Subprime Risk and Insurance with Regret

<table class="table-group" id="tab5"><tr><td><table class="table"><tr><td class="thead-hr" colspan="4"><hr/></td></tr><tr><td align="left">  Outstanding balances</td><td align="center">  Value</td><td align="center"></td><td align="center">  Required capital </td></tr><tr><td align="center" colspan="4"><hr/></td></tr><tr><td align="left"> Original mortgage portfolio (<svg height="11.175" id="M327" style="vertical-align:-0.0pt" version="1.1" viewbox="0 0 17.475 11.175" width="17.475" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,11.113)"><path d="M998 650l-8 -28q-71 -4 -86 -16t-22 -69l-50 -397q-3 -28 -4.5 -44t2 -29t6.5 -18.5t17 -10.5t24.5 -6.5t37.5 -3.5l-8 -28h-271l7 28q63 6 78 22t25 90l60 415h-2l-353 -552h-23l-130 536h-2l-70 -254q-44 -158 -47 -188q-5 -38 9 -51t71 -18l-6 -28h-241l8 28
q45 4 67 18.5t35 45.5q16 38 74 233l52 173q24 79 11.5 98t-89.5 26l6 28h177l136 -508l337 508h172z" id="x1D440"></path></g>
</svg>)</td><td align="center"> 10 000</td><td align="center"></td><td align="center">400</td></tr><tr><td align="left">Reference mortgage portfolio (<svg height="20.450001" id="M328" style="vertical-align:-3.56265pt" version="1.1" viewbox="0 0 36.137501 20.450001" width="36.137501" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,15.95)"><path d="M619 670q0 -13 -9 -26t-18 -19q-13 -10 -25 2q-36 38 -66 38q-31 0 -54.5 -50t-45.5 -185h120l-20 -31l-107 -12q-23 -138 -57 -293q-27 -122 -55 -184.5t-75 -109.5q-60 -61 -114 -61q-25 0 -47.5 15t-22.5 31q0 17 31 44q11 8 20 -1q10 -11 31 -19t35 -8q26 0 47 19
q34 34 71 253l54 315h-90l-3 12l31 30h70q28 138 90 204q35 37 75 57.5t70 20.5q26 0 45 -14t19 -28z" id="x1D453"></path></g>
<g transform="matrix(.012,-0,0,-.012,10.975,7.8)"><path d="M570 168l-39 -168h-498v23l262 301l-248 304v22h471q4 -71 11 -146l-29 -4q-17 65 -37 88q-12 15 -36 20.5t-79 5.5h-181l211 -256l-243 -287h280q51 0 77 20.5t49 83.5z" id="x3A3"></path></g>
<g transform="matrix(.017,-0,0,-.017,18.712,15.95)"><path d="M998 650l-8 -28q-71 -4 -86 -16t-22 -69l-50 -397q-3 -28 -4.5 -44t2 -29t6.5 -18.5t17 -10.5t24.5 -6.5t37.5 -3.5l-8 -28h-271l7 28q63 6 78 22t25 90l60 415h-2l-353 -552h-23l-130 536h-2l-70 -254q-44 -158 -47 -188q-5 -38 9 -51t71 -18l-6 -28h-241l8 28
q45 4 67 18.5t35 45.5q16 38 74 233l52 173q24 79 11.5 98t-89.5 26l6 28h177l136 -508l337 508h172z" id="x1D440"></path></g>
</svg>)</td><td align="center"> 6500</td><td align="center"></td><td align="center">260</td></tr><tr><td align="left">Sen tranches (<svg height="16.225" id="M329" style="vertical-align:-0.0pt" version="1.1" viewbox="0 0 16.950001 16.225" width="16.950001" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,16.163)"><path d="M594 511q0 -122 -171 -157l1 -2q158 -33 158 -159q0 -52 -34.5 -95t-90.5 -65q-76 -33 -217 -33h-223l8 28q63 5 79.5 19t26.5 72l83 426q9 48 -2.5 60t-77.5 17l6 28h259q195 0 195 -139zM499 509q0 59 -37 83t-91 24q-36 0 -51 -9q-17 -9 -22 -44l-35 -195h62
