I'm not surprised that HUD "couldn't understand", they never put an OVERSEE process in place. The banks do not even have to give HUD a reason, much less answer to you.
Go ahead an try the Shortsale, it will at least give you time.
I have never heard of staying ONLY 3 payments behind; seems kind of silly: The Bank may figure that if you can make payments #4, #5, #6..... you should be able to make 1,2 and 3. You are not pushing them toward the Hardship.
Good luck and may God bless
We are sorry to hear about your situation. We help people in your situation daily. The loan modification and/or foreclosure process can be very frustrating. The process takes a lot of communication with the banks & requires that you fulfill all requirements in a timely manner.
We have been helping people in your situation for over 10 years so we do understand your frustration. Our experience has been that once the lender denies a loan modification they suggest you do a short sale by listing your home with a Realtor experienced with short sales. Look for the CDPE (Certified Distressed Property Expert) designation. You can go to http://www.ForeclosureSolutionsCA.com for more information on your options.
Every situation is different so if you would like to discuss your particular options call me at 288-4967 before it is too late.
Mark A Pretzer