If the second is a purchase money mortgage and the property goes to foreclosure, Citi would only receives what's left over after the back taxes are paid, and the first lien holder is paid off... likely little to nothing.
Has the Ocwen been informed of Citi's demand? Even if you agree to provide the additional $1,700, Ocwen could refuse to allow these funds to be allocated to Citi and insist their payoff be limited to the 8%. If you were my client, I would advise you to draft a letter indicating the current offer was your highest and best and that you've been informed Ocwen has capped the payoff at 8% and as such even if you wanted to provide the additional funds you would not be permitted to do so. Sign and date this and have the listing agent provide this to the negotiator for Citi. If this didn't work I would reach out to some of our executive level contacts with the bank. Good luck!
Better Homes and Gardens Real Estate
You're Realtor should be advising you on this. I hope you have a Buyer's agent who is versed in short sales. They should be able to negotiate this for you pretty easily. If you don't have a Realtor and you're doing it yourself, the bank may hold tighter to their guns as they know you don't do this everyday and aren't as familiar with industry standards, etc.