The Builder's Pool and Mortgage Protection Policies.
Bringing down the weekly cost of a mortgage to a potential working-class buyer to significantly under a pound a week, including rates, was the target of the societies. In general, building societies worked on the basis that the weekly repayments should be no more than 25 per cent of the weekly earnings. However, there were apparent differences between some societies, and there were those who would be willing to accept overtime as part of the normal income and even include part of a wife's earnings when calculating the maximum mortgage allowable. Applying for a mortgage was easy. The application forms were often completed by the society's local representatives, who were often also the selling agents for the houses. They relied upon the production of the wage packet as evidence of employment except where wage rates were known as, for example, with the police (57). The aim was to make the application as simple as possible and keep 'repayments as light as rent' (58).
There were no statutory limitations on the periods of the loans-just caution on the part of the building societies (59). Therefore one obvious way of reducing the weekly payment was to extend the period of the mortgage. Over a fifteen-year period, the weekly cost of repaying £500 at 5 per cent. is 18s 10p, over 20 years 15s 5p, 25 years 13s 7p and 30 years 12s 6p. The major impact on the weekly payment comes when the term is increased from 15 years to 25 years. Assuming a weekly mortgage payment of 13s 7p and rates of 2/6p this represented the equivalent of 25 per cent of a wage of $3.4s per week. Such a wage level was well within the reach of many of the members of the working-classes during the 1930s especially those who lived around areas were the new industries were situated. A weekly wage of £3. 4s is close to the national average as used by Swenarton and Taylor in their analysis, and was lower than the wages earned by semi-skilled or skilled workers who took part in the New Survey of London (60). Other wage schedules which were examined from the L.C.C., Nestlés,[see over page] Lloyds and Barclays Banks all show that wage levels in inner and outer London areas were generally in excess of this figure. The income schedule from the Borough of Surbiton, indicates that even on wage levels below £3.4s some workers were buying houses.
As a result of competition and the pressures from their agents more and more societies extended the terms on offer (61). Policemen were offered 100 per cent mortgages covering the entire purchase price of the property by several societies, loans to them were relatively safe because all police officers had to show their rent books or mortgage payment books to the senior officers every year to prove they were free from arrears (62). The competition between the societies during the 1930s resulted in twenty-five and thirty-year mortgages becoming commonplace.
Other ways to ease payments were devised. The "builder's pool" was a cash deposit made by the developer against which the society would lend an additional amount so that the purchaser could buy a house from the developer. The society would progressively release money from the pool as the advances were reduced by the borrowers repayments. The threashold for the release of the builders deposit corresponded to two-thirds or so of the valuation of the house. Essentially, by accepting security from a third party, the builder, against which the societies would lend money, the societies were able to lend the purchaser 75 per cent of the purchase price of the property against the security of a mortgage on the house, and a further 20 per cent or more against guarantees or cash put up by the builder/developer of the house. The purchaser was liable to repay the whole amount by way of a mortgage. In effect the purchaser obtained almost a 100 per cent mortgage. As the building boom developed, the cash deposit in the builders pool was often replaced by a guarantee from the builder or a charge over assets. The creation of what became known as the builder's pool was the most important feature which enabled the societies to avoid the necessity of the purchaser paying a large deposit representing, possibly, 10 per cent of the purchase price and thus enabling more members of the lower-paid or working classes to buy their own homes.
Once the builders pool became commonplace it developed so that the purchaser could buy a house with the minimum of a deposit. The builder would be happy to lend or give £15 to the buyer of one of his houses, as by doing so it enabled him to sell the house, release capital and make a profit. The society would advance against the security of the house and the builder's pool; because the society was covered against losses there was less onus to tie the advances to the purchase price of the house and advances were made against valuations of the property. By the middle of the decade the arrangements between some of the developers and the certain societies were very close and the use of the builder's pool was widespread. The builders pool also brought many societies into early involvement with the developer when the building of an estate was proposed as the terms of the pool agreements were usually negotiated before the process of development commenced rather than after the houses were completed. It was not uncommon for pooling agreement to have provisions whereby the builder was obliged to repurchase the house on foreclosure.
