Tina, just push back and let the negotiator know that your seller has no money and can't pay any of the closing costs.
Google for Mortgagee Letter 2008-43, if you don't have it already. Then, read it, again, and again. And, remember, this document is written for the mortgagee, meaning the Servicer. So, some parts apply to fees that HUD will pay to the Servicer, not directly to fees on the closing HUD1 settlement sheet.
I have done quite a few FHA/PFS short sales, in all cases HUD paid property taxes, adjustment and delinquent. I have not seen this language. Does not sound like HUD language to me.
Is "Assesment" for Homeowners Assocation or property tax? It matters which, I think.
Secondary liens are generally the hard part on these.
And, read the $1000/$750 incentive section carefully.
HUD means every word they write, precisely. If something is permitted by 2008-43, you are in, if not, then most likely not. This is my experience.
sounds like it needs to be cleared up. Does your client have funds available that would indicate to them that they can ask for this . The lender should of provided a "Approval to Participate " providing you with the net acceptable proceeds that it will take to settle the default.