaker 2:Now, that agreement, our co-ownership commitment agreement, is a revenue producing agreement. Right, there is actually a revenue being generated. So one of the things that I help clarify for folks is the secondary market and how it works, and this is a little bit deep and I hope that I won't lose you. So it's an aspect of securitization. Securitization is a key aspect of homeownership. So you've heard of the name Freddie Mac and Fannie Mae.
Speaker 1:Yep.
Speaker 2:Freddie Mac and Fannie Mae are not banks and they don't loan money.
Speaker 1:Or did I mix up the names? That's okay Freddie Mae or whatever. Yeah, you know what I'm talking about.
Speaker 2:Yes, the Fannie and Freddie the sisters. Yes, yep. They actually are, are not banks and they actually do not loan money.
Speaker 2:They're prohibited from lending money. So what do they do? They were established by Congress to allow foreign investors to actually invest in housing in the United States because there's not enough money sitting in depositories in the United States banks to support funding for housing in the United States. It's a trillion dollar requirement for that every year. So they were actually created to be the middlemen to pool these mortgages into something called mortgage-backed securities and they would offer these securities 500 million security at a time or so to foreign investors. And I'll give you an example pension funds.
Speaker 2:I don't know if you know much about pension funds. But teachers, for example, are part of pension funds. So let's say, a pension fund in for the teachers union in France. They there's a fund manager so that those teachers have their pension when they actually retire. They have to manage those funds and they have to invest them in something. One of the things they invest in is US mortgage-backed securities, because Americans tend to pay their debts right, they tend to pay, and so the actual return is a safe return, so to speak, for that pension fund manager. Freddie Mac and Fannie Mae make those possible. But when they actually engage with guidance, what are they looking at? They're looking at co-ownership commitment agreements. So what they're doing is essentially seeing revenue, risk and revenue. And our revenue comes from what? Utilization fees? So what we do is we sell the revenue rights to Freddie Mac and Fannie Mae.
Speaker 2:So that they can open it up and share it with pension fund managers and other international managers who want to invest in the US housing market. Now they don't know, that they're getting halal returns, but all they do is essentially pull these and create securities. Sukuk is actually permissible in Islam?
Speaker 1:Does guidance ever leave the contract between you and the consumer?
Speaker 2:The answer is no. And so that's a simple no, and that's what people fear, I think as guidance is going away. Yeah. What we do is we sell the revenue rights essentially to Freddie Mac and Fannie Mae, but we are the servicer. It's called in the industry it's called servicing rights. Okay. We maintain servicing of our contracts forever.
Speaker 1:Okay For as long as the contract Until maintain servicing of our contracts forever.
Speaker 2:for as long as the contract Until the term, until the term Okay.
Speaker 1:So the customer will always, because the LLC is registered with who it's registered with us, okay, that claims this, that state Okay, because yeah, because afterwards, like you, you, you don't see the bank and I'm not saying I don't have any experience with guidance, but with other ones that I do have experience with uh, you don't even like your payments, don't even go to them.
Speaker 2:Yeah, your payments will go to guidance every month.
Speaker 1:You'll get a statement from guidance.
Speaker 2:Okay, you'll get um instructions to you know. Cut a check. If you still use checks to guidance residential Um, now we can hire administrators to send that on our behalf and if we do, we have to alert you. That's part of the process, so it's called sub servicing, so it's an administrative task.
Speaker 2:So we do hire a company that literally just takes our mailers, our our envelopes, our prints out our statements, sends it on our behalf and then collects the payments on our behalf, Because if you did it in-house it costs more and that cost ends up going where. To the consumer. So we outsource it just at least so that we can keep our costs down. But you'll always be dealing with guidance residential.
Speaker 3:So we're running out of time, so I wanted to kind of just give you an opportunity, like an elevator pitch, to why guidance and not the others well.
Speaker 2:So I think we make a conscious decision to avoid dribba um, and it is a um.
Speaker 3:It is a decision that's rooted in our faith so are you saying the other Islamic companies might not?
