Chiara CalÚ

Computer Science and Simulation for Economics

Project work on

"Mortgages market."

 

The applet requires Java 1.4.1 or higher. It will not run on Windows 95 or Mac OS 8 or 9. Mac users must have OS X 10.2.6 or higher and use a browser that supports Java 1.4. (Safari works, IE does not. Mac OS X comes with Safari. Open Safari and set it as your default web browser under Safari/Preferences/General.) On other operating systems, you may obtain the latest Java plugin from Sun's Java site.


created with NetLogo

view/download model file: mortgages_market.nlogo

WHAT IS IT?

The model try to explain the dynamics and the trends of american mortgages loan market.
Banks that are more successful in getting mortgage gain on profits. This model includes two kinds of banks: those that draw up high-risk-mortgage (SubPrime-mortgage) and those that draw up low-risk-mortgage (prime-mortgage). It shows how these two different strategies do by varing the insolvency-chance of the mortgage Prime and SubPrime and by varing other variables of the market.


HOW IT WORKS

Every turn, each bank looks at the patch that it is currently on, and draw up a mortgage. The no-risk-banks draw up regardless of the insolvency-chance-threshold on the current patch. The no-risk-banks won't grant the mortgage above a certain threshold. Below the "insolvency-threshold", the mortgage has a lower chance to default than above it. Thus, the no-risk-banks agents have more chance to make profits, while the pro-risk-banks agents draw up mortgage only high-risk, so they have more chance to lost.


HOW TO USE IT

GO: Starts and stops the model.
SETUP: Resets the simulation according to the parameters set by the sliders.
INITIAL-NUM-BANKS: Sets the number of initial banks.
NO-RISK-BANKS-PROBABILITY: Sets the chance an initial bank will be of the NO-RISK breed
STEP-LENGTH: This value determines the movement of the bank. Each bank will move forward a distance of STEP-LENGTH each turn. As the value is increased, the banks will move to other patches more frequently.
CAPITAL-FUNDED: Each time a bank draw up a mortgage from the patch that it currently occupies, if the mortgage doesn't default, the bank gain the interest calculated on this value set by the slider.
PRIME-RATE: it's the rate of interest gained on the Prime-mortgage
SUBPRIME-RATE: it's the rate of interest gained on the SubPrime-mortgage
COSTS: Every time step, each bank loses the amount of wealth set by this slider. If the banks wealth dips below 0, it dies. Every bank starts with a wealth of COSTI * 4, which means it can go 4 steps without drawing up.
WEALTH-EFFECT-THRESHOLD: If a bank's wealth reaches the value of this slider, it reproduces. This value represents the wealth-gaining success that a bank would have to have in order to be able to reproduce.
INVESTMENTS: Each time a bank reproduces, it loses the amount of wealth set by this slider. This value represents the wealth cost of investment.
PRIME-INSOLVENCY-CHANCE: This value is the percentage chance that the Prime-mortgage below the growth threshold will default the loan.
SUBPRIME-INSOLVENCY-CHANCE: This value is the percentage chance that the grass above the growth threshold will default the loan.
INSOLVENCY-THRESHOLD: This value sets the default mortgage threshold. At, or above this value, the mortgage default with SUBPRIME-INSOLVENCY-CHANCE. Below this value, the mortgage defaults with PRIME-INSOLVENCY-CHANCE.
PROPERTY-VALUE-ON-THE-MARKET: this is a very important value you can set. It determines banks' loss and gains. If the borrower defaults on the loan, the bank would have the legal right to repossess the house and sell it, to recover sums owing to it. But, if prices of houses market are growning up, the bank gains a profit; if prices drop the bank get a loss.


THINGS TO TRY

At what value of PROPERTY-VALUE-ON-THE-MARKET do the populations' wealth change dramatically? What does this indicate about the advantages of Sub-Prime versus being Prime? What are the important environmental factors?
Change the COSTS and the INVESTMENTS values. How do these values affect the model?
Change the PRIME-INSOLVENCY-CHANCE and the SUBPRIME-INSOLVENCY-CHANCE values. How do these values affect the model?
How does the INSOLVENCY-THRESHOLD value affect the growth of the populations?