HUD Management: Greater Oversight Needed of FHA's Nursing Home Insurance
Program (Letter Report, 08/25/95, GAO/RCED-95-214).
The Department of Housing and Urban Development (HUD) has insured
private lenders against financial losses arising from defaults on
mortgages for nursing homes and retirement service centers. Although HUD
officials believe that the program has enabled the agency to assist
populations or areas that are not well served by the private sector, GAO
found that the nursing home program has not been targeted to specific
populations or communities and that HUD does not collect or analyze
information on whom the program is servicing. The Federal Housing
Administration (FHA) has not done any complete assessment of the
finanical performance of the nursing home and retirement service center
programs. Available data indicate that the nursing home program has
incurred losses of $187 million, adjusted for inflation, during its
35-year history. Additionally, FHA's fiscal year 1994 loan loss reserves
anticipate future losses equivalent to about 19 percent of the $3.7
billion balance of nursing home loans in the portfolio as of September
1994. HUD data show that about 46 percent of the retirement service
center's total portfolio of about $1.4 billion had defaulted and
resulted in FHA insurance claims as of September 1994. GAO doubts
whether HUD will be able to effectively manage the nursing home and
retirement service center programs in the near future.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: RCED-95-214
TITLE: HUD Management: Greater Oversight Needed of FHA's Nursing
Home Insurance Program
DATE: 08/25/95
SUBJECT: Nursing homes
Mortgage loans
Mortgage programs
Loan defaults
Mortgage protection insurance
Federal aid for housing
Data collection operations
Elder care
Handicapped persons
IDENTIFIER: Medicare Program
Medicaid Program
HUD Reinvention Blueprint
HUD Multifamily Housing Loan Program
HUD Retirement Service Center Program
HUD Section 242 Hospital Mortgage Insurance Program
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Cover
================================================================ COVER
Report to Congressional Committees
August 1995
HUD MANAGEMENT - GREATER OVERSIGHT
NEEDED OF FHA'S NURSING HOME
INSURANCE PROGRAM
GAO/RCED-95-214
FHA's Nursing Home Insurance Program
(385425)
Abbreviations
=============================================================== ABBREV
AARP - American Association of Retired Persons
FHA - Federal Housing Administration
GAO - General Accounting Office
HUD - Department of Housing and Urban Development
UPB - unpaid principal balance
Letter
=============================================================== LETTER
B-261654
August 25, 1995
The Honorable Alfonse M. D'Amato
Chairman
The Honorable Paul S. Sarbanes
Ranking Minority Member
Committee on Banking, Housing
and Urban Affairs
United States Senate
The Honorable Jim Leach
Chairman
The Honorable Henry B. Gonzalez
Ranking Minority Member
Committee on Banking and
Financial Services
House of Representatives
The Department of Housing and Urban Development (HUD), through two
Federal Housing Administration (FHA) programs, has insured private
lenders against financial losses from borrowers' defaults on
mortgages for nursing homes and retirement service centers. The
nursing home program, established in 1959, was expanded recently to
include insurance coverage for assisted living facilities, a type of
residential care facility for the elderly and disabled. The
retirement service center program, terminated in 1991 after 8 years
of operation primarily because of many loan defaults, was also
targeted to the elderly population. The loans for these programs are
part of FHA's multifamily loan portfolio.
This report was prepared to comply with the requirements in the
Multifamily Housing Property Disposition Reform Act of 1994 (P.L.
103-233, Apr. 11, 1994) that we report on the nursing home,
retirement service center, and hospital insurance programs in FHA's
multifamily loan portfolio.\1
As agreed with your offices, we evaluated (1) the relationship of the
nursing home and retirement service center insurance programs to
FHA's mission, (2) information on the programs' financial performance
and HUD's estimates of potential future losses under these programs,
and (3) HUD's ability to manage these programs.
--------------------
\1 The results of our study on the hospital insurance program will be
provided in a separate report.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
HUD officials, including the Deputy Assistant Secretary for
Multifamily Housing Programs, believe that the nursing home program
supports HUD's mission by serving populations or areas that are not
adequately served by the private sector, such as rural communities.
However, the extent to which FHA's nursing home program has achieved
these objectives is uncertain. The nursing home program has not been
targeted to serve specific populations or communities, and HUD does
not collect and analyze information on whom the program is serving.
When HUD evaluated the market being served by the retirement service
center program, it found that the private sector and the FHA program
were primarily serving the same market.
FHA has not done any complete assessments of the financial
performance of the nursing home and retirement service center
programs. Furthermore, because, historically, HUD's data systems
have not tracked the receipts and expenditures for its individual
mortgage insurance programs, the actual financial performance of
these programs can only be estimated. HUD's data that may be used to
approximate the financial performance of the nursing home program
during its 35-year history indicate that losses of approximately $187
million, adjusted for inflation, have been incurred. Additionally,
FHA's fiscal year 1994 loan loss reserves anticipate future losses
equivalent to about 19 percent of the $3.7 billion balance of nursing
home loans in the portfolio as of September 30, 1994. While fewer
cost data are available for the retirement service center program, it
is clear that the program has incurred losses. For example, HUD's
data show that about 46 percent of the retirement service center
program's total portfolio of about $1.4 billion had defaulted and
resulted in FHA insurance claims as of September 30, 1994.
We believe it is unlikely that HUD will be able to effectively manage
the nursing home and retirement service center programs in the near
future. For example, many of HUD's current efforts to overcome the
staffing inadequacies, data deficiencies, and poor management
controls that have hindered its portfolio management capability for
many years are in the early stages. In addition, while HUD is
planning to consolidate its multifamily underwriting and asset
management responsibilities in response to the Department's proposed
restructuring and downsizing, it is not clear when the
consolidations--and the potential benefits of loan specialization
that this restructuring offers--will be implemented departmentwide.
In the meantime, HUD has implemented legislative changes that
authorize FHA mortgage insurance for assisted living facilities which
may result in the nursing home program's growth and in potentially
riskier loans especially if FHA is unable to effectively underwrite
insurance for the loans and monitor their performance.
BACKGROUND
------------------------------------------------------------ Letter :2
Section 232 of the National Housing Act, as amended, authorizes FHA
to insure mortgages made by private lenders to finance the
construction or renovation of skilled nursing facilities,
intermediate care facilities, board and care homes, and assisted
living facilities, as well as combinations of these types of
projects.\2 As of September 30, 1994, the insured nursing home
portfolio consisted of about 869 loans with an aggregate unpaid
principal balance of $3.7 billion.
In 1994, HUD issued regulations implementing legislation that has
expanded FHA's nursing home program to include mortgage insurance for
the refinancing of non-FHA-insured projects and for assisted living
facilities. HUD had previously revised its regulations to allow for
the refinancing of FHA-insured projects. Assisted living facilities
offer a combination of housing and personalized health care,
including separate living units for residents, common areas, and
assistance with activities of daily living, such as bathing,
dressing, and eating. According to HUD's Director of Insured
Multifamily Housing Development, assisted living facilities under the
nursing home program will generally be unsubsidized, market-rate
projects serving the moderate- and upper-income elderly.
FHA's terminated retirement service center program also served the
upper-income elderly, providing unsubsidized rental housing that had
more services and amenities, such as meals, than those available in
the typical FHA-insured project for the elderly.\3 HUD established
this program administratively under section 221(d)(4) of the National
Housing Act, which provides for multifamily rental housing for
moderate-income families. The retirement service center program was
not part of the nursing home program. Because retirement service
center loans are included with other market-rate housing loans, HUD's
data systems cannot readily identify retirement service center
projects. According to HUD's July 12, 1995, report on retirement
service centers, 85 retirement service center loans with original
face amounts of $689 million were in force as of September 30,
1994.\4
When a default occurs on an insured loan, a lender may assign the
mortgage to HUD and receive payment from HUD for an insurance claim.
Each year, FHA establishes loan loss reserves to reflect the net
amount that the agency expects its insurance funds to lose from
future defaults on loans in the existing multifamily portfolio.\5 FHA
is also required each year, under the Credit Reform Act of 1990, to
estimate credit subsidies--the net costs to the government of
insuring new mortgages. The act requires that for credit
instruments--including mortgage insurance--budget authority be
provided for credit subsidies to cover the government's cost before
such credit is extended. The federal budget shows whether credit
programs lose money, break even, or make a "profit."\6
--------------------
\2 These facilities form a "continuum" offering varying degrees of
care. For ease of presentation, we refer to any mortgage insured
under section 232 as a nursing home loan and to FHA's section 232
program as the nursing home program. About 89 percent of the unpaid
principal balance of insured loans is under the basic section 232
program, which provides coverage for new construction and substantial
rehabilitation of these facilities. The remaining loans include
supplemental loans and refinancing. (See app. I for a description
of section 232 facilities and loans.)
