Residential Care Facilities Mortgage Insurance Program:

Opportunities to Improve Program and Risk Management

GAO-06-515: Published: May 24, 2006. Publicly Released: May 24, 2006.

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Through its Section 232 program, the Department of Housing and Urban Development's (HUD) Federal Housing Administration (FHA) insures approximately $12.5 billion in mortgages for residential care facilities. In response to a requirement in the 2005 Consolidated Appropriations Conference Report and a congressional request, GAO examined (1) HUD's management of the program, including loan underwriting and monitoring; (2) the extent to which HUD's oversight of insured facilities is coordinated with the states' oversight of quality of care; (3) the financial risks the program poses to HUD's General Insurance/Special Risk Insurance (GI/SRI) Fund; and (4) how HUD estimates the annual credit subsidy cost for the program.

While HUD's decentralized program management allows its 51 field offices flexibility in their specific practices, GAO found differences in the extent to which staff in the five field offices it visited were aware of current program requirements. For example, four offices were unaware of required addendums to the programs' standard regulatory agreement. Further, while individual offices had developed useful practices for loan underwriting and monitoring, they lacked a mechanism for systematically sharing such practices with other offices. Also, field office officials were concerned about adequate current or future levels of staff expertise--a critical factor in managing program risk in that health care facility loans are complicated and require specialized knowledge and expertise. FHA requires a review of the most recent annual state-administered inspection report for state-licensed facilities applying for program insurance, and recommends, but does not require, continued monitoring of such reports for facilities once it has insured them. Four of the five HUD field offices GAO visited do not routinely collect annual inspection reports for their insured facilities. While the reports are but one of several monitoring tools, they provide potential indicators of future financial risk. HUD has proposed revising its standard regulatory agreements to require insured facility owners or operators to submit annual inspection reports and to report notices of violations. However, the proposed revisions have been awaiting approval since August 2004, and the implementation date is uncertain. The Section 232 program accounts for only about 16 percent of the GI/SRI Fund's total unpaid principal balance, but program and industry trends pose potential risks to the Section 232 program and to the GI/SRI Fund. For example, in recent years the program has insured increasing numbers of assisted living facility loans and refinancing loans, for which there are limited data available to assess long-term performance. Other potential risk factors include increasing prepayments (full repayment before loan maturity) and loan concentration in several large markets and among relatively few lenders. Projected shifts in demand for residential care facilities could affect currently insured facilities and the overall market for the types of facilities that HUD insures under the program. To estimate the program subsidy cost, HUD uses a model to project cash flows for each loan cohort (the loans originated in a given fiscal year) over its entire life. HUD's model does not explicitly or fully consider certain factors, such as loan prepayment penalties, interest rate changes, or differences in loans to different types of facilities, and uses some proxy data that is not comparable to Section 232 loans. The model's exclusion of potentially relevant factors and it use of this proxy data could affect the reliability of HUD's credit subsidy estimates.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: According to HUD officials, the Handbook has been revised and is scheduled for internal clearance at HUD by November 1, 2010.

    Recommendation: To ensure that field offices are aware of and implement current requirements and policies for the Section 232 Mortgage Insurance for Residential Care Facilities program, and reduce risk to the GI/SRI Fund, the Secretary of Housing and Urban Development should direct the FHA Commissioner to revise the "Multifamily Asset Management and Project Servicing Handbook" in a timely manner to include monitoring requirements specific to Section 232 properties.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: All production and asset management functions have been transferred to the Office of Health Care Programs (OHCP). The Multifamily Housing program is completing its role in managing Section 232 loans. OHCP underwriters are being trained to utilize a standardized process for Section 232 application processing. Loan underwriting and monitoring are regularly shared in both the development and asset management activities of OHCP through a unified loan commmittee, regular management and staff reports, and conference calls.

    Recommendation: To ensure that field offices are aware of and implement current requirements and policies for the Section 232 Mortgage Insurance for Residential Care Facilities program, and reduce risk to the GI/SRI Fund, the Secretary of Housing and Urban Development should direct the FHA Commissioner to establish a process for systematically sharing loan underwriting and monitoring practices among field offices involved with the Section 232 program.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Not Implemented

    Comments: According to HUD officials, additional staff are needed to meet current demand levels for Section 232.

    Recommendation: To ensure that field offices are aware of and implement current requirements and policies for the Section 232 Mortgage Insurance for Residential Care Facilities program, and reduce risk to the GI/SRI Fund, the Secretary of Housing and Urban Development should direct the FHA Commissioner to assure, as part of the department's strategic human capital management efforts, sufficient levels of staff with appropriate training and expertise for Section 232 loans.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: On August 8, 2016, the Office of Residential Care Facilities (ORCF)informed us that the Centers for Medicare and Medicaid Services (CMS) implemented its Star rating system. This system uses previous surveys of the facilities and a number of other factors to assess quality of care. Facilities are ranked from one to five stars--with five stars being the best. The Office of Healthcare Programs (OHP) provides HUD's Account Executives, who oversee the Asset Management for the Section 232 program, with a monthly report that addresses the star ratings of each of the Section 232 facilities, as well as any of its facilities that are Special Focus Facilities. CMS deems Special Focus Facilities to have the poorest quality of care. HUD's Account Executives must follow up with the facilities' servicing lenders and the operators by going over survey reports. These reports are currently posted on the CMS website. OHP also has a contract to develop another tool that will be used by OHP to analyze quality of care of Section 232 facilities. It will be used to supplement its monitoring under the star rating system. These processes address the concerns reflected in our report related to inspection reports and we closed the recommendation.

    Recommendation: To ensure that field offices are aware of and implement current requirements and policies for the Section 232 Mortgage Insurance for Residential Care Facilities program, and reduce risk to the GI/SRI Fund, the Secretary of Housing and Urban Development should direct the FHA Commissioner to incorporate a review of annual inspection reports for insured Section 232 facilities that are subject to federal or state inspections, even in the absence of a revised regulatory agreement.

    Agency Affected: Department of Housing and Urban Development

  5. Status: Closed - Implemented

    Comments: On August 8, 2016, HUD informed us that the Office of Residential Care Facilities (ORCF) was established in December 2008 as a "virtual team" within the Office of Healthcare Programs--that is, ORCF is organized as an out-stationed program office from Headquarters, rather than by separate Field Offices. As such, the processes and procedures for ORCF became centralized for the entire country. Shortly after its inception, ORCF began to establish its own collection of standard documents for healthcare facilities. These documents (including Healthcare Regulatory Agreements for Borrowers, Operators and Master Tenants) were vetted through the HUD clearance process, and published in the Federal Register for public comments in May 2012, with final OMB approval and publication for use on March 14, 2013. Since that time, ORCF received an initial one-year renewal and then a subsequent three-year renewal of the entire document collection on June 1, 2014. The Healthcare Regulatory Agreements have been in use since that time and are intended to promote compliance with HUD requirements and obligations. Although completion of this work has taken a number of years, these documents, including the regulatory agreements, are responsive to our recommendation. The current agreements will expire in June 2017, and HUD is already beginning the review process to obtain OMB approval for renewal.

    Recommendation: To ensure that field offices are aware of and implement current requirements and policies for the Section 232 Mortgage Insurance for Residential Care Facilities program, and reduce risk to the GI/SRI Fund, the Secretary of Housing and Urban Development should direct the FHA Commissioner to complete and implement the revised regulatory agreements in a timely manner.

    Agency Affected: Department of Housing and Urban Development

 

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