Why the bank didn't want to discuss mortgage contracts
Last week, after I returned from Spain, one of the first things I needed to do was to go to the bank and arrange a transfer of some money to my family account there. Since I'd arrived back on the Saturday, and a welcome Bank Holiday was imminent, I couldn't get to the bank until Tuesday. A transfer of funds from the UK to Spain is a pretty painless affair and so, there I was, waiting at the Information Desk for the Nat West representative to copy over the details from my previous transfer.
Scattered periodically over the desk were a number of pamphlets - you know the kind, they give you useful information about Student Loans, offer you great deals on Credit Cards or Savings Accounts. The one that lay closest to me detailed the different Mortgage options available at the bank. My friendly representative, sharp as a pin, jumped on the opportunity to ask if I was looking to take out a mortgage. I said, "Hmmm, well ... perhaps you could answer me a couple of questions first."
Now, don't get me wrong - there is absolutely nothing wrong with the staff at the particular branch of Nat West that I go to, they are very friendly and helpful, and this occasion was no exception.
I went on.
"When I come into the bank for a mortgage, we go through all the necessary 'application' forms, decide how much money I need from the bank, and I sign the mortgage contract. I promise to pay you back, and you give me the money by crediting my bank account."
"That's right, Sir", she says with a customary Nat West smile.
"So, firstly, can you tell me where the money comes from that gets credited to my account?"
The friendliness and courtesy remain, however the customary smile has become more enigmatic.
"Er, well - I'm not sure...", and she seems a bit flustered. It is not my intention to make her uncomfortable, so I feign ignorance to make her feel more at ease - two's company, and all that!
"It's just that I'm very confused about the nature of the contract. For example, for any contract, both parties must put up something in case of a breach of contract. For my part, it is the property that I buy that is at risk if I do not keep up payments on my mortgage - what is it that the bank puts up?"
"Sir", she now knows what she needs to do, "I can get one of our mortgage advisors to call you if you'd like to discuss that in more depth."
This is acceptable, and we arrange that a mortgage advisor would ring me Saturday (today, in fact) to discuss the subject in detail.
As you have probably already guessed, the call never materialised. Why wouldn't the bank want to talk to me about the nature of mortgage contracts? Now, I understand that there are multitude reasons why the call may not have been forthcoming - the advisor may have ended up under a bus, or had a family crisis to deal with. The call request by the representative in the bank may have been mislayed or lost or cleaned away by the night janitor by mistake - who knows? Obviously, I was a little forearmed when I went to the bank. The Mortgage pamphlet nudged me to do something I'd thought about before - asking questions. But, at the time, I was a little unsure about how it worked. So, I went out and bought myself the Third Edition of Contract Law, the Third Edition of The English Legal System and ordered a much weightier tome, called 'Equity'. In addition, I obtained a copy of 'Modern Money Mechanics', issued by the Federal Reserve Bank of Chicago, which is a handy little guide to the modern 'fractional reserve' banking system that also operates in the United Kingdom.
Now I know why the bank didn't want to talk to me!
The story begins with our monetary system, known as the 'Fractional Reserve' system. As you probably know, banks bookkeeping revolve around 'assets' (loans) and 'liabilities' (deposits). Under the fractional system, when a deposit is made (say you just sold your car for £10,000 and you go to the bank to deposit it in your account), the bank has to keep a certain percentage (generally this is ten percent) as a 'reserve' - this covers the number of depositors who withdraw their funds within a specific time period (generally, not all depositors will do this at the same time - when it occurs, it is called a 'run' on the bank - the banks reserves cannot cover the depositors demands; anyone remember Northern Rock?)
Therefore, of the £10,000 made as a deposit, £1000 is kept in 'reserve', with the remaining £9000 becoming 'excess reserve' and used as the basis for new loans. Now, stay with me, the very important point is coming, and is best illustrated with an excerpt from Modern Money Mechanics:
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If business is active, the banks with excess reserves will have opportunities to loan the £9000. Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts.
