Customer Service Chat
Get quote & make Payment
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)
_ 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?
Posted Date: 12/20/2012 11:16:12 AM | Location : United States
Ask an Expert
economics, Assignment Help, Ask Question on economics, Get Answer, Expert's Help, economics Discussions
Write discussion on economics
Your posts are moderated
Write your message here..
Circumference, circumference of a circle
circumference of a circle
What is the area covered through the motion of the fan, The arm of a ceilin...
The arm of a ceiling fan measures a length of 25 in. What is the area covered through the motion of the fan blades while turned on? (π = 3.14) The ceiling fan follows a circula
Rate and ratio, express 4:24 as fraction in lowest term
express 4:24 as fraction in lowest term
What is the volume of this prism in terms of x, The area of the base of a p...
The area of the base of a prism can be expressed as x2 + 4x + 1 and the height of the prism can be expressed as x - 3. What is the volume of this prism in terms of x? Because t
Prove that op=2ap, Two tangents PA and PB are drawn to the circle with cent...
Two tangents PA and PB are drawn to the circle with center O, such that ∠APB=120 o . Prove that OP=2AP. Ans: Given : - ∠APB = 120o Construction : -Join OP To prove : -
Explain angle theorems, Explain Angle Theorems ? Certain angles and an...
Explain Angle Theorems ? Certain angles and angle pairs have special characteristics: Vertical angles are opposite angles formed by the intersection of two lines. Vertical ang
Prove that cos - sin = v2 sin , If cos?+sin? = √2 cos?, prove that cos? - ...
If cos?+sin? = √2 cos?, prove that cos? - sin? = √2 sin ?. Ans: Cos? + Sin? = √2 Cos? ⇒ ( Cos? + Sin?) 2 = 2Cos 2 ? ⇒ Cos 2 ? + Sin 2 ?+2Cos? Sin? = 2Cos 2 ? ⇒
Probability, There are 20 defective bulbs in a box of 100 bulbs.if 10bulbs ...
There are 20 defective bulbs in a box of 100 bulbs.if 10bulbs are choosen at random then what is the probability of there are just 3defective bulbs
Ampltude and period, find the amplitude and period of y=3 sin 2 pi x
find the amplitude and period of y=3 sin 2 pi x
Illustrate pythagorean theorem, Q. Illustrate Pythagorean Theorem? Ans...
Q. Illustrate Pythagorean Theorem? Ans. You have definitely seen the Pythagorean Theorem before, so a 2 + b 2 = c 2 should look familiar to you. The Pythagorean Theor
Accounting Assignment Help
Economics Assignment Help
Finance Assignment Help
Statistics Assignment Help
Physics Assignment Help
Chemistry Assignment Help
Math Assignment Help
Biology Assignment Help
English Assignment Help
Management Assignment Help
Engineering Assignment Help
Programming Assignment Help
Computer Science Assignment Help
Why Us ?
~24x7 hrs Support
~Quality of Work
~Time on Delivery
~Privacy of Work
Human Resource Management
Literature Review Writing Help
Terms & Conditions
Copyright by ExpertsMind IT Educational Pvt. Ltd.