R.K.
You are not a loser. You probably got into your situation honestly, especially since you don't overspend - or at least you are not aware of it. You have a lot of positive things going for you - like both of you have jobs. And, you are aware of the direness of your circumstances and are not just blowing it off.
I've been on a roller coaster myself, and have been both poor and very comfortable. Since I am self-employed, I've learned to adjust my spending habits according to what I am making or believe I will be making in the near future.
What I do, and have done several times since the downturn of the economy, is to take a hard look at what I'm spending money on. And then I look for things I can cut. I've done this several times, and from the same list, that has already been cut, I find new things to cut. It helps a lot. Here are a few things I've cut and really haven't missed:
1. Premium channels on Dish Network TV. Saved about $60 a month.
2. Changed my cell phone plan to one that worked better for us. Saved about $30 a month
3. Reviewed my phone bill and internet bills to consoldate (may cancel home phone service)
You probably already do this, but sit down with your husband and come up with a family budget, and a priority. Your family has to be your first priority, and that means putting aside a few dollars every paycheck no matter what. That's your emergency fund that you don't touch unless there is absolutely no choice.
Second priority has to be your mortgage. Lenders are having a rough time too. Talk to them and be honest about your situation and see if they will give you some slack. Ask if you can make up for past mortgage payments by paying a little extra each month with future payments. They don't want to foreclose, so in the spirit of creating a win win situation, see what you can work out.
Your cars - these are major expenses, but if you can sell one and live with just one, you'll be much better off. That may sound crazy, but I had to go for nearly a month with just one car, and did fine. Carpooling for work and kids' events worked out. I also got to know people I would not have otherwise. It ended up being very positive.
Gasoline - just say no to driving unless it's absolutely necessary. I just saved $200 in gas this month because I refused to take short little trips here and there (which eats more gas than highway driving.) If you plan things out just little - and group your errands into one trip, it's amazing how much you save. If you can walk or ride a bike to do some of your errands, you'll be buring calories instead of gas and feel great about it!
Food - Since you are both working, chances are you eat out or grab fast food more than you can really afford, just because you're a busy family. Everyone does. Bringing your lunch to work every day can save a few hundred bucks a month. Double that for both of you. That doesn't mean you have to be a killjoy at work, but limit the lunches out to one a week.
Groceries - I don't know if you plan meals or not, but this saves a lot of money. I write down what we're going to have for dinner every night, and buy food accordingly. The difference between planning and winging it is at least $50 - $75. When you wing it, you spend money on food you may or may not eat. When you plan, you buy what you eat and eat what you buy. Also - another cool tip I just learned was if you plan and buy for two weeks instead of one, you will spend less overall. I tried this and bought 1 1/2 weeks worth of groceries instead of one week's worth, and spent only about $50 more. (Usually a week is $130 for six of us.) Bonus - fewer trips to the grocery store = less gasoline!
Clothes - this is a biggie. For you and your husband, just say no to new clothes for a few months. Or, give yourselves a reasonable clothing budget and stick with it. For your daughters, there are mountains of adorable baby and toddler clothes that are hardly used at garage sales and second hand stores everywhere. There is no reason to spend $30 on a cute girly dress when you can get the same thing for $1 from a garage sale. Same with toys and other stuff. Don't feel bad about this - consider that you can buy your children far more "stuff" and spend less money doing this. Plus, you are helping the environment and your community.
Second job - one of you could consider getting a second job temporarily until you get caught up. Don't consider a minimum wage job demeaning - it's not. You or your husband I'm sure would gladly flip burgers a few nights a week to make sure your children keep a roof over their heads. If you can get a better second job with better pay - great. And when thinking about a second job, think about a business that you use a lot. If you shop at Target a lot, for example, try getting a job there and get the discounts.
Take a look at everything you spend money on, and if you can trim thing back just a little in every area, you may find that you can cut your spending by several hundred dollars a month - without a whole lot of sacrifice.
The good news for you two is that you haven't gone under and you have a lot of options in front of you. Instead of fretting, take this on as a challenge that you and your husband share in. When you come out of it, you'll be a closer family!