\3 When a loan insurance program is terminated, new loans are not
added to the portfolio. However, existing loans remain in force
until they are either paid in full or default.
\4 We did not evaluate the reliability of the data contained in the
report Retirement Service Centers, by Richard G. Calvert, Thomas N.
Herzog, James E. Laverty, Darrel S. Connelly, Statistical and
Actuarial Analysis Staff, HUD (July 12, 1995). On August 2, 1995,
HUD reported that it is revising the report to reflect new data.
\5 Our report HUD Management: FHA's Multifamily Loan Loss Reserves
and Default Prevention Efforts (GAO/RCED/AIMD-95-100, June 5, 1995)
identified limitations that reduced the reliability of FHA's estimate
of fiscal year 1993 loss reserves.
\6 These calculations are made before administrative costs are taken
into account.
FURTHERANCE OF HUD'S MISSION BY
PROGRAMS IS UNCERTAIN
------------------------------------------------------------ Letter :3
As an agency of HUD, FHA is to further the Department's overall
mission of enhancing opportunities for housing and community
development. HUD officials, including the Deputy Assistant Secretary
for Multifamily Housing Programs, believe the nursing home program
supports HUD's mission by serving populations or areas that are not
adequately served by the private sector. However, the extent to
which FHA's nursing home program has achieved these objectives is
uncertain. The nursing home program has not been targeted to serve
specific populations or communities, and HUD does not collect and
analyze information on whom the program is serving. When HUD
evaluated the market being served by the retirement service center
program, it found that the private sector and the FHA program were
primarily serving the same market--the upper-income elderly.
EXTENT TO WHICH THE NURSING
HOME PROGRAM FURTHERS HUD'S
MISSION IS UNCLEAR
---------------------------------------------------------- Letter :3.1
The mortgage insurance program for nursing homes was established by
the Congress in 1959 to encourage the construction of nursing homes.
At that time, the Congress believed that sponsors of for-profit
nursing homes had difficulty in obtaining financing on reasonable
terms.\7
According to officials in the Policies and Procedures Division of
HUD's Insured Multifamily Housing Development Office, lenders
generally viewed nursing homes as risky ventures prior to the
establishment of the Medicaid reimbursement program in 1965. The
nursing home program was intended to overcome private lenders'
reluctance to finance nursing homes by drawing on FHA's experience in
credit enhancement programs to minimize the lenders' risk of
financial losses. The passage of the Medicaid program in 1965
provided a more reliable income stream for nursing homes by
reimbursing their costs.
Since the program's inception, FHA has insured over 2,000 nursing
home loans totaling about $5.1 billion. By comparison, over 16,000
skilled nursing and intermediate care facilities were in the United
States as of March 1994. In addition, the American Association of
Retired Persons (AARP) reports that an estimated 32,000 licensed
board and care homes are in the United States, some of which are
assisted living facilities. Because assisted living facilities can
be called by a variety of names, the exact number is difficult to
determine; however, the Assisted Living Facilities Association of
America represents about 12,000 facilities.\8 These statistics
indicate that a relatively small number of nursing homes operating in
the United States today were financed with mortgage loans carrying
FHA insurance. Nonetheless, the Deputy Assistant Secretary for
Multifamily Housing Programs and officials in HUD's Insured
Multifamily Housing Development Office and in the Housing Management
Divisions of two of the three field offices we visited believe that
the nursing home program furthers HUD's broad mission of increasing
opportunities for housing and community development.
Specifically, HUD officials said that the program supports HUD's
mission by insuring mortgages for nursing homes that may serve
populations such as low-income individuals or areas such as small
rural communities or inner cities that are not adequately served by
the private sector. In addition, HUD officials said the program also
supports the Department's mission by assisting borrowers who might
otherwise be unable to obtain financing for nursing homes. Along
these lines, a 1993 report indicates that nonprofit, public, and
small for-profit entities are most likely to obtain financing from
either the FHA or state programs, whereas large for-profit entities
generally obtain financing from commercial banks, savings and loan
associations, and life insurance companies and through the stock
market.\9
Nonetheless, the extent to which the program actually achieves the
purposes cited by the HUD officials is uncertain. For example, the
nursing home program is not targeted to specific unmet market needs,
such as providing access to nursing homes to underserved locations
and populations, nor are borrowers required to demonstrate that they
could not obtain financing without FHA mortgage insurance. Current
FHA borrowers that we contacted cited various reasons why they used
FHA insurance in financing their nursing homes. While some noted the
unavailability of other financing, others cited different reasons;
for example, the program enabled them to obtain lower interest rates
and the program offers "nonrecourse" terms, which protect investors.
While FHA does have requirements to determine whether sufficient
market demand exists for nursing home projects that it insures, the
requirements are not specifically aimed at determining whether a
project will meet a need that would not otherwise be met by the
private sector.\10 Furthermore, HUD does not collect and analyze
information on whom the program is serving, such as the income levels
of the patients served by FHA nursing homes, the economic
characteristics of the communities in which FHA nursing homes are
built, or the borrowers' ability to obtain financing without FHA
insurance.
Available information indicates that participation in FHA's nursing
home program varies widely by state. About 32 percent of FHA's
nursing home loan balances cover facilities located in New York, and
another 38 percent of FHA's nursing home loan balances cover
facilities located in seven other states. (See fig. 1.) In
contrast, FHA currently insures only a small number of nursing homes
in many states. For example, FHA currently insures 2 percent of the
nursing homes in California and 1 percent of the nursing homes in
Texas. (See app. II.)
Figure 1: Geographic
Distribution of $3.7 Billion
Total Unpaid Principal Balance
in FHA's Insured Nursing Home
Portfolio, as of September 30,
1994
(See figure in printed
edition.)
Eight states each have over $150 million in UPB. New York has $1.2
billion in UPB, which is 32 percent of the total. Massachusetts,
Ohio, Virginia, New Jersey, Illinois, Rhode Island, and Pennsylvania
together account for 38 percent of the total.
Legend
UPB = Unpaid principal balance
--------------------
\7 The program was expanded in 1964 to provide coverage for nonprofit
sponsors.
\8 Data on skilled nursing and intermediate care facilities were
reported as of March 1994 by the Department of Health and Human
Services. Statistics on board and care homes and assisted living
facilities were cited in February 1995 by AARP.
\9 See Financing Options for Long Term Care Facilities in the United
States, Institute for Health and Aging, University of California
(Sept. 1993). The report, funded in part by HUD, presents data from
a small 1993 telephone survey on current public and private financing
options for nursing homes and board and care facilities.
\10 Most states use a certificate-of-need process that limits the
number of new nursing homes to those for which the state certifies
that a sufficient market demand exists. HUD requires a certificate
of need for the states that use this process. Alternatively, HUD
requires a market analysis demonstrating adequate demographic demand
and financial viability for these states.
THE RETIREMENT SERVICE
CENTER PROGRAM AND THE
PRIVATE SECTOR SERVED THE
SAME MARKET
---------------------------------------------------------- Letter :3.2
The retirement service center program did not contribute to HUD's
mission of serving unserved markets. When HUD terminated the
retirement service center program in 1991, it reported that the
program primarily assisted the upper-income elderly and that the
private sector also had been developing a wide variety of similar
products for the upper-income elderly.
HUD established this program administratively in 1983 with the urging
of developers to provide market-rate rental housing for the elderly
with a significant level of services and amenities over and above
those found in the typical HUD-insured project for the elderly.
However, as the HUD Inspector General has noted, HUD implemented the
program without having fully assessed the risks and benefits of the
Department's involvement in underwriting loans for retirement service
centers.\11 In particular, HUD did not do an adequate job of
analyzing the market for such housing--an error that was also made by
some private sector investors in retirement centers in the 1980s who
also incurred losses as a result of defaults.
For example, HUD underestimated the reluctance of many seniors to
move from their current home to alternative housing. In addition,
because retirement service centers had no direct federal rental
subsidies, the high rents associated with these projects made them
affordable to only the upper-middle-income to upper-income elderly
population. As a result of these and other factors, the program
incurred a high level of loan defaults.
Because of the defaults, the Secretary placed a moratorium on
insuring additional facilities in 1989. HUD terminated the program
in 1991, at which time, it reported that approximately 53 percent of
the retirement service center projects had either defaulted or were
experiencing financial or operational difficulties. In terminating
the program, HUD noted that this action would not cause a gap in the
types of housing and support services available to serve the
lower-income elderly because retirement service centers charged
market rate rents and had no direct federal rental subsidies.
--------------------
\11 Multi-Region Audit of the Insured Retirement Service Centers
Program, Office of the Inspector General, HUD, 90-TS-111/112-0008
(Apr. 6, 1990).
