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

Times fractons, In a garden, 1/8 of the flowers are tulips. 1/4 of the tuli...

In a garden, 1/8 of the flowers are tulips. 1/4 of the tulips are red. What fraction of the flowers in the garden are red tulips?

Write down the system of differential equations, Write down the system of d...

Write down the system of differential equations for mass system and the spring above. Solution To assist us out let's first take a rapid look at a situation wherein both of

Probability, An unbiased die is tossed twice .Find the probability of getti...

An unbiased die is tossed twice .Find the probability of getting a 4,5,6 on the first toss and a 1,2,3,4 on the second toss

Basic set union operation, Q. Basic Set Union Operation? Ans. Supp...

Q. Basic Set Union Operation? Ans. Suppose instead that your school needs to know which students are taking either art or business or both. Then the students who are ta

Velocity of derivation, Velocity : Recall that it can be thought of as sp...

Velocity : Recall that it can be thought of as special case of the rate of change interpretation. If the situation of an object is specified by f(t ) after t units of time the vel

Compound and simple interest, Your grandparents gave you a gift of R2 000 o...

Your grandparents gave you a gift of R2 000 on your 16th birth day. You want to invest the money in an account over four years. You have an option of investing the R2 000 at 8% per

Jamal, jamal works every morning in his garden. yesterday he worked 3 AND 3...

jamal works every morning in his garden. yesterday he worked 3 AND 3-4HOURS. HE SPENT 1-3 OF THE TIME PULLING WEEDS. HOW MANY HOURS DID JAMAL SPEND PULLING WEEDS?

What is symmetric value, What is symmetric value

What is symmetric value

Find out that the relation is an equivalent relation or not, Let m be a pos...

Let m be a positive integer with m>1. Find out whether or not the subsequent relation is an equivalent relation. R = {(a,b)|a ≡ b (mod m)} Ans: Relation R is illust

Equation, Solve : 4x2+2x+3=0 Ans) x^2 + (1/2)x = -(3/4) (x+1/4)^2 = 1/...

Solve : 4x2+2x+3=0 Ans) x^2 + (1/2)x = -(3/4) (x+1/4)^2 = 1/16 - 3/4 = -11/16 implies x = (-1+i(11)^(1/2))/4 and its conjugate.

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