Credit Crunch-Effect of NINJA Loans

Credit crunch is an economic condition when there is remarkable shortage of investment capital and credit, leading to a shortfall in liquidity. In reality, it implies that credit cards, mortgages etc will be more expensive. The stock markets show upheavals. The credit crunch that is prevailing throughout the world economies happened due to the bursting of the housing bubble in United States. Subprime lending was one of the reasons for giving rise to credit crunch.

The background

It happened in the mortgage industry when borrowers who were not eligible for a loan, were approved one. In majority of the cases, the income of the borrowers was inflated so that they could qualify for a loan. Several years of subprime lending created a debt bubble. Lenders were very liberal and most of the time they did not perform credit checks or approved loans to consumers with bad credit rating. In fact, these loans were also known as NINJA Loans. In other words, NINJA means, loans that were given to people with No Income, No Jobs, No Assets. The lenders were of the opinion that if consumers face any repayment problem, the rising cost of homes would allow them to remortgage their property. Moreover, the interest rates were also low. However, the interest rates started rising again. With the increase in the interest rates, the cost of homes started falling. More and more borrowers started defaulting on their mortgage repayments. There was marked increase in the number of foreclosures and the number of people filing for bankruptcy increased.

Who started it?

It will be wrong if we blame the lenders and the real estate agents alone for giving rise to the mortgage crisis and subsequent credit crunch. The borrowers are also to be blamed equally. Had it not been for their greed, the graveness of the prevailing situation could have been minimized to a great extent.

Almost all sectors of the economy were affected. Starting from unemployment, services industry, banking sector all were affected by the credit crunch created by subprime mortgage crisis.