FINANCIAL DATA AND HUD'S
ANALYSES INDICATE LOSSES FOR
PROGRAMS
------------------------------------------------------------ Letter :4
Because of data limitations, the financial performance of the nursing
home and retirement service center programs can only be estimated.
Cost estimates for both programs indicate that they have incurred
losses. HUD's data also indicate that both programs will experience
a significant number of loan defaults in the future. Furthermore,
HUD's credit subsidy estimates for the nursing home program, which
assume that receipts will exceed costs, may be unreliable.
BOTH PROGRAMS APPEAR TO HAVE
INCURRED LOSSES TO DATE
---------------------------------------------------------- Letter :4.1
HUD has not done any complete assessments of the financial
performance of the nursing home and retirement service center
programs. For example, "actuarial" studies conducted periodically on
these programs focus primarily on the number of defaults and the
original loan balances associated with the defaults but do not
analyze the full costs of the programs. Therefore, this information
does not establish whether the programs operate at a profit or a
loss.\12
Furthermore, while HUD's data systems currently track receipts and
expenditure data associated with its individual mortgage insurance
programs, cumulative receipts and expenditure data for its insurance
programs are not available because historically the data systems have
not tracked these data for the Department's individual programs.\13
Consequently, the actual financial performance of the nursing home
and retirement service center programs can only be estimated.
Data from HUD that may be used to approximate the financial
performance of the nursing home program from its inception to
September 30, 1994, indicate that losses were likely incurred under
this program. Specifically, HUD's data on loan defaults, original
loan amounts, premium payment requirements, and recoveries from the
sale of notes and properties indicate that the nursing home program
has incurred losses of approximately $187 million, adjusted for
inflation, since its inception.\14 Primarily because of the data
limitations, we excluded some expenses, such as administrative costs,
and developed some assumptions, for example, on recovery amounts from
the sale of defaulted notes or properties, which tend to understate
the cost of the nursing home program. These factors are discussed in
more detail in appendix III, which summarizes our methodology for
estimating the losses of the nursing home program.
Available data indicate that the terminated retirement service center
program has incurred losses as well. For example, in terminating the
program in 1991, HUD estimated that net losses to the insurance fund
could total about $300 million. Furthermore, HUD's data show that
about 46 percent of the total retirement service center portfolio of
about $1.4 billion had defaulted as of September 30, 1994.\15
While HUD has not updated its net loss estimates, HUD's data indicate
that claims have been paid on loans with an original face value of
$648 million.
--------------------
\12 Profits or losses represent the difference between the present
value of program receipts (such as premium income collected and sales
receipts) and expenditures (such as claims paid and selling
expenses).
\13 In addition, according to HUD accounting officials, files on
defaulted loans were not retained for more than 10 years. The
enhancements to the data systems supporting program-by-program data
were phased in from about 1987 through 1992.
\14 This amount represents the sum of the program's estimated cash
flows under the basic section 232 program, excluding administrative
costs, from 1959 to 1994, adjusted to 1994 dollars. The estimated
loss in nominal dollars is $70 million. The estimate does not
include the interest cost of federal debt associated with the program
or the interest income that HUD received on some of its assigned
loans, which partially offset the federal interest cost.
\15 See footnote 4.
INDICATORS OF FUTURE
PERFORMANCE PROJECT
CONTINUING DEFAULTS
---------------------------------------------------------- Letter :4.2
As part of the analysis of the fiscal year 1994 loan loss reserves
for its insured multifamily inventory, FHA developed an estimate of
future losses expected from defaults on loans insured under the
nursing home program. On a net present value basis, FHA estimated
that it will sustain approximately $724 million in future losses from
loan defaults. This amount includes an offset representing estimated
premium receipts for loans evaluated in the analysis as having a low
risk of default. The loss reserves represent about 19 percent of the
total unpaid principal balance of nursing home loans insured as of
September 30, 1994.
FHA's loan loss reserve estimates are based primarily on analyses of
the financial and physical condition of properties with FHA mortgage
insurance. They do not specifically consider the potential financial
impacts of changes in health care policies on nursing homes.
Although the exact nature of future national changes in health care
is uncertain at the present time, the health care industry is
currently undergoing significant changes as a result of national and
state efforts to contain costs and reform the health care system.
Industry and government officials with whom we spoke generally do not
believe that proposed and ongoing changes in the health care industry
will have a negative impact upon FHA's nursing homes. However,
efforts by federal, state, and local governments to control rising
health care costs--such as current state and federal actions to
reduce Medicaid and Medicare costs--could increase risks and
undermine the financial viability of some of these projects. For
example, a substantial portion of nursing homes' revenue is provided
from Medicaid reimbursements.\16
(See app. IV.)
In addition to the high number of defaults of retirement service
center loans that have occurred to date, more defaults are expected.
We conducted a survey of HUD's loan servicers in November 1994 to
determine the extent to which they believed the remaining retirement
service center loans were likely to default in the future.\17 (See
app. V for the scope and methodology for the survey.) The results of
this survey and the recent financial analysis of most of the
remaining retirement service center loans by a HUD contractor
indicate that additional loan defaults under the program are likely.
HUD's loan servicers indicated that about 18 percent of the remaining
retirement service center loans that we identified were likely to
default in the future. The unpaid principal balance for these
projects was approximately $192 million as of September 30, 1993.
Furthermore, an analysis of the 1993 audited financial statements of
90 retirement service center projects, conducted in 1994 for HUD by a
contractor, rated one-half of these projects as "poor" in at least
two of the five financial ratios evaluated. In nine of these cases,
the auditors' opinions raised a "going concern issue," indicating
that the auditors seriously question the continued viability of these
projects. The unpaid principal balance for the projects with two or
more poor ratings was $392 million.
--------------------
\16 Medicare is a health insurance program administered by the Health
Care Financing Administration for persons aged 65 or older and for
disabled persons who are eligible for care. Medicaid is a joint
federal-state program under which the states assume primary
administrative responsibility for health care coverage for the aged,
disabled, and economically disadvantaged.
\17 HUD's loan loss reserve analysis does not analyze retirement
service center loans separately, and the small number of these loans
in the loss reserve sample did not provide sufficient data to
reliably estimate the level of future defaults in this program.
CREDIT SUBSIDY ESTIMATES MAY
NOT ACCURATELY REFLECT
FUTURE LOSSES
---------------------------------------------------------- Letter :4.3
HUD's credit subsidy estimates for nursing home loans to be endorsed
in fiscal year 1996 may not accurately reflect the losses that are
likely to be incurred as a result of future defaults on such loans.
HUD's fiscal year 1996 credit subsidy estimate for the nursing home
program projects a profit--that is, HUD expects that the net present
value of receipts on these loans (insurance premiums and recoveries
on loan defaults) will exceed losses resulting from default claims.
For several reasons, we believe that this estimate may not be
reliable. First, according to HUD budget staff, the credit subsidy
calculation was based on assumptions about loan performance contained
in a 1992 report by Price Waterhouse that HUD applied to a standard
credit subsidy model (spreadsheet) used by the Office of Management
and Budget. According to the HUD staff, the data used to provide the
credit subsidy estimates have not been updated even though the most
recent data used in the Price Waterhouse study are from 1990.
Furthermore, according to the study, because of the lack of available
financial data on nursing home loans, the models used in the study
were based on historical trends and economic indicators and did not
incorporate project-specific financial indicators. The study noted
that the general economic models used in the study cannot explain
loan performance as accurately as loan-specific models.
Second, HUD's fiscal year 1996 credit subsidy estimate assumes a
higher recovery rate on defaulted loans than HUD has historically
experienced--60 percent as opposed to the 40.2-percent rate supported
by HUD's data.\18 Third, HUD's credit subsidy estimate does not take
into account the differences in default risk that may result from
HUD's insurance of assisted living facilities compared with its
insurance of nursing homes. These differences are discussed in the
next section of our report. And last, a recent study prepared for
the Mortgage Bankers Association indicates that the nursing home
program has incurred losses in the last 8 years and requires a small
credit subsidy. That study also used the 60-percent recovery rate
that HUD uses in its credit subsidy model, which may underestimate
the program's losses.
--------------------
\18 We estimate HUD's recovery rate for the nursing home program to
be about 40.2 percent. (See app. III.)
PROGRAM AND AGENCY CHANGES MAY
FURTHER STRAIN FHA'S MANAGEMENT
CAPACITY
------------------------------------------------------------ Letter :5
As discussed in our June 1995 report on FHA's loan loss reserves and
default prevention efforts, HUD is unable to provide adequate
oversight and management of its existing multifamily loan inventory,
including nursing home and retirement service center loans.\19 While
HUD is taking steps to overcome its historical loan management
deficiencies, its ability to improve its management may be negatively
affected, at least in the short run, by the planned FHA restructuring
and staff reductions. Currently, HUD's loan servicers provide
limited oversight of nursing home and retirement service center
loans. Moreover, recent legislative changes may result in the growth
of the nursing home program and potentially riskier loans, placing
additional strains on HUD's management capacity.
