The federal government’s lending program for nursing homes has come under national scrutiny in the wake of a record-setting default, but financial leaders in the space say the initiative is vital to the overall health of the industry.
The Department of Housing and Urban Development’s (HUD) Section 232 program gives skilled nursing operators and investors the flexibility to invest in their operations for the long-term and potentially improve care, multiple lenders told Skilled Nursing News.
“The program is essential for nursing homes to function,” Adam Offman, managing director in lender Dwight Capital’s health care finance operation, said. “I don’t know of any other source for permanent financing other than HUD for skilled nursing facilities.”
The 232 initiative — administered through HUD’s Federal Housing Administration arm — allows qualified borrowers to secure loans of up to 40 years for the acquisition, refinance, or renovation of skilled nursing and other senior housing facilities, including assisted living properties.
Though operators of senior living communities can also find backing from Fannie Mae and Freddie Mac, the vast majority of government-sponsored lending for skilled nursing facilities goes through HUD and FHA, with a small amount of loans and grants for rural SNFs funneled through the United States Department of Agriculture (USDA).
In addition, Freddie Mac does allow financing for properties with skilled nursing services through its senior housing loan program, but the SNF business line can’t account for more than 20% of a community’s overall net operating income.
“Essentially, the program has evolved into the go-to program for primarily skilled nursing home operators, but also assisted living owners and operators,” Jeffrey Davis, chairman and president of HUD lender Cambridge Realty Capital Companies, said of the program. “The popularity of the program is terrific and also socially relevant, as with SNF buildings, HUD is servicing both an elderly and financially needy population.”
But the 232 program has attracted negative attention in recent weeks after the New York Times reported on the default of the Rosewood Care Centers skilled nursing portfolio in the greater Chicago area. After buying the 13 buildings in 2013, Rosewood’s operators began falling behind on their mortgage payments, with the loan finally defaulting last year — resulting in a loss to HUD of $146 million, the biggest in the 232 program’s history.
The Times followed up on the story by identifying 74 properties that had received HUD loans on an erstwhile “secret” list of skilled nursing facilities identified as candidates for the Special Focus Facility program.
“These homes are causing harm and neglect to their residents,” Charlene Harrington, a professor of nursing and sociology at the University of California, San Francisco, told the publication. “So the fact that HUD is propping up these bad operators is very sad.”
Officials from the Centers for Medicare & Medicaid Services (CMS) defended the safety of the more than 400 Special Focus Facility candidates in the aftermath of the list’s release, while also vowing to begin regularly reporting the information in the near future. Rep. Richard Neal, the Massachusetts Democrat who chairs the influential House Ways & Means Committee, additionally sent a letter to HUD secretary Ben Carson, asking the department to reinstate mandatory inspections for all buildings involved in the 232 program.
But regardless of whether or not HUD should have provided loans for those properties — or whether the department is responsible for struggles that an operator endures years after a loan closes — the lending community insists that the Rosewood default is the exception, not the rule.
“What happened with that portfolio is very unfortunate, but there’s a reason why you’re hearing about it: It doesn’t happen too often,” Offman said.
A HUD spokesperson emphasized to both the Times and SNN that defaults represent less than 1% of the overall pool of government-backed nursing home loans. At the end of September 2018, the 232 program insured 3,636 loans with an unpaid principal balance of $29.0 billion, according to HUD’s fiscal 2018 report, with a claim rate of 0.62% — lower than the 1.31% rate in its related 242 program for hospitals, which had a UPB of $6.5 billion.
In that report, HUD deputy assistant secretary Roger Lukoff touted the 232 program’s credit subsidy receipts, a measure of a federal lending program’s success. In HUD and FHA parlance, a negative credit subsidy means that the program takes in more than it lays out, with the surplus going to cover other expenses in the overall HUD portfolio.
For fiscal 2019, the government projects a negative credit subsidy — or surplus — of 5.81% for regular residential care loans and 5.23% for 232 refinances, bringing in total receipts of $232 million.
Part of the reason for that surplus is mortgage insurance premiums (MIPs), which all HUD borrowers must pay as a condition of receiving government-backed financing. Typically, a SNF borrower pays a MIP of 100 basis points for the first year, and 65 basis points every year thereafter, according to Offman; loans for certain energy-efficient and affordable housing properties come with slightly lower MIPs.
In turn, the federal government uses that money to cover the cost of any loan defaults, such as the $146 million associated with the Rosewood collapse; based on current loan volume, Offman estimated that the government takes in about $600 million annually in mortgage insurance premiums.
“This is a horrible default, a tremendous default. It doesn’t happen every year, and even it did, they’re prepared for that,” Offman said.
Defaults aside, Offman and Davis described the availability of HUD funding as a vital lifeline for operators in a nursing home landscape pockmarked by staffing pressures and insufficient Medicaid reimbursements.
“Though senior housing and long-term care is a very popular investment currently, especially skilled nursing facilities do not have many other financing options with the benefits of HUD — especially opportunities that have long term fixed interest rates and no personal recourse,” Davis said.
With rates in the 3.5% to 4% range and a non-recourse feature — meaning operators can never owe more than the current value of the properties in the event of a default — the program just can’t compare to financing from local banks, Offman said, which generally offer shorter terms and higher rates.
HUD’s terms free up cash flow for operators who, in theory, can devote more funding toward staffing, capital projects, and other factors that directly influence patient care.
“We’re all hopeful that that translates into better patient care, because it puts the owner/operator in a better financial position,” Offman said.