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The Operation of the House Purchase Department
 
"How it all Worked"
 
by Michael Bourke
 
 
House Purchase
Department
 

It has been suggested to me that it might be a good idea to commit to writing about the principles that guided the work of the Mortgage Department (originally known as the House Purchase Department) whilst I am reasonably sound in mind and body.  This I am happy to do but confess to misgivings as to whether this will be perceived as a textbook and therefore, by inference, to be boring and outdated.  I promise the reader that I will try to avoid that trap and leave it to posterity to decide if I have succeeded or failed.

 

The Department’s official name was the House Purchase Department; in this article I have used the term that the Staff used – ‘Mortgage Department’.  The slight problem we encountered was that ‘House Purchase Department’ was misinterpreted by some customers as a Property Agency and it was not unusual to field telephone enquiries about what houses we had available for sale in specific areas of Birmingham.

 

This was never a real problem as it very often allowed us to explain exactly what the Department did and then offer basic advice to the customer.  It was not unusual to find yourself interviewing bank customers who had started by telephoning in one of these enquiries and ended up having a Bank mortgage on a property they had chosen.  Everything passed off with smiles and the important thing was that a satisfied customer left the Department.

 

I have already written an article on what it was like working in the Department and this reminiscence should be read in conjunction with that one.  It is always worth remembering that the Mortgage Department was created and operated just as any branch office or Head Office department did; to serve the customers of the Bank and thereby the citizens of the City of Birmingham.  It was, by its very nature, a specialised Department therefore any enquiry for mortgage facilities at branch level was always directed to the Broad Street Head Office where the Mortgage Department was based.  Once there, customers would be interviewed by trained personnel to determine their exact financial requirements and to confirm that they had the income to service the mortgage.  Once this hurdle had been overcome that application would be subject to final approval by the Head of the Department a process that, if the interviewer had done their job properly, took but a few minutes and then the interviewer went back to communicate the good news to the customers.

 

It was then the real work began.  An application form had to be completed and instructions taken regarding the valuing of the property by the Bank’s valuer.  The valuation process for an existing house would normally take no more than seven to ten days, provided that access to the property could be assured.  As I wrote in my earlier article, in the 1960s valuations would cost £5. Sometimes the customer would specifically ask for a copy of the valuation (not supplied by the Bank); if so, then the valuation cost would increase to £10-£15 dependent on the size of the property.  The reason being that the Bank’s principal requirement was for a professional opinion of what the property was worth in the event of a forced sale.  The report received was on a single page of foolscap, issued by the Bank to the Valuer, covering basic information.  The report issued to the customer by the valuer, if requested, could run to three or four pages and covered matters such as: the decorative state, any remediation requirements to either the structure or out-buildings, the state of any driveway, availability of public transport, etc.  This report would close by giving two figures regarding value; the first being the mortgage valuation (the figure the Bank needed) and the second being the market value as required by our customer.  If the remediation requirements were serious then, if the customer(s) were determined to proceed, the Bank would ask for a legal undertaking from the customer(s) to carry out the necessary works within twelve months of the completion of purchase.   On completion of these preliminaries an offer would be sent to the applicants(s) together with a form of acceptance that when signed and returned to the Bank, matters would proceed to the next stage.

 

If the property was a new build and stage payments were required by the customer then a valuation would be undertaken on the basis of an initial site visit by the Bank’s valuer plus copies of the plans of the building.  For two-storey properties there would be a further four site inspections: footings i.e., groundworks, wall-plate level, roofing and finally, complete and ready for occupation.  Single-storey buildings followed the same pattern with the exception that the “wall-plate” inspection was dispensed with.