--------------------
\19 GAO/RCED/AIMD-95-100 (June 5, 1995).
HUD'S MULTIFAMILY LOAN
PORTFOLIO NOT ADEQUATELY
MANAGED
---------------------------------------------------------- Letter :5.1
Numerous studies over the past 2 decades by Price Waterhouse, HUD's
Office of Inspector General, and us have identified weaknesses in
FHA's ability to effectively manage its multifamily portfolio, which
includes the nursing home and retirement service center programs.
The agency currently insures a number of multifamily properties that
are in poor condition and projected losses of $9.5 billion from
future defaults of loans in its $45.4 billion insured multifamily
portfolio as of September 30, 1994. Although HUD is taking steps to
overcome staffing inadequacies, data deficiencies, and poor
management controls that have hindered its ability to manage the
portfolio for many years, many of the Department's efforts to improve
its management are in the early stages. Some of the corrective
actions could take years to accomplish. For example, efforts to
overcome the serious data deficiencies in FHA's multifamily portfolio
are only at the strategic planning stage. As such, HUD continues to
have only limited ability to oversee these programs, and we cannot
determine at this time whether HUD's initiatives will be successful.
In addition, HUD is proposing organizational changes and staffing
cuts that could, at least in the short run, place additional strains
on FHA's portfolio management. In December 1994, HUD issued its
"Reinvention Blueprint" proposing broad departmental changes,
including restructuring FHA, in an effort to operate more efficiently
and effectively.\20 HUD's fiscal year 1996 budget proposal would
streamline HUD's headquarters and field office operations, reducing
staff from the current level of 12,000 to about 7,500 over the next 5
years. Under HUD's proposal, FHA would be transformed into a
"streamlined, business-oriented government entity." As a new
"market-driven corporation," FHA would consolidate its many existing
insurance programs into three broad authorities: single-family
homeownership; multifamily rental housing; and health care
facilities. These sweeping proposals are likely to change the nature
and extent of FHA's future involvement in managing the multifamily
portfolio.
According to the Deputy Assistant Secretary for Multifamily Housing
Programs, HUD is studying ways to consolidate its multifamily
underwriting and asset management responsibilities in response to the
proposed departmental restructuring and downsizing. For example, HUD
is planning to assign loan originations for assisted living facility
loans for its Region 10 offices in Alaska, Idaho, Oregon, and
Washington State to the Seattle, Washington, field office to bring
efficiency and specialization to the loan origination process for
nursing home loans that are unlike other multifamily loans. The
Deputy Assistant Secretary said that concentrating highly experienced
staff in a few locations will reduce the risk associated with certain
types of loans, such as those of assisted living, board and care, and
intermediate care facilities. In addition, the Deputy Assistant
Secretary indicated that HUD is currently redesigning its program for
nursing homes and other residential health care facilities. The
Department is considering changing fees and premiums as well as basic
underwriting terms, such as reductions in loan-to-value limits and
shorter mortgage terms.
--------------------
\20 In May 1995, HUD issued the American Community Partnerships Act,
a legislative plan to implement the blueprint's proposals.
PROGRAM'S EXPANSION MAY
FURTHER STRAIN HUD'S
OVERSIGHT ABILITY
---------------------------------------------------------- Letter :5.2
The recent expansion of the nursing home program to include mortgage
insurance for assisted living facilities (as well as for refinanced
loans covering non-FHA-insured nursing homes) could strain HUD's
already limited capacity to manage nursing home and other multifamily
loans. Our work in several HUD field offices, as well as data from
FHA's loan loss reserve analysis, indicates that HUD's loan servicers
provide limited oversight of nursing home and retirement service
center loans. For example, of the 142 nursing home loans that HUD
sampled in its fiscal year 1994 loan loss reserve analysis, only 36
had received recent management reviews and 87 had current physical
inspections. In general, HUD's loan management staff that we
contacted viewed nursing home loans as low-risk and, as a result,
generally do not focus attention on nursing home loans unless
financial trouble appears imminent or a default occurs.\21
The new assisted living component of the nursing home program has the
potential to further strain HUD's management capabilities.\22 This
additional strain could result not only from the fact that the
program could increase the size of FHA's insured loan portfolio but
also because the default risk associated with insuring assisted
living facilities could be higher than that for other nursing home
loans--particularly if the new program is not effectively managed.
In this regard, assisted living facilities differ from nursing homes
in fundamental ways that can potentially increase the risk of
default. For example, while most states limit the supply of skilled
nursing homes through the certificate-of-need process, similar limits
are not placed by most states on assisted living facilities.
Furthermore, the new assisted living facilities program shares some
characteristics with the failed retirement service center program in
that both target the moderate- and upper-income elderly. As such,
these projects typically do not receive Medicaid financing and
require careful analysis to ensure that sufficient market demand
exists to support the facilities.
Officials in HUD's Insured Multifamily Housing Development Office
believe that several differences between assisted living facilities
and retirement service centers will mitigate the risks associated
with their similarities. For instance, unlike retirement service
centers, FHA's assisted living facilities (1) will be licensed and
regulated by the states; (2) are expected by FHA to be developed and
managed by developers and operators experienced in the delivery of
long-term care, although no specific level of experience is required;
and (3) are intended for residents who, by virtue of their physical
condition, no longer have the option of living independently,
resulting in a more need-driven market for these facilities.
However, as noted earlier, state monitoring and regulation, which
focus on the adequacy of health care, do not address default
prevention. Furthermore, the extent to which experienced developers
and adequate market analysis are used in this program will depend on
the HUD field staff responsible for analyzing and underwriting the
insurance.
HUD's Director of Insured Multifamily Housing Development
acknowledged that excessive workloads could limit HUD's ability to
adequately administer the assisted living program. However, she
stated that HUD will attempt to minimize the risks of assisted living
projects through careful underwriting evolving, in part, from HUD's
plans to provide special training to field staff. Training is
critical because, as HUD has recognized, the lack of extensive
training in underwriting projects exacerbated the problems that HUD
experienced with the failed retirement service center program.
Nonetheless, HUD's plans to have initial training completed in early
1995 were not implemented. However, HUD did provide training for
underwriting assisted living facility loans to its field offices via
a live broadcast from headquarters on August 16, 1995. In addition,
HUD plans advanced valuation training for staff from several field
offices in August 1995. The training will emphasize market and
marketability issues for nursing homes and board and care and
assisted living facilities.
HUD's ability to effectively oversee the assisted living program may
be further constrained, in our view, by the fact that the Department
has not conducted a market feasibility study to fully assess the
risks and benefits associated with assisted living facilities.
According to HUD officials, the Department's policy is to perform
feasibility studies only for new programs. Because HUD views the
assisted living program as an expansion of FHA's nursing home program
rather than a new program, it does not believe that the assisted
living program warrants a feasibility study. However, as noted
earlier, the lack of a full assessment of the risks and benefits in
underwriting retirement service center loans was cited by HUD's
Inspector General as contributing to the problems associated with
that program.
Officials in HUD's Insured Multifamily Housing Development Office and
field offices also believe that FHA's experience with board and care
projects will help ensure effective management of the loans for the
assisted living program. However, according to available data, board
and care projects are a small part of the nursing home portfolio, and
many of HUD's field offices have little or no experience with board
and care facilities.\23
In addition, in response to our questions about the default risk of
board and care facilities, HUD conducted a preliminary analysis of
nursing home default claims since 1986 that indicates that FHA may
need to strengthen its underwriting standards for board and care
facilities. According to the Deputy Director of the Office of
Insured Multifamily Housing Development, the preliminary results
indicate that a higher proportion of loans for board and care
facilities have defaulted than these facilities' relative share of
the nursing home business. HUD is currently taking steps to begin
tracking loans for board and care and assisted living facilities in
its data systems, but these efforts have not been fully implemented.
Furthermore, the steps that HUD plans to take to monitor the
performance of these loans after it starts to track them remain
unclear.
--------------------
\21 One reason cited by field staff for believing that nursing home
loans are low-risk is that these facilities are monitored and
regulated by the states. However, some field staff and an industry
expert, as well as a report by HUD's Inspector General, indicate that
state monitoring focuses on the adequacy of care given to patients
and not on the financial viability of nursing home operations.
\22 HUD's regulations authorizing FHA insurance for assisted living
facilities became effective on December 29, 1994.
