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

Right angle triangle, If the points for a right angle triangle are XYZ wher...

If the points for a right angle triangle are XYZ where do I mark the points?

Statewide mortality rates, Assume that between workers exposed to asbestos ...

Assume that between workers exposed to asbestos in a shipyard in 1980, 33 died over a 10 year period from COPD, whereas only 24 such deaths would be expected based on statewide mor

Discrete math, ) Show that the following argument is valid: (~p ? q) =>...

) Show that the following argument is valid: (~p ? q) => r s ? ~q ~t p => t (~p ? r) => ~s ------------------------ ? ~q 2) Show that the following argum

Trigonometry, show that, sin 90 degree = 2 cos 45 degree sin 45 degree

show that, sin 90 degree = 2 cos 45 degree sin 45 degree

Describe square roots, Describe Square Roots? When a number is written ...

Describe Square Roots? When a number is written inside a radical sign (√), the number is called the radicand, and we say that you are "taking the square root of" that number.

Find out primes of each denominator, Find out primes of each denominator: ...

Find out primes of each denominator: Add 1/15 and 7/10 Solution: Step 1:             Find out primes of each denominator. 15 = 5 x 3 10 = 5 x 2 Step 2:

Differential calculus and probability, Josephine is constructing an open bo...

Josephine is constructing an open box by cutting the squares off the corners of a sheet of paper sized 20cm by 16cm. She is considering options of 3cm, 4cm and 5cm squares in order

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