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

Theorem of reduction of order, In this theorem we identify that for a speci...

In this theorem we identify that for a specified differential equation a set of fundamental solutions will exist. Consider the differential equation  y′′ + p (t ) y′ + q (t

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

Explain polynomials, P OLYNOMIALS : It is  not  once  nor  twice  b...

P OLYNOMIALS : It is  not  once  nor  twice  but  times  without  number  that the  same ideas make  their  appearance in the  world. 1.  Find the value for K for which

Combination, three complain forces of magnitudes 20N 30N and 45N

three complain forces of magnitudes 20N 30N and 45N

Relating addition and subtraction, RELATING ADDITION AND SUBTRACTION :  In...

RELATING ADDITION AND SUBTRACTION :  In the earlier sections we have stressed the fact that to help children understand addition or subtraction, they need to be exposed to various

Determine the area of the book jacket, A publishing company is creating a b...

A publishing company is creating a book jacket for a newly published textbook. Determine the area of the book jacket, given that the front cover is 8 in wide by 11 in high, the bin

Prisoners dilemma, Prisoners Dilemma This is a type of non-zero sum gam...

Prisoners Dilemma This is a type of non-zero sum game and derives its name from the given story: The district attorney has two bank robbers in separate cells and offers them

Geometry, RS=8y+4 ST=4y+8 RT=15y-9 a.) WHAT IS THE VALUE OF y b.) FIND RS...

RS=8y+4 ST=4y+8 RT=15y-9 a.) WHAT IS THE VALUE OF y b.) FIND RS, ST, AND RT

Objectives of why learn mathematics, Objectives After studying this uni...

Objectives After studying this unit, you should be able to explain how mathematics is useful in our daily lives; explain the way mathematical concepts grow; iden

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