"It says he will pay her mortgage and keep the rental house."

"since she cant take the huge over $200K loss"

It seems she got that money, and he is either paying that mortgage or paid it by refi. That means she has minimal loss.

If she had sold at $557k and paid off $268k debt = net $289k to her.

She got $268k. She's down $21k.

You want to value her half at $278.5k; she got $268k. She's down $10.5k.

She got off cheap.