q82 0 128 37t46 104zM481 199q0 71 -48 102.5t-121 31.5h-56l-37 -201q-11 -58 7.5 -77t80.5 -19q76 0 125 44.5t49 118.5z" id="x1D435"></path></g>
<g transform="matrix(.012,-0,0,-.012,10.55,8)"><path d="M457 488l-30 -3q-17 148 -131 148q-53 0 -84.5 -34.5t-31.5 -82.5q0 -42 25.5 -72t74.5 -62l33 -22q63 -42 95 -85t32 -102q0 -84 -67 -137t-163 -53q-58 0 -113 22t-70 43l-4 152l27 4q4 -32 15 -62.5t31 -59.5t53.5 -47t76.5 -18q56 0 92 35t36 96q0 39 -25 70t-78 68
l-31 22q-32 23 -53.5 41.5t-45 57t-23.5 77.5q0 82 58 132.5t156 50.5q46 0 101 -17l18.5 -6t17 -6t8.5 -3q-4 -55 0 -147z" id="x1D446"></path></g>
</svg>)</td><td align="center"> 5850</td><td align="center"> Sold</td><td align="center"></td></tr><tr><td align="left">Subtranches (<svg height="16.75" id="M330" style="vertical-align:-0.0pt" version="1.1" viewbox="0 0 29.025 16.75" width="29.025" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,16.7)"><path d="M594 511q0 -122 -171 -157l1 -2q158 -33 158 -159q0 -52 -34.5 -95t-90.5 -65q-76 -33 -217 -33h-223l8 28q63 5 79.5 19t26.5 72l83 426q9 48 -2.5 60t-77.5 17l6 28h259q195 0 195 -139zM499 509q0 59 -37 83t-91 24q-36 0 -51 -9q-17 -9 -22 -44l-35 -195h62
q82 0 128 37t46 104zM481 199q0 71 -48 102.5t-121 31.5h-56l-37 -201q-11 -58 7.5 -77t80.5 -19q76 0 125 44.5t49 118.5z" id="x1D435"></path></g>
<g transform="matrix(.012,-0,0,-.012,10.55,8.538)"><path d="M409 504l-29 -5q-16 60 -44.5 96t-86.5 36q-54 0 -82.5 -32t-28.5 -77q0 -51 30.5 -82.5t96.5 -65.5l35.5 -18t33 -19.5t33.5 -23.5l27 -25.5t24.5 -32t13.5 -36.5t6 -45q0 -80 -62 -134.5t-160 -54.5q-47 0 -98 15q-22 7 -50 21q-8 23 -27 155l30 7q7 -27 18 -52
t30 -51.5t49 -42.5t67 -16q56 0 88 32.5t32 87.5q0 51 -31.5 82t-98.5 67q-80 44 -110 73q-55 53 -55 124q0 75 56 126.5t150 51.5q53 0 126 -23z" id="x53"></path></g><g transform="matrix(.012,-0,0,-.012,16.035,8.538)"><path d="M518 50v-26q-32 -4 -77 -16l-37 -11t-33 -9l-6 6v71q-56 -42 -74 -52q-43 -25 -77 -25q-55 0 -89.5 36.5t-34.5 112.5v196q0 38 -6.5 48.5t-26.5 15.5l-28 6v23q19 1 72 7q59 9 71 11q-3 -31 -3 -145v-135q0 -113 88 -113q59 0 108 48v234q0 38 -8 49t-34 15l-36 6v23
q44 2 90 8q37 4 67 10v-334q0 -37 8.5 -47t38.5 -12z" id="x75"></path></g><g transform="matrix(.012,-0,0,-.012,22.306,8.538)"><path d="M152 404l81 35q23 10 41 10q81 0 139 -61.5t58 -149.5q0 -107 -74.5 -178.5t-176.5 -71.5q-71 0 -147 36v555q0 48 -9.5 59.5t-56.5 15.5v23q79 10 145 35v-308zM152 374v-258q0 -20 6 -35q7 -19 30 -37t58 -18q63 0 99.5 50t36.5 137q0 82 -43.5 131t-108.5 49
q-44 0 -78 -19z" id="x62"></path></g>
