Financial Engineering Seminar: "Option Value of Mortgage Interest Tax Deductibility" - Hamed Ghoddusi | Hanlon Financial Systems Center

Financial Engineering Seminar: "Option Value of Mortgage Interest Tax Deductibility" - Hamed Ghoddusi

Financial Engineering Seminar: "Option Value of Mortgage Interest Tax Deductibility" - Hamed Ghoddusi

Event Location: 
Stevens Institute of Technology, Babbio Center, Room 110
Event Time: 
Thursday, February 23, 2017 - 5:00pm to 6:30pm

Hamed Ghoddusi

Assistant Professor of Finance, School of Business, Stevens Institute of Technology

"Option Value of Mortgage Interest Tax Deductibility"

 

ABSTRACT:

The tax shield value of mortgage interest deductibility (MID) can be significantly lower than what it might seem, when the tax code requires household to switch from `standard' to `itemized' deductions. By focusing on effective tax deductible rate we are able to identify convexities and concavities in the relationship between the effective mortgage interest tax deduction and a set of underlying variables, including household income, house price, and local and state tax rates. To quantify the expected value of MID a dynamic option-pricing model is proposed and solved for a range of realistic household characteristics. Using the quantitative model we compare the relative attractiveness of Adjustable Rate Mortgage (ARM) versus Fixed Rate Mortgage (FRM) and demonstrate an inverse U-shape relation between the tax shield of the two types of mortgage and the household income. We then discuss the tenure and location choice implications of the model to analyze the impact of tax reforms on the ratio of rent to value for different classes of houses. Finally, we report a critical analysis of MID representation in a set of popular real estate advising websites. BIO: Hamed Ghoddusi is an Assistant Professor of Finance at the School of Business, Stevens Institute of Technology. Before joining Stevens he was a postdoctoral associate at MIT's Engineering Systems Division (ESD). He has received his Ph.D. from the Vienna Graduate School of Finance (VGSF) and holds degrees in Quantitative Economics, Management Science, and Industrial Engineering from the Institute for Advanced Studies (Vienna) and Sharif University of Technology (Tehran). His research interests include Resource and Energy Economics, Asset Pricing, Society-Centered Financial Innovations and Contracts, and Risk Management. Hamed has been a visiting scholar/consultant at the International Institute for Applied Systems Analysis (IIASA), Oxford Institute for Energy Studies (OIES), UT Austin, UC Berkeley, UNDP, and UNIDO.