Subprime Mortgages and the Case for Broadening the Duty of Good Faith

Abstract

In the wake of “the most virulent global financial crisis” caused by defaults in subprime mortgages and derivative financial products in 2007 and 2008, much finger pointing and soul searching have been taking place on different fronts. Scholarly attention primarily focuses on the financial industry and regulations. This article argues that US contract law played an enabling, albeit hidden, role in the subprime mortgage crisis. US contract law facilitated the subprime mortgage crisis in two First, US contract law’s laissez faire paradigm has incentivized parties to pursue their self interests while failing to provide any constraint on excessive pursuit of self interests. Second, the current contract law paradigm has also contributed to the subprime mortgage crisis by having nurtured a US business culture of everyone for him or herself. Contract law’s general tolerance of parties’ single minded pursuit of self interest has led to a “moral deficit.” This article proposes that US contract law adopt a more proactive paradigm by recognizing a broader duty of good faith in economic relationships prior to the formation of a contract.

Keywords: contract law, subprime mortgage crisis, good faith, laissez faire paradigm