OK so after much experimentation and reading tons of posts, youtubes, the manuals etc...  I finally solved the problem.  I think my analysis was right because in the end what I did was just set the Guitar Input switch on top of the HD500 to PAD and set the global Guitar 2 input to Variax.  That  lowered the signal going to the DT to a manageable level and now I can use the Master to control volume on the DT25.

Before doing this, the signal was so hot that the Master could not be set higher than maybe 2 or 3 (8 or 9 oclock).  As soon as the Master engaged, the volume was already near stage level.  It was almost unusable for home play.  Now I can listen COMFORTABLY with the Master at 2-3 and still have stage level with the Master turned up.  It is a world of difference.  Many of the patches I have made and downloaded sound better now because they are not overpowering the amp.  It sounds amazing at 12 oclock... (with ear plugs!)

The one thing I am still working on is the first FX block in the chain.  According to all my research, with my inputs set this way my guitar signal is only coming in on the A path so I have to use a mono block first to send the signal to both paths if I want to use any stereo blocks or dual amps later in the chain.  However, by doing it this way I get a 6db reduction in signal strength at the first block when it sums the two inputs.  Combined with the 10db(?) reduction by using the PAD setting, my signal is now low enough to pass to the DT without overpowering it.

For now, I am placing a noise gate set at 50/50 as the first FX.  A lot of the patches I downloaded already have it set that way and it works good.  Other than making sure your signal is routed correctly from the first FX block, you don't need to change anything else on any of your patches.

Other changes made, added my own "beam blockers" to both speakers (2x12), and rewired cab to 16 ohms.  Rewiring had NO effect.  Beam blockers do seem to have reduced the harsh ice pick effect but I don't see any other big change in tone or volume.

Bottom line, if you are feeding a DT25/50 with a POD HD500, set the Guitar input switch to PAD, Guitar 1 input to guitar and Guitar 2 input to Variax (Global).

I guarantee you will like the difference.  If you need more volume on stage at any time, turn the Master down first and set the Guitar input switch back to Normal.