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The Trials of a Mortgage Applicant

Lucky was the depositor who could obtain a BMB mortgage, for not only were the interest terms generous compared with those of most building societies, but there were two options for making repayments. One was the Equated Mortgage, by which the mortgagor would be required to repay a fixed monthly sum comprising at first mainly interest, with the interest/capital ratio gradually shifting throughout the mortgage term until in the latter years the same fixed payment consisted almost entirely of capital. The second option was the Reducing Mortgage by which the mortgagor would discharge the indebtedness by equal monthly payments to which were added interest based upon the amount borrowed, this interest being calculated monthly upon the ever-reducing, outstanding balance. As the outstanding balance reduced, so accordingly did the interest. Of the two choices, the Equated method was the most expensive over a whole term, but suited mainly the borrower who could initially afford only limited repayments – at the cost, of course, of never seeing the monthly repayments reduce.

 

With all these benefits on offer, and private house-building booming following six years of war, demand for BMB mortgages during the 1950/60s – the period of the typical application – was high, as described by another member of the staff (Eric Bignell – see MEMORY 019) working in the Department at this time. There were also, however, numerous pitfalls which the prospective mortgagor could encounter. In following his or her progress from the time of arriving at the House Purchase Department’s rather imposing lobby within the even more imposing Broad Street Head Office, we can learn a little of how an application was handled.

 

As with the depositors at branches, applicants for mortgages were of all ages and occupations. Apart from making random enquiries, the common factor was that they were anxious to borrow the Bank’s money against the security of a home that they either already owned or, more usually, against a property they wished to purchase. Their first, undramatic step was to press the doorbell. This was mounted at the outer door of the office of the House Purchase Department and pressing it would immediately summon a member of staff to ascertain the reason for the visit and if the visit was to enquire about the possibilities of being granted a mortgage, the applicant(s) would be ushered into one of the three interview rooms round the perimeter of the lobby. The rooms had an air of solid security; their furnishings were typical of the whole building and both interviewer and interviewee would be discussing their business in an atmosphere more akin to a board-meeting than an inquisition. The interviewer (at that time almost invariably male, often on the verge of appointment to a junior management role) knew full well that the matter to be discussed might be of life-changing importance and that it was more than likely that the applicant would be totally ignorant of at least some of the commitment they were contemplating.

 

The discussion naturally followed a formula, but this could change as information was gradually extracted. Was the applicant a depositor? This was essential. Importantly, there would be questions as to the applicant’s BMB savings record; was it purely nominal, with principal savings being with a building society, perhaps, in which case the applicant’s prospects of success were already poor; or substantially with the Bank? Where was the property, as there were restrictions upon where the Bank could grant mortgages? If (unusually) they already owned the property, possession must be ‘unencumbered’ or already subject to an existing Bank mortgage, as the Bank was never prepared to become a legal ‘second mortgagee’, though to an existing Bank mortgagor it may be prepared to  grant a sum by way of ‘Further Charge’ for alterations, extensions, etc. At any one of these points, the application could fail, but hopefully for all parties the interview could continue. What was the price of the property that they had in mind and what proportion of this price would they be expecting to borrow: the maximum amount was 80% of the Bank’s valuation of the property. Was any of the purchase price being supplied by parents, etc., or would the latter be prepared to act as guarantors if necessary? Was it a new or existing property? If new, would the builder be requiring ‘stage payments’, in which case the mortgage would be limited to 75%? What employment did they have and what was their income? Twice annual income was the preferred maximum granted by way of mortgage, though 2½ times was permitted if the employment was especially sound. All this questioning took place with a minimum of formality and in a friendly fashion, the conversation often leading to quite personal issues: a pig farmer whose savings fluctuated wildly when he was in the process of replenishing his ‘stock’ and was genuinely indignant to discover that he might have been expected to maintain a permanently larger balance; an applicant who had no need for a large mortgage but was unwilling to use ‘blood money’ compensation from a family accident. To the observer, these might seem obstacles easily overcome, but in fact they demanded a large amount of empathy, even sympathy, yet could not be allowed to influence unduly what was largely a commercial decision.

 

Having gathered all these relevant facts and decided that the application had merit, the interviewer could not make any decision nor give any official opinions as to the potential success of the application. The next task for the interviewer was to prepare a report for consideration by the Superintendent of the House Purchase Department, who in this particular era was a certain Mr S A Guy, a quiet, thoughtful man whose rise to this important post was the result of an impeccable career (he later became a much-admired General Manager). His judgement would take into account not only the merits of the application, but also the unfortunate truth – which would have been explained to the applicant during the interview – that the total sums available for mortgages were a proportion of total Bank deposits and were thus effectively ‘rationed’. Some applications were therefore bound to fail in such a competitive market. With some uncommon exceptions, where an application was so meritorious that it could not possibly be allowed to fail, in which case the applicant would complete a formal application immediately, the ‘normal’ prospective borrower would be requested to telephone later for a verdict. A border-line or controversial case might even be put before the Bank Committee for a decision.

