In general, there are several options, depending on your financial situation.
Your best are probably A, 2 and 5
A - Call the lender(s) and explain the situation. Ask for a workout.
1 - Sell at a loss and come out of pocket with the difference.
2 - Sell as a Short Sale and the lenders take the loss (You must have a verifiable hardship).
3 - Keep the home till it appreciates to the loan balance.
4 - Rent it out.
5 - Get a loan modification from Hope Now - http://www.hopenow.com/
HOPE NOW is an alliance between HUD approved counseling agents, servicers, investors and other mortgage market participants that provides free foreclosure prevention assistance. See the tab called "Helpful Resources".
6 - Let the home go into Foreclosure.
7 - Deed in Lieu of Foreclosure. You quit claim the prpperty back to the bank. They do not have to accept.
8 - Bankruptcy (If the house has no equity, it will be removed from the BK).
First a definition:
A "Short Sale" means that the loans and obligations are more than the property is worth so the seller is "short" of enough funds to pay off the existing loans, taxes, closing costs and other obligations against the property. The seller requests the bank take an amount which is short of the amount owed instead of foreclosing on the property. The bank will consider a short sale if the seller has a verifiable financial hardship, and, the bank will get more for the property than it will in a foreclosure.
A Short Sale can occur with or without the bank filing for foreclosure. Usually it is a race to see of the property can be sold before the foreclosure. Foreclosure in California takes 90 plus 21 days from the date the bank filed. This can be proceeded by 2 to 12 months of the seller not making payments.
The seller does not get any money from the sale, however, the seller usually is not asked to pay any of the back obligations or transaction costs. The bank pays all these costs and eats the loss. It is a big hit on your credit report but not as bad as foreclosure.
There are 3 approvals required on a short sale.
1 - The Sellers acceptance of the buyers offer. That is easy since the seller does not have to pay anything.
2 - Banks acceptance of the price & terms. Banks usually want at or near fair market value.
3 - The banks acceptance of the sellers verifiable hardship...no hardship = no deal.
A Short Sale is usually anything but "short".
Most banks will not agree to a short sale in writing until they have a formal offer. Before a short sale is APPROVED, the sellers have to submit an application, hardship letter, financial statements, tax returns, pay stubs, the purchase agreement from the buyer, a HUD statement from the pending transaction, payoff letters from all lenders involved, and several other things depending on the lender.
Either lender can start the foreclosure action.
If your equity loan is not a "purchase money" loan, they will be able to come after you for the difference but rarely do, except in cases of fraud.