A new idea for a bailout

Matt Yglesias may be onto something here.

The financial crisis is based on the housing crisis. All, or nearly all, of the "toxic waste" products that are threatening to destroy financial firms are either mortgage-backed bonds, or "derivatives" (complicated bets) based on mortgage-backed bonds. With derivatives, a single mortgage going bust can create many times the value of that mortgage in financial losses. Of course, it also creates some gains to offset those losses, but nobody knows where the gains and the losses will be until much later. That's why derivatives are called "financial weapons of mass destruction."

So here's a thought: All of those derivatives were constructed assuming that housing prices would never go down nationwide. Housing prices did go down nationwide, so all the derivatives are messed up now. But if the government stepped in and helped bail out homeowners, many of the derivatives would be worth close to what companies originally thought they were worth. That would let companies sell the derivatives again, meaning the financial system would un-freeze itself.

So instead of bailing out the finance companies directly, why not just provide govt. support for homeowners who are late with payments or in foreclosure? That would help poor people as much as rich people in the short term, and it would buy the financial system a lot of time to "unwind" all those derivatives. Is there some reason this idea is totally dumb? I haven't heard anyone bring this up at the national level.