\23 HUD's data systems do not identify board and care facilities in
the insured nursing home portfolio, so the actual number included is
not known. Several listings provided by HUD indicate that board and
care facilities may constitute about 15 percent of the nursing home
portfolio.
CONCLUSIONS
------------------------------------------------------------ Letter :6
HUD has not collected and analyzed information needed for it to
effectively manage the nursing home program and for it to assess
whether the program's benefits outweigh its costs. While HUD
officials believe that the nursing home program serves populations
and geographic areas that are not adequately served by the private
sector, the Department has not analyzed the types of communities and
individuals that the program actually serves nor has it
systematically collected the information needed to perform such an
analysis. As a result, the extent to which FHA's nursing home
program has contributed to HUD's mission is uncertain. In addition,
HUD has not performed complete assessments of the nursing home
program's financial performance, although in recent years more
complete financial data on the program have been collected. In our
view, analyses of whom the program is serving and the costs
associated with providing such service are essential elements of
managing the program.
FHA's loan loss reserve estimates and its credit subsidy estimates
are intended to reflect, respectively, the potential losses
associated with loans in its insured multifamily portfolio as well as
loans that FHA plans to insure in the coming fiscal year. However,
neither of these estimates, in our view, currently provides a
complete assessment of the likelihood of such losses. While FHA has
made improvements in its loan loss reserve estimates, estimates of
losses related to expected nursing home loan defaults, based on
assessments of the nursing homes' physical and financial condition,
do not take into account how changes in health care financing may
affect the default potential of these loans. In addition, FHA's
credit subsidy estimates for nursing home loans are based on outdated
and questionable data and do not reflect the differences in the
default risk of loans insured in the past and those that will be
insured in the future.
In our view, HUD has not been able to provide adequate oversight of
loans in its insured multifamily portfolio, including loans for
nursing homes and retirement service centers. The addition of
assisted living facilities to FHA's nursing home program could place
additional strains on HUD at a time when its ability to effectively
manage its existing multifamily portfolio is already limited.
Furthermore, we are concerned about the potential risk associated
with the addition of these loans to FHA's portfolio, especially since
it is unclear how HUD will monitor the loans' performance.
RECOMMENDATIONS
------------------------------------------------------------ Letter :7
To better measure the outcomes of FHA's nursing home program, we
recommend that the Secretary of HUD direct the Deputy Assistant
Secretary for Multifamily Housing Programs to (1) collect data on the
characteristics of patients, locations, and borrowers for all future
projects; (2) use the receipts and expenses data now tracked by HUD's
data systems to monitor the program's financial performance; (3)
reformulate credit subsidy estimates for nursing home loans on the
basis of data that are up-to-date, are accurate, and, to the extent
possible, take into account differences between the potential default
risk of loans that are to be insured and loans that have been insured
in the past; and (4) establish procedures to carefully monitor the
financial performance of assisted living facility loans in the
nursing home portfolio in a timely manner so that prompt action may
be taken to prevent future loan defaults.
MATTERS FOR CONGRESSIONAL
CONSIDERATION
------------------------------------------------------------ Letter :8
Given the changes in health care and mortgage financing that have
occurred since the nursing home program was established in 1959, the
program's financial performance, HUD's limited management
capabilities, and the Department's impending reorganization, the
Congress may wish to review FHA's role in insuring loans for nursing
homes and assisted living facilities. Among the issues that the
Congress may wish to consider are (1) whether the program should be
targeted more toward meeting specific needs or serving specific
populations, (2) how the resource and management problems that have
inhibited effective oversight of the program can be addressed, (3)
what impact changes in the financing of Medicaid are likely to have
on the default risk associated with FHA's nursing home portfolio, and
(4) whether HUD has the capabilities to effectively underwrite the
insurance for and oversee loans for assisted living facilities.
AGENCY COMMENTS AND OUR
EVALUATION
------------------------------------------------------------ Letter :9
We provided a draft of this report to HUD for comment. Appendix VI
contains the complete text of HUD's comments, which were provided by
the Deputy Assistant Secretary for Multifamily Housing Programs.
HUD's comments did not include any substantive disagreements with the
facts presented in the report. However, as discussed below, HUD
disagreed with the scope of our report and one of our
recommendations. HUD also cited actions it was taking to address the
other recommendations and provided comments on a number of issues
covered in the report.
HUD characterized the scope of the draft report as misleading because
it did not, in the Department's view, appropriately distinguish
between the operations or status of the nursing home and retirement
service center programs. HUD stated that the programs are different
products serving different markets and argued that we should issue
separate reports on these two programs. However, throughout the
report, we provide information on each program separately. We
believe the report clearly distinguishes between the operations and
status of HUD's nursing home and retirement service center programs.
While there are clearly differences between the two programs, there
are also similarities and instances in which the operation of one
program has implications for the other. In addition, many in the
housing and medical facility fields see housing and care for the
elderly as a "continuum of care." The continuum starts with
facilities that provide the lowest levels of assistance, such as
retirement service centers; moves toward increased levels of care
provided by board and care and assisted living facilities; moves to
the various levels of nursing home facilities; and finally ends with
hospital care. For these reasons, we believe it is appropriate to
discuss both programs in a single report.
HUD disagreed with our recommendation that the Department collect
data on the characteristics of patients, locations, and borrowers for
future nursing home projects. The Department suggested additional
language to the recommendation to state that the recommendation's
purpose is to ensure that the Department serves the target population
and then stated that nothing in the legislation directs the
Department to target certain areas or populations. However, our
recommendation is directed at HUD's obtaining a better measure of the
outcomes of the program--that is, to have information on whom the
program is serving. We believe this information is important for
assessing the costs and benefits of the program. In addition, the
Department maintained that a major effort at this time to collect
such data is overly burdensome. To avoid an undue burden on the
Department, our recommendation is prospective in nature.
Accordingly, we do not agree that collecting some additional data on
new loans would be unnecessarily burdensome.
HUD also noted actions that it is taking as part of a strategic plan
prepared in November 1994 that it believes will address our
recommendations. While these actions appear worthwhile, they do not,
in our view, affect the validity of our recommendations. For
example, HUD states that its credit subsidy estimates are a subject
of continuing discussion with the Office of Management and Budget and
that as better data are obtained and more experience is gained,
credit subsidy estimates will be refined and revised. However, HUD's
comments are unclear about what specific improvements it expects to
make in its credit subsidy estimates for the nursing home program and
when those improvements will be made. Similarly, HUD states that its
strategic plan includes other actions such as redesigning products to
ensure a self-sustaining FHA, monitoring the financial performance of
FHA programs, and implementing a variety of remedial actions on the
basis of lessons learned from past practices. However, it is unclear
what all of these actions will involve and how soon some of them will
be completed.
HUD also provided comments on other issues in the report. For
example, HUD pointed out that (1) the retirement service centers are
"demand-driven" because they appeal to a relatively independent and
well-off segment of the elderly population that has other options,
including staying in their own home, and (2) assisted living
facilities and board and care facilities are "need-driven" because
they address situations in which the elderly can no longer remain
fully independent and need the support and health-related services.
Our report reflects these differences. Nonetheless, we note that
this distinction does not guarantee a market for these facilities.
For example, affordability and location are also likely to be
important factors. Private sector experts with whom we spoke
indicated that identifying the market for assisted living facilities
is a difficult and complex task.
HUD asserted that the nursing home program serves those not served by
the private sector. However, HUD acknowledged that it does not have
data to substantiate its position. In our view, without such data,
it is not clear to what extent FHA-insured facilities serve a need
that would not otherwise be met by the private sector.
In our report, we provide information on the number of nursing homes
in each state compared with the number of nursing homes currently in
FHA's loan portfolio to show that participation in FHA's nursing home
program varies widely by state. HUD stated that FHA's share of the
market should be computed by comparing what has happened in the
market over the last few years. We noted in the draft report that
the data presented provide an approximate representation of FHA's
role in providing nursing homes in each state, and we identified the
limitations in the data provided. In response to the Department's
comment, we have further clarified that the information we provide is
not sufficient to represent a complete analysis of FHA's share of the
nursing home market.
We also note that HUD's data systems do not provide reliable data on
the types of nursing home projects insured, and thus comparisons with
market data are limited.\24 In addition, available market data are
based on varying definitions of housing and medical care facilities
for the elderly, which further limit analysis. Nonetheless, in its
comments, HUD reported that the American Seniors Housing Finance
Association and AARP estimate that since 1990, the FHA nursing home
program has been responsible for 20 to 25 percent of the loans for
seniors' housing for board and care and assisted living facilities.
Through discussions with HUD and AARP officials, we understand that
this information is based on an undocumented, informal analysis by
HUD of incomplete data on the number of FHA-insured facilities and
those in the private sector during this time period. On the basis of
these data, the Department also expressed the opinion that a similar
situation exists for nursing homes but did not provide quantitative
support for this assertion.
