Oh, very interesting on the city showing up. Did they say anything about their legal basis for the loan being superior to the mortgage? Sounds like your next step is to talk to the title company - in the end, if you plan to resell, what is even more important than the law is whether or not the title company will give you title insurance. If they will, you’re done, it will be title’s problem not yours if the city sues. If not, then the law bit matters, and you may have to go to court to quiet title in order to get title insurance.
Has the city sent you a payoff demand? Do you know how they collect the payments? Hopefully the payments aren’t added to the property taxes. Generally I’ve had little luck getting out of any liens that legally roll to the tax role.
Above is just based on my experience, I’m not an attorney, and if title says no, hiring one is probably your next step.