I have a client in a similar situation - but he is actually an investor that got in over his head and has an ARM adjusting that will put him in a negative cash flow...he can't refi, and the lender won't do a loan modification.
I will be representing him to sell his home for less than he owes, and have the bank consider the lower sale price full payment for his outstanding mortgage...this is called a SHORT SALE.
The reason we are doing this is because if there are no other programs he can qualify for to refi into a fixed loan, and assuming he wants to preserve as much of his credit as possible without showing a foreclosure, lien judgment, or bankruptcy, a short sale is the beest option. When you get foreclosed on, the judgment for the amount you owe on your mortgage follows you ... i.e. garnished wages, lawsuit, etc...UNLESS you file for bankruptcy. If for example you owed $250K and the house sold at auction for $200K, there would be a judgment against you for the different of $50K. With a short sale, and depending on who your lender is and how your case is presented to the lender, the debt is forgiven once the short sale closes. And although you will have a ding on your credit due to possible missed payments, and reflecting the settlement via short sale, you can recover from that much easier and quicker vs showing a foreclosure or bankruptcy on your credit profile.
Go to the FAQ section of my website http://www.shortsaletosell.com
for more information on short sales and how they work - or call me at: 732 822 6870 Good luck. Tom