The way I read your narrative, your house is worth 130,000 and your first mortgage is 198,000 - you are upside down without the second mortgage. Meet with your first mortgage lender and discuss choices. They have serveral alternatives under government incentive programs. Your problem is with the second mortgage of 60,000. Even if the First Mortgage lender would agree to a short sale, the second mortgage lender has no incentive for any agreement because with your facts, there is no way there would be any money for them.
Of course, from the sounds of it, you are probably better off to let the home go. Otherwise you are making payments on a home that will probably always have negative equity.