The partial government shutdown has brought a multi-billion-dollar program for skilled nursing facility acquisitions and refinances to a halt, and the backlog could complicate deals long after the impasse eventually ends.
The Department of Housing and Urban Development (HUD) has stopped endorsing loans, the final step toward closing deals through the Federal Housing Administration’s (FHA) Section 232 financing program. The initiative, which insures loans for nursing homes and other residential care properties, forms a key pillar of the acquisitions and refinance market, offering borrowers fixed-rate funding on a non-recourse basis — in other words, the operator or investor won’t owe more than the value of the property should it enter foreclosure.
In fiscal 2018, which ended last September 30, the FHA endorsed 317 loans through the 232 program for a total of $3.6 billion, working out to an average mortgage amount of about $11 million apiece.
But that pipeline has been shut off since the federal government failed to fund HUD’s operations on December 22 amid a political dispute between President Trump and Congress over the administration’s plan to build a wall along the southern border. HUD and eight other federal agencies have remained closed since that day; on Wednesday, HUD’s website was updated to include a link for furloughed workers to apply for unemployment compensation.
“We are able to submit deals for processing, but they will be on hold until all is resolved and the government is open again,” Fred Levine, managing director at real estate lenders Greystone & Co., told SNN in an e-mailed statement. “There will probably be a significant backlog of deals for HUD to work through when they can get back to work, so this will create further expected backlog in closings even once business is back to usual.”
While shutdowns have been part of the new political reality in Washington for the last decade — this current one marks the second in two years of the Trump administration, and a 2013 stoppage under President Obama lasted 16 days — it would become the longest in history should it stretch into the weekend, and the negative effects could begin to compound.
“HUD’s been through this before and been through this in recent years, so it’s not super alarming,” Steven Kennedy, senior managing director at lending and advisory firm Lancaster Pollard, told SNN. “However, the more this plays out, the more concern we get about a few things.”
For now, lenders and borrowers can still perform a variety of tasks related to their HUD deals, according to Cambridge Realty Capital founder and CEO Jeffrey Davis, from working on already committed deals to submitting previously started applications to the federal government.
In addition, the requirements associated with FHA deals mean that borrowers generally expect the process to take longer than traditional non-agency financing, and the timing of this particular shutdown has served to soften the blow: With the first week and a half of the closure falling over the Christmas and New Year’s holidays, many financial professionals weren’t around to work on deals anyway, Lancaster Pollard managing director Robert Baxter said.
But that lull only lasted so long. HUD uses an array of third-party contractors to underwrite deals, Baxter noted, releasing specific loan applications to its private partners in batches every two weeks. January 4 came and went without the scheduled assignment, and the backlog will only become worse if the government remains shuttered through the next assignment date of January 18.
Even if third-party contractors continue to work on applications during the shutdown, they still must defer to their HUD superiors for any questions and final approvals — and aside from a handful of staffers deemed essential by the government, those workers are all stuck at home. In addition, while Baxter said that certain HUD employees can be recalled to work in “dire” loan circumstances, the staff at Lancaster Pollard remains cognizant of the fact that they wouldn’t be paid for their efforts.
“The hope is that they will be paid, but they’re not being paid,” Baxter said. “It’s one of the things we’re constantly trying to be sensitive to: We are asking these individuals to work, and they don’t know when they’re going to get paid.”
As of press time, Congress and the president seem to be no closer to reaching a consensus on sending the 800,000 furloughed employees back to work, with Trump reportedly storming out of a White House meeting with Speaker of the House Nancy Pelosi and Senate Minority Leader Chuck Schumer on Wednesday after the top Democrats refused to entertain the idea of a border wall. Vice President Mike Pence on Thursday told reporters, “No wall, no deal,” while Democrats have repeatedly said that they will not vote for legislation that includes any of the requested $5.7 billion in wall funding.
And with each day that passes, the economic impact on owners and operators in the skilled nursing space worsens. Borrowers can typically lock in interest rates for about 30 days, an issue if the shutdown lingers longer than that — especially considering the general rising interest rate environment. In addition, FHA cannot issue new case numbers for loans during the shutdown, meaning that lenders and borrowers cannot start the process for deals that may arise in the interim.
While a vast number of individuals and businesses have suffered as a direct result of the shutdown, nursing homes are in a particularly tight spot, Kennedy observed, with razor-thin Medicaid margins and other headwinds making survival difficult outside of FHA financing headaches.
“If the government doesn’t open, and we can’t close, and we have rate-lock deals, there’s going to be penalties that are going to be owed by borrowers to investors,” Kennedy said. “There’s economic consequences to small business owners in that circumstance.”