LER Alumni Teleconference Series

February 4, 2010

Professor Michael H. LeRoy

School of Labor and Employment Relations

University of Illinois at Urbana-Champaign

Home Affordable Modification Program (HAMP)

U.S. Dep’t of Treasury Estimates 7-9 Million Americans Eligible

2. How do I know if I am eligible for a modification under the Home Affordable Modification Program (HAMP)?

To apply for a modification under HAMP, you must:

• Be the owner-occupant of a one to four unit home;

• Have an unpaid principal balance that is equal to or less than: 1 Unit: $729,750 2 Units: $934,200 3 Units: $1,129,250 4 Units: $1,403,400;

• Have a first lien mortgage that was originated on or before January 1, 2009;

• Have a monthly mortgage payment (including taxes, insurance, and home owners association dues) greater than 31 percent of your monthly gross (pre-tax) income.

Home Affordable Modification Program (HAMP):

Benefits for 7-9 Million Recipients

How low can my interest rate go?

Treasury is providing incentives to your servicer to write the interest down to as low as 2 percent, if necessary to get to a payment that you can afford.

What happens if that is not enough to get to an affordable payment?

If a 2 percent interest rate does not result in a payment that is affordable (no more than 31 percent of your gross monthly income), your servicer may:

First try to extend your payment term. . . . up to 40 years. If that is still not sufficient, your servicer may defer a portion of the principal amount

you owe until the maturity of the loan. This is called a principal forbearance. A portion of the principal could be also be forgiven.

Moral Hazard

Moral hazard occurs when there is an “incentive for someone to behave badly because he is insulated from the consequences of his actions.”

Moral hazard is created by risk sharing contracts or public policies that discourage individuals from avoiding costly behaviors.

Historical Approaches to Debtor Relief

Jewish Law: Forgiveness After Seven Years

Roman Law: Execution and Pro-Rata Distribution of Body Parts

16th Century England: Debtor’s Prison Colonial America: Indentured Servitude U.S.: Bankruptcy Discharge (Primary)

and Compulsory Public Service (Extreme Exception)

History of Compulsory Public Service in U.S.

Lawyers “are not considered at liberty to reject the cause of the defenseless (Rowe, 1860).”

Broadened in 1970s-80s beyond criminal cases to termination of parental rights, paternity disputes, evictions, nursing home abuse, etc.

Moral Hazard Potential Critics say that the modification program

creates moral hazard by rewarding borrowers who took on too much debt. They also believe that current debt relief programs pile new moral hazards on the original ones that led to the credit crisis. One critic suggests that “moral hazard sends a clear message to the American people: The worse the behavior, the greater the reward.”

A 2009 GAO sees moral hazard in the Treasury’s mortgage relief program: new loans might cause borrowers who would otherwise not default to fall behind on mortgage payments in the expectation of being bailed-out.

Sample Characteristics

The sample contained 134 federal and 101 state cases.

The earliest case was decided in 1807. The most recent one occurred in 2002.

Each of the 235 cases was adjudicated at a trial, while 194 were decided by an appellate court, and 12 more were ruled on by a supreme court.

The sample of 235 cases yielded 441 judicial rulings on individual challenges to mandatory service or employment.

Table 1AIndividual Challenges to Government Imposed Work or

ServiceTrial Court Rulings

Status of Individual Trial Court RulesFor Individual

Trial Court Rulesfor Government

Conscientious Objector Mandatory Employment

54.9%

9895.1%

Public Aid Recipient Public Service or Employment Requirement

17.7%

1292.3%

Men on Road Duty Mandatory Civic Service

1725.8%

4974.2%

Lawyer Pro Bono Publico Appointment

830.8%

1869.2%

Physician Mandatory Work Assignment

934.6%

1765.4%

TOTAL (N = 194) 4017.1%

19482.9%

Table 1BIndividual Challenges to Government Imposed Work or Service

Appellate Court RulingsStatus of Individual Appellate Court Rules

For IndividualAppellate Court Rules

for GovernmentPhysician Mandatory Work Assignment

19.1%

1090.9%

Lawyer Pro Bono Publico Appointment

313.0%

2087.0%

Conscientious Objector Mandatory Employment

1315.9%

6984.1%

Men on Road Duty Mandatory Civic Service

3046.2%

3553.8%

Public Aid Recipient Public Service or Employment Requirement

650.0%

650.0%

TOTAL (N = 193) 5327.5%

14072.5%

Table 2ALegal Issues to Challenge Government Imposed Work or

ServiceTrial Court Rulings

Legal Issue Trial Court Rulesfor Individual

Trial Court Rulesfor Government

ThirteenthAmendment

00%

34100%

Equal Protection

00%

6100%

Due Process 00%

36100%

Other Federal Statutes

1511.5%

11688.5%

State Constitution

1035.7%

1864.3%

Other State Statutes

1625.8%

4674.2%

TOTAL (N=297)

4113.8%

25686.2%

Table 2BLegal Issues to Challenge Government Imposed Work or

ServiceAppellate Court Rulings

Legal Issue Appellate Court Rulesfor Individual

Appellate Court Rulesfor Government

ThirteenthAmendment

28.0%

2392.0%

Equal Protection

00%

5100%

Due Process 26.9%

2793.1%

Other Federal Statutes

1515.8%

8084.2%

State Constitution

725.0%

2175.0%

Other State Statute

2947.7%

3252.5%

TOTAL (N= 243)

5522.6%

18877.4%

Implications of Research Findings: Deter Moral Hazard

and Share Burden Government ordered work assignments were challenged

on numerous legal grounds and usually failed. The powerful and the poor have been required to make

sacrifices as a condition to receive a government bailout. But a transfer of $75 billion to “middle class homeowners” (U.S. Department of Treasury, 20099b))

My research also shows that compulsory service requires a compelling and overarching government interest—plus an egalitarian ethos that justifies its imposition.

There is wisdom in allowing hopeless debtors to start anew— but why is no thought given to a policy of requiring bailed out homeowners to pay back part of their debt relief by serving their communities?