What you are really asking about is called strategic mortgage default, where a homeowner voluntarily walks away a mortgage because the balance of the mortgage(s) is greater than the fair market value of the home.
Two schools of thought have emerged regarding the ethics or morality of strategic mortgage default. Former Treasury Secretary Henry M. Paulson Jr. is quoted in The New York Times saying that "any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator -- and one who is not honoring his obligation."
On the other hand, Brent T. White, a University of Arizona law professor and author of Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis argues that the deleterious effects of foreclosure are less than people expect, and that morals and ethics should not enter into an economic decision. After all, banks use economics and not emotion when making loans, and banks are not averse to breaking leases for office space when it is to their benefit. Therefore, I will leave the ethics question up to you to decide.
If a modified mortgage will cause you financial distress, then there is no moral or ethical issue to ponder -- you must walk away from the deal and the property. If the deal is bad, consider a short sale or deed in lieu or foreclosure.
You did not mention foreclosure, but would be remiss if I did not point out the Bills.com resources Judicial Foreclosure, Foreclosure Advice, and Stop Foreclosure as sources to learn more about foreclosure.
You mentioned economic reasons to allow a strategic default, which are compelling. However, you do not mention intangible reasons to stay in the property. For example, if you have minor children who attend a great neighborhood school, then that is a benefit to staying. Also, if the property is your dream house, in a great location with neighbors who a picture-perfect, then your chances of recreating that neighborhood synchronicity are low. Living in a great house that you love disfavors strategic default.
On the other hand, if the neighborhood is in general decline, you have no attachment to the area, and your children (if any) would be happier elsewhere, then the intangibles are in favor of a strategic default.
Before you settle on a strategic default, be sure to educate yourself on the Home Affordable Foreclosure Alternatives Program (HAFA), which is a federal program that defines standards for short sales.
I hope this information helps you Find. Learn & Save.