Dave wrote:
"Do the control wires typically connect to something else
(transformer?) between the heatpump and thermostat? I had assumed
the transformer is located within the heatpump

No.

and the 24vac is
supplied via the red wire to the stat which then determines which
path it returns on. Is that correct?"

Yes.

What I'm getting at is do I need to start looking for a transformer
outside of the heatpump that feeds the 24vac or are my assumptions
correct about thermostat wiring in general and it's just that the
wiring on this set-up completely jacked?

Your wiring sounds fine, but you're looking in the wrong place. If the
solution isn't obvious, please call a professional.