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I hold a mortgage for $130K. "6% per annum", 20 years, 240 monthly payments of $931. The mortgagee paid the initial 45 monthly payments and has not paid for 264 months.

I would like to know the current value of the mortgage if it were to be paid off today.

I think it should be the balance listed in the amortization table for the most recent payment, which is $115,841, plus 6% interest since that payment, or $115,841 * (1.06 ^ (264/12)), which is $417,437.

The mortgagee claims it's (240-45) * $931 = $181,545. She says there is no provision in the mortgage for changing the number or amount of payments.

Edit: I got a copy of the mortgage. It's a standard-looking mortgage apparently supplied by the title agency. The only recourse it lists for missed payments is foreclosure.

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    Looking through your previous questions it seems like this may be part of an ongoing financial situation where you may be getting taken advantage of financially by a family member. Please seek legal advice on how to get back what has been taken from you. Clearly presenting 'fairness' arguments will not work with a counterparty that refuses to engage with you in good faith. I hope you are able to get the help you need. – Grade 'Eh' Bacon Oct 20 '20 at 17:47
  • @Grade'Eh'Bacon I've been referred to a few lawyers who will represent me for a retainer I cannot yet afford, and I will retain them if it comes to that. – Dev1 Oct 20 '20 at 18:28
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    @Dev1 sell some shares if you still have them, get that retainer. Make it top priority. Your money is being stolen, for many years already. Your brother's wife is taking advantage of you. Let a professional handle it, and prepare to never talk to her again afterwards. She does not respect you. – user103433 Oct 21 '20 at 7:30
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    How did it come to this? You've essentially given them a free ride for longer than the full term of the mortgage. – Barmar Oct 21 '20 at 14:40
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    @Dev1 sounds like you should just foreclose and let her use the life insurance money to buy a new house. I can't imagine you'll have much luck selling a mortgage which hasn't been paid for two decades. The "value" of a debt includes how likely it is to be repaid, not simply the outstanding balance. – Kat Oct 22 '20 at 17:37
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Your calculation, which continues to compound interest on the principal amount remaining at the time of the latest payment made, is intuitively correct. If this were a standard mortgage contract with a bank, it would certainly work that way (that is, if they allowed you to go on a 20-year payment hiatus).

The problem is, you are dealing with a legal matter, and what truly applies in this case will depend on the legal agreement you made with the mortgagee. Does your contract actually consider this possibility? Further, is your contract one which would hold up in court as being legally binding?

You're dealing with a $230k discrepancy between what you believe is correct and what the mortgagee believes is correct. Time for paid legal advice, not a free forum post.

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  • I don't think "standard mortgages" in the US compound interest - they just compute interest on the unpaid principal balance (at least mine does, and I assume it's "standard"). That said, one you miss a payment and are in default then you start including late fees which are MUCH higher than the compounded interest would be. – D Stanley Oct 20 '20 at 17:42
  • @DStanley In cases where a payment hiatus is allowed (somewhat common in Canada, typically for 3-6 months based on some list of 'emergency' events), I believe interest does continue to compound. I suppose this may not be a 'standard mortgage' contract, but more broadly standard fair debt calculation. – Grade 'Eh' Bacon Oct 20 '20 at 17:45
  • I got a copy of the mortgage. It's a standard-looking mortgage apparently supplied by the title agency. The only recourse it lists for missed payments is foreclosure. – Dev1 Oct 20 '20 at 17:49
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    @dev1 Does it calculate interest owed anywhere? I still think a lawyer could really give you value. You might pay $500 to gain $200k. Seems worth it to me. – Grade 'Eh' Bacon Oct 20 '20 at 18:24
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    I am not a lawyer, but if the agreement says "6% per annum", then that means interest is charged annually - and barring any definitions otherwise, it should at bare minimum accrue on outstanding principal, if not unpaid interest [ie: it should at least give you simple interest for 20 years, and might even be argued to compound]. Go to a lawyer who can read the contract and give you options. – Grade 'Eh' Bacon Oct 20 '20 at 19:01
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She is certainly wrong (you don't get to just not pay for 20 years and pick up where you left off) and you might be right depending on what the mortgage says about "accrued unpaid interest" - if it compounds (meaning any unpaid interest is included in the calculation of the next month's interest) then your formula would be right.

If it does not get included in the interest calculation and just accrues as simple interest (for example, my mortgage says that interest will be charged on the "unpaid principal balance", which would probably be interpreted to NOT include unpaid interest), then you need to split the remaining "balance" into two parts: the actual principal owed and the accrued interest.

