I changed the previous post include your #'s (I missed the $264 - I had $240). I also changed the assumption to include the Auction yielding a 90% return.
Foreclose No Foreclose Payoff 1st $264 Payoff 1st $0 Total foreclosure costs $40 Total foreclosure costs $0 Loss on 2nd $170
Loss on 2nd $170 Total cost $474 Total cost $170 FMV $410 FMV $410 Auction/REO value @ 90% of FMV $369 Auction/REO value @ 90% of FMV $0 Net Loss ($64) Net Loss ($170)
The bottom line is the bank would loss either $64 or $170, or from your analysis - it would better it's loss by $106. When you find the manager that will put up another $264 (with all kinds of risks and uncertainties) with the expectation of "recouping" $106, you've found the next guy in the unemployment line. It's far better for the bank to settle this then to go through all of the problems, not to mention financial pitfalls (what happens if you get so pissed off you trash the place before you leave? What if the market keeps going down (really likely) ? )
I didn't read all of your post but why not take the $'s your paying and put them in a bank account and see what the bank does ? If you get get the sense they're likely to do something you can always bring the account current. Everyone is different and has different tolerances to risk. There is a risk in doing something like this but you have to decide what is best for you.