Is it legal to receive proceeds from a HAMP loan modification?

CitiMortgage gave me a HAMP Backup modification and over estimated the arrears, fees and taxes from 10 months of trial payments and grew my loan balance by an excess of $ 2500. They then took those funds and put them in my escrow account. When I discovered it, I asked the escrow dept for the refund, which they approved. When the check didn’t come, I discovered the loan modification dept ordered the amount applied directly to the loan to reduce the balance, which I later learned from a CM escrow supervisor was illegal – and especially without my consent. After a second request, I received the funds. I am paying 2.375% for 25 years on this refund. It is ludicrous to use this money to make mortgage payments but it is the best use of the money – but it’s like taking out a loan and using the proceeds just to make payments on the same loan. So am wondering, 1. Is it legal to receive proceeds from a gov’t backed loan, and 2. What is the term if I were to use these proceeds/refund, which is actualy a debt carrying interest over 25 yrs, to make principal and interest payments on the same debt?

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