The collapse of a Chicago-area nursing home business resulted in the largest loss in history for the Department of Housing and Urban Development’s (HUD) loan guarantee program for skilled nursing facilities, the New York Times reported Friday — prompting the paper to question the safeguards in place for the program.
The nursing home chain in question, Rosewood Care Centers, stopped making mortgage payments on its flagship facility in Inverness, Ill., about a year after purchasing it in 2013. The business defaulted on $146 million in government-backed mortgages last year, the Times reported.
Section 232 of the National Housing Act, which began in 1959, authorized the federal government to insure mortgages for nursing homes. The mechanism allows nursing homes to secure affordable loans, and as of March 8, 2018, HUD had insured 2,458 nursing home mortgages, with a collective principal balance of more than $19.6 billion, according to a September 2018 audit report by the HUD inspector general.
While senior living and multifamily housing operators have a variety of options long-term, low-rate mortgages — including products backed by Fannie Mae — HUD lending remains the primary option for skilled nursing providers. Federally backed nursing home loans are typically non-recourse, meaning the borrower can never owe more than the value of the property in the event of a foreclosure, with terms of up to 40 years.
Many of the nursing homes backed by HUD are for-profit, private businesses, according to the Times.
But despite the significant loss taken on the Chicagoland properties, only 1% of the guaranteed loans in the program end up defaulting, the article noted and a spokesman for HUD stressed to Skilled Nursing News.
In statements to the Times, the agency indicated that Rosewood is an outlier. The business had growing monetary issues that HUD was aware of in 2015; these problems included the diversion of federally insured funds to at least one other SNF, the investors who purchased Rosewood — led by Zvi Feiner — missing mortgage payments, and the chain struggling to pay its bills to vendors.
HUD’s oversight of the nursing homes in the section 232 program was flagged as early as 1995, when a report from the Government Accountability Office found a lack of bureaucratic attention to nursing home loans until default or imminent financial distress, the Times noted.
The 2018 audit, which zeroed in on 18 financially challenged SNFs, found that HUD didn’t always find and address the causes of financial or operational challenges; it also failed to punish operators that didn’t submit complete and accurate data on time.
Rosewood had never filed the financial statements required by the Section 232 program, the Times reported, and because HUD insured the loans, it had to sign off when Rosewood was purchased by Feiner and his fellow investors in December 2013. When Rosewood’s corporate parents defaulted on the $146 million in mortgage loans, HUD filed a lawsuit to appoint a receiver to run the 13 Rosewood facilities in Illinois and Missouri, half of which are losing money, according to the Times.
HUD currently pays $1 million a month to keep the facilities, which have more than 1,100 residents, running, the publication reported.
In October, HUD filed a complaint against Feiner seeking almost $1 million penalties for failure to file the required financial reports; Feiner’s lawyers told the Times that they agreed to settle the case.
HUD is now auctioning off all 13 facilities in a single portfolio; bidding for the properties closed Friday. Though HUD doesn’t expect to fully recover its claim, the sale would let it at least make a partial recovery, the HUD spokesman told SNN.