One of them stated that even if the 2nd gets foreclosed on they can file a deficiency judgement on them and or sell to a debt collector to get repaid. 

I have yet to waste my time trying to collect deficiency balances.  

Borrowers liked short sales because banks were quick to waive the deficiency with short sales.

We put foam board in some of the walls along the lower foundation where it was missing but did not uncover any other obvious deficiencies.

The seller could care because they have multiple liens to mitigate and need the higher sales price to make it work.Also with a higher sale price they have less of a deficiency judgement or a promissory note to deal with.Even if just getting a 1099 they have less to show with a higher price.

There are firms like ours that are familiar with curing or dealing with file deficiencies and loan issues and do so on a daily basis.

I do not know Michigan's foreclosure laws.By what you are posting it sounds like they have foreclosed and are now trying to seek a deficiency against you through the court system.Usually in many cases once a lender forecloses they only have a certain amount of time to seek a deficiency from the court.Example you have a 100k mortgage and the bank forecloses and at auction sells for 40k.The bank then takes you to court for a 60k deficiency.You then go to court and argue with the judge that the bank did not sell a at market value and the property was worth 65k.So a this point you are arguing that the bank shouldn't be able to get a deficiency period and if that doesn't work that the value they sold for is wrong so the deficiency should be less.If the deficiency is granted then most of the time you go back and forth and settle on a reduced amount and structure payment plan with the attorneys or you simply file a chapter 7 along with your other debts and and tell the bank have a nice day.You really need someone to help you with this.It takes a lot of time,patience,and sometimes money to fight the banks if they are not working with you.Besides legal aid I do not know who can help you for free as time is money.These attorneys for the banks do this day after day so you need to be knowledgable to protect your rights.No legal advice

Even with the lenders waiving any deficiencies, which would mean no liability to the previous owner, it's still seems dicey.

Assuming it seemed likely that the buyer could negotiate away any deficiency and avoid paying taxes on the difference (mortgage relief act), any listing agent would be stupid -- and NOT DOING THEIR JOB -- by recommending to the seller that they present the higher offer to the bank.So, for any listing agents reading this -- NEVER TREAT THE BANK AS A CLIENT (unless in some very weird situation the bank legally is your client).

This is not to say they couldn't let you off the hook, but if they want to seek the deficiency you'll end up paying it, IMO.It can make life rough, you open any bank account, they can nab it, they can take future assets, they can garnish wages, they can even take it out of your social security payments!