Mortgages

When the prices of securities dealt in on the Stock Exchange are high - that is, when they return a lower rate of interest than the average - I have advised that it is generally preferable to place money temporarily on deposit until a fall of values enables a purchase to be reasonably effected. But, in such circumstances, the investor may often find it worth his while to consider a mortgage upon property, which will return a superior rate to that provided upon deposits, and a rate, moreover, which may be fixed for a term instead of varying with the Bank of England rate. And besides this occasion for directing attention to the subject, mortgages should form a part of the securities which the possessor of reasonably large means might consider and select. The subject of the purchase of houses and shops and ground-rents will necessarily, also, be included in this volume. All these modes of utilising savings, though they demand a most careful and judicious discrimination, form excellent investments, or, to employ preciser language, securities. For the term investment should be restricted to those cases where a person parts finally with a certain sum of money and accepts, in exchange for it, a claim upon the assets of an undertaking (to use a general word: in the instance of Government Funds, a claim upon the nation), which claim he can absolutely dispose of as owner, at any time, and thus reconvert it into money, though not necessarily of the same amount as that which he originally parted with; while in a security, ho parts with his money only for a time on condition that the exact amount shall be afterwards restored to him, and be meantime protected by some "earmarked" property which he may sell under specified circumstances in order to regain the precise amount which he had originally advanced. I will first consider a Mortgage1 upon a freehold house or shop.

Mortgages Upon Freehold Property

1. It should be ascertained that the property is situated in an established neighbourhood, or one which seems likely to be permanently attractive to residents. An intending lender is advised, as far as possible and convenient, first to inspect the property himself, and its surroundings. It is true that a first impression often requires modification on subsequent reflection and inquiry, but a first impression is in all cases of the greatest value; and I have generally found that if, looking with an unprejudiced eye, my first impression was unfavourable, I acted wisely, as subsequent events proved, in rejecting.

"Is it so true that second thoughts are best?" - "not first?"

1 Mortgage: a form of security for a debt: from two words (Latin and French) signifying a "dead pledge." Coke explained the term to the effect that, on pledging a property for a loan, an accompanying condition provided for its release on repayment of the debt at a specified date, so that if repayment should not take place, the property was taken from the borrower and thus became dead to him, while, if repayment occurred, the pledge then became dead in respect of the lender.

2. The advance according to circumstances should not exceed 75 per cent of the value placed upon the property by the valuer whom the lender employs.

3. Any contract to lend should be expressed in writing; especially should the conditions of the loan be unambiguously stated, such as, that the Valuer's Report must prove satisfactory to the lender in all respects.

4. The valuer should invariably be appointed by the lender himself for the specific occasion; and the choice of this expert is very important, and is frequently dealt with negligently. He should not be (a) an architect, for an architect's function is to lay out money, not to estimate the price which a property will fetch; nor (b) should he be simply an estate agent, for his business is concerned with the management of properties and the collection of rents; but (c) he should be an auctioneer of house and shop properties, whose employment is the selling of them in the public mart. This latter knowledge alone renders him familiar with the actual and changing demand by the public for such premises, and can furnish (according to his ability and experience) a sound opinion upon their probable selling value, and upon the prospect of that value increasing, declining, or remaining fairly stationary. He should be selected after inquiry by the lender, or, if he cannot do so, by some one in whose knowledge and judgment of men he can trust. The fee for valuation should always be paid beforehand by the borrower. In order to reduce as much as possible this preliminary cost to the borrower (since he will entirely lose the sum if the proposal for loan prove fruitless), it is often arranged that the valuer should charge a higher fee in the event of the advance being completed, and a lower one should the security be declined. This, in my experience, is an unsatisfactory arrangement for obvious reasons; and a fixed fee (which will range between the preceding amounts), should be settled and paid whether negotiations ultimately succeed or fail. Where the property proposed to be mortgaged is situated in a provincial city or town, a local valuer should be selected, as being necessarily more cognisant of the market than a valuer in London can be.

5. The valuer should state what he considers to be the annual value from a solvent tenant on a repairing lease; whether the premises are in sound condition; whether they are of such a class and in such a position as to be readily saleable at any time; and the sum which he expects they would be likely to realise both at the present time, or during the continuance of the loan. It is not always advisable for the lender to depend, as an index of value, upon any rental-agreement between the owner of the premises to whom he is proposing to lend and the existing tenant. It is to be hoped that the following incident does not frequently occur, but I remember an instance (the loan was happily rescinded in time), where, by collusion between the owner and tenant (which probably, however, was quite innocent upon the tenant's part), a written agreement for letting expressed the rent at £45 a year, but the owner, by separate arrangement, refunded £10 annually to the tenant: the real rental value was accordingly £35, but the owner fraudulently thus represented it on the document exhibited to the lender as £45.