This would be an interesting approach, and has several advantages from an efficiency standpoint.
First, the homeowner would likely stay put and keep making payments in the hope that house prices are likely bottoming out this year, and the expense of moving is a huge waste he could now avoid. There are a lot of inherently wasteful things that occur when a foreclosure happens and all parties lose–lenders, forclosed homeowners, neighborhood degradation, to name a few.
Second, house values would more likely stabilize as fewer foreclosures would hit the market. Result–more consumer spending as ALL homeowners have a better personal balance sheet. The economy recovers faster, tax revenues increase, etc., etc.
Much as I hate to see bad behavior rewarded–the moral hazard objection–this is worth considering, providing its only a one-time deal (ah, there’s the rub!)
