I am sorry to hear your friends are having so much difficulty. Foreclosures & short sales are happening all over these days.

For what it's worth, she can still save her property. Obviously her first job is to speak to her husband. They need to work on a bare-bones budget, and how to increase their income. If she is able to work, she needs to hit the ground running and find any job she can.

They should contact their lender immediately. In order to have reached the point of short sale, they must have received many previous notices from the lender to which they did not respond. They can research online or through the lender's customer service department to find the Home Retention Department. This is the department set up to help homeowners re-structure their mortgages and catch up on arrears. If the value of their home is less than what they owe, they should provide some information on comparable sales and/or listings in their area. They will need to provide a list of expenses and income, and a plan for covering their monthly payments going forward, as well as additional monies each month to correct the arrearages. It is certainly possible to negotiate new terms (interest, length of mortgage, etc.), but they will need to act quickly.
They need to document every conversation, and send every letter, document, etc., via regular and certified mail, return receipt requested.
These companies are swamped, so persistence is necessary.

I wish them luck, and hope they land on their feet one way or another.