That's certainly is an unpleasant surprise!
The situation looks a little "off".
There are several things you could do/options to consider:
1) You can request a preliminary HUD1 (with the verbal payoff from the seller's mortgage - which the closing attorney should obtain - I'm not sure I can trust the seller much to obtain it for you at this point). Payoff letter (estoppel) costs money, and seller can obtain a verbal payoff amount for free.
If you want to save money and trust the seller - a verbal will do at this point.
2) In the preliminary HUD1 you'll see how much the seller is under water - if at all.
This way you'll find out if this is a case of a short sale or the seller wants to be paid some "relocation assistance" money - either by you or the bank (some short sale lenders pay sellers, and a considerable amount).
3) Then - it'll be up to you to decide if you want to pay the seller (to make sure you buy at today's lower price - as banks could come up with a higher counter during short sale). Or, you could ask the listing agent to pitch in (your agent didn't cause this issue, so should not be paying). Last option - both agent(s) and you pitch in to get the house purchased/sold.
All things can be negotiated...But, if not - I feel that while the law may be on your side, the seller may have nothing as far as assets (in hardship) - and so the seller will be "judgment proof"...
Hope this helps,
Beachfront Realty, Inc.
I suggest you speak with your attorney and see what the ramifications are of the seller not proceeding as they have agreed and what rights you have$$$$$
Some options to proceed
A possible option is to determine the amount needed to get the releases needed and pay them off. But that means you will be paying more for the property. Is it worth more in the market place? Is it worth more to you?
The other option is to go through the short sale process.
Last option to find another home.
Greater Boston Short Sales, LLC
On the flip side, if the list agent knew the homeowner was underwater ahead of time that should have been disclosed up front.
Here's the secret; you got 2 choices;
wait until it goes thru foreclosure, and buy it as an REO,
walk away and find another house.
good luck and may God bless