Home / David W. Cooney / Practical Distributism: The Home Mortgage

 

We have had several articles and comments regarding usury, mainly focusing on what usury is and why distributists oppose it. Considering the prevalence of usurious practices in our current economy, can we even envision how our banking and credit system would work without it? We must candidly admit that loans (and I use the term because of it familiarity rather than its accuracy) would come to a screeching halt if those institutions providing it cannot make a living by doing so.

In the case of providing loans for the purchase of productive property, an interest in company earnings could conceivably replace the current practice of charging interest on the money provided. It would be a major shift, but the prospect is not inconceivable. However, there is another aspect that literally strikes close to home; in fact, it involves the home itself. Considering that home mortgages are a large part of our financial world, and that this is the largest expense for the average family that manages to buy a home, how could we apply Distributism to a large loan for non-productive property like a home?

The Swedish JAK Medlemsbank developed a plan where members earn points toward interest-free loans. The points are based on savings deposited over time. It makes its profit by using the money members have in savings for loans on interest while the members build up their points. This arrangement encourages members to keep money in JAK Medlemsbank, where it can be put to work in the economy through loans. By making the profitable loans in a non-usurious way, distributists should be able to accept this type of arrangement.

One drawback to this, however, is that it could take a very long time before enough points were earned for a major purchase like a home. Therefore, this article will offer another alternative form of home mortgage that is both interest free and profitable.

Since a home mortgage is a credit for non-productive property, there is no projected income in which the mortgage provider can claim an interest. He will need some security to back his interest in the credit provided, otherwise his risk would be too high and he would have no incentive to offer the credit. Since the average home buyer doesn’t have enough capital to secure such a large amount, the property being bought is the most reasonable security to back the investment. This is already accepted in home loans today and is applied in the form of a lien.

Keep in mind as you read this proposal that there are other possibilities. What I present is certainly open to revision to fit particular circumstances. I would recommend an agreement of joint ownership where the buyer is on a schedule to buy out the mortgage provider’s percentage. This would be somewhat similar to the current “rent to own” plans. There are pros and cons to any arrangement, but they can still be made so that both parties are equally protected (and equally at risk). I am not a lawyer, but I think the following terms could be written in a way that reasonably protects both sides.

1: The buyer and mortgage provider are joint owners of the property with all of the rights that pertain to ownership. The obvious problem with this is that the buyer wants the benefits of home ownership. I suggest that the terms of the agreement has the buyer paying the mortgage provider for exclusive use of the latter’s ownership rights on a monthly basis. This includes nearly all rights to the property, like mineral rights, to the land. This arrangement prevents the mortgage provider from interfering with the buyer’s use of the property, but compensates him for not being able to make use of property in which he has a share of ownership.

2: The amount the buyer would need to pay for exclusive use would be based on the mortgage providers ownership (principal). In my opinion, one half of one percent (0.5%) of the principal per month would be adequate. If the purchase price was $200,000 and the buyer provided $5,000, the mortgage provider would start out owning $195,000. The exclusive use payment would be $975 for the first month of the partnership. As the mortgage provider’s ownership decreases, so does the amount the buyer has to pay for exclusive use.

3: The amount the buyer has to pay toward full ownership ownership is determined by the term of the loan in years and the amount the mortgage provider paid for the purchase. If the term is for fifteen years, the buyer has to pay one-fifteenth of the mortgage provider’s initial investment per year. If the term is thirty years, he would be required to pay one-thirtieth per year. In the example from number 2 above, the mortgage provider paid $195,000 of the purchase price. A fifteen year agreement would require the buyer to buy $13,000 of the mortgage provider’s ownership per year. A thirty year agreement would require the buyer to buy $6,500 per year. These amounts are the buyer’s increase in equity per year.

4: The buyer can pay the balance of the mortgage provider’s investment at any time, bringing the contract to an end and transferring exclusive title to the property to the buyer. There can be no penalties for early payment because the mortgage provider will have his full investment returned and will have the money available for further profitable investment.

5: There would be no requirement for monthly minimum payments beyond the payment for exclusive use. Throughout the year, the buyer is free to pay whatever he can afford against the principle, provided that he pays at least the required portion of the loan per year. A monthly payment schedule against the principal could still be provided, but there are no penalties for not following it. Throughout the year, the buyer is free to pay whatever he can afford against the principal, as long as he makes the required amount by the end of the year.If he paid more than what is due in a year, the excess amount would be applied toward what would be due in the following years.