 

Once a favourable decision had been given, the business of the formal application could begin. This was the start of firm commitment from both sides. The Bank was agreeing to make an advance by way of mortgage, provided that the valuation of the property was adequate to meet the requirements of both the Bank and the depositor, and that the legal title to the property was proved to be in order. The first of these functions would be carried out by a valuer designated by the Bank; the second by members of the Birmingham Town Clerk’s Department, who were the Bank’s solicitors. From the mortgage applicant, completion of the deceptively simple Form MB44 was the only requirement for the time being, but it contained vital undertakings, namely that the applicant would pay any costs incurred in connection with the application, whether proceeded with or not. It also acknowledged facts regarding the legal status of the property, probably already noted in the initial interview, but now being declared legally, e.g. whether it was leasehold or freehold; the builder’s name (if a new house); the chosen term of repayment of the loan and the solicitors who would be acting on behalf of the purchaser. This latter question was often a cause of concern to the applicant, for many (especially younger) depositors of the Bank had never in their whole lives crossed the threshold of a firm of solicitors. Professional ethics prevented Bank staff from recommending a specific firm, though they were able to produce a list of City centre and suburban solicitors from which to choose. If pressed further and the applicant was entirely bewildered with the task, it seemed sensible to produce a shorter list of solicitors who were highly familiar with Bank mortgages and which was amended from time to time, so that no one solicitor was named exclusively. To send an applicant on an uninformed trek around the City to find a solicitor was not all that helpful and if used in extremis, such assistance at least put the applicant on the right track.

 

The bank’s valuation was often a bone of contention. Forty years hence, borrowers would be able to obtain from some sources even 100% of the house cost, but at this period the Bank’s own policy was very conservative. Not only was the mortgage offer limited to 80% of the valuation made by the appointed valuer, but this valuation was often somewhat less than the actual price of the property, even if newly built. For instance, a new estate in one suburb used ultra-modern materials in the building process and the Bank’s valuer guardedly suggested that mortgages should be limited to 75%, as ‘untried materials’ had been used. Few prospective Bank mortgagors were going to be impressed by that. ‘Progressive mortgages’ on new properties, by which the loan was paid direct to the builder in stages, each stage being separately inspected, were subjected to tight controls, the maximum mortgage being 75% of the valuation. Builders and purchasers were sometimes enraged by these policies, yet the Bank would not deviate from it and even its own staff suffered similarly. There was a determination not to put the funds of the Bank at risk and reputedly it had a proud record of having had only one mortgage repossession since the Department was formed. Unfortunately this led to some depositors saying that “to get a mortgage from the Municipal Bank, you have to prove that you don’t need one!”, a rather unfair criticism in the light of the much later international results of over-zealous lending by mortgagees in the years immediately prior to 2008. So …. The criteria for obtaining Bank mortgages stayed rigidly in place and demand still remained higher than could be met.

 

Having surmounted all these difficulties, an official offer was then posted to the applicant(s), together with a form of acceptance. On occasions, certain non-legal conditions were contained in the offer, these usually being matters arising from the valuer’s report, such as “property to be repainted externally within six months”; “manholes require reflaunching”, etc. and were unlikely to be followed up; the applicant was not made aware of this and was trusted to comply. When the offer was accepted, the Town Clerk’s department was briefly instructed to proceed and was supplied with the name of the purchaser’s solicitors with whom they would henceforward be dealing.

 

The bank’s role in the matter was now temporarily complete, for until the legal title to the property had been satisfactorily investigated, there would be no call for the mortgage sum to be supplied. At the relevant point, however, the Town Clerk’s representative, the vendor’s (or builder’s) solicitors, and the purchaser’s solicitors would arrange the ‘completion’ of purchase and the Bank’s cheque was handed over. Finally, the deeds to the property were passed to the Bank for safe custody until the mortgage was redeemed no later than the twenty or twenty-five years allowed, though frequently total repayment was made, and permitted without penalty, before the term ended.

 

All mortgage properties had to be adequately insured for their declared value and the insurance companies submitted premium demands direct to the Bank; in turn these were debited to the mortgagor’s account. Sometimes the house deeds stipulated that a particular insurance company must be used. Although the Bank could, if it was thought necessary, demand that its own choice of company be used instead, or even in addition, this right was rarely enforced and the Bank generally complied with the insurance clause in the deeds. Conflict over such a matter was undesirable, as the Bank’s main concern was the protection of the mortgaged asset.

 

The necessary internal account records were instigated and the branch at which repayments would be made opened up the appropriate ledger record, appropriate, that is, to which type of repayment method had been chosen. Unless events proved otherwise, the branch would now be the only section of the bank dealing with the usually well-content depositor(s) who would have a House Purchase passbook in which was entered every transaction, including annual property insurance. The transaction could be made in person at the branch counter or by a free standing order from a savings account.

 

In reflecting upon the generosity of the Bank’s mortgage terms, so sought after by so many of Birmingham’s citizens, it is worthy of mention that in the years immediately following World War 2, mortgage interest rates began to fall, leaving metaphorically stranded those people who, pre-War, had obtained mortgages at higher rates. In 1947, for these earlier mortgages (and some new mortgages) the interest, for purely technical reasons, continued to be calculated and charged at the legitimate higher rates, but with the added benefit of an ex gratia rebate of ½% of the amount ‘overpaid’ being credited annually to the savings account of the depositor/mortgagor. This arrangement lasted for several years until the number of mortgages affected markedly declined and general interest rates began to rise again. This article did start with the words: “Lucky was the depositor who could obtain a BMB mortgage”, did it not?

 

 

 

 

The above article was written by Norman Worwood who had extensive experience in both the branch network and at Head Office (in House Purchase Department and as Superintendent of Branches). He retired in 1984, at which time he was Assistant General Manager - Operations with TSB of Birmingham & The Midlands.

 

 
Memory 019
 
 
MB 44