User Account

All Pages

economics, Mathematics

Assignment Help:
A mortgage lender seeks to maximize the expected value of its portfolio. The portfolio, of course, is the
sum of all of the mortgages in it, so no generality is lost by examining the case of one loan:
E[port] = (1-p).B +p.(V-L)
where:
_ E[port] is the expected value of the portfolio
_ p is the probability of foreclosure
_ B is the principal balance
_ V is the sale price at foreclosure
_ L is the legal fees incurred by foreclosure
Assume that the borrower’s probability of foreclosure is an increasing function of his/her ”balance-to value ratio” (i.e. B/V):
P ? p (B/V) P’>0
In other words, borrowers who are deeper underwater are more likely to enter the foreclosure process. In such cases, reducing principal balances would reduce foreclosure-related losses (by reducing the probability of foreclosure). On the other hand, principal balance reductions are a direct loss for the lender.
1. Derive the marginal benefit of reducing principal balances.
2. Derive the marginal cost of reducing principal balances.
3. What is the necessary condition for maximizing E[port] with respect to the principal balance?
4. What is the sufficient condition for maximizing E[port]?
5. How does the marginal benefit curve shift in response to an increase in L?
6. How does the marginal cost curve shift in response to an increase in L?
7. How does the optimal principal balance change when L increases?

Related Discussions:- economics

Explain how to distribute simplifying expressions, Explain How to Distribut...

Explain How to Distribute simplifying expressions? The distributive law states that for all numbers a, b, and c, a(b + c)= ab + ac What does this mean in plain language?

Integral calculus, I need help to understand: fxx for f(x,y)=x^2+y^2-2xy

I need help to understand: fxx for f(x,y)=x^2+y^2-2xy

A, a

a

Prisms, i have to find surface,lateral,and volume

i have to find surface,lateral,and volume

Area and perimetre, area and perimetre of semi circle

area and perimetre of semi circle

Variation of parameters, In this case we will require deriving a new formul...

In this case we will require deriving a new formula for variation of parameters for systems.  The derivation now will be much simpler than the when we first noticed variation of pa

Give an example of numerator and denominator, Give an example of Numerator ...

Give an example of Numerator and Denominator? Fractions represent parts of a whole object. Fractions are written using a horizontal line, with one number on top of the line and

Linear programming, importance of lp

importance of lp

Rlc circuit, State clearly that the current in an RLC circuit with an AC so...

State clearly that the current in an RLC circuit with an AC source with and without the use of complex variables

Power of iota, The next topic that we desire to discuss here is powers of i...

The next topic that we desire to discuss here is powers of i. Let's just take a look at what occurring while we start looking at many powers of i . i 1 = i

Write Your Message!

Captcha
Order Assignment

Featured Services

Order Now

Popular Subjects

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +91-977-207-8620

Phone: +91-977-207-8620

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd