Loss mitigation had been a small department at most lenders. They could take their time and didn't have that many cases to handle. The disposal or foreclosure department had been handling cases in a timely fashion for many years.
When the wave of delinquencies started, first the loss mitigation department became overloaded, because they were charged with attempting to contact the borrower and see if something could be worked out. Eventually they staffed up or outsourced those contacts, but the volume in backlog is still rather high.
Loss mitigation also had to handle all the workouts, reviewing financials, getting BPOs and approving whatever disposition made sense. Short sales may mitigate losses or the proposed sale price may be larger than just foreclosing and selling the REO. This judgment call is important and takes time. Nobody wants a file audited to find that the BPO was significantly higher than the approved sale price.
Listing agents should be contacting the seller's lender for a bottom line, but the lenders are not forthcoming about that , because disclosing to the agent would create a conflict of interest. So, the agent guesses, submits whatever low-ball he gets in (some are ridiculous), and finds the bank dragging their feet. The bank sends out a contract agent to do the BPO and eventually processes the file. The answer is painfully slow, and usually not good when the price is low ball or commissions are over 5%.
At this point the file is in a similar state to a REO, a few weeks after the offer was submitted. They know roughly what the property is worth and what their approvable bottom line is.
This is why Short Sales are very much slower than REO sales.