Here is a comparison of the two terms presented so far, fifteen and thirty years. For the fifteen year term, the first month’s payment would be $2,058.33 ($1,083.33 for the principal and $975 for exclusive use). For month 60—one third of the way through the term—the payment would be $1,738.75 ($1,083.33 for the principal and $655.42 for exclusive use). At this point the buyer’s ownership (equity) has reached $70,000, 35% of the purchase value. The final scheduled payment (month 180) would be $1,088.75 ($1083.33 for the principal and $5.42 for exclusive use). For the thirty year term, the first month’s payment would be $1,516.67 ($541.67 for the principal and $975 for exclusive use). For month 120—again, one third of the way through the term—the payment would be  $1,194.38 ($541.67 for the principal and $652.71 for exclusive use). Once again, the buyer’s equity has reached $70,000. Compare that to the standard interest based mortgage agreement. The scheduled final payment [month 360] would be $544.38 ($541.67 for the principal and $2.71 for exclusive use).

How does the mortgage provider fare in this arrangement? For the fifteen year term, he would get $88,237.50 in exclusive use fees. For the thirty year term, he would get $175,987.50. This ends up being comparable to a fixed interest loan at around 5.5%, but the buyer’s equity increases at a constant rate instead of very slowly in the beginning of the term and very quickly toward the end.

6: There are no interest charges except as follows. In the event that the buyer has not paid the required amount due at the end of each year, he will pay a monthly interest of 0.5% on the remaining balance of what was due until it is paid. This is not usury because the basic terms of the agreement are interest-free. The mortgage provider has invested in the property for the buyer’s benefit (eventual exclusive ownership). In doing so, he has forgone the opportunity to use that money for other potentially profitable purposes according to the payment schedule. The agreement is that he will get back an agreed portion of his original investment per year. If the buyer fails to pay this amount, the mortgage provider is unjustly deprived of the use of that money, and can charge interest to counter that loss until it is recovered. There could also be interest charges against any late payments for exclusive use on the same basis.

7: Spouses are automatically participants of the contract, even if the marriage takes place after it is enacted. The terms are inheritable to their children if the couple should die before the end of the term.

8: If the buyer stops making payments for a period of time to be determined by the contract, the mortgage provider has the following options:

8a: He can forgive part or all of the money due for either the repayment or the payments due for exclusive use. If he only forgives a portion of the repayment, the remaining terms of the contract remain the same. Forgiving a portion of the repayment due means transferring to the buyer that portion of ownership without payment. Forgiving the balance of the repayment grants the buyer full ownership of the property without any further payment.

8b: He can choose to grant the buyer more time, provided that there is no additional charge beyond the terms laid out above for doing so. This would effectively be the same as forgiving the buyer for any interest due for not paying the required amount due by the end of the year.

8c: He can pay for the buyer’s percentage of ownership, based on the original purchase price, and take full ownership of the property.

8d: He can force the sale of the property. The money from the sale is divided according to the percentage of ownership.

Unlike foreclosure terms, there is no way the buyer loses the house and ends up empty handed. In option 8c he is paid back his percentage of ownership—that is all of the money he has paid for the property (not for exclusive use). In option 8d he is paid his percentage of the sale price. This could be less than his investment to date if the house sells for less than the original purchase price, or it could be more if it sells for more. In this, the buyer and the mortgage provider share a proportional risk. The money paid for exclusive use is not counted because that is money charged for a service provided. While the agreement was active, the mortgage provider lost his use of the property and the exclusive use fee was his compensation for that loss. Additionally, any outstanding exclusive use payments or interest for late payments would be deducted from the buyer’s portion on the same basis.

9: This agreement is between the buyer and the mortgage provider. Since both parties are owners of the property, neither one can sell his portion and thereby transfer his portion of the agreement to a third party. Neither party can enter into an outside agreement that grants a third party any claim to the property without the consent of the other party and the appropriate amendments to the original agreement.

I am not claiming that this is a perfect arrangement, but it could certainly serve as the starting point for establishing an interest-free and non-usurious method of financing the purchase of a home, or practically any other non-productive purchase, while keeping it a worthwhile business endeavor for the mortgage or credit provider.

 

About the author: David W. Cooney

 

David W. Cooney serves on the Editorial Board of The Distributist Review. His articles have appeared in Gilbert Magazine and he has also contributed to The Hound of Distributism, a book of various authors. Originally from Southern California, he now lives with his wife and two children in Western Washington state where he works as a network administrator.

 

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50 Comments

  1. Hi. Have you checked how that was done in the Western Middle Ages or in the Muslim world, two realities where we know usury was or is not allowed?

  2. Hi David, very interesting idea. I think we need to stand it up against the current practices for further scrutiny.

    A quick comparison on your $200k scenario suggests that monthly P&I would be $930/mo @ 4% vs. $1,500/mo for your proposal. We need a few graphs and charts where we show the crossover/break-even where the non-usurious loan overtakes the current practice and potential benefits to both buyer and investor.

    Quite possibly a case could be made for investors to offer this type of package (according to your numbers, the investor would make $35k more over 30-yrs assuming 4%, but $30k less assuming 5.5%), but it needs more math and clarity of terms to make the case. Ultimately the case has to be compelling to the investor to part with the use of his money for 30-years.

