My lender is telling me that he cannot declare rental payments as income for two years. 

They're thinking about letting it just go into foreclosure and declaring bankruptcy.

He could declare bankruptcy to stall the foreclosure too.

I have had 3 slab leaks in the last 4 years at a low of $2k and a high far over $10k (but we declared it against our insurance).  

The law allows you to declare the property abandoned and take possessionThe law does not specifically define what abandoned is but some of the criteria I use are:-Contents of value have been removed-Neighbors saw the tenant moving-Utilities are off-Mail forwardedI would feel confident with their contents removed as well as they advertised to sublet the property to move forward and take possession. 

Last two years W2s and last one month's worth of paystubs for each borrower on the loan (where applicable)Homeowners insurance declarations pages for each property you own.

You do not want to compound your troubles by cleaning the place up and getting it ready for the next tenant, and have this tenant come back and declare they had a 90" TV, designer clothes, etc in the house that you took. 

I bet most don't actually declare and pay all that is actually owed though...

Also, being willing to take on distressed properties and muscle out the rehab will help you filter out some of the competition from the hedge-fund investors who are willing to pay top dollar (typically above asking price) for rent-ready properties in these markets.Rents are growing at 8% or more YOY in these markets. 

His is where title insurance comes in handy. however, definetly follow up with a MA attorney and at least let him declare a clear title and facilitate tiltle insurance for your property.