foreclosure in the State of: California

Like most people in California, I own a distressed home. Here are the facts:

>> I bought my condo in 2006 for 0K, paid 10% down. 80% mortgage, 10% HELOC
>> I later paid the original HELOC back, refinanced the home for a lower rate then got another 10% HELOC. Right now my Heloc is frozen and I have K balance on it that I am paying on interest-only basis.
>> Now the home value is around 0K

My wife and I just had a baby and we wanted to move to a bigger house with a better school district taking advantage of the market. I figured if I lost 0K on this condo and I can get a house for 0K discount, I would do cost averaging. Our loan broker told us that we can show that we can get rental income on our condo and qualify for a 600K loan which would allow us to get our house. All was well.

However, one day I did a what-if scenario and found out that if we are being conservative and not depending on the rental income, we can only afford a 0K home. In bay area, even with the current market, that does not buy you much.

Before giving up completely, I decided to see if I have other options. One thing is clear, the condo has to go. The question is how?

1. If I buy the second house and then walk away from the condo to let it foreclose, what happens? I have been reading about deficiency judgment. Does that allow the lenders to go after the new home or other assets? Is there any online resource you guys found valuable regarding these procedures?

2. If I pay back the 28K I owe on the HELOC, what are my chances of negotiating a deed in lieu of foreclosure with HSBC (my primary lender)?

3. Related to number 2, I had this idea of going to HSBC and laying out my entire plan to them. Currently, they are being pretty aggressive to attract some good mortgages. They are giving out 4.5% APR to conforming loans with LTV <= 80%. I could tell them about what I am planning to buy (an REO actually). Since my new house would be a bigger asset to them, I thought I could negotiate a deal with them to accept my condo as a burden to keep me as a customer. Does this sound crazy?

Any other options I have other than waiting for my income to come to a level that I can manage both properties OR waiting for the condo to increase in value so I can sell it (both of which are unlikely for the near future).

Thanks all!