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Does settlement of second mortgage count as short sale?
No that will not count as a short sale although it may still affect your chances of getting a loan because some lenders wont want to see it on your credit if you are pursuing a new FHA loan. In the best case scenario you will need an explanation letter of why you did this. In the worst case scenario the lender will want you to wait to get financing.  Try and find a lender with NO FHA overages which means they don't put additional restrictions on giving you an FHA insured loan. That type of lender will be your best choice because they just follow FHA rules and don't add any additional requirements.