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  4. Marchmaine,
    I would also assume that if the interest rate were lower, the P&I would be even lower. However, the fact is that interest rates are artificially low at this time, so you would have to compare it to a more realistic rate, or adjust the charge of my formula accordingly. My calculations were based on 1/2 of 1% per month, which would be 6% per year, not 4%. You are also forgetting the insurance payments which the banks currently force the buyer to purchase and which has no place in my own plan. Naturally, if the bank wishes to protect is investment it could purchase (and pay for) insurance on its part, and if the buyer wanted to get insurance to cover payments in case of bad times, he could do so voluntarily. This is separate from the base agreement under my plan, where it is a requirement under the current mortgage.
    As it happens, I had this plan reviewed by the vice president of a mortgage company in my area and he thought it was a good plan that would definitely provide enough profit to make the investment worthwhile. You also need to remember that not all of the investment is unavailable for the 30 year term. One third is returned and available to be used for further profit every ten years.

  5. Caio,
    I have not yet found documentation on this type of purchase in the Middle Ages. I did reference George O’Brien’s book, “An Essay on Medieval Economic Teaching,” and consider it a very good resource in understanding usury and methods of avoiding it.

  6. +AMDG
    .
    I love this idea. It’s also worth noting that it’s significantly harder for the “lender” to alienate his interest; or at least for the interest to become alienated from the actual property. A mortgage is just a piece of paper, a specific type of promissory note; we can package it, slice it, dice it, and do whatever else we like with it easily. But with this plan, it’s completely and irrevocably tied to the property itself. That’s a Good Thing, especially in light of our recent economic doldrums.
    .
    Praise be to Christ the King!

  7. Hello,

    I just google sharia-compliant mortgage and found some interesting things:

    http://www.guidanceresidential.com/ [check out their co-ownership program]

    This other bank has 3 systems:

    http://www.devonbank.com/Islamic/home_buyingahome.html

    My best,

    Caio

  8. I like this idea. I remember that when the current system was explained to me that I thought it very unjust … three houses later I think so even more! And I never fully understood how we, in a supposedly Christian culture, ended up with a system of financing condemened in the Bible.

  9. Marchmaine brings up a valid point about how this arrangement compares to what is currently in place. While I disagree with his use of a 4% APR loan when my terms are closer to 6% (and I suggested they could be amended), the reader should understand that I did not devise this plan without any direct comparison to existing mortgages.

    One interesting factor is the monthly payment. I did a direct comparison with a 30 year fixed mortgage at 5.5% currently being paid by someone I know. His monthly payments are just over $1,600 and are scheduled to remain at that level over the course of the entire loan. In my plan, the first payment is just over $1,500 and decreases every month, with the final payment being less than $600.

    This means that an added benefit to the buyer is that his continued payments, his increased investment in the property results in a greater benefit to himself as the property costs him less and less each month until he has full ownership.

    This is not an injustice to the mortgage provider because he is getting his investment back, he owns less and less of the property as time goes on, so his compensation is proportionately less. Also, his risk of loss decreases as his investment is returned. He carries less and less risk as time goes on.

  10. Thanks David… the crux of the matter is how you peg the Exclusive-Use Fee. If it is always .5% as a matter of principle, then my survey indicates that equilibrium is a 5% Conventional Mortgage Loan… not factoring more sophisticated models that account for NPV.

    At interest rates below 5%, this model is more lucrative for the Investor, above 5% it will lag behind significantly. As a businessman, it becomes a question of balancing the benefits and the risks; and, as a consumer, there has to be sufficient benefit to justify the higher early-year payments.

    What then are your thoughts around floating the Exclusive-Use Fees? Perhaps some sort of formula indexing against Rental Prices?

    You mention the Mortgage insurance (or lack thereof) as a sort of equalizer between payments, I believe you cannot make that assumption. The Insurance is a risk mitigation fee paid to a third party; your hypothetical new Investor would make the same sort of risk assessment about partners who only put down 2.5%… the alternative is to require 10%, 15% or 20% to join the partnership at all.

    I bring up these points in an attempt to fortify your proposal, not to tear it down; I rather think there are several nuggets that would benefit the lender/buyer relationship and put us all on track towards better business models…but still we labor under certain important constraints that must be accounted for.

  11. Marchmaine,
    I also do not bring up my counter points to tear down, but to further discuss the issue. I am no expert in the mortgage field, and I realize that there can be other factors for which I have not accounted. The solution (considering this is The Distributist Review) needs to conform to distributist principles.

    I also present what I hope could be a model for an actual Distributist economy. There would likely be some sort of hybrid approach during a period of peaceful transition to that goal.

