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

Algebra, simplify mn+mp+nq+pq /n+p

simplify mn+mp+nq+pq /n+p

Multipliying decimals / money, 13.8 times by 5

13.8 times by 5

Find the discount factors and linear interpolation, Question: All rates...

Question: All rates should be calculated to 3 decimal places in % (e.g. 1.234%), the discount factors to 5 decimal places (e.g. 0.98765), and the bond prices to 3 decimal place

Real numbers, prove root 2 as irrational number

prove root 2 as irrational number

Higher-order derivatives, Higher-Order Derivatives It can be se...

Higher-Order Derivatives It can be seen that the derivative of a function is also a function. Considering f'x as a function of x, we can take the derivative

Fractions, a boy is six months old his sister was given birth to three mont...

a boy is six months old his sister was given birth to three month after him. if their cousin is 0.33years old, arrange their ages in ascending order

Operation research, Formulate LLP

Formulate LLP

Calculate how much ribbon is needed to wrap the box, Ribbon is wrapped arou...

Ribbon is wrapped around a rectangular box that is 10 by 8 by 4 in. Using the example provided, calculate how much ribbon is needed to wrap the box. consider the amount of ribbon d

#title : Radius Vector, how it will be ? = ? + Ø

how it will be ? = ? + Ø

Definition and fact of the shape of a graph, Definition 1.   Given any ...

Definition 1.   Given any x 1  & x 2   from an interval  I with x 1 2  if f ( x 1 ) 2 ) then f ( x ) is increasing on I. 2.   Given any x 1  & x 2  from an interval

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