What are the pitfalls of buying a second home and walking away from the first in California?

Not enough information provided. So, I will make some assumptions.

1. First house was purchased but never refinanced. If true, then California's foreclosure rules prevent the lender from seeking a judicial foreclosure. That's good news for you... they can't sue you for a deficiency.

2. Assuming "1" is true (that the mortgage was used to purchase the house), then once a deficiency is established through foreclosure, you will receive a 1099-C from the bank for the amount of the "loss". This loss becomes income to you. That's bad news for you... the IRS and the Franchise Tax Board will want their money AND they will collect it.

the biggest question here is who will grant you a new note? See the rules have changed to stop what you are thinking about doing. Your idea is not original at all. If you are now going to be a new landlord, then in order to off set the payments by rental agreement then you MUST have 30% equity in the rental. You are underwater as you state. You have no equity! So you in order for this to work you would need to pay down to the 70% of current fair market value to count rents. The other thing is that of course you can buy another home if the income can support both mortgage payments inside your total debt to income ratios.

Then if you foreclose then Ghost is correct about what they will do with the balance owed

I am a mortgage banker in TN

If you bail on your current mortgate on your present property, you will put a Mark 48 torpedo through your credit rating. You will likely do LESS damage if you can get your lender to agree to a SHORT SALE. (This is where they agree to take less for theo house than the present pay-off balance on the mortgage and report it to the credit bureaus as a "Settlement".) A short sale will also damage your credit, but not nearly as much as bailing on the mortgage.