The property in question has no problems but the stand alone garage roof has a few tiny holes in the roof. The appraiser called this a health hazard. Thus the lender required the Escrow Holdback account.
How a garage with some miner roof leaks in southern California is a health hazard is beyond me.
As far as I know it is perfectly legal for the lender to specify what repairs need to be done in order for them to feel OK with commiting the funds to close. I am not endorsing the practise and I am not an attorney but as a Realtor I have seen it done several times over the years. If the trust is eager to make the sale they will facilitate the conditions the lender is asking of the buyer. The escrow holdback guarantees the reimbursement for the actual cost of the repairs and that the repairs will be completed. Without knowing the state I cannot address the legality and as for the ethics of it--those with the money-- make the rules. All you can do is try another lender if the condition is unacceptable to you.