The accrued interest would be the interest rate times the principal balance after the last payment times the number of periods, or $115,841 * (.06/12) * 264 = 152,910. So the total amount "owed" would be $268,751, but only the 115,841 would continue to accrue interest.

All that said, this mortgage is in default, and if the mortgage doesn't specify what to do in case of default, then it comes down to whatever the two of you can agree on. You hold a lien to the house, but she holds the checkbook, so you need to wither work out a settlement or go to court, present your arguments, and let a judge decide what would be "fair".

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    I'm not sure the mortgagee being "certainly wrong" can be guaranteed here - if this is an agreement between 2 previously friendly parties (family, etc.), I could easily imagine a contract which does not discuss interest at all, and only defines payment owed based on an amortization table. Interest may be implied but not directly stated, and depending on statute in the OP's jurisdiction, barring a legally binding contract, it is unclear how such a situation would be handled. – Grade 'Eh' Bacon Oct 20 '20 at 17:31
  • @Grade'Eh'Bacon Fair enough, there could be an agreement that allows this, but foregiving unpaid interest (let alone 20 years' worth) is certainly not typical. – D Stanley Oct 20 '20 at 17:40
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    Based on previous questions by the OP, it seems there may barely be a 'contract' at all, and possibly just an amortization table they agreed to. – Grade 'Eh' Bacon Oct 20 '20 at 17:47
  • @Grade'Eh'Bacon It's a standard mortgage. It looks like the form was supplied by the title agency who was involved in the house purchase. It is registered with the county registrar of deeds. – Dev1 Oct 20 '20 at 18:21
  • @Dev1: I've seen these "standard mortgage" forms. Usually they don't handle falling behind at all and it's easy to argue that you've clearly entered an unexpected case as far as the original contract is concerned. – Joshua Oct 22 '20 at 16:43
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How default is handled is highly dependent on what agreement, and what documentation of that agreement, exist. But it might be moot: if no payment, and no attempt at collection, has been made in 264 months, any action may be barred by statute of limitations. I have moral qualms about saying this, but your first priority probably should be restarting the SOL clock, by getting them to do things such as acknowledge the debt, promise to repay the debt, make initial payments, etc.

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  • +1, suing for a 20 year old debt will be very difficult. If OP can reach a new agreement for any particular sum, things become much easier. – jpa Oct 21 '20 at 11:20
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    Sounds like the OP still has a legal lien on the house as it was registered in their county. This is poor advice as it potentially underplays the situation they are in - the correct action is to get a lawyer before 'accepting a loss' and coming in at a weaker negotiating position like this. – Grade 'Eh' Bacon Oct 21 '20 at 15:40
  • @Grade'Eh'Bacon There's nothing about accepting a loss in the answer. – Acccumulation Oct 24 '20 at 3:35
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Mathematically, the correct outstanding balance on the loan, under the assumption of a nominal annual interest rate of i^(12) = 0.06 convertible monthly, with compounding continuing on the unpaid balance, is $432216.91. This is consistent with your stated value in the amortization table, which should be exactly $115840.77 at 45 months, and is because the effective monthly interest rate is i^(12)/12 = 0.005. The level payment per month is $931.36, as given by $130000 x 0.005 / (1 - (1.005)^-240).

Rather than the formula you used, we simply write $115840.77 x (1 + 0.005)^264 to get the accrued value of the outstanding balance, because the compounding schedule is monthly.

Had a bank or other mortgage lender allowed such a long period of nonpayment (longer than the original term of the loan!), which is absurd since they would have long since foreclosed on the home, they would have undoubtedly tacked on additional penalties for nonpayment. They would not have allowed the outstanding balance to remain the nominal value for 22 years. This would effectively constitute an interest-free loan with no penalties and would result in a tremendous loss of the time value of money. As such, there is no conceivable justification for the borrower to claim that the outstanding balance remains at $115841. Even simply adjusting for inflation for the past 22 years, with no interest applied, that amount would be roughly equivalent to $184298 today.

I would immediately begin foreclosure proceedings on the property and resell it because the value of that property alone probably exceeds what the borrower will repay even under your proposal. If she is wishing to hold you to the terms of the mortgage, and foreclosure is your only recourse, then she is more than welcome to experience the consequences of being in default for 22 years.

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  • The conceivable justification for the reduced payment is a question of law, based on interpretation of the actual contracted agreement, not simply what appears 'fair'. This is why legal advice must be sought before taking action such as pursuing foreclosure. – Grade 'Eh' Bacon Oct 21 '20 at 20:14

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