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

Geometry, can i get some triangle congruence proofs help?

can i get some triangle congruence proofs help?

What is the ratio of the areas of sectors , What is the ratio of the areas ...

What is the ratio of the areas of sectors I and II ?                               (Ans:4:5) Ans:    Ratio will be 120/360  Π r 2 : 150/360  Π r 2 4/12  : 5/12  =

Gauss-siedel or newton-rapson method, A one-line diagram of a simple three-...

A one-line diagram of a simple three-bus power system is shown in Figure 1 with generation at bus 1. The magnitude of voltage at bus 1 is adjusted to 1.05 per unit. The scheduled l

Closure : Activity 5.4, A classmate mixes 2 drops of red food coloring for ...

A classmate mixes 2 drops of red food coloring for every 4 drops of blue food coloring. Create a ratio table with 5 entries to represent this situation. Write the entries of the ra

Decimal representations of some basic angles, Decimal representations of so...

Decimal representations of some basic angles: As a last quick topic let's note that it will, on occasion, be useful to remember the decimal representations of some basic angles. S

Triangles, In a triangle ABC, D &E is a are points on AB & AC ,if the one s...

In a triangle ABC, D &E is a are points on AB & AC ,if the one side of a triangle is 4cm & another side is 5 cm find that the ar(triangleABC):ar(BCDE)

ADAM, SQUARE 12 IN

SQUARE 12 IN

Combination, nc6:n-3c3=91:4

nc6:n-3c3=91:4

Mensuration of plane figures, a sail has a spread of canvas as measured 12'...

a sail has a spread of canvas as measured 12'',12'', 15'' and 9'' and it has 90 degrees. Find the area of one side of the sail

International marketing, #questionsdvvc..

#questionsdvvc..

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