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

Estimate the distance to this star, To find the distance to nearby stars, t...

To find the distance to nearby stars, the method of parallax is used. The idea is to find a triangle with the star at one vertex and with a base as large as possible. To do this, t

Compound interest, principal=2000 rate=5% time=2 years find compound intere...

principal=2000 rate=5% time=2 years find compound interest

Calculus, limits

limits

Matrices, how to find inverse of matrix

how to find inverse of matrix

Smooth curve - three dimensional space, Smooth Curve - Three Dimensional Sp...

Smooth Curve - Three Dimensional Space A smooth curve is a curve for which → r' (t) is continuous and → r' (t) ≠ 0 for any t except probably at the endpoints. A helix is a s

On income and return from shares, a company declares a semu annual dividend...

a company declares a semu annual dividend on 5%.a man has 400 shares of the company.if his annual income from the share is rs 1000 find the face value of each share?

Negative Numbers, -3+4 #Minimum 100 words accepted#

-3+4 #Minimum 100 words accepted#

Triangle treat, give me the anwsers ..

give me the anwsers ..

International marketing, #questionsdvvc..

#questionsdvvc..

How much does it car cost her per year, Ashley's car insurance costs her $1...

Ashley's car insurance costs her $115 per month. How much does it cost her per year? Multiply $115 by 12 because there are 12 months in a year; $115 × $12 = $1,380 per year.

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