For millions of homeowners across the country, and thousands of housing counselors trying to help them, there is a "holy grail," an almost mythical solution that everyone is searching for and almost no one ever finds. It's called "principal reduction" and it cures underwater home-ownership, arrearages and makes modifications a snap.
The Sanchez family, however, has done what others have only dreamed about: drank the sweet elixir of modification from the mythical chalice of principal reduction. Action NC members, community activists and church friends gathered Thursday, December 6th to celebrate the Sanchez's victory over Bank of America, and their ability to stay in their home. There's a light at the end of the tunnel. Here's a little of how it happened...
Principal reduction is when a portion, or all if you're into daydreaming, of the amount owed is erased. Since the amount you pay back is your principal plus the interest, and interest is a percentage of the principal, reducing the principal is a quick way to cut the monthly payments. Imagine walking down 20 flights of stairs (cutting the interest rate) versus strapping on a parachute and jumping out the window (principal reduction). Both will get you to the street...one's just way quicker (and more scenic).
Banks are reluctant to employ this nifty solution, however, as it means an instant reduction in the profit they make off the loan. Some cases simply aren't going to be resolved any other way without kicking people out of their houses, which isn't something homeowners, or Action NC, want for anyone.
But, didn't these people simply buy too much house, get into bad loans and do all this to themselves? Why should these poor, defenseless bankers have to make concessions to these dastardly homeowners?
Excellent question... First, the vast majority of those going into foreclosure today are not housing investors or people with "exotic loans" like Adjustable Rate Mortgages or Interest-only Loans. Those loans, for the most part, have already worked their way through the system to some conclusion: mostly empty houses and displaced homeowners. For the last few years, the majority of cases are people with 30-year fixed mortgages, the "peanut butter and jelly sandwich" of lending tools. These are ordinary people, many of whom bought their homes during the housing boom, back when banks were speculating on housing prices, overvaluing mortgage loans, using math they didn't understand to slice and dice these loans into "commodities" to be sold to investors and, generally, running amok thanks to congressional deregulation.
When the housing market crashed in 2008, people started losing their homes, stopped spending money on anything not absolutely necessary, which caused businesses to start laying people off, which led to more people defaulting on their loans. This cycle continued, at the rate of hundreds of thousands of jobs lost every month. Gonzalo Sanchez, like millions of other homeowners, lost his job and had to choose between paying for his daughter's medical supplies and paying the mortgage. Which would you choose?
Like most parents, Gonzalo and Silvia chose their daughter's health. Eventually, Gonzalo went back to work, albeit at a greatly reduced income. He could pay a mortgage but not the mortgage he was in. Bank of America seemed quite reluctant to make any changes to his mortgage though. That is, until Action NC hosted a rally specifically for the Sanchez family during the Democratic National Convention in 2012. Sometimes, when people aren't listening, it helps to shout. Getting national attention is moved the Sanchez case from the back-burner to center stage. Lo and behold, the phone started ringing. On the other end...Bank of America, anxious to do a deal.
We at Action NC saw in the Sanchez Family a case that exemplified what millions of other homeowners in this country are facing...what you yourself may be facing. Our job, as community organizers is to, well, get the community involved. Across the country, homeowners are figuring out that this mess is not their fault. No one is asking for a handout (except the bankers currently paying nothing in taxes and receiving heavy government subsidies...but I digress). Hardworking, conscientious, level-headed homeowners, looking to invest and grow, possibly while providing a safe place for themselves and their loved ones to reside...these are the people currently affected by the shenanigans of Wall St.
But, the government is listening. In a stunning turn, the Attorneys General from nearly all 50 states sued many of the largest "too big to fail" banks and won a settlement, cleverly coined the "AG Settlement" (these guys are so creative it hurts). In the settlement, the banks get off scot-free for most of their wrongdoings during the global financial crash. However, they did have to set aside $29 billion in assistance funds for struggling homeowners and municipalities. That figure may sound like a lot, but it's really not much when you consider that these same banks received $800 billion in the first bailout and even more after. (They should really be calling it the "Keep the Change" settlement).
The good news, however, is that the Sanchez's case seemed to all involved to be a perfect fit for these settlement funds, which could be used for principal reduction. The Sanchez family, in conjunction with housing counseling through NACA, went to the Department of Justice who agreed.
The Sanchezes received $63,000 in principal reduction, which erased the amount they owed after falling behind. Coupled with a lower interest rate, their payment dropped from $917 to roughly $400. Which is why this is the "holy grail" of solutions.
But it shouldn't be. Principal reduction shouldn't be uncommon at all. As a matter of fact, for the 16 million underwater and struggling homeowners in this country, principal reduction should be a given. Unfortunately, there are some pretty powerful, and incredibly wealthy people standing in the way of this solution for millions. And, until people start making more noise about their own situations, these solutions aren't going to be seen as politically viable.
If you're ready to make some noise, contact us, let us know your story. We can give you information on how to connect to others here in Charlotte, across the state and across the country. We work closely with the Home Defenders' League and Occupy Our Homes both nation-wide organizations for homeowners.