This market is saturated with cash buyers. Buyers using mortgages to purchase their homes are facing harder and harder challenges when competitive offers are from cash buyers. So you could have offered several thousands more than the next lowest bid and may still not have won.
What's the big deal? Most borrower's offers include "ifs," or more formerly, contingencies. They'll buy the property if it appraises, if there are no issues with the home inspection, if the borrower can get financing. Cash buyers typically don't have all of those contingencies, so their offers are far more attractive. And they can often close in two weeks.
Most of us agents are not allowed to share whether we think an action is illegal since we are licensed only to practice real estate. But if you are using mortgage financing to buy the VA foreclosure, this may explain what is going on.