It's not clear whether this property was listed as a bank-owned home or as a short sale. Perhaps the lender negotiated a deed-in-lieu with the previous owner, but somehow did not record it, which means they did not have the authority to sell the home. That means the sale agreement you had with the bank to purchase the home was invalid. This might be why you were asked to resumbit your offer.
It sounds like you really want to buy this house, and the seller has countered at the same purchase price, but is not agreeing to pay toward your closing costs and pre-paids, which you need them to do so you can purchase the house. Correct? If the appraisal came in higher than the agreed-upon purchase price, perhaps you can increase the offer amount and ask for the difference to be paid toward your closing costs. Otherwise, if the seller won't pay the amount you need toward your closing costs and pre-paids, and you can't obtain the money elsewhere, you may not be able to close this transaction.
Talk with your buyer's agent and get their advice.
Best wishes to you.
Sally Mehalovich, Oregon Principal Broker
Amerivest Realty of Portland
Not sure what you mean by they took away closing money, if it was escrow money you should get that all back. As far as buying this property either walk and wait for it to come back on the market as REO or take what the bank is offering.
It is not clear what kind of deal you have going because I am not used to seeing a property for sale where a deed in lieu is a condition.