If anyone wants to know the solution to this, its a two part thing. The first part is getting WP to load the correct template. I put a template redirect in the functions.php file. See Change template dynamically. I've been building Wordpess themes for 3 years, pretty much full time, and this is the first I've heard of template redirect. There's always another layer to WordPress.
And it works perfectly.. except that now pagination is messed up. If I add an offset to the loop's query_posts to account for the front page's featured posts, then pagination disappears. You can't have both pagination and offset in a query_posts loop. You have to choose one or the other.
Again, some smarter-than-I programmer has a solution (from 2008). It involves yet more functions, and a loop syntax I've never seen before. Its here: How to: Offsets and Paging.
Finally pagination seems to be working correctly at Fashioncow.