HUD's response also asserts that FHA-insured nursing home facilities
lower the government's Medicaid costs. The Department stated that
because FHA-insured borrowers have loans with lower interest rates,
Medicaid's capital reimbursement costs are lower. While this may be
true, other variables, such as loan term and mortgage insurance
premiums, affect total loan costs. Furthermore, while FHA's program
may result in savings to the government from lower Medicaid costs, it
also carries with it increased risks of losses resulting from future
loan defaults.
HUD also provided us with information on the steps being taken to
overcome identified management deficiencies and improve its
operations, such as moving to a team approach to underwriting loans,
upgrading technology and skills through providing computers and
software and training, and designing and implementing new information
systems for tracking, monitoring, and evaluation. Our draft report
recognized that HUD had a number of initiatives under way, and we
have added additional information into the final report on the basis
of the Department's comments. However, we still have concerns about
HUD's ability to effectively manage the nursing home and retirement
service center programs in the near future. The actions being
undertaken are in the planning or early implementation phase, and it
is too early to know if they will be effective. In addition, the
Department's proposed organizational changes and staffing cuts will,
at least in the short run, place additional strains on HUD's
management capacity, which is currently inadequate to effectively
oversee the multifamily loan portfolio.
--------------------
\24 As a result of our review, HUD has begun separately tracking new
nursing home loans in the following categories: nursing homes, board
and care facilities, and assisted living facilities.
---------------------------------------------------------- Letter :9.1
We conducted our review from September 1994 through July 1995 in
accordance with generally accepted government auditing standards.
(See app. V for a discussion of our scope and methodology.) We are
sending copies of this report to appropriate congressional
committees; the Secretary of HUD; the Director, Office of Management
and Budget; and other interested parties. We will also make copies
available to others upon request.
Please contact me on (202) 512-7631 if you or your staff have any
questions. Major contributors to this report are listed in appendix
VII.
Judy A. England-Joseph
Director, Housing and
Community Development Issues
FACILITIES AND LOAN CATEGORIES
INCLUDED IN FHA'S SECTION 232
NURSING HOME INSURANCE PROGRAM
=========================================================== Appendix I
Four types of facilities may be insured by the Federal Housing
Administration (FHA) under the section 232 nursing home program. In
addition to insurance for the construction or renovation of the four
types of facilities provided under the "basic" nursing home loan
program, FHA's section 232 loan program also covers other types of
loans, such as supplemental loans for additions and improvements to
facilities and for the refinancing of loans. FHA also has
established categories for insured loans for nursing home facilities
that are located in declining urban neighborhoods, processed under
the agency's delegated processing program, or processed under the
coinsurance program that was terminated in 1990.
SECTION 232 FACILITIES
--------------------------------------------------------- Appendix I:1
Four types of facilities are eligible for FHA mortgage insurance
under the section 232 nursing home program.
Skilled Nursing Facilities--For purposes of FHA's program, a skilled
nursing facility is licensed or regulated by the state in which it
operates and accommodates convalescents or others who are not acutely
ill but who need skilled nursing care and related medical services.
The nursing care and medical services provided must be prescribed by
or performed under the general direction of licensed personnel.
Intermediate Care Facilities--An intermediate care facility under
FHA's program is licensed or regulated by the state in which it
operates and accommodates individuals with certain incapacitating
infirmities requiring minimum but continuous care.
Board and Care Homes--A board and care home under FHA's program is
regulated by the state and provides room, board, and continuous
protective oversight. Only a limited portion of the facility's total
capacity may be made up of separate independent living units. Board
and care homes are generally nonmedical settings that offer a range
of services, such as supervision of nutrition and medication,
assistance with daily activities such as dressing and eating,
continuous responsibility for residents' welfare, or other services.
Assisted Living Facilities--Under FHA's program, assisted living
facilities are licensed and regulated by the state and offer a
combination of housing, including separate living units and
personalized health care for residents who need assistance with
activities of daily living, such as bathing, dressing, and eating.
SECTION 232 LOAN CATEGORIES
--------------------------------------------------------- Appendix I:2
Identified below is each of FHA's loan categories associated with the
section 232 nursing home program with loans in force as of September
30, 1994. The number of loans and unpaid principal balances reported
for each category are also as of September 30, 1994.
Nursing Homes (Section 232)--FHA's basic section 232 nursing home
portfolio consists of 769 insured loans with an unpaid principal
balance of $3.3 billion covering the construction or renovation of
the various types of facilities approved for the program.
Supplemental Loans (Section 241/232)--The portfolio comprises 28
supplemental loans to pay for improvements to, additions to, or
equipment for nursing home projects that already have FHA-insured
mortgages. The unpaid principal balance is $62 million.
Coinsurance on Nursing Homes (Section 244/232)--FHA's portfolio
includes 10 loans insured under the multifamily coinsurance program,
which was terminated on November 12, 1990, and 2 formerly coinsured
loans that have been converted to full insurance. The unpaid
principal balance is $75 million.
Declining Urban Neighborhood (Section 223[e]/232)--FHA's nursing home
portfolio includes 11 loans with an unpaid principal balance of $47
million covering insured mortgages for nursing homes in older,
declining urban areas.
Two-Year Operating Loss Loans (Section 223[d]/232)--FHA's portfolio
includes 16 2-year operating loss loans with an unpaid principal
balance of $8 million. If an FHA nursing home has an operating loss
during the first 2 years after the project is completed, FHA may
provide insurance for a loan to cover the loss.
Delegated Processing Authority (Section 232)--FHA's section 232
portfolio includes 25 loans with an unpaid principal balance of $167
million processed under FHA's delegated processing program. Under
this program, FHA staff work with private mortgage bankers under
contract to FHA to process mortgage insurance applications.
Delegated processing is intended to streamline the underwriting
process while maintaining FHA's control over final underwriting
decisions.
Refinancing (Section 223/232)--The portfolio includes eight loans
with an unpaid principal balance of $39 million. FHA insures
mortgages to refinance the debt of existing nursing home facilities
whether or not the projects were originally financed with FHA
insurance.
FHA-INSURED NURSING HOMES AND
TOTAL NURSING HOMES
========================================================== Appendix II
The information in table II.1 provides an approximate representation
of FHA's role in providing nursing homes in each state and is not
sufficient to represent a complete analysis of FHA's nursing home
market share, such as what has happened in the market over the last
few years. The number of FHA's nursing homes represents the number
of FHA-insured mortgage loans (and excludes supplemental and
operating loss loans for properties with mortgage loans) for skilled
nursing facilities, intermediate care facilities, and board and care
homes that were in FHA's insurance-in-force database as of September
30, 1994. The numbers do not include nursing homes previously
insured by FHA. The number of total nursing homes in each state
represents long-term care facilities providing skilled and unskilled
care during 1993, excluding intermediate care, board and care
facilities, and assisted living facilities.
Table II.1
FHA-Insured Nursing Homes and Total
Nursing Homes, by State
FHA-insured
nursing
Number of Total Total homes as a
FHA- number nursing percentage
insured of home of all
nursing nursing beds per nursing
State homes homes 1,000\a homes
------------------------ ---------- -------- -------- ------------
Alabama 2 204 42 1
Alaska 0 15 44 0
Arizona 5 130 33 4
Arkansas 5 232 68 2
California 26 1,178 36 2
Colorado 1 188 57 1
Connecticut 9 256 68 4
D.C. 6 18 40 33
Delaware 1 49 55 2
Florida 23 609 30 4
Georgia 9 337 56 3
Hawaii 0 23 17 0
Idaho 1 56 42 2
Illinois 38 778 70 5
Indiana 10 552 89 2
Iowa 7 426 83 2
Kansas 1 368 84 0
Kentucky 13 247 49 5
Louisiana 7 295 77 2
Maine 6 137 60 4
Maryland 21 214 53 10
Massachusetts 55 554 66 10
Michigan 24 422 43 6
Minnesota 13 385 77 3
Mississippi 14 158 48 9
Missouri 7 549 77 1
Montana 1 68 53 1
Nebraska 1 205 76 0
Nevada 1 30 27 3
New Hampshire 7 80 57 9
New Jersey 31 337 44 9
New Mexico 1 71 40 1
New York 125 572 43 22
North Carolina 41 332 42 12
North Dakota 1 75 73 1
Ohio 72 983 67 7
Oklahoma 21 403 84 5
Oregon 3 168 37 2
Pennsylvania 33 662 48 5
Rhode Island 33 104 68 32
South Carolina 3 157 39 2
South Dakota 1 108 73 1
Tennessee 19 284 55 7
Texas 13 1,116 69 1
Utah 1 85 44 1
Vermont 4 49 54 8
Virginia 70 254 44 28
Washington 12 273 48 4
West Virginia 2 104 37 2
Wisconsin 24 408 74 6
Wyoming 0 26 52 0
======================================================================
Total U.S. 824\b 15,334 55\c 5
----------------------------------------------------------------------
\a The "Total nursing home beds per 1,000" column represents the
number of nursing home beds per 1,000 people aged 65 and over in that
state. The beds per 1,000 column represents long-term care
facilities providing skilled and unskilled care during 1993,
excluding intermediate care facilities, board and care facilities,
and assisted living facilities.
