Subprime lending means making loans to people with poor credit who may default on their repayment schedule. Lenders have the right to foreclose to repay the debt owed. In a severe macroeconomic crisis where asset prices collapse, the problem of ‘negative equity’ may arise where the market value of the home falls below the outstanding mortgage. Borrowers however will still have to service the debt.
Here is how FundMyHome differs from and is NOT subprime mortgage lending:
Not conventional mortgage debt
The homebuyer pays 20% of the purchase price. The remaining 80% is raised from investors and is secured against the property. Investors’ recourse for repayment of the 80% is against the property. They cannot come after the homeowner personally for the shortfall in the event the proceeds from the sale of the property are insufficient to repay the 80% funded by them. It is thus NOT a conventional bank mortgage.Losses are capped
Losses are capped
Should the property market suffer a catastrophic crash, at worse the homeowner under FundMyHome loses his or her capital invested which is 20% of the original purchase price and nothing more. The homeowner’s exposure is thus limited to the amount they have paid when they entered into the transaction.
Shelter of five years
Under a normal mortgage, foreclosure can happen anytime should theborrower default in paying the regular loan instalments. Under FundMyHome, the issue of default in loanservicing does not arise as there are no loan instalments to be paid.
FundMyHome requires an upfront payment of 20% of the purchase price.This acts as a filter for responsible finances at the outset. Those who have been able to tap or accumulate personal savings or raise a personal loan to meet the 20% payment would have gone through some credit screening by banks.
Profit- and risk-sharing model
Conventional mortgages are based on the paradigm of caveat emptor or “buyer beware”. Under this framework, the system can pursue defaulting borrowers at all costs. This is the original sin that underpinned the US subprime mortgage crisis.
In contrast, FundMyHome draws on Islamic finance and is based on a profit- and risk-sharing model for home ownership. It realigns the mortgage market with a new social contract where all key participants ( buyer, lender,vendor) have a stake in the performance of the underlying asset over the life of the contract. This creates a wider system of accountability compared to conventional mortgage lending.
In conclusion: FundMyHomeis an innovative and inclusive homeownership framework whose financial and legal instruments apportion risk and rewards in a fair, balanced and sustainable fashion.