Underwater Mortgages

1. Is the California program to use eminent domain to seize underwater mortgages legal under eminent domain? Why or why not?

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It is not constitutional and it undoubtedly illegal to use the power of eminent domain to deal with the real estate crisis in many cities in the state of California. Eminent domain gave the government the power to take control of the property for the sake of improving the infrastructure of the city. Nevertheless, it must be pointed out that the case of Kelo vs City of New London created a precedent that may pave way for the novel use of eminent domain. However, it must be made clear that in the Kelo vs City of New London situation, the application of the eminent domain principle did not veer far away from the original intent of the U.S. Constitution. In addition, it was to improve the lives of people by taking care of the physical structures. In the proposed use of eminent domain in California, the objective is not the physical houses but the mortgages, thus, one can argue that it did not sustain the spirit of the law. As a result, it is prudent to view the strategy as laden with hidden agenda. It is important to know who will benefit from such action. Moreover, it can be argued that the financiers behind the case will benefit from the clever use of eminent domain and not the homeowners, who needed government support the most. The most troublesome feature of the proposed solution is the power of the government to compel homeowners to sell their homes or to partner with another financial institution to re-structure their loans. The approach is problematic because the values of the homes are already improving. In addition, many homeowners already requested refinancing on their homes. Furthermore, homeowners who qualify are those who stayed current when it comes to their mortgage payments. In other words, there are many unknown risks. In the present time, homeowners know what will happen; they have to pay more on property that was already devalued. It can be argued that most homeowners can live with that idea rather than to contemplate with a new environment with so many unknown variables. Consider for instance the ripple effect if they do not want to sell their homes to the government. They are forced to work with a new financial institution and in the different setup there are so many potential surprises that may not be beneficial for them in the long run.

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2. Is the California program, assuming it is legal, moral pursuant to Utilitarian ethics? Why or why not?

It is not moral pursuant to Utilitarian ethics because it does not promote happiness on the part of the homeowners. One of the problematic aspects of the proposal is the link between homeownership, real estate investments and pension. Employees use part of their earnings to avail of investments that can help enhance their pension when they retire. The investment money was used on real estate. If the proposal is approved, investment institutions will be affected by new ordinances and new laws that will be the direct result of the “eminent domain”, therefore, it is possible that pension plans will be severely affected. Current homeowners, who are theoretically the beneficiaries of the proposal, are the same people who invested in the said pension plans.

3. Is it moral pursuant to Kantian ethics? Why or why not?

It is not moral pursuant to Kantian ethics because it does not promote the best solution that will benefit a large number of the population. It will only help a fraction of the people that were affected by the real estate crisis in California. It will support those who are current in their mortgage payments. However, it will harm those who already suffered from foreclosures and those who struggle to pay for their mortgage.

4. What should a “socially responsible” banking industry do for its borrowers who are “underwater” on their mortgages?

A socially responsible banking industry must consider the principles of the “eminent domain” strategy proposed by the local government and implement the same in accordance to the business strategy of the company. Banks need to be profitable. However, they also need to consider the impact of their policies on their clients and the community where banks are located. One of the best things that banks can do is to lower the loan amount in order to ease the burden of the homeowners, who are paying more than the current value of their property.

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