They stated that since it is a "non conforming" property that it can stay a duplex.  

Main house is a 1500sf 3bed (1 non-conforming), 1.5 bath with a detached one car garage...

Your only option if you plan to refinance sooner than that is to go the non-conforming, commercial route.

Further, the lower level unit wasn't in conformance with current egress code requirements.

One of the problems here, which may be similar in other places, is that new construction has to conform to newer setback regulations & the lots just aren't big enough.

If you own the properties in your own name(s), you can get Fannie Mae conforming loans at great rates.5) Again, find a lender that works with investors.  

If you have this currently and the HML includes the funds to repair - then you shouldn't have any problems having the 20 -25% (equity) you would need for your conforming loan.

If it can be argued that it doesn't look out of place, and it conforms with other Duplexes (try to find nearby similar ones?)

In all other respects, these dwelling units shall conform to the minimum prescriptive requirements for residential dwelling units.

For a loan to be sold on the secondary market it must meet what we call "conforming guidelines" and I have heard statistics that between 80%  - 95% of all loans are sold on the secondary market.