 

The Bank's standard stage payment system for two-storey progressive mortgages was established by the Bank Committee in May 1923. The Committee's Minute on the subject was as follows: 

 

That the advances to be made be granted at definite stages of the building progress and consist of a percentage of the whole sum it is proposed to advance in connection with each house. The following are the stages at which advances should be made and the percentages of the whole sum to be lent on mortgage at these stages:

 

 

% of

total

1. When brickwork is carried up to first floor joist level

    and ground and first floor joists are fixed

 

20

2. When houses are completely roofed in, eaves, gutters and down spouts fixed

25

3. When floors are laid, partitions built and plasterers work completed

20

4. When all internal fittings are fixed, drains are completed, painting and glazing

    completed, fencing and gates fixed, and houses passed for occupation

 

35

TOTAL

100

 

In 1939, a system involving five stage payments was quoted in Committee Minutes.  However, in practice in the 1960s, only four stage payments were made, the Bank paying to the customer, through the customers’ solicitors, a percentage of the mortgage on the basis of an initial payment for ‘footings’ or what is properly entitled ‘ground works’.  Then followed ‘wall plate’ (i.e. first floor joists);  followed by ‘roof, eaves gutters and downspouts are fixed’ and the fourth stage being plastering, floors laid, and partitions built, internal fittings fixed and drains connected. In practice, the percentages of the whole loan paid in the stage payments was flexible, the Bank generally meeting the requirements of the builder.

 

The building company was probably working off bank finance and a BMB stage payment scheme would carry the same weight as a Bank of England promissory note to another bank in those days.  Interest was  charged on the advanced monies and was paid by the customer. No payment of capital was called for until the structure was complete and ready for occupation.  At this point the total advance required was converted into a mortgage and the usual procedure of repayment began one month later.

 

The registration of land was not made compulsory until 1990.  It was then required by statute that within two months of completion of purchase the new owners had to register their title. The effect of this was to ensure the Land Registry provided a guarantee of ownership certainty to the owner and subsequent owners.  Any subsequent defect of title discovered would, in theory, result in compensation being paid by the State to the disenfranchised owners.  Registered land was placed into four categories, which after 1990 became legally binding:

 

ABSOLUTE – being freehold land without any defect in title.  This is the most desirable status of land to own.

 

GOOD LEASEHOLD – being land held on a lease from the freeholder.  Leases are generally awarded for periods of 99-125 years and rent must be paid to the freeholder in accordance with the lease.  The other important issue is that the property has be insured with an insurance company chosen by the freeholder.  This latter clause is a puzzle because the land does not go away; if the house is demolished the land still exists. Avarice is, I am afraid, the reason for the clause in the lease.  The freeholder will receive a regular income from the denoted insurance company as a reward for having this clause in the lease. From the BMB’s point of view, as a mortgage provider, once a lease had less than 50 years left then it was problematical.  This was simply because with a 20-year mortgage (or latterly 25 and 30-year mortgages) the house would be greatly reduced in value as the lease term is compressed, thereby putting pressure on the Bank’s security.  This was often resolved by encouraging the would-be owners to purchase the freehold, with the Bank providing all or part of the cost by means of an additional charge on the property.

 

The issue of leasehold property is, as I write in 2021, becoming a contentious issue caused by, in my opinion, unscrupulous owners of land charging excessive amounts of ground rent and imposing other onerous conditions.  It is my belief that reform of leasehold property should be a priority for any government professing to have the welfare of its citizens at heart.  To be fair, governments of very differing political persuasions have attempted to rectify this vexed issue, going back to the Harold Wilson-led government in the 1970s to the present day.  It must be remembered that the leasehold conundrum has been with us since Norman times. The United Kingdom is the only democratic country in the world that used this antiquated system whereby a house owner can own the building but not the land upon which it was built. There now seems to be a cross-party consensus that this must end and all single entity homes should be freehold.  There is only one valid reason for the leasehold entity to exist and that is for blocks of flats.  The solution to this specific issue is that supplied by the Law Commission in their report to Parliament: the extension of the new tenure of land possession – Commonhold.  This was approved by Parliament in the Commonhold and Leasehold Reform Act, 2002. The Act provides that ownership of the land should be vested in the owners of the flats themselves. They can then grant themselves leases of 990 years at a peppercorn rent.  Unfortunately, the Act is not being enforced and Parliament is being encouraged to intercede and bring the concept to a close once and for all.  I have been involved with property transactions now for more than fifty years both as a banker and a company director and it is my considered opinion that leasehold property is an anachronism in this modern world.  Whatever use it may have been is long past (I doubt that it could ever be proven as useful to the owner(s) of property) and there are too many instances of it being used to fleece an unsuspecting public.  There are presently houses that are effectively unsaleable because of the ruinous ground rents levied by people and companies that are only marginally on the right side of usury.  As an example of how it should have been administered, the Church of England used to issue leases (and perhaps still does?) that were for 999 years and were therefore considered by a mortgage provider as effectively freehold.  The only issue anyone could raise is that the lease insisted that any insurance had to be with the Ecclesiastical Insurance Office until it is realised that the EIO is also one of the best for customer satisfaction and, from a banker’s perspective, a pleasure to deal with.  In sharp contrast, are the individuals and companies that demand leases that have ten-year reviews of ground rent (upwards only, of course) with increases varying between 50-100% of the previous figure.  Here endeth this lesson!

