I received two 1099-A forms from different lenders. One with the first mortgage with principal balance of $117K and FMV of $122K and a 1099-A form with second mortgage information principal balance of $29K and FMV of $118K. I did not receive a 1099-C because the FMV on each of these forms was greater than the principal, however if I combined the information than it is a different outcome.

How do I treat this on my tax return?

The two lenders did what they are supposed to, per the instructions for filling out 1099-A forms. I suspect that they haven't forgiven your debt yet, so for now you have nothing to report. Once the property is sold off the 2nd mortgager will realize that he has come up short, and at that point will issue a 1099-C for the difference (I assume the 2nd mortgage is a non-recourse loan)

The good news is that cancelled debt due to foreclosure on your principal residence is generally not taxable, due to the mortgage debt relief act of 2007. See the following IRS web site for details:

Home Foreclosure and Debt Cancellation (http://www.irs.gov/newsroom/article/0,,id=174034,00.html)

Thanks for the response to my question.

One follow-up. You state that I have nothing to report, does this mean I do not include on my tax return?

You will report the sale on schedule D.
You do not report the sale if it was your main home and you can exclude the gain. If you lived in the house for two years and owned it for two years in last 5-years, you may be eligible to exclude gain of up to $250,000. Read: Your U.S. Tax Return: Profit From the Sale of Your Home (http://taxipay.blogspot.com/2008/03/profit-from-sale-of-your-home.html)