Due to unforeseen cirstances, I need to know if I should allow foreclosure.?

After a year of spending all our savings to start a business, my wife and I were forced to adopt 3 children from our family. This forced her to walk away from the business to be the full-time caretaker. Here's the problem(s): We own a 2nd home that is in the mountains and will not sell. I haven't made a payment since June and cannot afford to. I am awaiting foreclosure. We bought that home on a re-fi in which we pulled $100k from our current home. We now have an interest only loan for $472k (monthly payment-$3700, taxes included) on a house that would probably only sell for $400k. Since I already am being foreclosed, how badly am I damaging my credit if I simply stop making payments on this house as well, since I feel like I am only spinning my wheels? The kids are more expensive than I thought, and I have already priced out rentals in my area, which would save me money. Plus, my wife is now pregnant. We may be losing the kids (CPS, what a delightful organization!) in a few months. We are both ready to just walk away, suffer the losses, sacrifice my credit, and become renters for awhile, maybe forever? We are now pretty broke, so I will be busting my just to make the house payments, and it may be years before the values return here. It is definitely not in an area where we'd want to raise a child, by the way. Good luck with this one!