\b Does not include one nursing home project on the island of St.
Thomas.
\c Represents the national average number of nursing home beds per
1,000 people aged 65 and over in each state.
Source: Data on FHA's nursing homes from the Department of Housing
and Urban Development. States' data on total nursing homes, nursing
home beds, and beds per 1,000 from Marion Merrell Dow Inc. Managed
Care Digest, Long Term Care Edition, 1994 and SMG Marketing Group
Inc.
METHODOLOGY USED TO EVALUATE THE
FINANCIAL PERFORMANCE OF THE
SECTION 232 NURSING HOME PROGRAM
========================================================= Appendix III
Because of the data limitations discussed below, the financial
performance of the nursing home program is subject to uncertainty and
can only be approximated. To develop an estimate of the actual
financial performance of the nursing home program since its
inception, we estimated the program's net cash flow for each year, on
the basis of the Department of Housing and Urban Development's (HUD)
data that can be used to estimate the premium income, claims
payments, and recoveries from the sale of either the properties or
the properties' mortgage notes.\25 The cash flows were computed on
the basis of a comparison of estimated premium receipts with
estimated claims payments net of recoveries. Each year's net cash
flow was then adjusted to 1994 dollars using the Gross Domestic
Product Deflator.
Our analysis does not include the interest cost of federal debt
associated with the program nor does it include the interest income
that HUD received on some of its assigned loans. HUD was unable to
provide complete interest income data. In addition, our analysis
does not include the general administrative costs relating to the
nursing home program borne by HUD.
Our analysis covers the basic section 232 program, which provides
most of the insurance under this program.\26 The basic section 232
program covers the new construction and substantial rehabilitation of
skilled and intermediate nursing homes, board and care facilities,
and assisted living facilities. As of September 30, 1994, these
loans represented 89 percent of the program's unpaid principal
balance. Our analysis excludes the other section 232 loans, such as
supplemental loans (described in app. I), because they represent a
small portion of the portfolio and would be expected to have only a
minor impact on the results. Also, our estimates are based on cash
flows under the program from 1959 to September 30, 1994, including
the estimated recoveries from loan defaults in 1992, 1993, and 1994
that would be received in 1995, 1996, and 1997 according to our cost
model.\27 The estimate does not reflect the amounts of expected
premium collections or claims payments in the future.
--------------------
\25 The default costs in this analysis are based on loans that
defaulted and resulted in a claims payment following the loan's
assignment to HUD.
\26 In HUD's data systems, the basic section 232 program is coded as
section 232 "RNF."
\27 In our analysis, we assume that recoveries from the sale of
either the properties or the properties' mortgage notes will be
received 3 years after the assignment. This is the same recovery
period that HUD uses in establishing loan loss reserves for its
FHA-insured multifamily portfolio.
HUD'S DATA USED IN OUR ANALYSIS
------------------------------------------------------- Appendix III:1
HUD provided us with detailed data on estimated premium receipts by
year and the face value of mortgages that had resulted in claims for
the basic nursing home program. We used the face value of the
mortgages as a proxy for claims payments, since HUD could not provide
data on all claims payments since the program's inception. According
to officials in HUD's Office of Mortgage Insurance Accounting and
Servicing, the face amount of the original mortgages is the best
proxy for claims payments. Furthermore, for the nine nursing home
properties that went through foreclosure and sale from 1987 through
1994, the cumulative face amount of the loans and the cumulative
amount of claims paid were close--$40.4 million versus $40.2 million.
We also note that using the face value of the loan to represent HUD's
expenditures may produce cost estimates that are more likely to be
understated than overstated because HUD also incurs costs while the
properties are in the HUD-held inventory. For example, for the nine
recent cases for which we have data, HUD's "net investment" in the
properties was $43 million, compared with the original loan amount of
$40.4 million.\28
Another data limitation is that HUD does not have historical data on
recoveries from the sale of nursing home properties or mortgage notes
prior to 1987. We used a weighted average recovery rate of 40.2
percent against total claims of $426 million. (See table III.1.) We
assumed 100-percent recovery for $48 million of the claims
representing (1) 25 loans\29 totaling $35 million that have been
repaid in full and (2) 6 additional loans totaling $13 million in the
HUD-held inventory as of September 30, 1994, which had not yet been
paid in full but which are classified as operational and current in
their payments.
For the balance of the defaulted notes totaling $149 million in the
HUD-held inventory as of September 30, 1994, we used the 37-percent
recovery rate that HUD used in developing loan loss reserves for its
FHA-insured multifamily portfolio as of September 30, 1994, including
nursing homes. We used a higher rate than the rate of HUD's actual
recoveries for the nursing home program from 1987 through 1994
because HUD management believes that recoveries will be higher than
the historical rate as the Department uses foreclosures and property
disposition less and increases its use of note sales at foreclosures
and third-party note sales upon loan assignment.
For the cases totaling $229 million for which the note or property
sales have been completed, we estimated recoveries on HUD's actual
recovery rate of 30 percent for the nursing home program for fiscal
years 1987 through 1994. This recovery rate is a weighted average
reflecting recoveries on HUD's net investment in the properties and
mortgages sold during this 8-year period.\30 The 30-percent weighted
recovery rate reflects actual recovery rates of 11 percent for
property sales and 44 percent for note sales. Using this rate for
all completed sales would tend to understate costs, since most of the
sales before about 1987 were handled through property sales.
According to FHA's Director of Accounting and Servicing, note sales
were rarely used before 1987.\31
Table III.1
Computation for 40.2-Percent Weighted
Average Recovery Rate
Recovery Weighted
Claims category rate Weight rate
---------------------------------- ------------ ------ ------------
Repaid 100 percent 100 11 11.0
HUD-held 37 35 13.0
Claims-sold 30 54 16.2
Total 40.2
----------------------------------------------------------------------
--------------------
\28 HUD's net investment includes claims payments, principal and
interest collections while the mortgage is held by HUD, expenses paid
for the properties, and property disposition costs incurred.
\29 HUD identified 24 loans that were paid in full and we identified
1 additional loan in the HUD-held inventory as of September 30, 1994,
which had been paid in full.
\30 From 1987 through 1994, note sales were used in 14 cases and
property sales in 9. Weighted on the basis of HUD's net investment,
note sales represented 58 percent of the cases, and property sales
represented 42 percent.
\31 Since 1987, HUD has sold some nursing home loans at foreclosure
following a policy change that permitted HUD to accept bids for less
than the loan balance.
NURSING HOMES WILL BE AFFECTED BY
EFFORTS TO CONTAIN HEALTH COSTS
AND REFORM THE HEALTH CARE SYSTEM
========================================================== Appendix IV
A substantial portion of nursing home revenue is provided from
Medicaid reimbursements.\32 FHA's loan loss reserve estimates do not
specifically consider the potential financial impacts of changes in
health care policies and reimbursement policies on nursing homes.\33
Although the exact nature of future national changes in health care
is uncertain at the present time, the health care industry is
currently undergoing significant changes as a result of national and
state efforts to contain costs and reform the health care system.
Industry and government officials with whom we spoke generally do not
believe that proposed and ongoing changes in the health care industry
will have a negative impact upon FHA's nursing homes. However,
efforts by federal, state, and local governments to control rising
health care costs--such as current state and federal actions to
reduce Medicaid and Medicare\34 costs--could increase risks and
undermine the financial viability of some of these projects.
The view that health care industry changes will not be detrimental to
the nursing home industry is based upon the premise that the market
for nursing homes will not be reduced, even if alternative housing
for the elderly--such as assisted living facilities--becomes more
available. Losses to other types of facilities are expected to be
offset by hospitals that move patients to nursing homes rapidly to
minimize costs and by the overall increase in the elderly population
in the United States. However, while market demand for nursing homes
may remain stable or increase in the future, the attempts to control
medical costs may make it more difficult for nursing homes to remain
financially viable. For example, according to officials at the
Department of Health and Human Services, skilled nursing homes could
face difficulties in covering costs through Medicare and Medicaid as
they admit more patients with greater care needs and lose patients
requiring less care to other facilities. Medicare and Medicaid
reimbursement policies that do not sufficiently compensate for these
structural changes in the health care industry could affect the
financial stability of nursing homes.