    The reason I consider mortgage insurance a legitimate factor for comparing my proposal to what is currently in place is that it is not an option. If you can’t come up with 20%, you have to get it. The main problem with mortgage insurance is that it is taken to protect the lender, but the buyer has to pay for it. This practice has always been condemned because the one being protected should be the one paying. Remember that, in the philosophy that is the foundation of Distributism, a financial arrangement in which only one side has risk of loss is inherently unjust. Both sides can make their own separate arrangements with third parties to mitigate the risk of the original agreement, but that is a separate transaction (with its own risks), and the party seeking the protection is the one who needs to pay for it.

    The stake in the property itself covers the lender, so why do I have to pay for insurance to protect him further? I didn’t want it in the case of my own mortgage; I simply didn’t have any choice in the matter because my lender required it. I have no problem if mortgage providers set a standard of requiring a certain percentage down to enter an agreement. True market forces will determine what that amount will be when some providers require less than others. Unlike our government, distributists would not tell mortgage providers that they are required to make loans to people who cannot realistically repay them. If you are a mortgage provider, I am happy to let you determine what requirements make good business sense for this arrangement.

    The amount of the user fee is certainly negotiable in my view, however it should not fluctuate during the course of the agreement. One of the factors in my arrangement is that, because this is a joint ownership partnership, the buyer is not a renter and the exclusive use fees are not to be considered a rental fee. I say this because a renter has certain legal rights in regard to the property owner, many of which would not apply in this case because the buyer is also an owner. Quite frankly, if the mortgage provider would not be satisfied with making nearly $176,000 over a 30 year period (and the majority of that is in the beginning), then I wouldn’t want to do business with him.

  12. I came across this in the National Catholic Register. My question is why all this hoop-jumping? What is wrong with getting a loan and paying a reasonable interest?

  13. CoastRanger,
    Welcome to our site.
    Our goal here at The Distributist Review is to promote a just economic model that is both economically and philosophically sound. Because we are promoting Distributism, this model conforms to the teachings of the Catholic Church.
    http://distributistreview.com/mag/2011/05/is-distributism-catholic/
    Included in those teachings is the unchanging and unchangeable condemnation of usury.
    http://distributistreview.com/mag/2012/01/is-usury-still-a-sin/
    http://distributistreview.com/mag/2011/07/the-errors-of-the-economists-usury/
    Therefore, this article seeks a practical way to meet a particular economic need in a way that is not usurious.

  14. David,
    I’ve read the Catechism many times. Why is it that there is no mention whatsoever of the word usury? How is paying 5% on a mortgage excessive interest?

  15. Actually, usury is mentioned twice in the Catechism (#’s 2269 and 2449). The problem is not the 5%, it is the fact that the charge is against money loaned. The Catholic Church has always condemned usury. It is truly sad that this teaching has been so badly neglected that most Catholics these days don’t even know what usury is.

  16. Additional proscriptions of usury can easily be found. For example, the Council of Trent listed usury as a form of theft prohibited by the 7th Commandment under the title of Various Forms of Robbery.

    “To this class also belong usurers, the most cruel and relentless of extortioners, who by their exorbitant rates of interest, plunder and destroy the poor. Whatever is received above the capital and principal, be it money, or anything else that may be purchased or estimated by money, is usury; for it is written in Ezechiel: He hath not lent upon usury, nor taken an increase; and in Luke our Lord says: Lend, hoping for nothing thereby. Even among the pagans usury was always considered a most grievous and odious crime. Hence the question, “What is usury?” was answered: “What is murder?” And, indeed, he who lends at usury sells the same thing twice, or sells that which has no real existence.”

    This teaching has never been (and can never be) altered. It is part of the faith.

  17. OK, the word “usurious” is used once. “Those whose usurious and avaricious dealings lead to the hunger and death of their brethren in the human family indirectly commit homicide, which is imputable to them” (CCC 2269). 2449 is about cheating the poor out of their sustenance.

    I don’t mean to be troll-like, but what does that have to do with my mortgage? Nobody in my community is going hungry or is impoverished because of money lending.

  18. CoastRanger,
    Your argument is not with me, or the Distributist Review, it is with the Catholic Church. Just because the current release of the Catechism doesn’t mention usury in the way we are discussing does not negate the centuries of teaching on the topic. Check out the recent Compendium of Social Doctrine, where you will find more references.

    Just because you don’t see people in your neighborhood starving because of their mortgage rates doesn’t mean there is nothing wrong with usury. If you are a Catholic, you must accept that usury is immoral and unacceptable whenever you can avoid it.

    Even if that weren’t the case, it doesn’t make any argument against what I have proposed in the article. I have done my best to propose an arrangement that is both profitable for the mortgage lender and not usurious (and, so far, you have not argued that there is anything wrong with not engaging in usury).

  19. Correction to a previous statement: What I attributed above to the Council of Trent is actually from the Catholic Catechism published shortly after that council, in 1566.

  20. “This teaching has never been (and can never be) altered. It is part of the faith.”

    That can’t be right.