Speaker 2:Well, here's what I would say If you're going to go and make this conscious decision to please Allah, subh'anahu Wa Ta-A'la, to rid the biggest purchase you'll ever make in your life the roof over your family's head, if you're going to remove riba out of it, you should take the time to do some research. I urge everybody to do so, and I mentioned at the top of the hour that there are certain requirements. We brought seven of the world's leading scholars to ensure that this is done correctly. We did that over a course of three years. We took the time to actually engage and engage and engage to the point where it costs us more money, to the point where, when we launched, we were essentially the only institution that is not tied to the Riba-based banking marketplace in the United States, and that comes with a lot, a lot of pain and challenges.
Speaker 1:Yeah, essentially you're an outlier, we are an outlier, Our costs are higher.
Speaker 2:Everything becomes a lot more challenging for you as an institution when you're not tethered like that. So the most important thing, I think think, is to make sure that if you're going to make that decision, you made the right decision. You didn't make the decision based on just the cheapest in the marketplace. I think pricing matters, but when you're looking at pricing, you want to make sure you're not also diluting the authenticity of the structure. That is to be pleasing to Allah. Second thing I would say is, when you do engage in home financing and I hope it's with guidance you'll recognize that we are a Muslim-owned institution through and through Meaning. When you finance your home and we make a profit, that profit gets circulated within the Muslim American circular economy. It does not go in to line the pockets of bankers who will do what with it.
Speaker 1:Loan it out. Loan it out or probably open up another banking branch and another banking branch, and that's what's happening essentially with direct competitors. So where can people find you if they have any questions, or just you know where can they find?
Speaker 3:you, you guys have a Minnesota, I know you guys have a minnesota, I know you guys have a minnesota base. Uh, where would that be? Also?
Speaker 2:we do um, so online they can find us at guidance residentialcom. We also have a youtube page that has a lot of videos that are short and can help crystallize the information. Uh, we are actually opening up an office today. It's our inauguration of our sort of first day, or October 1st it was in the Zawadi Center in Bloomington, minnesota, so our office is there now.
Speaker 1:Oh, is that by the Dar Faruq Masjid?
Speaker 2:It's in the south.
Speaker 1:I think I remember hearing about that, yeah.
Speaker 2:Yeah, it's a growing community, yeah there's a wadi community center is really profound. It has a coffee shop, a restaurant offices, a banquet hall. So we're gonna, we've, we've essentially, uh, moved our office to that location and it makes it, I think, very, very comfortable for people to come visit with us, talk about their options, go grab a cup of coffee and even maybe have lunch or dinner in the center. But online, guidanceresidentialcom. We have a number of different social media feeds Facebook, twitter. What else is out there? Tiktok Are you guys on TikTok?
Speaker 1:Yes, we are. We're on all of those, Are you guys? Last question Um, um, what else is out there? Uh?
Speaker 2:Instagram. Yes, we are, we are.
Speaker 3:We're on all of those, are you guys? Uh, last question, and I just want to, for people that are, uh, you know, maybe not, english is not their first language and you know how do you guys have, um, employees that are you know either? In the Somali community in the autumn has a large Oromo-Somali Ethiopian community that are you know that are interested, that are in Islamic financing To help with the education part of it.
Speaker 2:Absolutely. We have over 50 licensed account executives in our organization. I mean our organization is 200 strong, but 50 are licensed to actually work with our consumers on this program and they speak so many languages. I think the last time we counted was over 20 different languages amongst the 50 that are spoken. Of course, Somali here is spoken by at least three of our associates and other languages as well. I know we have some really talented account executives who speak at least three or four languages.
Speaker 1:That's amazing.
Speaker 2:So we're always prepared to help you know, bridge the gap of communication in any way we can, and if someone's not here that speaks your language, they're likely to be in our corporate headquarters in. Northern Virginia or somewhere else.
Speaker 1:Awesome. Thank you so much. All right, thank you. This has been Difficult Conversations. Join the conversation in the comment section or on our Instagram page to share with us what you think. We do not have all the answers and our biggest goal is to kick off and get the conversation going. May Allah accept our efforts and use us as catalysts for change.