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

Surface area, Find the amount of sheet metal need to form a conical funnel ...

Find the amount of sheet metal need to form a conical funnel of base radius 30cm with a vertical height of 50cm, allowing for 0.5cm overlap. Find the total surface area?

Limits at infinity, Limits At Infinity, Part I : In the earlier section w...

Limits At Infinity, Part I : In the earlier section we saw limits which were infinity and now it's time to take a look at limits at infinity.  Through limits at infinity we mean

Sets.., n(aubuc)..

n(aubuc)..

Definition of the definite integral , Using the definition of the definite ...

Using the definition of the definite integral calculate the following.                                                             ∫ 0 2  x 2   + 1dx Solution Firstly,

Free Assignment Test Online, Well, my uncle want me to tutor him in mathema...

Well, my uncle want me to tutor him in mathematics. But, the problem is I don''t know what he already knows about math. It for his Compass Test when he go back to school in the spr

Multiplication and division, you want to share 34 pencils among 6 friends ....

you want to share 34 pencils among 6 friends .How many would each friend get?

What is the marginal product of labor function, Your engineering department...

Your engineering department estimated the following production function. Q = 15L 2 - 0.5L 3 a. What is the marginal product of labor function, MP L ? b. What is the aver

Learning, my math skills are keeping me from getting my ged need help in al...

my math skills are keeping me from getting my ged need help in all areas

He would such as to leave 20% tip how much should he leave, Mr. Pelicas too...

Mr. Pelicas took his family out to dinner. The bill was $65.00. He would such as to leave a 20% tip. How much should he leave? Find 20% by multiplying $65 through the decimal e

Help me please, Cristiano Ronaldo runs 33.6 kilometres per hour. Usain Bolt...

Cristiano Ronaldo runs 33.6 kilometres per hour. Usain Bolt set world record for running 100 m at 9.58 sec. Show me how to compare these two sportsmen. Step by step.

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