  21. CoastRanger, it has been taught since at least the Middle Ages that usury is totally wrong as part of the ordinary magisterium at least.

    In order to refute Mr. Conney’s point, you need something other than a gratuitous denial.

  22. Oops. That should be “Cooney” not “Conney”!

  23. I think a well-formed Catholic can say something he is hearing can’t be right based on his sense of the faith.

    In his monumental work-in-progress on moral theology, THE WAY OF THE LORD JESUS, Germain Grisez, writes

    “But the main reason why the Church does not teach today on usury as she did in the Middle Ages . . . is that the economic subject matter has changed; money and interest simply are not now what they were then.” http://www.twotlj.org/G-1-36-G.html

  24. In regard to one’s sense of faith, that sense has to conform with the Church’s teaching. When the magisterium actively teaches in agreement with Germain Grisez, then I’ll agree with him. However, any statement that money and interest are not now what they were in the Middle Ages is, to me, a foolish statement. I have yet to see any demonstrable difference other than the use of computers to speed up the transactions and (unfortunately) to create money. In what way is the charging of interest on money loaned different today than it was in the 13th Century?

    While it is certainly true that the punishments for usury have varied over the two thousand year history of the Church, there has at no time been any magisterial declaration that usury is in any way acceptable, nor is there any writing of one of the Early Fathers that gives approval of usury. Any time the subject of usury has been addressed by the Church, it has been condemned as sinful in one way or another.

    In the 4th Century, the Council of Elvira ordered any priest guilty of usury to be degraded and any layman who persisted in usury to be excommunicated. (Although the text of the penalty to laymen is doubted by some.) In the 4th Century, the First Council of Carthage declared taking usury to be reprehensible. The Council of Aix did the same in the 8th Century. The Third Council of the Lateran in the 12th Century condemned usurers as did the Second Council of Lyons in the 13th Century. The Council of Vienna in the 14th Century declared that anyone persisting in teaching that usury was not a sin was to be declared a heretic. Pope Benedict XIV condemned usury in the 18th Century.

    These are just some examples, please see Thomas Storck’s recent article to which I provided a link above for even more. When a teaching of the Church has been consistently held and handed on throughout its history, it is part of the deposit of faith. This means that it is unchangeable and must be accepted by all Catholics. This is the case with the Church’s teaching on ordination, on contraception and abortion, and on many other subjects including usury.

    It is legitimate to ask of modern methods of transactions fall under the proscriptions of the Church’s teachings. That is what was done in regard to the question of modern methods of contraception in the 1960’s. However, the teaching itself cannot change and no “sense of the faith” in any individual or even large group of Catholics can change it. In regard to usury, all I have heard are claims that money and interest are significantly different today than in the past, but I have not heard one actual reason to substantiate such a claim.

  25. In regard to the page to which you linked, CoastRanger, on the development of moral doctrine. An often misunderstood point on the development of doctrine (from the Catholic perspective) is that “development” never means altering past teaching. It can never be that what was once not a sin is now a sin, or that what was once a sin is no longer a sin.

    Development means a deeper understanding which both confirms the existing teaching and expands upon its broader moral implications. For example, one could argue that the commandment forbidding murder has a deeper meaning on the respect for life, but you could never conclude that murder is no longer a sin. I use an extreme example on purpose to illustrate a principle that must be consistently applied to all such development. The “development” can never involve the refutation of existing moral teaching.

  26. I have a friend who is the president and owner of a community bank. People deposit their money in his bank and get paid interest. Other people borrow that money and pay interest. My friend (hopefully) makes money. Is he a mortal sinner?

  27. The state of an individual’s soul is known only to God (and possibly himself).

  28. Okay. Regardless of his personal culpability, are you saying the Church teaches his acts are seriously sinful, intrinsically evil?

  29. Unless you can find positive magisterial teaching that directly refutes the previous teaching that taking interest on a loan of money (that is, interest on the money itself) is not usury, then he is engaging in usury which is an intrinsically evil act.
    I do not address his personal culpability, or that of anyone else, for the ability to conduct business in our current political and economic environment without usury is practically impossible. The current impossibility of it does not mean, however, that we should just blindly accept it and do nothing to change the situation so that a morally acceptable means of finance can become available.

    The terms of my own mortgage are intrinsically evil, as are the terms of my credit cards. I use a credit union, so the dividends I earn on my deposits are my share of profits earned based on my investment rather than interest on the money. I personally would change some of the terms for determining that return so that the distinction from interest on money is more clear.

  30. CoastRanger,
    I will also add the following caveat to the above. Unlike some others, I still consider money to be a completely fungible good. Its use involves its loss. I do understand that others disagree, including some whom I consider to be worthy and very reliable instructors. I admit that I have to give this further thought.

