I think you need to look for another house. If the current sale fails it is likely that the bank will simply put the house back on the market and another round or multiple offers will follow.
Information is generally kept confidential. If this this came thru the Listing Agent, I would be suspicious. If it came from anywhere else, I would discount it entirely.
You are a distant 2nd in line; in fact, there is no line.
In the best senario, the Bank will ask for a new round of Offers.
The Bank does care about your feelings, one way or another.
First, yes banks can do what they want really, they are the owner and they must have seen something in the other offer they felt was better. As far as work, rarely do REO or bank properties let just anyone on their property to do repair work so its somewhat hard to believe they are just able to walk in and do "major" work in the home to get a loan.
Sometimes banks will find out after listing they have work they need to do to get it sold/closed and may do some work in the home themselves. I would be curious and be able to answer more I think if we knew...
1. Why did the other buyers loan fall thru?
2. How do you know it fell through - what was the source?
3. The major work - what is it?