57 Pages Posted: 3 Sep 2021
Date Written: September 1, 2021
Most individuals strive to satisfy every obligation laid out in standard form contracts such as their mortgage, insurance plan, or credit agreement. Sophisticated parties, however, adapt and modify their obligations during contract performance by negotiating for lenient treatment and taking advantage of unclear terms. The common law explicitly authorizes standardized contract terms being utilized differently during performance. When the same standard terms create value for sophisticated individuals and destroy value for others, the result is contractual inequality. Contractual inequality has grown without scrutiny by courts or scholars, enabling regressive redistribution of resources and creating economic inefficiency by sowing distrust in markets for consumer contracts.
To document the magnitude of contractual inequality, this Article provides novel empirical evidence from a case study of residential mortgage contracts. Data from a large nationwide sample show that many mortgage servicers choose not to utilize their power to foreclose on a borrower in default, with more than one third of non-paying borrowers avoiding foreclosure. Servicers disproportionately foreclose on borrowers in poor neighborhoods, regressively redistributing over $500 million in wealth to high income communities each year. Moreover, servicers’ unfettered freedom to choose who undergoes foreclosure may have worsened the value of mortgages to consumers, increasing market inefficiency.
Courts and regulators need not turn a blind eye to contractual inequality, allowing private market forces to determine the exercise of contract rights. This Article argues that lawmakers should gather information about inequalities in contract performance and disseminate such data to private and public enforcement authorities. By bringing these inequalities to light, lawmakers can take a first step towards more efficient contract markets and a more equal society.
Keywords: Inequality, mortgages, law and economics, consumer law, household finance
JEL Classification: K12, G21, D18
Suggested Citation: Suggested Citation