You've received some good information below. Obviously you do not want the property any longer since you said you wanted out but if you do want to retain it, applying for a loan modification is a wise decision. Depending on your income, hardship, etc. you may qualify and usually during the loan mod process, the bank will temporarily hold the foreclosure action.
If you truly do not want it and the bank will not accept a deed in lieu of foreclosure, unfortunately, you can either follow the steps the bank is proposing or do nothing and eventually they will foreclose on the property. With that being said, typically the bank will ask what your intention is (to keep the property or not). If you don't want the house any longer, I can't see them forcing you into a loan modification.
As recommended below, a short sale may truly be your best option. The bank gets partially paid and most likely you can negotiate with the bank for a full release.
Gina Chirico, Sales Associate
973-575-6353 ext 17 office
As always, Essex County Real Estate at its BEST!