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Answers
I found out the bug from this video https://youtu.be/2HjAnFtmPjU?si=5X83bJUGv0fcp15w
The solution it seems is to just expand the canvas a bit in CSP and then export it again as a PSD.
I did try the same method with GIMP and was unsuccessful. So it seems like the move is to just use CSP.
The key difference I noticed was that when it doesn't work there are no images next to each individual layer on the warp deformer area. But when I went through CSP they all showed up so I'm assuming that means it works.