Tough to do a short sale on an investment property, but you should talk to your lender now. Maybe they can adjust your mortgage rate and you can find another tenant. There are new programs right now, but they are primarily for owner occupants. If that doesn't work, then it will go into foreclosure if you don't make your payments. Have you spoken with the realtor who sold it to you? Or call another realtor in that area. There are agents who can help you. Best wishes.

Dawn, don't you have an insurance on the house that would do all the repairs on the house ?

Dawn
Sorry to hear of your situation.
You have two great answers so far, I will try to fill in with a few comments.

In most markets areas values have declined over the past three years or so. We expect values to remain flat for the next three or four years, based on what we know right now.

From the lender's perspective this is what they would prefer you do:
1. Keep the home - make the payments with new tenants - Impact on your credit - positive
2. Keep the home, modify the loan to make it affordable, rent to tenants at a lower rate, Impact on your credit - positive
3. Try to sell the home as a short sale. Lender agrees to pay closing costs and absorb the loss, you bring no money to the closing table, however you'll need to prove hardship and also prove that you are basically broke by providing a financial statement including all assets and liabilities (in other words, be broke). They will go after other assets that you have (boats, jewelry, 401K, etc.)
Impact on your credit - 80-100 points or so. Don't plan on buying anything in the near future.
It is possible that they may agree to issue a promissory note for the negative balance which you agree to repay over ten years or so.

4. Let them foreclose - trashes your credit 150-250 points, you cannot buy anything for 5 years. Of course, you'll have a lot of company.

My suggestion is to have an expert evaluate your situation and provide you with your options, pros and cons. I would be happy to refer you to an expert in your area that can help you do it. Just contact me via my Trulia profile.

We had a situation like yours. We ended up keeping the home (18 years) and in the end made a lot of money. It was tough in the first five years, but the appreciation of the property and the tax consequences made it worth while. Talk with a CPA or financial planner as part of this process.

I think you should first determine what the home is worth in the present market. You could have an agent do a comparative market analysis of the home or if you want an totally unbiased opinion, hire an appraiser. Since you have other assets, the bank is probably NOT going to let you just walk away from this obligation. My suggestion is to fully disclose the flood/possiblity of and price it REALISTICALLY for present conditions of the market, even if that means you may still end up owing some money to the bank for it. You didnt say if the flood damage has been repaired, but if it has, I would try to find a new tenant and hang on to it, at least for another year or two.

I would still try to sell it either outright or by Short Sale. You would have to make arrangements with the bank on the Short Sale. Have you had a market analysis done yet to determine the potential for selling it outright? If not, email or call me with the address and particulars and I would love to have one done for you. You may be able to make a positive sale.
Thanks.