Southern California is no different than parts of Florida with a large choice of properties on the market that are short sales or REO (bank-owned) because we appreciated at a much higher rate over the past 6-7 years. As a realtor, we are not supposed to provide financial or legal advise; however, having sat through dozens of hours with my clients meeting with real estate attorneys, most of the latter would recommend short selling your property. I am assuming even a major loan modification for you dropping the interest to 1-2% doesn't solve your problem.
Is this your primary residence? There are two or more entities for you to consider. One is the bank(s) with the loans and if your hardship qualifies you for a short sale & #2 is the IRS. To quote IRS website, the Debt Foregiveness on the 1st zeros out; however, any write off or debt forgiveness on your 2nd or HELOC loan is 100% taxable as ordinary income assuming the proceeds from the 2nd were not used exclusively for improvements to your home.
In almost all cases banks realize that the proceeds from a Short Sale will be at least 20-25% higher than repossessing your home and their having to deal with attorney fees, maintenance of the property, various risks, and legal fees. Someone referred to the ultimate total reported on a 1099 to the IRS would be substantially less than if you SS the property. Successful SS agents generally price the property at the very bottom of the comparable homes to hopefully get an acceptable offer by the bank. No matter how bad your market is, a well-valued and priced home will sell and represent less Debt Forgiveness to be reported to IRS.
If you are upside down 35-50% from the price paid, if normal home appreciation returns at a 3-4%/yr rate, it could easily be 10-15 years before the value might return to the peak value of 2005.
Currently industry & govt. sources indicate your credit will only be damaged for a couple of years in a SS vs from 5-10 years with a Foreclosure or a Deed in Liew Of (giving the keys to the bank). Unfortunately, you are like millions of other Americans faced with the same dilemma. I would recommend calling a major brokerage and asking the Broker (manager) for a recommendation of one of their best SS agents to meet and explain these options in detail. Also, http://www.google.com
I wish you well.
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