Ron D’Vari, CEO of NewOak Capital,  proposed today that government guarantees of nonperforming mortgages be modified requiring borrowers’ giving up equity participation. The proposal, which is named Government Equity Modification (GEM), "is one of the most viable and timely answers to the current mortgage credit crisis,” according to D'Vari. 

NewOak Capital is an advisory, asset management, and capital markets firm based in New York specializing in distressed assets and mortgage credit.

“Continued weakening in consumer confidence has halted consumer spending, accelerating contraction in corporate spending and will lead to downsizing," D'Vari said. "The credit squeeze has extended to corporations, and commercial real estate problems are still ahead. This could force further delevering and cut off financing for homes and push down house prices even further.”

According to the release from NewOak, recapitalizing the more viable national banks and closing the severely undercapitalized banks are needed to shore up the global financial system.

TARP and related U.S. government responses, according to the release, aside from actions taken by other major central banks are already targeting to address these issues. But, these programs may not flow through fast enough to home owners and prevent foreclosures to buttress the housing prices.

The solution, D’Vari said, is that the U.S. government should also guarantee certain existing loans modified to fit the borrowers current financials with participation in equity in exchange.

“Right now, banks have executive changes every day and people do not know who they are reporting to,” says D’Vari. In some instances, he said, it might take six months before homeowners defaulting on their mortgages receive even a call.

D'Vari explained that massive foreclosures will result in abandoned homes, dragging down the housing market further. If the government guarantees existing or modified mortgages subject to commercially reasonable criteria, properties will be maintained. After five years, homeowners and the government can both share in the profits, when the homes are sold or refinanced.

To reduce the tax burden, government could also set terms with the holders of the mortgages to share the ultimate costs. This will aid in slowing down the quick delevering, and in turn, stabilize home prices and hence the financial system.

Banks, financial companies, and trustees in securitizations holding the impaired loans can work with re-refinancing specialists to expedite the work-out, new documentation, and loan terms with the borrowers, the release said.

Subscribe Now

Access to a full range of industry content, analysis and expert commentary.

30-Day Free Trial

No credit card required. Access coverage of the securitization marketplace, including breaking news updated throughout the day.