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

Evaluate the volume of a ball, Evaluate the volume of a ball whose radius i...

Evaluate the volume of a ball whose radius is 4 inches? Round to the nearest inch. (π = 3.14) a. 201 in 3 b. 268 in 3 c. 804 in 3 d. 33 in 3 b. The volume of a

Statistics, Calculate the Kendaul''s correlation cofficient for a given dat...

Calculate the Kendaul''s correlation cofficient for a given data.

Tangents, two circle of radius of 2cm &3cm &diameter of 8cm dram common tan...

two circle of radius of 2cm &3cm &diameter of 8cm dram common tangent

COS Sheets, How do I find percentages with doing COS Sheets

How do I find percentages with doing COS Sheets

Explain different base numbers, Explain Different Base Numbers? In mult...

Explain Different Base Numbers? In multiplying or dividing two exponential expressions with different base numbers, write out the exponential expressions as products. Since

How far did the ?rst arrow goes, From a fixed point directly in front of th...

From a fixed point directly in front of the center of a bull's eye, Kim aims two arrows at the bull's eye. The first arrow nicks one point on the edge of the bull's eye; the second

Polar to cartesian conversion formulas, Polar to Cartesian Conversion Formu...

Polar to Cartesian Conversion Formulas x = r cos Θ y = r sin Θ Converting from Cartesian is more or less easy.  Let's first notice the subsequent. x 2 + y 2   = (r co

Geometry, what are the parts of angles

what are the parts of angles

Write Your Message!

Captcha
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!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd