The bad news is that pension funds are heavily involved in the residential mortgage business. This will be through the ownership of shares in UK (and global) banks, whose travails of late are mainly from residential mortgages in the US. The UK banks will suffer as house prices fall. Pension funds will also have some peripheral investments in hedge funds that invested in mortgages and their derivative products.
Many people have invested their pension money in Buy-to-let. Caveat emptor.

Redwoodians who are BBC World Service fans, (the WS is the best thing the BBC does), may have been following this. I don't think the UK has the equivalent of the "non-recourse loan" concept on our mortgages; or, can consider a UK mortgage as a "Call Option". Never-the-less, the impact of just "Walking Away" in the US, could / will have an impact on a bank near you.

Now that those of us, of a certain age, are trying to remember the lyrics to Just Walk Away Renee [Four Tops], click on.
http://news.bbc.co.uk/2/hi/business/7529277.stm

And then,
http://economistsview.typepad.com/economistsview/…

Then far too much was lent on far too flimsy security to people without the means to repay. The influx of new home loan companies into the market caused cutthroat lending in which the lenders (not all of them banks in the conventional sense) were left exposed to a downturn in the economy through their own imprudence. The 100% mortgage with no need to prove income was not uncommon and the capital was to be repaid by an endowment policy. Along came the downturn, the borrower lost his job, it was too soon for the endowment to have any value, the lender repossessed and made a huge loss in a falling market.

Even in a stable or mildly rising market, if you lend at 100% LTV the mere facts of repossession and forced sale are enough to almost guarantee a loss. A repossessed property sold at auction commands a wholesale price not a retail price and one sold through estate agents often realises a lower net price after taking into account (i) the time it takes to sell (during which time the capital of the loan is being financed by the lender), (ii) agents' commission and (iii) the weak bargaining position of the vendor. Of course lenders insure themselves (at the borrower's expense) for at least part of this loss but it is not often that such insurance is sufficient in a falling market.

That type of lending helped inflate the house price bubble during the 1980s and exactly the same has happened over the last 10 years. The banks might claim they were responding to demand by offering products their customers wanted but it takes only a moment's thought to realise that lending to the impecunious on the security of a property with no equity gives the lender negative security. When there is a downturn and repossessed properties hit the market they accelerate market price falls because they add stock into the supply chain at a discounted price.

There is, in my view, a pressing need for first charges over residential property to be limited to 75% of the property's value at the time the loan is made. Any further secured lending will then be seen for what it is – speculative lending subject to a risk of insufficient or no security.

If the lenders are not prepared to protect themselves in this way there can be no reason to call on the taxpayer to dig them out of the negative-equity hole. More importantly, limiting the amount that can be borrowed against a first charge will reduce the risk of people borrowing beyond their means. It will depress the housing market, perhaps for many years, but only until the current bubble has been deflated.

The problem of people on modest incomes not being able to get on the housing ladder is a serious problem. But it is not solved by lending them money they cannot afford to repay in order to buy a house or flat which is overpriced.

Existing homeowners will face a substantial capital loss as house prices fall to a real market level but all we will lose is air from the bubble.

In the long term it will benefit everyone to have a true market rather than one skewed by reckless lending. Those who will benefit most will be those hit hardest at present, the hard working people of modest means.

My only political obsession is for economic policy which allows hard working people doing "ordinary" jobs to benefit fully from their labours. I want them to have every opportunity to own their own homes so that they and their children have security for the future and are not beholden to anyone (particularly the State). I have read many calls in comments on this and other blogs for the income tax threshold to be raised to £10,000 or more and I support those calls but they must be part of a package and strict controls over mortgage lending should be in the package. It will be of greatest benefit to those who most deserve to benefit from their honesty and industry.

I am in our family home for free, so I can speak freely. Are falling house prices a bad thing? If so, please explain why exactly. In a perfect world, wouldn't people put their money into doing something useful? For instance, they could invest in industrial/agricultural development of backward countries, industry or making money on the stock exchange instead of locking it up in a house spiral?
And what about the poor? How can they afford these prices? So where do they live, please?

Why not look at allowing pension funds to hold residential property as an investment class, but with strict rules on the level of gearing required.

This would provide a steady flow of new capital in the property market helping to avoid the correction in property prices going to low. It would encourage savings into pensions helping to adjust the structual imbalance in savings. As the lending to a pension fund would be at a lower level of gearing ( Loan to value) it would free up bank's capital. And pension funds would make better long term landlords as they are generally better capitalised than heavily geared buy to let investors.

Institutional pension funds own large portfolio's of residential property on the continent.

1.) Windfall taxes – no way. Deposit insurance – yes a levy would be sensible. Hike guarantee to £100K and lend the deposit insurance corp money from the government in the short term.
2.) Stabilise banking system, enforce the capital rules rigorously. Strengthen oversight, lines of responsibility and try to reach agreement before the next crisis between the different regulatory parties.
3.) Forget about house prices, the market will clear at some point and a necessary, but not sufficient condition is that the banking system is sound and thus able to make loans.
4.) The economic situation is insufficiently dire to require the BoE to subordinate the inflation fighting for economic growth. At best a moderate cut in the base rate, perhaps even a hike.

* A further stage of the crisis will come if a bank is totally shut out of interbank markets and appears insolvent if they borrow such a large amount from a central bank that the haircut on their collateral is more than the bank's capital. Will the central bank keep lending to them? Should they?

But as to the mortgage market the problems here are structural to our economy, where we have too few savings, too much consumption, and too much debt ( public and private ), essentially we have an economy that is built on tick, borrowing other peoples money to buy their goods which is under written by a bubble asset market these funds have helped inflate. It was always going to end in tears for eventually the countries lending us the money were going to see us as a bad credit risk with the result the funds would dry up, as they did.

So either the state steps into the funding gap to keep the bubble asset economy afloat, which would eventually bankrupt the country, or we have to learn to do things differently, like learn the art of saving money, and start making some of the goods we so voraciously consume, for if we don't we are destined to relive the same bubble asset economy time and time again, but every time we do it we slip that little further down the wealth league, and find we have fewer national assets to flog off to pay the bills.

Today a borrower needs a 10% deposit, proof of their income and proof of repayment method. The borrowing allowed is 4.25 joint income. A 2 year fixed rate is 6.2% with a fee of £599.

So over the 10 years a larger deposit is now needed, although you can still borrow more historically and at a lower rate than 10 years ago.

So why the fuss?

Because under Gordon Brown's watch the lenders changed their lending criteria to

A borrower needing no deposit, no proof of their income, no proof of their repayment method, 6 times joint income on a 2 year fixed rate of 4% with a £149 booking fee.