"The way to do so is through the shared appreciation mortgage, or SAM. " Sam I Am.

Greg Mankiw considers a proposal to renegotiate mortgages and stop foreclosures:

"I can see the attraction of these ideas, but I have two questions:

1. Would a law giving homeowners the right to write down their mortgages in exchange for equity attract so many homeowners that financial institutions would suffer even bigger hits than they already have? As these authors note, foreclosure is unpleasant for everyone. But because it is so unpleasant, some homeowners who are underwater on their mortgages keep paying them anyway. If we give them a better alternative, why would they?
2. If Congress were to pass a law allowing homeowners to rewrite their mortgage contracts, and lenders suffered losses as a result, what would the constitutional implications be? The fifth amendment says "nor shall private property be taken for public use, without just compensation." Could lenders get "just compensation" for losses that resulted because Congress crammed down an equity-for-debt swap? If so, would this be the best use of taxpayer funds?"

He then gets answers:

"In response to the first question, he writes:

The offer would come from the lender (not borrower) in cases in which there is a stop in payment on the mortgage. Offering this on top of a standard write-down is an option that is currently not in their arsenal, a fact that many of them are not aware of (essentially ruled out by the tax code). One offers incentives for the writedown e.g. by exempting the shared appreciation strip from capital gains taxes. This is then part of the workout routine that would be far more attractive than a pure write-down, and often superior to enforcing default.

Suppose someone stops payment on their mortgage without needing to just because this offer is potentially open. They can be offered some powerful discouragement: (a) Increasing share of appreciation with increasing write down; (b) Give lenders ability to check income. There would then be a high % dedicated to the loan (you won't want this if you are doing fine or expect to recover income); potentially, have payments on the mortgage rise with income if one needs to work this angle harder.

The complete incentive system could be designed in a dynamic manner, adjusting as evidence of excessive use came to light.

In response to the second question:

This would be voluntary negotiation. The idea would be to set up the incentives for it in the tax code. It simply dominates current options in most circumstances."

I would have thought that the answer to both questions would be that the lender makes the ultimate decision. If payment stops, and he doesn't feel the offer is kosher, he can foreclose. In any case, since it's a negotiation, he can say yes or no. All this program does is give government inducement for mortgage renegotiation instead of foreclosure.