 

POSSESSORY TITLE is often referred to in the popular press as being “squatter's rights” and is, to quote the Land Registry, ‘the term applied to the legal title of someone who is in adverse possession of a property’.  It was not unusual when dealing with some applications from customers to be asked questions about the property they were considering buying. The question of vacant land was raised regularly and was usually the result of land that for one reason or another had not being utilised by the builder when the houses were being built.  It was very often land-locked at the rear of the properties.  The advice we, as BMB staff, would give is “talk to your solicitor”.  This was sound advice because the legal advice to the customer was very often - fence in the land and apply for ‘Possessory Title’. This would inevitably be granted and if there were no claims after 12-years then Title Absolute could be applied for and granted.  The Bank would always declare that our mortgage was secured on the house and original plot; however, we would hold the new title with our charge certificate (free of charge) thereby ensuring that all the title deeds were in one place.  Again, good customer service that was greatly appreciated. 

 

QUALIFIED TITLE is the least desirable title to have and is given where the title is defective in some material particular.  It was quite rare to run across one of these instances but one that springs to mind concerns a strange set of circumstances.  A BMB customer was interested in purchasing a specific property and had completed all the preliminary stages: interview, valuation, offer and acceptance.  When the purchaser’s solicitor attempted to contact the seller’s solicitor to complete the sale, he was told by the seller that this was unnecessary!  Further questioning elicited the information that when the seller acquired possession it was achieved by him paying a sum in cash to the then seller and, following that, continuing to pay that person’s mortgage.  The mortgage had subsequently been paid off and, as far as the current occupier was concerned, he believed that he was the true owner.  Following the receipt of legal advice, our customer withdrew his offer as the seller only had qualified title.  We never did find out how the matter was concluded but at least our customer was protected. 

 

Prior to 1990 the unregistered property procedure was, as described in my earlier paragraphs, therefore, let us return to that time.  Once the mortgage offer had been accepted the legal process of purchasing the property began.  To a large extent this did not involve the BMB to any large extent because the work was undertaken by the City of Birmingham's legal team.  The appropriate instructions were given to the City, together with any covenants required by BMB, plus the blank mortgage deed ready for engrossment.  Once the initial legal paperwork had been concluded, the City would requisition a bank draft for the agreed sum and the process would be completed usually within seven days.  The City solicitors then advised BMB that there was now a de facto mortgage in place and the exact date the purchase was completed.

 

The mortgage account would then be set up by issuing instructions to the branch nominated by the customer to administer the account, to activate an enclosed standing order to make the necessary payments from the customers' bank account.  With both  Endowment and Reducing Mortgages, the first period of interest would be calculated by the Department but thereafter the calculations would be carried out by the branch.  The Bank's financial year ran from 1st April to 31st March and mortgages followed this pattern.  Therefore, for equated mortgages the Department would calculate interest to the following 31st March and supplied this information to the branch.  For reducing mortgages, all we had to do was calculate the interest up to the next monthly due date and thereafter the branch took over the management of the mortgage account.  Branches would report instances of non-payment to the Mortgage Department who were responsible for any recovery action.

 

Once the mortgage was completed the next stage of the process was receipt of the house deeds and the signed, engrossed mortgage deed. Although the deeds had been processed by a solicitor it was incumbent on the Department to ensure, before the deeds were filed for storage, that all the deeds were present and as stated by the solicitor and, importantly, that the Bank's security was intact.  For registered titles this was straight forward; simply a matter of examining the charge certificate and making the appropriate notes on the file.  For unregistered properties the process was somewhat more difficult.  The first step was to examine the Epitome of Title:  the bundle of documents that had been assembled together, hopefully in date order, that comprised what we used to call 'a good root of title'.  The first document we were looking for was the Conveyance (or if the property was leasehold the Assignment).  Our interest in this document was specifically for two reasons: the first being the 'Habendum Clause', so called after the Latin phrasehabendum et tenendum - translated as 'to have and to hold' a phrase that may be familiar to any married reader.  The Habendum Clause describes the property being sold and particularly the tenure.  Our interest was to confirm either that it was in fee simple (i.e. freehold) or the term of years (i.e. leasehold).  All we were interested in was (1) did the tenure match the description provided  by our customer(s) and (2) did it match the information provided to the valuer?