The builders pool did present financial and ethical problems for the societies which, during the boom years, they largely ignored. The public exposure of the operation and application of the builder's pool came as a result of a court action brought by Mrs Elsie Boarders against her building society, in respect of defects in the house on which the society had made an advance. Mrs Boarders claimed the society had misrepresented the quality of the building. It was only when the matter reached the courts that the fact was revealed that the society had relied partly on collateral security when they made the loan. In the Bradford Third Equitable Benefit Society v Boarders case in 1938, Morrells (Builders) Ltd were shown to have advertised themselves 'as the only builders in Great Britain who can offer by special arrangement with a leading building society a 95 per cent mortgage over a period of 24 years at 5 per cent interest' (63). The operation of the builder's pool made this claim possible. The application of the builder's pool became a controversial part of the case and arguments were made by the defence for the invalidity of the collateral security and therefore the invalidity of the mortgage itself. If the judgement had gone against the society it would have seriously affected the future of the building society movement in the United Kingdom, as a large proportion of the loans granted in the 1930s would have been invalid. The High Court and later The House of Lords ruled against Mrs Boarders and found in favour of the building society but the case indirectly led to the passing of the Building Societies Act of 1939 (64).
In the debate of the second reading of the Building Societies Bill, Arthur Henderson, the Labour member for Carlisle, later Lord Henderson of Ardwick, said that in this case 'the judge held that the acceptance of collateral security was within the powers of building societies...that some building societies... have been criticised for making these arrangements with house builders on an excessive scale and on far too liberal a basis (65)'. When it was passed, the Building Societies Act of 1939 would severely restrict the ability of the societies to lend via collateral security but by that time the pool system had been very successful, and World War II had started in any case, thereby bringing the house-building programme to an end.
The builder's pool system was the most important factor in making it possible for the societies to lend more and especially to the lower paid. Without the operation of the pool the numbers of loans made would have been considerably reduced, and the societies would not have been willing to lend to any purchaser unable to raise a substantial deposit. The builder's pool was especially important in assisting the lower paid to acquire a house. Even though it was realised by the majority of societies and the developers of houses that the problem of reducing the weekly payment could be solved by effectively combining the lower rates of interest currently available with an extension to the loan period, the main difficulty facing working-class purchasers was the size of the deposit required. Middle-class purchasers may well have had capital or relied upon the savings of their family to provide the deposit, and therefore the operation of the builders pool had particular reference to the lower-paid members of the working-classes.
At the moving of the second reading of the Building Societies Bill in 1939, Miss Wilkinson said 'We have been for some years now in a period of a building boom, and in connection with the building of cheap houses of a class which this House has on various occasions thought necessary to discuss, the problem is that of the deposit... To meet the situation which I have described there has come into existence what is known as the builders pool' (66).
In the 1920s and the 1930s buying a £500 house ideally required a prospective purchaser to find at least a deposit of 25 per cent of the purchase price, say £125. The purchase price on the cheaper houses almost always included all costs such as building society fees, legal charges, stamp duty, etc. It was only on the houses costing over £750 that reference is often made in builders' advertisements to building societies survey fee, normally two guineas, and legal costs which were about £25 to £30. Prior to 1930 a deposit had always been considered necessary, and in 1931 the Council of the Building Societies Association felt it necessary to send a circular to all their members. The circular stated 'A word of warning...all prospective buyers should have a stake in the property to the extent of 10 per cent...all societies should have strict adherence to this practice' (67).
But most of the member of the lower-paid classes and the working class did not have access to capital. Those people whom the writer interviewed who were in rented accommodation during the 1930s, said that the reason they could not buy was because they were unable to find the deposit. It was possible for a purchaser to offer additional security in the form of existing insurance policies or charges over other assets. But in the 1920s few working-class purchasers were in a position to offer any additional security. The societies had been unhappy about extending the level of their advances but circumstances in the 1930s, as outlined above, and the market forces upon them were such that they gradually did so. Ideally, the societies would have liked to have obtained guarantees or indemnities to protect them when they raised above 70 per cent the proportion of the purchase price which they were prepared to advance. The societies were not able get the government or local authorities to guarantee any losses they might incur if they extended the loan period or granted larger advances. However, it was possible for the societies to take out residential mortgage indemnity policies with the major insurance companies which would indemnify them against any part of the loss incurred in the event of default by borrowers. However, the policy only covered the proportion of the loan up to the 70 per cent usually advanced.
