Thank you for your question. I look forward to working with you to provide you the information you are seeking for educational purposes only.
1) Unfortunately, in any loan forgiveness, any forgiven interest is considered taxable income as is any forgiven principle according to the IRS and Tax Court in Robert J. Brooks v. Commissioner, TC Memo 2012-25, Jan. 26, 2012.
2) The sale of the house and their entitlement to any proceeds is legal and subject to negotiation by you. They can ask for a refund or recoupment from proceeds of any sale for any forgiveness granted, which would then be deducted from your taxes of course as well.
3) This can be an issue, balloon payments can be indications of predatory loans, so this is something that needs to be examined more carefully.
Furthermore, if you already have signed agreements, you can likely force them to abide by the last signed agreement and it is something you may want to also consider.
I would not sign this and I would strongly consider getting another local consumer protection law attorney to deal with this as it has some aspects that could potentially raise flags for predatory loans and could also be a breach of the other contract for modification you signed and an unfair and deceptive practice.