The Unfinished Business of Dodd-Frank: Reforming the Mortgage Contract

The standard residential mortgage contract is due for a reappraisal in light of today’s mortgage lending and regulatory environment. The goals of Dodd-Frank and the CFPB have been geared toward creating better stability in the residential mortgage market, in part, by mandating more robust underwriting. This is achieved chiefly through the ability-to-repay rules and the “qualified mortgage” safe harbor, which call for very conservative underwriting criteria to be applied to new mortgage loans. And lenders are whole-heartedly embracing these criteria in their loan originations—in the fourth quarter of 2015 over 98% of all new residential loans were qualified mortgages, thus resulting in a new wave of homeowners that are less likely than ever before to default.

As a result, the standard form residential mortgage contract, with its harsh terms and overreaching provisions in favor of the lender, should be reformed. This is necessary not only due to the fact that such terms should no longer be needed since borrowers are better financially positioned than in the past, but also because of a disturbing trend in the past few years where lenders and their third party contractors have abused the powers accorded to them by the mortgage contract—mostly through break-in style foreclosures. This Article argues for a reformation of the standard residential mortgage contract and specifically singles out three common provisions that are ripe for modification or removal.