Lender vs Lender... The Short Sale.

I recently was asked to set up a showing with a lead from RE/MAX Lead Street.  Our companies way to distribute inquiries from the Internet.  I was pleased to oblige and immediately called the Lister to set up the showing request. 

I was somewhat amazed to hear the response from the listing agent.  Seems the first mortgage holder has allowed this property to be marketed as a short sale.  There is a second mortgage on the property also with a very nominal balance owed.  The property has had several offers which, according to the listing agent, are all very good offers considering the circumstances. 

I was a little stunned when the the listing agent told me the story of this property.  Seems the second mortgage holder will not release their position unless 2/3 of the balance owed be paid with the proceeds of the sale.  The first mortgage holder has refused to pay this much out of proceeds and has offered a 7% payout. 

Now, neither bank is agreeing to the terms of the other lender and hence, the home will be going into foreclosure within the next several days. 

Can you believe this?   Nationally, statistics given by Re/Max state that short sales yield the lending bank 70% of their loan proceeds.  Foreclosures yield a whopping 40%.

What are they thinking???

Can anyone help me with this behavior?  Has this happened to you and is this the norm with a depressed sale condition?

Thanks in advance for your clarification.

Larry Stanul