Loans (assets) and deposits (liabilities) both rise by £9000. Reserves are unchanged by the loan transactions. But the deposit credits constitute new additions to the total deposits of the banking system.
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You should digest this, re-read it and let it sink in. The implications of the above paragraph are astounding. If the new loans for £9000 don't come from the money they receive as deposits (and, of course, they can't come from the reserve), where does the money come from? Are you ready for this? NOWHERE!!! The money is created out of thin air! When you sign a loan agreement, the bank accepts this as a promissory note - this is your promise to pay back to the bank (with interest). You agree to pay back this money, in return having someone type in a few digits on a computer and - voila - new money is created. Even better, when the operator does this, of course, it becomes a new deposit - from which ten percent is held in 'reserve' and the 'excess reserve' can feed even more loans! Even more money created from nothing. Bear this all in mind now, as I turn the focus onto contract law.
Let's start by defining a contract:
Contract - A contract is an agreement between two parties by which both are bound by law and which can therefore be enforced in a court. Contracts are distinguished from 'agreements', which are not binding, and from 'promises', which are enforceable but unilateral.
A contract involves one of the parties making an 'offer'. There are generally two ways in which an 'offer' is made. A 'straightforward offer' - when you sell your car, for example, you might say "Do you want to buy my car for £10,000?" You are making a direct offer. The second option for an offer is known as 'invitation to treat' - if your car is being sold at auction, for example, the car (lot) is the 'invitation to treat', and the bids on the car are the 'offers'.
The contract is made when there is 'acceptance' of an 'offer'. The person you asked directly may respond 'Yes'; the auctioneers hammer concludes a successful bid. Both the 'offer' and 'acceptance' have to be communicated' - this is the foundation for a written contract.
For a contract to be legally valid, both parties must give 'consideration'. This is a very important point, so please stay with it. Consideration is 'quid pro quo' - something in return for something else. One party agrees to do something and the other party agrees to 'something else'. As we have already found out, in the context of a loan agreement, your 'consideration' is the promissory note - your promise to pay the bank with interest. Consideration from the bank is the creditation of your account with the agreed sum.
Now for the bombshell - the rules of 'consideration' say that 'Consideration need not be adequate' - it is not for the law to say whether a contract was a fair one, if one party wants to sell his comb, as a ridiculous example, for £10,000 and the other party agrees to buy it - well, that's their business! Most importantly, however, 'Consideration must be sufficient' - this has a precise legal meaning in that:
a) Consideration is sufficient if it is real.
b) Consideration is sufficient if it is tangible.
c) Consideration is sufficient if it has discernible value.
And so, after quite a long ramble, we can return to our friends at the local bank, and their reasons for not contacting me to discuss these issues. When you go to the bank and apply for a mortgage, you 'accept' their 'offer' of a mortgage, then you sign the papers that seal the contract. You give 'consideration' in the form of the promise to pay back the sum, with interest, and the bank credits your account for the agreed sum. The credit to your account of this sum is the 'consideration' given by the bank in the contract, but the money is created out of nothing, as we saw from our look at the fractional reserve system. Since the rules of consideration specifically state that 'consideration is sufficient if it is real', as soon as you sign the contract at the bank, the bank has breached the contract by 'insufficient consideration'. The money, which never existed in the first place, is 'not real'!
What does this all mean, then? Since I do not have a mortgage, I cannot test this hypothesis, but from my research one thing is very clear - it would appear that every mortgage provided by a bank is illegal due to breach of the 'rules of consideration'. I don't want to influence anyone here, I'm just presenting the facts, but I'm sure you will understand the implications of what I've talked about. All loans are pretty much the same, whether it be a mortgage, a loan or a credit card. All of the contracts for these systems must be illegal, because the money is created from nowhere - it didn't exist, and therefore fails the 'rules of consideration'.
I wonder whether the bank will ever ring me? I certainly look forward to that call!
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