</svg>)</td><td align="center"> 650</td><td align="center"> Sold</td><td align="center"></td></tr><tr><td align="left">Final mortgage portfolio (<svg height="20.450001" id="M331" style="vertical-align:-3.56265pt" version="1.1" viewbox="0 0 73.587502 20.450001" width="73.587502" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,15.95)"><path d="M300 -147l-18 -23q-106 71 -159 185.5t-53 254.5v1q0 139 53 252.5t159 186.5l18 -24q-74 -62 -115.5 -173.5t-41.5 -242.5q0 -130 41.5 -242.5t115.5 -174.5z" id="x28"></path></g><g transform="matrix(.017,-0,0,-.017,5.944,15.95)"><path d="M384 0h-275v27q67 5 81.5 18.5t14.5 68.5v385q0 38 -7.5 47.5t-40.5 10.5l-48 2v24q85 15 178 52v-521q0 -55 14.5 -68.5t82.5 -18.5v-27z" id="x31"></path></g><g transform="matrix(.017,-0,0,-.017,17.877,15.95)"><path d="M535 230h-483v50h483v-50z" id="x2212"></path></g><g transform="matrix(.017,-0,0,-.017,31.629,15.95)"><path d="M619 670q0 -13 -9 -26t-18 -19q-13 -10 -25 2q-36 38 -66 38q-31 0 -54.5 -50t-45.5 -185h120l-20 -31l-107 -12q-23 -138 -57 -293q-27 -122 -55 -184.5t-75 -109.5q-60 -61 -114 -61q-25 0 -47.5 15t-22.5 31q0 17 31 44q11 8 20 -1q10 -11 31 -19t35 -8q26 0 47 19
q34 34 71 253l54 315h-90l-3 12l31 30h70q28 138 90 204q35 37 75 57.5t70 20.5q26 0 45 -14t19 -28z" id="x1D453"></path></g>
<g transform="matrix(.012,-0,0,-.012,42.55,7.8)"><path d="M570 168l-39 -168h-498v23l262 301l-248 304v22h471q4 -71 11 -146l-29 -4q-17 65 -37 88q-12 15 -36 20.5t-79 5.5h-181l211 -256l-243 -287h280q51 0 77 20.5t49 83.5z" id="x3A3"></path></g>
<g transform="matrix(.017,-0,0,-.017,50.288,15.95)"><path d="M275 270q0 -296 -211 -440l-19 23q75 62 116.5 174t41.5 243t-42 243t-116 173l19 24q211 -144 211 -440z" id="x29"></path></g><g transform="matrix(.017,-0,0,-.017,56.169,15.95)"><path d="M998 650l-8 -28q-71 -4 -86 -16t-22 -69l-50 -397q-3 -28 -4.5 -44t2 -29t6.5 -18.5t17 -10.5t24.5 -6.5t37.5 -3.5l-8 -28h-271l7 28q63 6 78 22t25 90l60 415h-2l-353 -552h-23l-130 536h-2l-70 -254q-44 -158 -47 -188q-5 -38 9 -51t71 -18l-6 -28h-241l8 28
q45 4 67 18.5t35 45.5q16 38 74 233l52 173q24 79 11.5 98t-89.5 26l6 28h177l136 -508l337 508h172z" id="x1D440"></path></g>
</svg>)</td><td align="center"> 3500</td><td align="center"></td><td align="center">140</td></tr><tr><td align="left">Total mortgages (<svg height="20.450001" id="M332" style="vertical-align:-3.56265pt" version="1.1" viewbox="0 0 73.587502 20.450001" width="73.587502" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,15.95)"><path d="M300 -147l-18 -23q-106 71 -159 185.5t-53 254.5v1q0 139 53 252.5t159 186.5l18 -24q-74 -62 -115.5 -173.5t-41.5 -242.5q0 -130 41.5 -242.5t115.5 -174.5z" id="x28"></path></g><g transform="matrix(.017,-0,0,-.017,5.944,15.95)"><path d="M384 0h-275v27q67 5 81.5 18.5t14.5 68.5v385q0 38 -7.5 47.5t-40.5 10.5l-48 2v24q85 15 178 52v-521q0 -55 14.5 -68.5t82.5 -18.5v-27z" id="x31"></path></g><g transform="matrix(.017,-0,0,-.017,17.877,15.95)"><path d="M535 230h-483v50h483v-50z" id="x2212"></path></g><g transform="matrix(.017,-0,0,-.017,31.629,15.95)"><path d="M619 670q0 -13 -9 -26t-18 -19q-13 -10 -25 2q-36 38 -66 38q-31 0 -54.5 -50t-45.5 -185h120l-20 -31l-107 -12q-23 -138 -57 -293q-27 -122 -55 -184.5t-75 -109.5q-60 -61 -114 -61q-25 0 -47.5 15t-22.5 31q0 17 31 44q11 8 20 -1q10 -11 31 -19t35 -8q26 0 47 19
