Should homeowners be required to perform community service in order to receive federal aid that reduces their mortgage debt? The U.S. requires sacrifices from bailed-out banks and auto firms; and at the other end of the wealth spectrum, welfare laws require public aid recipients to work or perform community service. But 9 million middle class homeowners— a term used by the Treasury Department— who took out risky mortgages are targeted to receive a free subsidy. To stem foreclosures, one Treasury Department program gives low interest rate loans, while another forgives debt. These programs require nothing in return from recipients.
The mortgage crisis was fueled by unconventional loans that promoted moral hazard— for example, teaser rates that temporarily insulated borrowers from bad credit decisions. Now, U.S. debt relief programs add a new moral hazard, according to a recent GAO report: they encourage more borrowers to fall behind on mortgage payments to qualify for a bailout.
My study asks whether the U.S. can require homeowners to perform community service as a condition for debt relief. I propose 200 hours of service in programs such as Habitat for Humanity. This idea is based on my analysis of five groups of citizens who were ordered by government to perform a public service. The first group is men who labored on road duty. Tracing to the early 1800s, these state and local laws required citizens to build roads several days each year without pay. Lawyers were ordered in the 1800s to represent indigent defendants without pay. In the 1940s, the draft law allowed conscientious objectors to avoid combat by accepting mandatory assignment to jobs in charitable organizations. In the 1970s, welfare recipients were required to work on community projects if they could not find a job. The National Health Service Corps required new physicians who received tuition grants to serve the poor.
My study of 441 court rulings from 1807 to 2002 focuses on recalcitrant individuals who challenged these compulsory service policies. In 83% of the cases, state and federal trial courts upheld government imposed work. In 100% of their rulings, the U.S. Constitution did not prohibit government imposed obligations. However, 37.5% of trial courts ruled in favor of individuals who raised state constitutional claims. In appellate cases, only 8% of courts ruled that a work or service obligation violated a right in the U.S. Constitution. In narrow rulings, individuals won 48% of cases before appellate courts when their challenge was based on state statutes.
The results suggest that courts would not interfere with a federal policy that requires community service in return for mortgage relief. My research also shows that compulsory service requires a compelling and overarching purpose— plus an egalitarian ethos that justifies its imposition. The mortgage relief programs satisfy these pre-conditions. In an age when the poor and powerful are required to make sacrifices, mortgage bailouts to the middle class perpetuate the spendthrift mentality that dug the nation’s deep financial hole. There is wisdom in assisting millions of strapped debtors, 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? If millions of homeowners who face foreclosure performed community service, moral hazard would be reduced by making them more responsible for their credit behavior, while other homeowners would be discouraged from intentionally falling behind on their loans.
Biography | Law and Economics
Date of this Version
Michael Leroy, "The Inequality of Sacrifice -- Reducing Moral Hazard For Bailed-Out Homeowners: The Case For Compulsory Community Service" (June 2009). University of Illinois Law and Economics Working Papers. Working Paper 104.