January 28, 2011
Dear SEC Chairman,
The standard under Dodd-Frank, without interpretation is an unworkable one that is easy to manipulate. Furthermore, it places addition incentive on individuals to obtain mortgage loans and removed their ability to invest into their own home. Furthermore, under the current proposal, a person can change his status between an Accredited Investor and Unaccredited one by simply purchasing or selling his home or by taking or paying off a mortgage loan.
For example, if Joe, a financially responsible and risk advertent person, has worked hard and saved $2M, Joe has become an accredited investor and is free to invest his money as he wishes.
However, if Joe decides to spend his $2M to purchase a home for his primary residence and does so in an all cash transaction, Joe would loose his ability to be an accredited investor since his net worth would be $0 because the value of the primary residence would be excluded.
However, if in that same transaction Joe would have used a standard 80% mortgage loan to purchase the property, Joe would remain an accredited since he would only need to spend $400K of his $2M to make the purchase, financing the balance. At the end of the Purchase, Joe would have $1.6M in cash allowing him to remain an accredited investor
Such actions would not only be limited to buying or purchasing a home. The same individuals would need to worry about making a prepayment on their mortgage loan because such prepayment would reduce their net worth and they might not be able to invest as they otherwise would have. This would create an incentive for people to NOT PAY OFF THE LOANS ON THEIR HOMES, even when the market conditions make doing so a financially sound decision.
The standard should be revised to allow equity in a home past a certain threshold (i.e. 20% of the value of the primary residence, to be included in a persons net worth). By doing so, the un-leveraged portion of the home would remain as equity when calculating a persons net worth. This would stop manipulation that simply refinancing a home can have on a persons net worth.
The alternative – not valuing the fair value of the home when determining a persons net worth and allowing the amount of financing supported by the home to be deducted from a persons net worth would be more unfair than the current proposal. Under such a situation, people would have great incentive to never purchase homes and to forever remain renters. For example, a $2M home purchase acquired by 1.6M in financing would result in a decrease of a persons net worth by $1.6M even though the person has assets to pay off the entire debt. Individuals who would want to remain accredited investors would decide to rent homes instead of buying them.