We're shoveling as fast as we can...

Interesting post at Effective Demand on the flow of foreclosed homes into the market, primarily making the point there's not a huge "shadow inventory" of REO

The net difference between REO resales and Trustee sales since the beginning of 2008 is around 30,500 homes, about a months to a month and half supply at current REO absorption rate. This number can easily be explained as mostly homes in the pre-list stage getting readied for sale.

While I believe the situation is more nuanced than this particularly (there are differences region to region and may even be differences from bank to bank) the big backlog is in delinquent but not yet foreclosed homes. Banks simply cannot foreclose fast enough to keep up.