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Optimal mortgage loan securitization and the subprime crisis

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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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Authors and Affiliations

  1. North-West University (Potchefstroom Campus), Private Bag X 6001, Potchefstroom, 2520, South Africa

    J. Mukuddem-Petersen, M. P. Mulaudzi, Mark Adam Petersen & I. M. Schoeman

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  1. J. Mukuddem-Petersen
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  2. M. P. Mulaudzi
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  3. Mark Adam Petersen
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  4. I. M. Schoeman
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Correspondence to Mark Adam Petersen.

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Mukuddem-Petersen, J., Mulaudzi, M.P., Petersen, M.A. et al. Optimal mortgage loan securitization and the subprime crisis. Optim Lett 4, 97–115 (2010). https://doi.org/10.1007/s11590-009-0140-y

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  • DOI: https://doi.org/10.1007/s11590-009-0140-y

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