It seems as though your situation is very similar to what mine was, it just happened to me a bit sooner than you. I bought a new place in Murrieta in January of 2007 for $512,000. The property taxes were ~ $9000 a year. It was an 80/20 with the 20 having a ballon payment of ~ $100,000 due January of 2012. Not a very uncommon situation at the time. I contacted both lenders about a possible modification at least five times each prior to stoping payments on the house, all to no avail. I made my last payment on August 1 of 2008 and the house finally went to auction June 12 of this year. Sold at auction for $212,000 to an investor and apparantly sold to a new owner a couple of weeks ago for $298,000. I offered the bank $50,000 cash if they would reduce the principal to $300,000 (basically short sell the home to me for $300,000) and they laughed in my face. I think that after taking a $300,000 haircut on the deal, they may wish they could have a do-over on that offer.

I was able to save over $30,000 while waiting for foreclosure and now rent a very adequate home for $1500/month less than a mile from the other house. Although the credit hit sucks, I have to say that we are very pleased with our decision and feel sorry for our old neighbors who are “toughing it out” with their $3500 a month payments. It seems inevitable that virtually everyone in our old hood will realize the futility of trying to stay the course in their home and regret following up the first bad decision (buying the home in first place) with another even worse decision (doing everything possible to keep a famliy killing liability). I hope that however it plays out for you that you keep your eye on the big picture and think about how where you will be financially in five years if you stay in the home or if you leave and rent. Odds are, you would prefer the latter. Good luck.