Credit crunch- Causes and the backwash
October 8, 2009
Credit crunch is the aftermath or the backwash that was triggered by subprime mortgage crisis. The subprime mortgage crisis was a cause of irresponsible subprime lending activities. Many consumers were extended mortgage despite the fact that they didn’t qualify for one. The disqualifying factors included the following –
• Low income levels
• Insufficient down payment amount due to inability in making payments
• Ruined credit history
• Unstable source of income etc.
However, these borrowers were extended mortgage with the help of forged documents in which income levels were inflated and appraisals were manipulated. These borrowers were under the impression that in case of emergency, the mortgage could be refinanced. But the housing market had a different song to sing. The housing bubble burst giving rise to escalated adjustable-rate mortgage rates. Nevertheless, borrowers started falling behind on payments. And the number of delinquent accounts increased manifold and so did foreclosures.
Such an unexpected scenario was the last that was expected although many financial experts had predicted a recession in near future. The economy finally drowned in credit crunch. This not only affected US economy but the tentacles touched all the major economies around the globe.
The backwash of credit crunch
Owing to credit crunch, lenders became more cautious than ever and adopted very stringent lending norms or declined requests for fresh credit altogether. The credit card issuers in an attempt not to incur any further financial loss changed credit limits and payment policies. This in turn caused a lot of inconvenience too. Many consumers were not informed about the changes that were introduced. And to add to the woes of the dwindling economy, credit card debts escalated. To address the needs of the credit cardholders, the Obama administration introduced few credit card rules that are to be introduced by July 2010.
However, the economy is showing very faint signs of revival and according to financial experts, the economy is likely to look up or attain stability by 2011.
Description: Credit crunch has left economies dwindling and consumers financially weary. However, there is light at the end of the tunnel. The economy is recovering finally although at snail’s pace.
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