Another complication to investment property?

We bought a duplex to live in. Payment $ 2600/mo. (We pay $ 500 over rent taken in.) Hubby wanted the house next door so that if something happens to him, I can pay that mortgage on my own. Payment $ 1400/mo. We moved over there & now rent out both sides of duplex. We have a 5 year ARM due Aug 2011. Mortgage Co has been sending us notices, calling, etc. to Refinance. The property is so upside down. Was worth $ 440,000. Now worth $ 255,000. We owe around $ 340,000. When I return their calls, they say they’ll only refinance 100% of Appraised value. I asked them what can we do? They have nothing to offer. Transferred me to talk to a different dept. They sent us paperwork for HAMP (we don’t live there) and Short Sale (We’re not behind in payments.) Seems like they’re walking away from us, not the other way around. We’re willing to keep paying if they’d lower the interest so that the rent covered the mortgage, but they won’t even consider refinancing. We feel like waking away now and Saving that $ 500/mo since they’re going to take it away from us and ruin our credit in August anyway. What do you do when your mortgage company won’t work with you. Oh yeah. And I just found out it’s a Bernie Mac loan. No one ever told us that before & I don’t know if it’s good or bad. Any suggestions?
I’m confused by the 1st answer. Maybe I didn’t state it correctly or use the correct terminology. We are required to refinance because of the 5 year ARM. They won’t refinance for the full amount. So do we refinance what they’re willing finance? What happens to the balance of the original loan? We just owe that separately? And no, we don’t have $ 85,000. Do we apply for another loan elsewhere for the balance? I’m just asking here bcz the bank wouldn’t give me any information or suggestions except two options that we don’t qualify for. We’re not looking for a way out. We’re just looking for a way. (Thanks to the answer person trying to help. We’d like to not ruin our credit if we can help it too.) Thanks.
We didn’t intend to be “investors”. We didn’t buy it bcz we thought it would go up in value, altho it did before it went down. We bought it because we wanted to live there. It’s a great place. I didn’t want to move. But we’re old, so we moved to a less expensive property. We then put the property up for sale before the drop but couldn’t sell it because one of the renters had destroyed his side of the duplex. We evicted him and set about repairing the property as fast as we could. It took us ten months. By the time we had it repaired, the value had dropped and we couldn’t sell it for what we owe. So we’re trying to figure out how to keep it or sell it. We’re making it ok, we haven’t stopped paying but don’t know what to do about the ARM. If there was no ARM, there’d be no problem. We’d just keep working until theres a solution. Are there no positive options? Telling me that I’m as stupid as I feel doesn’t help a lot.

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