... in fact, that was the status of George Romney (Mitt's father). His parents were US citizens. They moved to Mexico. He was born in Mexico.
Because he was born outside of these United States, he was not a natural born citizen, nor was he a US citizen at birth (via 14th Amendment).
But he was a US citizen through naturalization at law (Congress' statute making such children US citizens).
Mitt was born within these United States and both parents were citizens, which made Mitt a natural born citizen.
One generation is all it takes to change status.
We are talking about law here, and law often uses terms that do not mean what they mean in common language.
"Naturalized" means acquiring citizenship by a legislative act. This is the case for all people born outside of these United States, whether it happens automatically at birth (for infants) or it happens through a formal application process (for adults).