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

ALGEBRA, FIND PRODUCT (-41)*(102)

FIND PRODUCT (-41)*(102)

Example on discrete mathematics, Suppose that at some future time every tel...

Suppose that at some future time every telephone in the world is assigned a number that contains a country code, 1 to 3 digits long, that is, of the form X, XX , XXX or followed

Combined mean and standard deviation -illustration, Combined mean Assu...

Combined mean Assume m be the combined mean Assume x 1 be the mean of first sample Assume x 2 be the mean of the second sample Assume n 1 be the size of the 1 st

Calculus, I need help with my calculus

I need help with my calculus

Geometry, all basic knowledge related to geometry

all basic knowledge related to geometry

Volume, a data set has a mean of 3, a median of 4, and a mode of 5.which nu...

a data set has a mean of 3, a median of 4, and a mode of 5.which number must be in the data set-3,4,5?

Where does glycolysistake place?, where does goes take place?

where does goes take place?

Algebra, (3+x)(3-x)

(3+x)(3-x)

Linear algrebra, how do we solve multiple optimal solution

how do we solve multiple optimal solution

Graphical method for interpolation, Graphical Method Whil...

Graphical Method While drawing the graph on a natural scale, the independent variables are marked along the horizontal line and corresponding dependen

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