    The argument is that, under Capitalism, money has become an instrumental means of acquiring more money. Even with such an authority as the late Dr. Waters supporting this claim, I still have my doubts and reservations because of the fact that the money returned in loans is not the same money lent. This means that, instead of the return of the same item, a different item of equivalent value is being returned.
    See my article on usury for more details on this.
    http://distributistreview.com/mag/2011/07/the-errors-of-the-economists-usury/

    If, however, the view of money as a non-fungible item is valid in at least some cases, then – in those cases – the charging of interest would not be usury and would therefore not be intrinsically evil. The test then is to prove cases where money is not a fungible item. If these cases can be proven, then charging interest in these cases is acceptable.

    HOWEVER, doing this merely demonstrates cases that do not apply to the Church’s teachings against usury, teachings which cannot be changed because they are part of the deposit of the Faith.

  31. I applaud the effort, but this has a couple of glaring problems:

    1. Capital has opportunity cost. If you can’t “lend” (via whatever structure) at interest, why wouldn’t one prefer more traditional equity investments? This also explains why equity accrues more slowly at the beginning–because more capital is tied up, with its associated opportunity cost.

    2. Of course debt and equity are to some extent inter-convertible, but their different investment profiles (read any prospectus) suggest a number of problems for an equity-only system. How, for instance, would pension plans be able to guarantee cash flows for recipients in down economic years?

    3. Free prepayment and non-recourse are standard terms in the vast majority of U.S. mortgages, so your proposal doesn’t differ by as much as you suggest. Furthermore, with the ability to take out home-equity loans, the possibility to “only pay the minimum” at certain times is already possible by laddering loans or refinancing.

    5. You’re ignoring the glaring problem that in most foreclosures the lender takes a 50% haircut. In your scheme there’s basically no way to recover that, and so lenders would take a loss on average and thus not lend.

  32. Mr. Miller,
    1: I understand that the prevailing view is that money is capital. However, I disagree because it is merely the means of acquiring and exchanging capital. Even if it can legitimately be considered capital, I question the claim that it is not a fungible (or “consumable”) good.
    http://distributistreview.com/mag/2012/01/friends-and-strangers-a-meditation-on-money/
    2: Why should pension plans be tied to the market? I know that they are, but I think that we should only gamble with what we can actually afford to lose.
    3: Free prepayment are certainly not the standard in all mortgages. I never claimed that it is not possible to only pay the minimum. I am simply offering an alternative to what is already generally in use.
    4: You’re ignoring the glaring fact that the money was created by making the loan. Therefore the 50% haircut you claim is being taken by the lender is largely fiction, especially when they get a claim on real property and get to keep all payments already made. In my scheme, the mortgage provider will never walk away empty handed – the difference is that the same is true of the buyer. You say that he will not lend, but history proves that this is wrong. I have already shared this plan with a local mortgage lender who says that this plan is viable and would work.
    Finally: I don’t claim that there are no problems with the terms as I have outlined them. I specifically stated that this is a starting point.

  33. 5. You’re ignoring the glaring problem that in most foreclosures the lender takes a 50% haircut. In your scheme there’s basically no way to recover that, and so lenders would take a loss on average and thus not lend.

    Here is the problem with that. The bank never had the money to begin with. The bank offers a loan of Bank Credit, which it is allowed to offer on a 9:1 ratio based on its deposit at the central bank. That means that it is offering you credit. When you sign a piece of paper that says “I owe the bank x”, the bank then creates an asset based on your promise to repay the principle + interest. That means that credit is deposited somewhere, and say on a 150k mortgage, 150k of bank credit now circulates in the system as “checkbook” money. When the bank seizes the asset, they don’t lose much of anything. It simply shows up on their books as a loss. We are the ones who lose because half of that “checkbook” money ceases to exist. On a small scale this is a minor contraction of the money supply, on a large scale that turns into less money to be earned overall to make payments, both by businesses and homeowners. This is why lending at interest on a fractional reserve, aside from questions of morality, sets up a system of default by design, unless 100% of all interest earned by banks and secondary lenders is recycled back into the economy. This has never been the case, which is why the system fails as a result of the arithmetic. Moreover, let’s look at the question of interest at a social level. If there is only $1 in existence, and you loan me $10 (on a 9:1 ratio as the banks do) on credit at interest, is the interest unpayable? Not necessarily, if the one who loaned me the money gave me chances to earn the $1 which is in existence again, in order that I repay it to him. So I shine his shoes, or build something, produce something, etc, until at last that dollar is paid with interest. Now he loans it again. I do all the work and give him all the goods until at last I have paid the $1, loaned at interest back again. That is the only way interest is payable. This has the social consequent when multiplied exponentially to acquire the scale of the modern economy, that those who produced are socially enslaved to those who push paper, simply because government gives them the right to counterfeit and call it lending, provided they follow the rules of accounting. So I’m not particularly interested in the bank’s “haircut”, they need a much bigger haircut, namely not being allowed to loan on a fractional reserve ratio, but only loan what they have on hand for deposits, and only be allowed to charge a fee in accord with salaries, actual work, etc. In reality the bank does not suffer at all, since it will always be bailed out in the current system.