q34 34 71 253l54 315h-90l-3 12l31 30h70q28 138 90 204q35 37 75 57.5t70 20.5q26 0 45 -14t19 -28z" id="x1D453"></path></g>
<g transform="matrix(.012,-0,0,-.012,42.55,7.8)"><path d="M570 168l-39 -168h-498v23l262 301l-248 304v22h471q4 -71 11 -146l-29 -4q-17 65 -37 88q-12 15 -36 20.5t-79 5.5h-181l211 -256l-243 -287h280q51 0 77 20.5t49 83.5z" id="x3A3"></path></g>
<g transform="matrix(.017,-0,0,-.017,50.288,15.95)"><path d="M275 270q0 -296 -211 -440l-19 23q75 62 116.5 174t41.5 243t-42 243t-116 173l19 24q211 -144 211 -440z" id="x29"></path></g><g transform="matrix(.017,-0,0,-.017,56.169,15.95)"><path d="M998 650l-8 -28q-71 -4 -86 -16t-22 -69l-50 -397q-3 -28 -4.5 -44t2 -29t6.5 -18.5t17 -10.5t24.5 -6.5t37.5 -3.5l-8 -28h-271l7 28q63 6 78 22t25 90l60 415h-2l-353 -552h-23l-130 536h-2l-70 -254q-44 -158 -47 -188q-5 -38 9 -51t71 -18l-6 -28h-241l8 28
q45 4 67 18.5t35 45.5q16 38 74 233l52 173q24 79 11.5 98t-89.5 26l6 28h177l136 -508l337 508h172z" id="x1D440"></path></g>
</svg>)</td><td align="center"> 3500</td><td align="center">—</td><td align="center"></td></tr><tr><td align="left">Total weighted mortgages (<svg height="13.6875" id="M333" style="vertical-align:-0.0pt" version="1.1" viewbox="0 0 25.700001 13.6875" width="25.700001" xmlns="http://www.w3.org/2000/svg" xmlns:xlink="http://www.w3.org/1999/xlink">
<g transform="matrix(.017,-0,0,-.017,.062,13.625)"><path d="M998 650l-8 -28q-71 -4 -86 -16t-22 -69l-50 -397q-3 -28 -4.5 -44t2 -29t6.5 -18.5t17 -10.5t24.5 -6.5t37.5 -3.5l-8 -28h-271l7 28q63 6 78 22t25 90l60 415h-2l-353 -552h-23l-130 536h-2l-70 -254q-44 -158 -47 -188q-5 -38 9 -51t71 -18l-6 -28h-241l8 28
q45 4 67 18.5t35 45.5q16 38 74 233l52 173q24 79 11.5 98t-89.5 26l6 28h177l136 -508l337 508h172z" id="x1D440"></path></g>
<g transform="matrix(.012,-0,0,-.012,17.412,5.463)"><path d="M615 290q0 -148 -114 -245q-65 -57 -125 -57q-39 0 -62 27t-29 70q-31 -41 -72 -69t-74 -28q-49 0 -82.5 43t-33.5 124q0 97 55 174.5t148 124.5l15 -24q-59 -45 -94 -113t-35 -146q0 -58 19.5 -88.5t48.5 -30.5q33 0 62 34.5t45 101.5q16 73 20 135l80 17l5 -6
q-11 -37 -23.5 -100t-12.5 -92q0 -47 16.5 -71.5t44.5 -24.5q62 0 95.5 67t33.5 160q0 107 -63 152l1 9q14 14 45 14q29 0 57.5 -44t28.5 -114z" id="x1D714"></path></g>
</svg>)</td><td align="center"> 1750</td><td align="center"></td><td align="center">140</td></tr><tr class="table-tr"><td colspan="4"><hr class="tbody-hr"/></td></tr></table></td></tr></table>

Required capital before and after securitization.

Discrete Dynamics in Nature and Society

tab5

Table 5

Table 5: Subprime Risk and Insurance with Regret 