Short Sales, Unrecorded Deeds, and a legal nightmare

[Matt Turcutto]

My direct mail campaign recently uncovered a lead. For the record, I'm in California. Here's what I found by talking to the lady that called me and what I found on title:

Man buys house with Wife 1. Man has daughter, Daughter 1. Man and Wife 1 gets divorced. Wife 1 records Quitclaim (or the like) renouncing any interest in property. Man owns mortgage and property as sole name as a married man as his separate and sole property. 

Man marries Wife 2. Man, Wife 2, and Daughter 1 live in home together. Real Estate Market crashes. Man completes successful loan modification of negative amortizing first and begins drawing on second. Man dies suddenly without will and property is not held in trust.

Wife 2 gains custody of 16-17 year old Daughter 1. Wife 2 continues to pay mortgage(s) and lives in house with Daughter 1. Bank calls and says loan mod is coming to term and payments are about to go way up. Wife 2 gets my postcard in mail and calls me. 

Wife 2 forgets she has an unrecorded joint tenancy with right of surviorship agreement. Records agreement. 

Now for my question. The house is not worth what (deceased) Man owes. Is Wife 2 responsible for the mortgage? If we work with the lender(s) to obtain a short sale, will this negatively affect Wife 2's credit score? She wants to purchase a home out of state to be with her family and I can help her out, but we both want to make sure this won't negatively affect her. 

Thoughts?