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

Express the product of -9p3r and the quantity 2p - 3r, Express the product ...

Express the product of -9p3r and the quantity 2p - 3r in simplified form. The translated expression would be -9p3r(2p - 3r). Noticed that the key word product means multiply.

Rules of integration, Rules of Integration 1. If ...

Rules of Integration 1. If 'k' is a constant then ∫Kdx =  kx + c 2. In

Comparison test - sequences and series, Comparison Test Assume that we...

Comparison Test Assume that we have two types of series ∑a n and ∑b n with a n , b n ≥ 0 for all n and a n ≤ b n for all n.  Then, A.  If ∑b n is convergent then t

Show that 8 - 10 + 21= 0, If A, B and P are the points (-4, 3), (0, -2) and...

If A, B and P are the points (-4, 3), (0, -2) and (α,β) respectively and P is equidistant from A and B, show that 8α - 10β + 21= 0. Ans :   AP = PB ⇒ AP 2 = PB 2 (∝ + 4) 2

Pre Calc, Find reference angle alpha and thea element of [0 degrees, 1800 d...

Find reference angle alpha and thea element of [0 degrees, 1800 degrees]

Determine the probability of given question, Q. Assume a birthday is equall...

Q. Assume a birthday is equally likely to occur in each of the 365 days. In a group of 30 people, what is the probability that no two have birthdays on the same day? Solution:

Statistics Assignment, I need help in assignment of stats? Please give me a...

I need help in assignment of stats? Please give me assist in my stats exam.

What is multiplying fractions, What is Multiplying Fractions ? The rule...

What is Multiplying Fractions ? The rule for multiplying fractions is to "multiply across": Multiply the numerators to get the numerator of the answer. Multiply the den

How many walkers got a ride school from their parents today, In Daniel's fi...

In Daniel's fifth grade class, 37.5% of the 24 students walk to school. One third of the walkers got a ride to school presently from their parents. How many walkers got a ride to s

One step ahead, how do we figure it out here is an example 3,4,6,9,_,_,_,_...

how do we figure it out here is an example 3,4,6,9,_,_,_,_,_,. please help

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