Optimal mortgage loan securitization and the subprime crisis |
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| Authors: | J Mukuddem-Petersen M P Mulaudzi Mark Adam Petersen I M Schoeman |
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| Institution: | (1) Gregory, Sharer and Stuart Term Professor in Forensic Accounting, College of Business, University of South Florida-St. Petersburg, St. Petersburg, FL 33701, USA;(2) College of Business, University of South Florida-St. Petersburg, St. Petersburg, FL 33701, USA |
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| Abstract: | We analyze the process of mortgage loan securitization that has been a root cause of the current subprime mortgage crisis
(SMC). In particular, we solve an optimal securitization problem for banks that has the cash outflow rate for financing a
portfolio of mortgage-backed securities (MBSs) and the bank’s investment in MBSs as controls. In our case, the associated
Hamilton–Jacobi–Bellman equation (HJBE) has a smooth solution when the optimal controls are computed via a power utility function.
Finally, we analyze this optimization problem and its connections with the SMC. |
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