As a result, the government will apply penalties and taxes when the funds are distributed.

I understand the regulations for REfinancing, but i am slightly confused about the lender's time constraints on free and clear properties. 

The HECM is FHA insured, thus the regulation.  

I know city government is not the most efficient entity in the world, but it has to be more efficient than spending $1300 per year (about a quarter of our dues) on liability insurance.

It sucks, but your wanting to do business as a legal entity and so, must abide by those state's tax laws governing business. 

Also outside of some government supported programs (e.g, FHA, VA) most lenders want to see a substantial down payment, which is a huge barrier for people who live paycheck to paycheck.2) There are lots of reasons one might need a place to live immediately (e.g., new job, divorce, starting school).  

Nothing with the government happens overnight and that includes editing assessments.

Especially if the units are regulated - are they?

Portfolio loans are non-conventional loans that are governed by each individual bank differently.  

I am a government employee too!