Since the existing mortgage is hard to renegotiate due to complicated structure of the financial product, I suggest the government design policies to encourage new home buyers to jump in and buy. Possible choices are:
1. low fixed rate mortgage on the purchase of nearly foreclosed homes;
2. tax incentives on first time home buyers;
3. give mortgage insurance as promised in the bailout plan.
In this way, the demand side can help to boost the housing market price and people who should not have get a subprime loan and investors who should not have hold so much subprime loans will not benefit from tax payers' money.
Even though the recent home sales went up but the prices are lower, which can drag the housing market into an even lower level. With help from the demand side, the housing market may be stabilized as soon as possible.
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