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

Congruum, Explain Congruum?

Explain Congruum?

Linear programming and its application, objective of linear programming?

objective of linear programming?

Area and perimeter, if perimeter is 300m length is 100m.find the breadth

if perimeter is 300m length is 100m.find the breadth

Regrouping, in regrouping if we have abig number in the end what should i d...

in regrouping if we have abig number in the end what should i do?add an number on top of it,please help

Shqip, 2+4

2+4

Determine the size of belt, On a piece of machinery, the centers of two pul...

On a piece of machinery, the centers of two pulleys are 3 feet apart, and the radius of each pulley is 6 inches. Determine the size of belt (in feet) is required to wrap around bot

Triangle Treat, Triangle Treat is the page name. I don''t know the answer f...

Triangle Treat is the page name. I don''t know the answer for it, can someone give it to me?

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?

Find a common factor of the numerator and denominator, Q. Find a common fac...

Q. Find a common factor of the numerator and denominator? Ans. There's only one key step to simplifying (or reducing) fractions: find a common factor of the numerator and

Variation, If p=10 when q=2,find p when q=5

If p=10 when q=2,find p when q=5

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