New York provides a good example of the potential impacts of health
care reimbursement policies on FHA's nursing home portfolio at the
state level. The Governor of New York proposed cuts of up to $1.2
billion in the state's Medicaid expenditures for the 1995-96 fiscal
year, including a cut of $242.8 million from nursing home
reimbursements. While the state budget's final cut in nursing home
reimbursements was lowered to $111.5 million, this reduction will
increase cost pressures on nursing homes in the state. This issue is
pertinent to FHA's insurance portfolio because it includes 136 loans
with an unpaid principal balance of $1.2 billion in the state of New
York.\35
In addition, reductions in spending levels for Medicaid are also
being considered at the federal level. For example, the federal
budget resolution calls for lowering Medicaid spending for the period
1996 through 2002 by $182 billion.
--------------------
\32 Medicaid is a joint federal-state program under which the states
assume primary administrative responsibility for health care coverage
for the aged, disabled, and economically disadvantaged.
\33 The loan loss estimates are based primarily on analyses of the
financial and physical condition of multifamily properties, including
nursing homes and retirement service centers with FHA mortgage
insurance.
\34 Medicare is a health insurance program administered by the Health
Care Financing Administration for persons aged 65 or older and for
disabled persons who are eligible for care.
\35 Our upcoming report on FHA's insurance program for hospitals will
address the potential impact of Medicaid cuts on hospitals.
OBJECTIVES, SCOPE, AND METHODOLOGY
=========================================================== Appendix V
As mandated by the Multifamily Housing Property Disposition Reform
Act of 1994 (P.L. 103-233, Sec. 103(f), Apr. 11, 1994), we
reviewed the role and performance of HUD nursing home and retirement
service center programs. Specifically, we (1) evaluated the
relationship of these programs to FHA's mission; (2) analyzed
information on the programs' financial performance as of September
30, 1994, and assessed HUD's estimates of potential losses under
these programs; and (3) evaluated FHA's ability to manage these
programs.
To evaluate the relationship of the nursing home program to FHA's
mission, we reviewed the legislative history to determine the
Congress's intent in passing section 232 of the National Housing Act,
which provides insurance for skilled nursing, intermediate care,
board and care, and assisted living facilities. We reviewed HUD's
regulations and policies to determine how the program was being
implemented, and we also discussed the ways in which the nursing home
program supports HUD's mission with (1) officials from HUD's Office
of Multifamily Housing Management and HUD's Office of Insured
Multifamily Housing Development, (2) multifamily staff in three of
HUD's field offices, and (3) staff with the Department of Health and
Human Services.
We also contacted industry organizations, such as the National
Long-Term Care Resource Center, the Health Care Financing Study
Group, the Institute for Health Services Research, the New York
Association of Homes and Services for the Aging, the Assisted Living
Facilities Association of America, and the Sunrise Assisted Living
Retirement Community. In addition, we contacted current FHA nursing
home insurance program borrowers and lenders to discuss the reasons
why FHA financing was used and reviewed studies on the financing of
nursing homes and assisted living facilities. Our work primarily
focused on issues relating to the extent to which HUD's mission is
furthered by the nursing home and retirement service center programs
and is not sufficient to determine whether the nursing home program
is needed to serve unserved markets. We also did not evaluate the
validity of the criticisms of FHA's policies and procedures cited as
disincentives to the use of the FHA nursing home insurance program
that we received in our contacts and that are also cited in some
articles we reviewed.
For the terminated retirement service center program, we reviewed the
regulations terminating the program that had been created by HUD as
part of an existing multifamily housing program and the 1990 program
studies by HUD's Inspector General and HUD's Office of Policy
Development and Research.\36 We also visited HUD's Minneapolis,
Minnesota; San Francisco, California; and Jacksonville, Florida,
field offices to obtain detailed information on FHA's nursing home
and retirement service center programs.\37
To provide information on the programs' financial performance as of
September 30, 1994, we met with officials from HUD's Office of
Housing-FHA Comptroller in August 1994 and requested cumulative
financial performance data (covering program receipts and
expenditures) for the nursing home and retirement service center
programs. While the Comptroller's office did provide some
information in December 1994 and February 1995, it was not sufficient
to determine the financial performance of these programs.
Subsequently, on the basis of discussions with HUD's Director,
Multifamily Accounting and Servicing Division, and a staff member
from HUD's Statistical and Actuarial Analysis Staff (Office of
Policy, Planning, and Financial Systems Enhancements), we obtained
data on the nursing home program that these officials believed could
be used to provide an estimate of the financial performance of this
program since its inception. We did not verify the reliability of
HUD's nursing home data. The scope and methodology of our analysis
are summarized in appendix III.
Because automated data are not available on the retirement service
center program, HUD did not provide comparable data that would have
enabled us to perform a similar analysis of the retirement service
center program's financial performance as we had done for the nursing
home program.\38
Accordingly, our assessment of the program's financial performance
was limited to a review of HUD's data on the program's default rate
and the related face value of loans that have defaulted. We did not
verify the reliability of HUD's data on the retirement service center
program in HUD's July 12, 1995, report, Retirement Service Centers,
by Richard G. Calvert, Thomas N. Herzog, James E. Laverty, and
Darrel S. Connelly, Statistical and Actuarial Analysis Staff, HUD.
We also reviewed the financial performance data in the HUD Inspector
General's 1990 study of this program and the study conducted by HUD's
Office of Policy Development and Research in 1990.
To assess HUD's estimates of future potential losses under these
programs, we reviewed information from FHA's fiscal year 1993 and
1994 multifamily loan loss reserve analyses that establish loss
reserves for estimated future losses stemming from loan defaults. We
also used information from our review of FHA's fiscal year 1993 loan
loss reserve analysis.\39 Because FHA's loan loss reserve analyses do
not provide a separate loss estimate for retirement service center
loans and FHA analyzed only eight retirement service center loans as
part of the fiscal year 1993 loan loss estimate, we used an
alternative approach to estimate potential losses for retirement
service centers. This approach was based primarily on estimates of
the potential for future defaults from loan servicers in the HUD
field offices with responsibility for insured retirement service
center projects. Working with HUD staff, we identified 108
retirement service center loans in force as of September 30, 1993.
In November 1994, we sent standardized questionnaires to the 32
cognizant HUD field offices for each of the 108 retirement service
center projects. Of these 108 projects, respondents told us that at
the time of our survey, two loans had been paid off and four projects
were not considered to be retirement service centers. We obtained
responses for all, or 100 percent, of the remaining 102 retirement
service centers. We also reviewed the 1993 financial statement
analyses of 90 FHA-insured retirement service centers performed by a
contractor for HUD in 1994.
To evaluate FHA's ability to manage these programs, we reviewed
relevant HUD Inspector General, Price Waterhouse, and GAO reports on
HUD's multifamily loan management, including reports on the nursing
home and retirement service center programs. We also used our June
5, 1995, report, cited above, to provide us with up-to-date
information on HUD's initiatives to prevent defaults. In addition,
we reviewed HUD's reinvention proposal and budget request and
discussed management issues with officials in HUD's Office of
Multifamily Housing Development and in the three field offices
visited.
We performed our review at HUD's headquarters in Washington, D.C.,
and at HUD's field offices in Jacksonville, Minneapolis, and San
Francisco.
(See figure in printed edition.)Appendix VI
--------------------
\36 Multi-Region Audit of the Insured Retirement Service Centers
Program, Office of the HUD Inspector General, 90-TS-111/112-0008
(Apr. 6, 1990) and Retirement Service Center Program Evaluation, HUD
Office of Policy Development and Research (June 1990).
\37 HUD officials in the Office of Multifamily Housing Management
said these field offices would have loans representative of HUD's
inventory of nursing home and/or retirement service center projects.
\38 The retirement service center program--a subprogram of a
market-rate multifamily insurance program--does not have a subcode
associated with it in HUD's data systems. Without a subcode, which
would identify this subset of loans, information on the individual
retirement service center loans would have to be gathered manually
and input individually into a database to generate reports on the
program.
\39 HUD Management: FHA's Multifamily Loan Loss Reserves and Default
Prevention Efforts (GAO/RCED/AIMD-95-100, June 5, 1995).
COMMENTS FROM THE DEPARTMENT OF
HOUSING AND URBAN DEVELOPMENT
=========================================================== Appendix V
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
(See figure in printed edition.)
MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII
HOUSING AND COMMUNITY DEVELOPMENT
ISSUE AREA
Jim Wells
Richard A. Hale
Christine M.B. Fishkin
Karen E. Bracey
Austin J. Kelly
Patrick B. Doerning
Mark H. Egger
Rose M. Schuville
Leigh K. Ward