    Now, JAK ultimately does not avoid charging interest, in many ways by requiring x amount of money to be invested in JAK to qualify for a loan, you are charging interest by another name. In fact, I believe it requires the same amount of money in savings as what is lent, and it generally charges a 2-3% interest rate on money that is lent out. So if you borrow 5,000 euro from JAK you must save 5,000 euro within a certain amount of time. Within the current financial system that means you are paying a high price to stay free from debt. Other economists will of course criticize it on the basis of interest you are not getting, but that is neither here nor there as far as I’m concerned. Rather, we should look at is that an effective model for reform of the banking community? Certainly it can’t be worse than the current system, but it is not a solution. The solution is for governments to force banks to lend at a 1:1 ratio. This limitation put on banks combined with sound monetary policy, like the government nationalizing the money supply and putting debt free money, will restrict the banks to investing in productive capital that benefits the community rather than vulture capital as it does now.

  34. Does anyone know whether the Vatican Bank lends money and receives interest on that money loaned, and conversely, pays interest on the money it borrows? The answers to those questions may shed some light on whether the imposition of interest on money loaned remains a sin,

  35. Does anyone know whether the Vatican Bank lends money and receives interest on that money loaned, and conversely, pays interest on the money it borrows?

    Originally the Vatican bank did not run on a fractional reserve ratio. This changed under Pope Paul VI to a 11:1 ratio, and then it ran up a huge debt. After the death of JPI the Vatican Bank was actually sold to the Rothschilds under JPII because it was insolvent. Since then it has operated on a 15:1 ratio.

    The answers to those questions may shed some light on whether the imposition of interest on money loaned remains a sin,

    Even if it wasn’t run by a foreign entity, that would be irrelevant, just as renaissance Popes’ decision to have mistresses does not change Catholic teaching on celibacy, so also the current Vatican apparatus’ failure to enforce that at a bank it no longer even owns cannot be used as an indicator of church teaching, only the the authentic magisterium which includes the remote rule of faith (the tradition, Church Fathers & medievals when unanimous, the Bible, and past magistrium) and the proximate rule of faith (the current magisterium).

    There is another trick to that, since Paul VI the Vatican Bank claims in its charter that it is not a bank in a proper sense, which seems dubious to me, but nevertheless it is officially called Istituto per le Opere di Religione (institute for the work fo religion).

  36. Thanks for your answer. But,

    1. When the Vatican Bank was not owned by the Rothschilds, did it charge interest on money it lent, based on the outstanding principal of the loan?

    2. Every person sins, and we can’t hold the Church or its teachintgs responsible for the breaking of Commandments by a Pope. But if the Vatican Bank, when owned by the Vatican, publicly charged interest under policies approved by the Curia, we can safely assume that neither the policies, nor the charging of interest (unless unjustly usurious), were sinful.

  37. 1. When the Vatican Bank was not owned by the Rothschilds, did it charge interest on money it lent, based on the outstanding principal of the loan?

    I can’t find any info on that. Let’s say for the sake of argument however they did.

    2. Every person sins, and we can’t hold the Church or its teachintgs responsible for the breaking of Commandments by a Pope. But if the Vatican Bank, when owned by the Vatican, publicly charged interest under policies approved by the Curia, we can safely assume that neither the policies, nor the charging of interest (unless unjustly usurious), were sinful.

    That’s not the case. As I said, let’s just say that under Paul VI they charged interest, when Marcinkus, who had mafia ties, ran the IOR. Let’s even say they did it when Pius XII founded it. If the curia approves something disciplinary this does not change the teaching of the prior magisterium, it means they ignore the teachings of the prior magisterium. There is a difference. A teaching on faith and morals cannot be changed by a discipline even approved by curial officials, any more than Renaissance Popes exempting themselves from clerical celibacy changes the discipline in genere or the teaching of the 6th and 9th commandments.

    Moreover, based on what I’m reading (which is all in Italian), the IOR functions not by curial or even papal approval, even under Paul VI (before sold to a foreign entity), but by its own internal policies. This is how the corruption was able to seep in under Paul VI, JPI and JPII.

    The other problem to consider is that the IOR (at least publicly) offers loans only to dioceses and religious orders. The problem is all the documents are in Italian and I don’t have the time to translate it for you.

  38. David W. Cooney

    Dmiehls, you wrote,
    “if the Vatican Bank, when owned by the Vatican, publicly charged interest under policies approved by the Curia, we can safely assume that neither the policies, nor the charging of interest (unless unjustly usurious), were sinful.”

    I just don’t see how that follows. Are you claiming that every policy of the Vatican, no matter how mundane, is somehow protected from being sinful? I’ve never heard of such a claim being made by the Church, so I would be very interested in seeing where that is taught. The pope has the grace of infallibility in certain limited circumstances, but I’ve never heard that anyone, with the exception of the Blessed Virgin, has been given the grace of impeccability.

