How the Housing Market Could have been Helped

The housing market is in terrible shape, Foreclosure Signs are now a popular yard decoration in most of America's front yards.
With the loss of jobs and bad banking we knew this was coming. My idea is not a perfect answer but it would have kept many people from running from their homes they loved.
First of all Banks could have worked with many people. This all started with those that signed up with that funky rate thing, where their payments where set for so much then BOOM balloon payment. Many Americans could have kept making their original payment amount even with bring home less money. The banks were not willing to work with these people, they must have not looked around and seen what was happening, decline of jobs, which was holding hands with the decline of home sales. But as we all know Banks are blind to the real world until they have no money coming in because they have thousands of empty homes with no buyers.
Many of these banks could have changed the way we see them. Instead of forcing a family out and losing big time they could have worked with the home owner. Accepted their original payment amount and extended their home loan, Based their payment on their income. Just until this storm blows over. Any amount of money is better than no money at all.
This would have also lowered with amount of money these banks had to borrow from the government.
I'm not blaming the banks solely here, America is full of people who live way beyond their means, A lot of people could still be in their homes had they changed the way they live. Less going out, wearing last summers clothes, less trips to Disneyland and so on.
Not all these families are homeless they just moved from a 1500 dollar a month home payment to a 1200 dollar apartment payment, with a difference of 300 dollars I think that the banks should have really looked into salvaging some of these home loans. Its never to late to do so. I'm sure many people would gladly move back to their dream homes if banks would offer such a deal like this.
We are suppose to take care of each other kicking families out of their homes is not the answer, working with them to keep them in the home is.