Hospital Mortgage Insurance Program:

Program and Risk Management Could Be Enhanced

GAO-06-316: Published: Feb 28, 2006. Publicly Released: Feb 28, 2006.

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Under its Hospital Mortgage Insurance Program, the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) insures nearly $5 billion in mortgage loans for the renovation or construction of hospitals that would otherwise have difficulty accessing capital. In response to a requirement in the 2005 Consolidated Appropriations Conference Report, GAO examined (1) the design and management of the program, as compared with private insurance, (2) the nature and management of the relationship between HUD and the Department of Health and Human Services (HHS) in implementing the program, (3) the financial implications of the program to the General Insurance/Special Risk Insurance (GI/SRI) fund, including risk posed by program and market trends, and (4) how HUD estimates the annual credit subsidy for the program, including the factors and assumptions used.

The Hospital Mortgage Insurance Program insures the mortgages of hospitals that are generally riskier than those that can obtain private bond insurance. While FHA's process for reviewing mortgage insurance applications includes more steps and generally takes longer, the agency monitors active loans with many of the same techniques that private bond insurers use. Under a Memorandum of Agreement, FHA and HHS work together in a variety of ways to review mortgage insurance applications and monitor active loans. However, FHA does not collect data to assess program performance against most performance measures specified in the memorandum, some of which are not objective. Further, FHA has not kept its program handbook of policies and procedures for applicants, lenders, and others up-to-date. The hospital program is small compared with other programs in the GI/SRI fund, and the losses from claims have been relatively low. Despite the program's relatively small size, some program and market trends may pose risks. For example, 61 percent of the program's total insured, outstanding loan amount is concentrated in New York, which makes the program vulnerable to state policies and regional economic conditions. While FHA has goals to diversify the hospital insurance portfolio and has made efforts to do so, it does not have a formal strategy to achieve these goals. To estimate the credit subsidy cost, or program costs, over the life of the outstanding loans insured, HUD uses a model that incorporates factors and assumptions about how loans will perform, including estimated claim and recovery rates, which are consistent with federal guidance. However, HUD's model does not explicitly consider some factors, such as the potential impacts of prepayment penalties or restrictions, which according to some economic studies, are important in modeling default risk.

Status Legend:

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  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: To improve management of the Hospital Mortgage Insurance Program and reduce potential risks to the GI/SRI fund, the Secretary of Housing and Urban Development should direct the FHA Commissioner to develop a formal strategy to geographically diversify its portfolio of insured hospitals, including such elements as the processes, skills, technologies, and various resources that will be used to reach diversification goals.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: To improve management of the Hospital Mortgage Insurance Program and reduce potential risks to the General Insurance/Special Risk Insurance Fund, we recommended that the Secretary of Housing and Urban Development direct the FHA Commissioner to develop a formal strategy to geographically diversify its portfolio of insured processes. In response to this recommendation, HUD issued a Geographic Diversification Action Plan on September 21, 2006 in an effort to reduce the credit risk associated with a portfolio concentrated in one region, and to enable more hospitals across the country to access the capital they need to bring health care to their communities.

    Recommendation: To improve management of the Hospital Mortgage Insurance Program and reduce potential risks to the GI/SRI fund, the Secretary of Housing and Urban Development should direct the FHA Commissioner to update the program handbook to make publicly available current eligibility requirements, policies, and procedures.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: HUD issued an updated Hospital Mortgage Insurance Program Handbook in May 2013. The handbook includes general eligibility requirements, application procedures, and other information for both program participants and HUD staff.

    Recommendation: To improve management of the Hospital Mortgage Insurance Program and reduce potential risks to the GI/SRI fund, the Secretary of Housing and Urban Development should direct the FHA Commissioner to establish measurable and objective performance measures for the hospital program and collect appropriate information to regularly assess performance against the measures.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: In February 2008 FHA formally adopted seven objective and measurable performance measures. The performance measures include goals and specific criteria for measuring the program's claim rate, diversification plan, and monitoring activities. Regular assessment of these performance measures will facilitate improved management of the Hospital Mortgage Insurance Program and reduce potential risks to the GI/SRI fund.

    Recommendation: To potentially improve HUD's estimates of the program's annual credit subsidy rate, the Secretary of Housing and Urban Development should explore the value of explicitly factoring additional information, such as prepayment penalties and restrictions, as well as the initial debt-service coverage ratio of hospitals, as they enter the program into its credit subsidy model.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: HUD explored the value of including additional information in its credit subsidy rate.

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