Do NOT do what you have been doing. You have many possible options, some likely far better than what you have mentioned. And your main issue should NOT be how long is it on your credit (almost anything you do will be there seven years).
The smart move is to sit down with a lawyer. If you are so upside down that there is no equity in the second mortgage, your best option may be bankruptcy court. In those cases, in both a Chapter 7 and a 13, you can strip the second mortgage and in some cases pay nothing at all to them, and keep the home by paying the first only.
In some cases a settlement could be a smart move, but there are potential consequences that need to be reviewed with a lawyer.
The person best qualified to counsel you will be a bankruptcy or debt settlement lawyer.
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First of all, the second mortgage company retains the right to foreclose. However, since they are second in line, they cannot get the house unless they pay off the first, which is unlikely. Also, if they do foreclose and try to remove you from the house, you would stop paying the first mortgage, causing them to foreclose and take the house out from under them, which is prudent for them to do. Therefore, the second is just a debt attached to the house that you owe. If you don't work something out, they can sue you or sit around until you pay off the first and they are the only mortgage left. You can work out a way to get caught up or even settle with them. If you do either, you should have an attorney review any agreement to make sure that it is in your best interest and that any settlement involves the release of their lien, as well as the tax ramifications of any settlement, which could be significant depending on the wording of any agreement. The answer to your last few questions will be in the details if any settlement t you come up with.
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