This is a pretty good example of just what was going on everywhere at the time.
You were in the market for a house and that was what it took at the time to own a house with your budget (nice to have $50K to put down). Since prices kept going up it seemed like it was wrong to wait because it would just get more expensive and you were missing out on potential equity gains by sitting on the sidelines.
Knowing what you know now you should have rented the last 2-3 years. And all of us that owned homes should have sold them and rented them back or moved to a rental for the last 2-3 years.
People that bought homes in 2004 with interest only mortgages and sold them in 2006 were geniuses.
People that bought those homes in 2006 and are trying to sell them in 2008 got caught with the hot potato.
Foreclosing may be the cheapest way out if you are that negative on cash flow. Foreclosing in this situation may not affect your ability to borrow in the future as much as it would have in the past.
There are many many people in your situation.
The country is pretty F'ed right now.