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My wife and I have put an offer on short sale property in Fontana, CA back in March '12. The seller accepted our offer and forwarded to Bank of America, the sole lender to the home. The seller also agreed to pay 5k towards closing. 

Around early June, our broker notified that the house was appraised for about 40k less than our original offer and that to put another offer to match that price. We put a matching offer right away. At the same time, we deposited 5k earnest money deposit. We had an executed California RE purchase agreement with contigent of lender approval.

BOA approved the short sale as of 7/26/12 and asked for the close of escrow date 9/21/12. We were very happy and started working on getting the escrow closed. We did the house inspection within a week and got the seller's disclosures about the property. At the same time got my loan approved for the purchase.

Things started going down when my lender wanted to appraise the house so the loan can be funded. My broker kept delaying for a week or so and then breaks the news to us that a company called SPS is now the loan servicer and that it is going to take them two weeks to get new approval from them. Around 2 weeks away from closing escrow, my broker calls me and says that SPS is now offering loan mod. to the seller and based on that seller cancelled escrow.

I immediately spend 3k to get a real estate lawyer who did the fact finding. It turns out that Bank of America sent  a denial letter to the seller (which my broker never gave it us) stating the short sale is denied based on the reason "servicing right -released."

Now my attorney is asking me to record lis pendens on the house and lawsuit against the seller for specific performance and damages. In the meantime, my lawyer sent demand letters to BOA and SPS. SPS only replied saying due to privacy laws, they cannot say anything to my lawyer without seller's consent.

Any thoughts beside walking away from the mess?