It appears to have been a common policy for the societies to take out mortgage protection policies during the 1930s. Those people interviewed by the writer and who were active within the movement confirmed this to be a usual practice. The insurance companies' records during this period do not split up the premium income in a way that the size of the business can be determined nor the level of any claims. From the information available from The Economist's surveys, the losses suffered by the societies from defaulters was very small and therefore the level of claims would have been negligible. The premiums for the cover were met by the building societies and were in the order of £8 to £10 per case. Therefore no other means were available to the building societies to protecting themselves in the event of losses being incurred when they increased the proportion of the loan to value ratio. As a result, the builder's pool became the accepted way of increasing the size of the mortgage granted to a purchaser and therefore keeping the deposit required low.
An earlier form of the builder's pool had been in existence during the 1920s. The Building Societies' Gazette of December 1924 mentions that Walter Harvey says that the Burnley Building Society was offered a proposal that the society should advance 100 per cent of the cost of buying a new house against holding the deeds of the property together with a deposit in cash of 25 per cent of the purchase price to be paid by the builder and the balance from the prospective purchaser. He commented that 'I do not like the business and I would not willingly be associated with such a scheme, a question of legality is whispered at. Is a building society justified in lending the full cost of a house under any conditions whatsoever even with cash or anything else as collateral security?' (68). The question of legality had been ruled upon many years earlier by E.W. Brabrook, who said on his retirement as Chief Registrar of the Building and Friendly Societies, 'In its ordinary business, therefore, as distinct from the investment of surplus funds, the society is absolutely restricted to investments on first mortgage of real or leasehold estate... Even collateral security is not admissible (69)'. Harvey himself said that 'for a long time our solicitors ruled against taking collateral security and we acted upon their advice' (70). However, with the continuing growth of deposits and the pressure between societies together with the forceful manner in which the builders tried to negotiate terms favourable to them, 'We have been inundated with inquiries from large builders endeavouring to negotiate terms with us' said one society chairman, the attitudes of some of the societies changed (71). The pool arrangements were to be commonplace by the mid-1930s and were refined and evolved so that the advance made to the purchaser was 95 per cent of the valuation, of the house, not the cost, instead of the usual 70 to 80 per cent (72). A. Shrimpton, the Solicitor of the Woolwich, gave an address explaining the procedures to solicitors at the 1936 conference of building societies and described the pooling arrangements as 'recognised procedure in the building society mortgage practice' (73). Walter Harvey, who had been against the pool system in the 1920s, said that 'of the millions of houses financed by building society loans since the war, collateral security (pooling) has been given in...75 per cent of the whole' (74).
In the early days of the operation of the pool system, the builder gave security in the form of a cash deposit from which the society was reimbursed against any loss which they sustained through the default of the purchaser in a given period, usually five years. As the pressure grew on both developers and the building societies to do more business and as the developments of the later part of the 1920s and the early years of the 1930s had proved to be successful enough to generate confidence, so adjustments were made to the operation of the builder's pool. Initially the builder had made cash deposits equal to the balance of the purchase price. In normal circumstances the builder would deposit 20 per cent in cash against the purchase price of the house with the society providing 75 per cent and the purchaser a 5 per cent cash deposit. It later evolved that the builder would arrange for a bank to deposit the funds with the society against the security of the land owned by the builder. The price of such land, often a part of a development site, would have increased in value by the success of the last phase of development on the site. The valuation placed upon the site was often made by the developer (75). In some cases the society would accept a guarantee from the builder, together with a small cash deposit, saving the developer the expense of arranging a bank deposit or guarantee from the bank. The Woolwich Building Society often accepted the full 20 per cent cash deposit from the developer on the first twenty-five houses on an estate and required no deposit for the next ten (76). In the words of one participant it became 'usual for the purchaser to put in only £5, the builder would put in £25 and the building society would lend the balance' (77).
