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LER Alumni Teleconference Series February 4, 2010 Professor Michael H. LeRoy

LER Alumni Teleconference Series February 4, 2010 Professor Michael H. LeRoy School of Labor and Employment Relations University of Illinois at Urbana-Champaign. Revisiting Debt and Labor— Bailouts for Homeowners: Can the U.S. Compel Community Service in Exchange for Debt Relief?.

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LER Alumni Teleconference Series February 4, 2010 Professor Michael H. LeRoy

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  1. LER Alumni Teleconference Series February 4, 2010 Professor Michael H. LeRoy School of Labor and Employment Relations University of Illinois at Urbana-Champaign Revisiting Debt and Labor— Bailouts for Homeowners: Can the U.S. Compel Community Service in Exchange for Debt Relief?

  2. 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.

  3. 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.

  4. 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.

  5. 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)

  6. 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.

  7. 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.

  8. 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.

  9. 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?

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