 

The second reason for examining the Conveyance (or Assignment) was the 'Parcels Clause'; so called because legal drafting of the conveyance/assignment invariably commenced this clause with the words 'all that parcel of land'.  What followed was a written description of the property being conveyed.  A plan often accompanied the written description but it was only of use for identification purposes.  Case law had upheld the view that only the written text had legal significance.  We compared the written description with our file to ensure that it matched what our customer(s) had told us and what the Bank's valuer had been instructed to examine.

 

We also examined the deeds for any Encumbrances.  The definition we used for 'Encumbrances' was anything that restricted an owner's use of the property.  For example, were there any mortgages outstanding (in legal parlance: liens).  I still have my handwritten notes from those far off days and find that I noted down one of John King's pearls of wisdom: 'any lien is an encumbrance but not all encumbrances are liens'.  What he meant was that a lien was a monetary obligation and, therefore, an encumbrance; whereas a shared driveway was an encumbrance but not a monetary commitment, therefore not a lien.

 

We also examined the deeds for Restrictive Covenants.  These are made between the purchaser and vendor and, by implication, restrict or burden the use of the property. For example a clause such as 'to use the property as a dwelling house for one family only' or 'restricting the use of placards on the exterior of the property to those concerning its sale'.  We would note these restrictions but providing that they did not impact on its value we would take no action.

 

We would also note any Easements.  These are private rights that impact on an owner's rights without the applicant actually owning the property.  There are four main categories of easement:  rights of way; rights of light and air; rights of support and, importantly in Birmingham, rights relating to artificial waterways.

 

Any Personal Covenants we tended to ignore because they did not impact on the Bank's security. Personal covenants are made between the current owner of the property and, usually, the owner(s) of adjoining properties and can cover a range of matters.  A typical example would be agreeing to erect a dog-proof fence. Personal Covenants are only enforceable against the persons(s) making the Covenant and any new owner can either make a new Covenant or not as they see fit.  The Bank not being the owner of the property, just holding a lien against it, did not enter into this contentious arena.

 

The only remaining work to be completed was the insurance of the newly mortgaged property.  The Bank had a very close working arrangement with the Royal Insurance Co. Ltd (since 1996 known as Royal and Sun Alliance Insurance Group plc) and for many years the BMB was its largest single customer.  All freehold properties that were the subject of a BMB mortgage were required to be insured with the "Royal".  All leasehold properties were insured in accordance with the terms of the lease.  There are many and varied views about the arrangement but all I can say is it worked well for BMB and the customer.  The Bank paid the insurance premium in the first instance and recovered the cost from the customer later.  Thus the Bank and our customers were always covered against any accidental damage to the property.  It suited the Royal because they had no problems whatsoever with unpaid premiums and, because of the Bank's interest, any genuine claims were always dealt with expeditiously.  Leasehold properties, with myriad insurance companies involved, were much more problematical.  Although premiums were paid punctually by the Bank, any claims were not dealt with as efficiently as the Royal due to the fact that the Bank's 'purchasing power' with the Royal provided for a small but extremely effective team to deal exclusively with the Bank and quickly resolve any problems.  As far as our customers were concerned they received a first-class service and many of them purchased other Royal products that only served to enhance the working relationship between the two institutions.  With the advantage of hindsight, I can appreciate the argument about customer choice; however, the Bank's relationship with the Royal worked extremely well for our customers thereby fulfilling our principal criteria.

 

In conclusion, I was extremely grateful to be chosen to work in and eventually manage BMB's mortgage department.  I had the privilege of working with dedicated people who were committed to delivering a service to our customers that was second to none in providing that elusive end-product - a home! 

John King: Credit Services & Mortgage Manager - 1977
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