We're the foreclosure threats and the recent short sale illegal?

Our house is worth $340,000 now and we bought it for $265,000 in 2002. I can guess what was owed on the mortgage was maybe half or something in the $60,000s. Should our home value have paid off our house (equity?) or what? I feel like our house was almost payed off so I feel cheated about losing out home. If all this bs was illegal how do we sue and go about buying a better home or our house back?

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