My house is worth way less, now what?

The drop in property valuation has not a thing to do with your scenario. The problem is that you are having difficulty paying the mortgage right now. You could afford the mortgage when you first took it out, and now things have changed.

Of course, getting a loan as you did was not the brightest thing you could have done. You've not reduced your principal ONE penny. Your only shot is going back to the lender for a loan modification, to assist you in making the payments bearable. Possibilities include a reduction in the interest rate and an extension of your repayment schedule.

I agree with most of Rusty's answer...however a lot has changed over the last few months. There is now a waiver on foreclosure tax, meaning you will not get taxed on the difference between what you owed compared to what it sells for.

The market will turn around, and if you can continue to make the payments, that would be the best solution. However, if you can't, you need to make that decision and try a short sale. If the short sale does not go through, relinquish your keys to the mortgage company BEFORE formal foreclosure proceedings and you won't take a huge hit on your credit.

If the bank won't work with you and you can't make the payments, sounds like its time to take a hike. But you'll need to file for bankruptcy to eliminate the possibility of the bank coming after you for the difference in what you owe and what the home sells for as well as any tax implications.

After bankruptcy you will be able to get credit cards and car loans almost immediately. Get what you can and use the credit whether you need it or not. Make your payments on time with the idea being to begin rebuilding your credit. In as little as 2 years you can get another home loan.

Unfortunately, you share the same story as many other homeowners in the US right now.

You bought at the peak of the market bubble in 2006, the bubble has popped and the market fell. CA is one of the hardest hit markets and you are feeling the brunt of it.

Your options are either short sale, ride it out, or rent the home out to try and re coop your monthly expenditures (likely that you will not 0 them out).

Sorry, it is what it is.

So if your house increased in value you would not accept that as your profit? Try a short Sale or keep paying mortgage till the market swings. Get second jobs both of you. this is not new, same thing in 1981 except interest climbed to 16% on mortgages.