Todd Horlbeck over at the Street.com's Real Money site laid out the following idea. I can't think of a single reason to disagree with it.
"I think the Treasury should set up the "U.S. Treasury Bank," or USTB, to deal directly with homeowners.
This new USTB will pay off, in full, the homeowner's current mortgage held by any private bank. This will be a huge positive to the banking system. The new USTB will retire the homeowner's old loan, and the principle balance on USTB loan will be reduced to a point that creates a 25% equity cushion on any home refinanced. (Anyone can qualify if you have less than 25% equity and only for existing homes loans.)
This would be a huge positive to the homeowner. In addition, this new loan would have a 4.5% fixed rate for 100 years. This would dramatically reduce payments for the homeowner. These new loans will be guaranteed, securitized and sold by the U.S. Treasury back to the public. This program will be financed by the corresponding sale of 100-year Treasury bonds, hopefully below 4.5%, helping the taxpayer directly, rather than giving money to banks and hoping they lend. The banks would receive huge amounts of capital and bad mortgages would be paid in full.
This would establish a bottom for home prices. The underwriting criteria can be set up quickly, probably in one week, and require every bank in the US to have at least one USTB employee at each branch (i.e. force banks to retrain one of their employees to be a USTB employee). This would expedite the set up."
Sure people who bought over their heads and have negative equity would get a free pass, but all in all it's worth it.