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

Which of the following binomials could represent the length, The area of Mr...

The area of Mr. Smith's rectangular classroom is x 2 - 25. Which of the following binomials could represent the length and the width of the room? Since area of a rectangle is

If 967.234 is divided by 10 how will the decimal point move, If 967.234 is ...

If 967.234 is divided by 10, how will the decimal point move? It will move one place to the left. While dividing by multiples of 10, the decimal point is moved to the left acco

Title expressions equivalent, 2x40 420x4 7x240 84x20 Explain h...

2x40 420x4 7x240 84x20 Explain how three expressions are equivalent.

Find the coordinates of c , Plot the points A(2,0) and B (6,0) on a graph p...

Plot the points A(2,0) and B (6,0) on a graph paper. Complete an equilateral triangle ABC such that the ordinate of C be a positive real number .Find the coordinates of C   (Ans: (

Assisnment, How a student of mathematics of b.sc can make an assignment on...

How a student of mathematics of b.sc can make an assignment on topic of asymptotes?

Derivative with polar coordinates - parametric equations, Derivative with P...

Derivative with Polar Coordinates dy/dx = (dr/dθ (sin θ) + r cos θ) / (dr/dθ (cosθ) - r sinθ) Note: Rather than trying to keep in mind this formula it would possibly be easi

Volume of grains in the silo , The volume of grains in a silo at a particul...

The volume of grains in a silo at a particular time (measured in hours) is given by V (t) = 4t(3-t) m3. Find the rate of change of the volume of grains in the silo from first princ

Math, i need help in math

i need help in math

What was the us''s policy towards latin america, What was the US's policy t...

What was the US's policy towards Latin America during the 20th century? What were the motives behind this policy? Give one example of the US executing this policy?

Write Your Message!

Captcha
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!

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