The Financial Crisis and the Forgotten Law of Contracts

At the bottom of the financial crisis lie failed contracts. Failed contracts are the stuff of contract law. Yet, to date, most discussions of possible responses to the financial crisis ignore contract law. To the extent contract law makes an appearance, the assumption is usually that the contracts at issue should and will be strictly enforced, so there is not much more to say. Contract law, however, is not dead. Nor is it impotent; it has just been forgotten. This Article explores how courts could use a number of contract doctrines to address perhaps the biggest remaining problem resulting from the financial crisis: the huge number of foreclosures of residential mortgages that have occurred, are occurring, and are expected to continue for some time. Modifications, especially those reducing principal, might have avoided many of these past foreclosures and might prevent ongoing and further foreclosures. Yet despite the fact that such modifications are often in the interests of both homeowner-borrowers and investors in bonds derived from those mortgages, in many cases, they do not happen. The political will for bold legislative action on this problem seems to be lacking. Many solutions to this problem have been proposed, but only a few have been attempted and those have not worked well. A cramped view of contract doctrine may be contributing to this lack of political will. Recognizing the flexibility of contract law may foster a greater willingness to consider creative legislative solutions. After reviewing the conventional contract law approach to the mortgage contract and examining how financial wizardry changed the relevant risks, this Article considers how courts might interpret the contract law doctrines of assignment, modification, restraint of trade, unconscionability, mistake, impracticability, damages, and the objective theory of intent to address the current foreclosure mess.