I believe you are talking about a "Short Sale", a preforclosure sale where the lender agrees to take less than the mortgage amount to satisfy the note. While it seems like a sensible thing to do to save the lender the money they would spend on the foreclosure proceedings and get the property off their books, it doesn't work out that way.
I have an offer on a short sale, all cash, close in 2 weeks and the lender, Country Wide, hasn't even assigned a case number to the property yet. We've had the offer in for two months now.
Such purchases are done with conventional lending at this time. There is talk about the feds providing funds to local governments to purchase foreclosures but that hasn't happened yet. Work with a Realtor who is versed in short sales. aloha