The girl has been living there for 5 and a half years. That predates the market crash.
Then the excuse would have been that a replacement home was too expensive.
A bad precedent for the HOA. They allowed the girl to live there for 5 and a half years. They failed to enforce their rules and get a judgement 5 and a half years ago. Pretty good case for the grandparents. In many states, a lack of enforcement, over a period of time, of a particular rule on the HOA's part can lead to the HOA losing the right to complain about that rule being followed years later.