She's definitely underwater. She bought at the peak of the bubble and her house is worth maybe a little over half what she paid. But she's tried to do the honorable thing. It's just that she's not making as much money as she was.
Some homes in my area lost 60% of their value. I bought a new house at about 1/3 of what the lost guy who it paid. It has been two years now and prices in the area are about the same they gone slightly. If he follow some rules he should be able to get a new home loan for a similar house. I am not sure what all the rules are but someone here will. The mean home price peeked at $450,000 in 2007 and bottomed out around $150,000 in 2009 for my area.