P: Incorrect bahavior of Warp Transformation of Smart Object when distorted past a certain degree

It is a strange bug. 
And I had not known the work-around, so thanks for sharing! 

And to needlessly mention a pet peeve of mine:
The Illustrator team has not released a fix for the Scripts-in-Actions bug in the more than a decade it has been with the application.
Supposedly it will be fixed with the next release, but still, it seems to show that Adobe’s bug-fixing priorities might appear somewhat eclectic. 

I just found this thread after just recently running into this issue, and I found that rotating the whole image (Image > Image Rotation) one more 90 degree rotation in the same direction as the rotated warped layer seems to let the warp tool correctly address the point the cursor is addressing.  Definitely just a workaround, but this still gets around that weird bug for the time being (which could be another 5 years given Adobe's lack of interest in fixing this...).

I think there are Adobe employees who do want to fix this bug (or any bug that falls into their field of work). 
But I suspect the people responsible for resource allocation have no interest in an idea like »fixing mistakes simply because they are mistakes«.  

So keeping a bug in an application for more than a decade is an option ... 

It seems no one at adobe is interested in solving this issue...

Hey guys, I had the same problem. I found it always happened after I used distort, and then warp. If that helps. 
Also, if you rasterize the layer that tends to get rid of the problem. Not sure if that helps either, but its a start I guess.

I'm currently having this problem while trying to create mockups for my website/portfolio. It's very frustrating! Sigh.

Thanks for the feedback. 
Seems like a strange one and while it seldom affects me personally it’s nice to know it has not been forgotten.