So why did the building societies finally yield to the continued pressure from the builders and allow security in the form of the builder's pool be taken as part of the security for making the advance? The statements made above from Harvey and Brabrook had been made some years before the housing boom of the 1930s, and more especially after 1933. Land and house prices were starting to rise in the period after 1933 and this brought more builders/developers into the industry. The price rises had the effect of making the building societies feel more comfortable with the level of advances they had been making in the last decade. By the mid-1930s inflation was having the effect of lowering the real levels of advances they had made in the past. The builders were able to make better levels of profit on the land they had bought in the past and such sites could be charged to the banks in order to provide funds to lodge as deposits with the building societies to assist in the operation of the builder's pool. As the land had increased in value the builders could raise further bank advances on the additional value created by the raise in land prices which allowed them to buy more land. More importantly, if a building society did not agree to make loans in conjunction with a builder's pool then other societies certainly would.
The builders had identified the English working-class artisan as a willing participant who was anxious to buy a house if he could (78). More houses were being built for them now that ways of making the financing easier had been found. Olechnowicz says that 'It cannot be assumed that home ownership was universally desired' (79). However, the building societies used advertising to demonstrate to the working classes the simplicity of buying their own homes and the supposed benefits attached to home ownership. The site salesman employed on a commission basis by the societies made the prospects of home ownership to the lower paid appear very attractive. The operation of the builder's pool by the societies, low interest rates and the extended loan made it possible for the lower paid workers to buy homes.
(57) From interviews with former employees of the societies noted before.
(58) This phrase would appear in many of the advertisement of the Abbey Road Building Society during the 1930s.
(59) The Building Societies Act of 1939, 2 and 3 Geo.6,Ch 55, was to define the terms under which the societies could operate. The normal advance was limited to 75 per cent. (60) The writer has examined the returns from the New Survey of London but no wage averages have been calculated.
(61) The BSG's in many instances during the 1930s make reference to customer demand. The writer was told by several estate agents of the time that they would tell their captive building society what was needed to gain customers and make them aware of what others were offering. Unless the terms offered were matched, the building societies risked their agents would changing their allegiance.
(62) From an interview with Harvey Leonard in January 1994.
(63)The Economist (18 February 1939), pp. 347 and 378.
(64) The Building Societies Act 1939, 2 and 3 Geo 6, Ch 55.
(65) Hansard 346, col. 382, 17 April 1938.
(66) Hansard 344, col. 212.
(67)From the circular in the Building Societies Library at the Building Societies Association. Filed under 1931 Circulars. (68) B.S.G (December), p. 244.
(69) E. Brabrook, Building Societies, (London, 1906), p. 107.
(70) B.S.G, (June 1921), p. 118.
(71) William Hassall made this statement at the 1937 AGM of the Leek and Westmorland society. R. Redden, Britannia Building Society,1856-1985 (London, 1985), p. 42.
(72) The valuation would include the cost price, all Land Registry fees, legal fees, etc.
(73) BSG ( July 1938), p. 636.
(74) BSG (April l938), p. 283.
(75) There are no documents to confirm these statements and the most that the BSG says about such matters are hints of certain customs of smaller societies. Discussions the writer has had in 1992 and 1993 with people who were executives of the building society movement in the 1930s make it clear that this was a common policy of the developers.
(76) From an interview with Douglas Davenport, a former general manager of the Woolwich Building society, in January 1994.
(77) From a letter written by A. Woolnough to the writer on 14 January 1994. He was at one time chief surveyor and deputy general manager of the Anglian Building Society.
(78)Attached to Planning Our New Homes, (HMSO Edinburgh, 1944) is a questionnaire sent to 15,634 people in industry and in the armed service. From the replies it can be seen that only 48 per cent of those interviewed who were employed in industry and 40 per cent in the armed forces said they wanted to buy a house. The writer believes the sample was taken only in Scotland which, traditionally, has a different attitude toward home ownership and where there were very few building societies, almost none in the pre-war period.
(79) A. Olechnowich,Working-Class Housing in England between the Wars,(London, 1997)p. 57.
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