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

Multiple linear regression models, Multiple Linear Regression Models T...

Multiple Linear Regression Models There are situations whether there is more than one factor which influence the dependent variable Illustration Cost of production weekl

Properties of radicals, If n is positive integer greater than 1 and a & b b...

If n is positive integer greater than 1 and a & b both are positive real numbers then, Consider that on occasion we can let a or b to be negative and yet have these propert

One-to-one correspondence to developing pre-number concepts, One-to-one Cor...

One-to-one Correspondence :  Suppose you are given a certain number of cups and saucers, and are asked to find out whether there are enough saucers for all the cups. How would you

g ( x ) = 3sec ( x ) -10 cot ( x ) -differentiate , Differentiate followin...

Differentiate following functions.                   g ( x ) = 3sec ( x ) -10 cot ( x ) Solution : There actually isn't a whole lot to this problem.  We'll just differentia

Evaluate numerator and denominator limit, Evaluate following limits. ...

Evaluate following limits. Solution : Let's do the first limit & in this case it sees like we will factor a z 3 out of the numerator and denominator both. Remember that

What is the cost to generate, The production costs per week for generating ...

The production costs per week for generating x widgets is given by, C ( x ) = 500 + 350 x - 0.09 x 2 ,         0 ≤ x ≤ 1000 Answer following questions.  (a) What is the c

Decision trees illustration, A company is considering whether to enter a ve...

A company is considering whether to enter a very competitive market. In case company decided to enter in market this must either install a new forging process or pay overtime wages

Measurement, into how many smaller part is each centimeter divided

into how many smaller part is each centimeter divided

Draw the bipartite graph, The graph C n , n  ≥  3 contains n vertices and n...

The graph C n , n  ≥  3 contains n vertices and n edges creating a cycle. For what value of n is C n a bipartite graph? Draw the bipartite graph of C n to give explanation for yo

Precalculus, how does sin of x equal negative 1/3

how does sin of x equal negative 1/3

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