How did I get into this mess? Should I stop paying my mortgage? Help?

Hello readers. This is not easy to write. Like many of you the current credit, mortgage, housing crises has finally hit me hard! And it is hard to admit that as a real estate agent myself I cannot figure a way out.
Problem: I bought a second single-family home in Richmond, California in 8/2005. I refinanced in 4/2006 and now I cannot make the mortgage payments and I need to decide whether to continue making payments or not. I have to make this decision by May 15, 2008.
I have invested a lot of time researching what the consequences may be, and I have found out that there are a lot of contradictions in the opinion of experts.I have patiently waited to see what comes out of Congress or the Lenders but nothing so far has helped.
Background: In 8/2005 a friend and I bought a house for investment purposes in Richmond. The goal was to buy and hold and eventually sell at a profit.We did not speculate, we did not lie to get our loan, we did not over buy. We bought something that we could afford and responsibly pay for. We bought a moderate house less than $400,000. The only possible mistake was that we ended up getting a 2 year fixed loan after which it would adjust. This loan was obtained from Fremont Savings Bank.
Then my friend lost her job and could no longer help make the payments. I continued paying it on my own. Then in 4/2007 I was able to refinance. I say that I refinanced just in time, because a few weeks later the whole mortgage/credit crises hit hard. Suddenly this house loss about 40% of its value. I had 10% equity at the time of refinance, but when the value dropped I lost all equity.
Overnight it seems that houses around my house were now worth 50% of less. And signs of foreclosures, and boarded up houses starting appearing.
Still I made my payments. As a real estate agent I was still closing transactions. There were still buyers, sellers, borrowers and mortgage CREDIT. But then the buyers dried up. And those that wanted to buy could not get loans. So my income went down. As I write this I have about 6 Short Sales transactions going on but either buyers cancel or the Lenders refuse to negotiate.
Since 12/2007 I still made my payments, but I knew I was heading for trouble so I started to call my lenders, Bank of America and Washington Mutual to see if I could modify terms. They refused then and continue to refuse to negotiated. They tell me that I first have to stop paying my mortgage before they talk to me about loan modifications, short sale, etc.
I called the many counseling help lines, and still no help. Everyone tells me that as long as I pay my mortgage then the lenders have no reason to negotiate anything.
In Summary: And so my house is worth much less than I owe. There are too many houses for sale, and now I have to decide whether I stop paying my mortgage in order to get the Bank's attention. But this has consequences:
The Consequences: I have researched the California foreclosure laws, my loan contract,the new and proposed State and Federal laws and nothing seems clear.
If I let the lender foreclose on or short sale my house, what are the tax consequence? Since it is not my primary home.
Will the lenders foreclose and stop there, or will they try to go after my primary home.
If I stop making mortgage payments in order to begin the process of getting the banks' attention, I will need to ruin my credit score. And this then has a lot of other consequences.
Responsibility: I know that I am responsible to pay this mortgage. However, the decrease in value of my house wasn't of my doing. Also, the lenders don't want to extend credit even though my FICO score is (as of 3/08 it was 756) very good since they think values will still go down. I also see the Federal Government is rescuing major banks, lenders (persuading Bank of America to buy CountryWide under favorable loan rates, helping JP Morgan buy Bear Sterns, etc).
From a purely investment perspective it doesn't make sense to keep the house. In my opinion, it will be at least 10years , if ever, bythe time my house goes back up to its current loan value.
And I have to decide whether I will make the mortgage payment to Bank of America (1st) and Washington Mutual(2nd) by May 15, 2008 or begin to let this nightmare finish.

Has the American Dream turned into a nightmare? ¿Se ha vuelto el Sueño Americano una pesadilla?

YES. And in my opinion this has to do primarily due to:
Greed! --buyer's, seller's, agent's, bank's. How can you buy something you cannot afford and with NO money down. I still remember some clients telling me "only in the U.S. can you buy something so expensive with no money down and still get money back." And they said with an incredible but satisfying smile.
Easy Credit! The industry (builders, banks, government) made credit so easy but with one fundamental basic mistake: How can you increase home ownership so fast so much with no increase in real income?