How much equity ownership does she have in the home? Does it have a low interest rate on the loan? Can you get the loan payment lowered?
Does she own the rental property free and clear? Is that the home the only debt?
One thing that jumps out: She is living in more house than she can afford... including the ongoing taxes and maintenance. It seems to me that selling the house is probably a good idea. However, timing is the problem. The RE market is poor right now. But if she has to delay for 4 or 5 years... she will have that much sunk into taxes, upkeep, etc.
This may end up being a loss minimization exercise.
Here are some things to mull over. But they are really just more questions.
Is the house upside down... could she do a short-sell? The bank may do that so there is not another default.
Could she move into the rental and make it her home and rent the newer home (to generate income to pay the mortgage and taxes)? If it turns out that she still cannot make it work out and a foreclosure happens... will the home she is living in be shielded in some way... need to talk to an attorney.
Don't forget bankruptcy. The bankruptcy laws are intended to restructure or clear debt that one can no longer afford. Will the retirement assets (490k) be shielded? This would require a discussion with an attorney.
Take your time and analyze all of the alternatives (pros and cons).