  39. But why, faced with a world economy heavily dependent on charging interest for borrowed money, would the modern Popes fail to speak out against all interest, not just usurious interest, if the charging of any interest was a sin? I don’t believe that they’ve even said that the prolific charging of non-usurious interest is a “necessary evil.” Haven’t the modern Popes supported low interest loans to developing countries because of the perceived good caused by borrowed money ?

  40. My reading of the Catechism is that charging usurious interest is sinful, because it is a form of stealing. It’s especially egregious if the borrower is poor. The Catechism, or any recent Papal teaching on social justice, could have just as easily declared all interest sinful, not just usurious interest. Either the modern Popes have not believed that all interest is sinful, or they’ve been too afraid to speak out against it. I find it hard to believe that JPII or Benedict XVI would be too afraid to speak out against anything that is both sinful and yet so prolific in the modern world.

  41. It’s especially egregious if the borrower is poor. The Catechism, or any recent Papal teaching on social justice, could have just as easily declared all interest sinful, not just usurious interest.

    I think I see where our disconnect is, namely in the terms we’re using.

    In the tradition “interest” per se is not necessarily sinful, but usury. There are many kinds of interest, and some may well be legitimate. For example if a bank invested in productive capital, the money is a form of capital and in justice they can charge interest, in as much as it is a profit on their end of the investment. The work couldn’t be done without them.
    What the Church has always and everywhere condemned as Usury is charging money from money, be cause it violates common law, one cannot give better title to something than one has. So not all forms of interest are immoral, but all forms of usury are.

    I find it hard to believe that JPII or Benedict XVI would be too afraid to speak out against anything that is both sinful and yet so prolific in the modern world.

    I don’t. Maybe that’s just me. Maybe they erroneously believe its okay because everyone is doing it. Doesn’t change the universal tradition, which was considered by the Salamancan Scholastics to be de fide non definita.

    See also Thomas Storck’s essay on this subject, it might help with respect to understanding both the universality of the tradition and the logic of it: http://distributistreview.com/mag/2012/01/is-usury-still-a-sin/

  42. David,

    What are your thoughts on my original remarks on JAK?

  43. I found this article by John Salza very helpful in pulling together the Church’s teaching on interest and usury, based on Jesus’s own words in Matthew 25:27 and Luke 19:23.

    http://www.scripturecatholic.com/usury.html

  44. I wonder whether at the end it is a matter of the name. The basic fact is that capital is a scarse resource and has to be allocated efficiently, and the most efficient way is to assign a price to it. You may call it usury, interest, or fee. At the end the only relevant thing is how much is it.

  45. Agreed. I think your post is the gist of what the Catechism now teaches about interest and usury. Interest is unjust and usurious if the lender is extracting too high a price for the loan, whether the price is called interest, a loan fee, or a share of the borrower’s equity or earnings. Lending to consumers in the United States is so highly regulated that one would be hard-pressed to call a loan officer a sinner when he or she is acting in good faith and following all laws and regulations when making a loan.

  46. Usury is not lending at high interest, but lending at interest when there shouldn’t be any interest, like unproductive loans.

  47. David W. Cooney

    Ryan,
    Your remarks on JAK are spot on. The JAK method would have to be modified to work with Distributism to only include interest (percentage of profits) on productive loans. In regard to the other issues (having to have deposits matching the amount you want to borrow), that would be addressed by another method, such as what I have proposed.

  48. David W. Cooney

    Dmiehls,
    You ask why the popes and bishops have failed to address the issue if it is so prevalent. I honestly don’t know, but their failure to do so doesn’t mean that there isn’t a conflict with Catholic teaching. Otherwise, we would have to conclude that any instance where Church leaders failed (for any reason) to address an issue indicates a change of teaching.

    Sorry, but Church teaching isn’t determined by what the magisterium does *not* say, but by what it does. The magisterium has spoken on this topic repeatedly over 20 centuries. As I indicated before, it is only if there is some use of money in which it is not a fungible (or “consumable”) good. I do understand that some people see it that way, possibly even some in the Church’s hierarchy, but it seems to me that the arguments in favor of that view are no different the arguments than were firmly rejected by the Church in the 13th Century.

    Charging an excessive amount can certainly be considered usurious, but the Church has always (including to this very day) taught that charging interest for any fungible good is usury. Period.

  49. David W. Cooney

    Dmiehls,
    I read the article to which you linked, and I think you are forgetting that we admit of legitimate ways of charging interest – the very same ways which the Church has always admitted when condemning usury. Therefore, the author’s conclusion that all forms of interest have been approved by Jesus is erroneous and specifically contradicts the Church’s teaching for twenty centuries.

  50. I would put the blame mainly on those who borrow for consumption.