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

Find the number of vertices in graph, A graph G has 21 Edges, 3 vertices of...

A graph G has 21 Edges, 3 vertices of degree 4 and other vertices are of degree 3. Find the number of vertices in G.   Ans: It is specified that graph G has 21 edges, so total

Function notation, Now we need to move onto something called function notat...

Now we need to move onto something called function notation.  Function notation will be utilized heavily throughout most of remaining section and so it is important to understand i

Solving an equation using multiplication and division, Solving an equation ...

Solving an equation using Multiplication and Division       A variable is a symbol that represents a number. Usually we use the letters like n , t , or x for variables. For

Cooking measurement question, Ask question what is half of 1 1/3 liquid mea...

Ask question what is half of 1 1/3 liquid measurements?

Geometry, Can two lines contain a given point

Can two lines contain a given point

Surds and logarithms, what are these all about and could i have some exampl...

what are these all about and could i have some examples of them please

How many handles must be molded weekly to break even, Northwest Molded mold...

Northwest Molded molds plastic handles which cost $0.70 per handle to mold. The fixed cost to run the molding machine is $5799 per week. If the company sells the handles for $ 3.70

Solve-|x2-5x+4/x2-4|

x^2-5x+4 can written in roots as (x-1)*(x-4) x^2-4 can be written interms of (x-2)(x+2).so [(x-1)(x-4)/(x-2)(x+2)]

Find the probability density function, 1. The lifetime T (in days) of an el...

1. The lifetime T (in days) of an electrical component has reliability function given by: R(t) = e -0.01t for time t > 0. An electrical system consists of four such components. Th

Shqip, 2+4

2+4

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