HAFA Short sale declined - too much given to Fannie

Weird situation here that I basically don't understand.  I've been doing short sales for clients for a few years and have never run into this situation. 

Client preapproved for HAFA with a list price of $146,000.  I thought it was inflated but put it on the market anyway.  Got an offer for $128,000.  Counteroffer came back at $146,000.  Buyer walked.  Got a new offer from a new buyer at $138,000.  I submitted this offer with an appraisal of $137,500.  The borrower owes approx. $130,000 on the 1st and $80,000 on the 2nd.  The first includes principal, interest, late fees, and attorney's fees.  Per the HUD, Fannie Mae would get approx. $118,000 after all closing costs, 2nd lien payoff, relocation assistance, etc.  Got a call from the negotiator at B of A and was told that she was declining the short sale because it was no longer a short sale since the 1st would be made whole.  Here's the kicker....Fannie Mae re-evaluated the value and decided to drop what they thought the property was worth.  I was told that if they didn't do that, we would be processing a short sale and probably getting it approved because FM thought the property was worth more.  That's where I'm confused....how does lowering the value of the property change it from short sale eligible to not eligible.  The negotiator told me to just sell it normally.  That would mean the seller would have to pay closing costs and come up with money for the 2nd which she does NOT have.  The negotiator said they have to follow their guidelines.  I don't understand so someone please help.

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