March 16, 2011
1. Residence is not a special asset for current rule purposes
A residence is an asset like any other asset. It is not much less liquid than many other assets. Different people with same net worth may choose to allocate a different portion of their net worth to a residence, and change that allocation over their life course. Such portfolio allocation behaviors should not be penalized through second-guessing of investor intent or the resultant impact on net worth and liquidity. It is also not possible to guess any of these accurately by a broadly directed regulation.
2. Net worth of a home is simply its fair price minus the borrowings against that asset
Asset-linked liabilities such as a mortgage or HELOC reduce the value of the asset, possibly to a negative value. If negative, the total assets value should be reduced by that amount. This is the only logical way to value total net worth. Any mechanisms available in the marketplace for potentially dismissing negative equity in a home are irrelevant to the computation of net worth till they are exercised and affect the actual asset and liability holdings of an investor.
PhD, MBA, FRM