Our speaker will be

Hamed Ghoddusi

(Stevens Institute of Technology)

The talk will take place at

12:00-13:00

in seminar room D5.1.003.

He will give a talk on

"Mortgage Interest Tax Deductibility under Uncertainty"

, co-authored with Mohamad Afkhami (Stevens Institute of Technology).

Abstract: The effective tax shield value of the mortgage interest deductibility (MID) can be significantly lower than what it may seem in the presence of standard deductions. We use a continuous-time contingent claiming framework to quantify the tax shield value of MID under uncertainty. Our pay-off model identifies convexities and concavities in the relationship between the effective mortgage interest tax deduction and a set of the underlying variables including the level and volatilities of household income, house price, and local and state tax rates. The model is simulated for a range of realistic household characteristics. Using the quantitative model we compare the relative attractiveness of an Adjustable Rate Mortgage (ARM) versus a Fixed Rate Mortgage (FRM), and demonstrate an inverse U-shape relation between the tax shield of the two types of mortgages and the household income. We find several inverse-U relationships between the volatility of underlying variables and the present value of the MID. We also offer some preliminary empirical results supporting the theoretical model.