FHA Hospital Mortgage Insurance Program:

Health Care Trends and Portfolio Concentration Could Affect Program Stability

HEHS-96-29: Published: Feb 27, 1996. Publicly Released: Feb 27, 1996.

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Pursuant to a legislative requirement, GAO reviewed the Federal Housing Administration's (FHA) Hospital Mortgage Insurance Program, focusing on: (1) factors that could affect the stability of the program's portfolio and financial performance; (2) FHA 1994 loan loss reserve estimate; (3) how the program relates to the Department of Housing and Urban Development's (HUD) mission; and (4) whether FHA has the expertise to manage the program.

GAO found that: (1) although the Hospital Mortgage Insurance Program has had a net positive cash flow since its inception, the program faces financial risks that could affect its future stability; (2) New York hospitals account for 87 percent of the program's $5 billion in unpaid principal and have 9 of the 10 largest unpaid principal balances; (3) New York hospitals unduly rely on the FHA mortgage insurance program because the state's restrictive reimbursement system hinders their ability to attract private-sector capital; (4) state actions and future health care policy changes and trends could further threaten hospital solvency; (5) FHA loan loss reserve estimates are unreliable because FHA used questionable assumptions about default probabilities and loss rates and did not consider health care market trends; (6) the extent to which the mortgage program contributes to the HUD mission is unclear because HUD does not routinely measure program outcomes; (7) FHA staff do not have sufficient health care expertise to manage key program functions and must rely on Health and Human Services staff experience to monitor hospitals' financial performance; and (8) hospital officials and program users are concerned about the length of the program's application and loan modification processes.

Matter for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: No action expected by the Congress.

    Matter: Given the risks associated with the portfolio's geographic concentration and the possible implications for the program of current health care trends, Congress may wish to explore further with HUD officials options for reducing the program's risk by, for example, limiting the program's risk exposure in a particular state and capping mortgage insurance amounts.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: FHA officials stated that they are no longer applying a graduated loss rate to hospitals, but rather an ungraduated, 50-percent loss rate, for all hospitals. In addition, FHA officials stated that they are using trend indicators (2-year weighted financial indicators) instead of single-year indicators. Further, HUD has established a $200-million general health reserve to cover uncertainty stemming from recent and impending health policy changes.

    Recommendation: To improve the reliability of the FHA loan loss reserve estimate, ensure future compliance with federal performance measurement requirements, and minimize potential financial losses from future projects, the Secretary of Housing and Urban Development should link the loan loss reserve estimate to documented analyses that justifiably support loss rates and default percentages.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Not Implemented

    Comments: As of September 1999, no further action has been planned on this recommendation because the Deputy Secretary did not approve the draft regulations on risk sharing that program officials had developed. FHA officials stated that they had written regulations for risk sharing. A draft final rule to implement risk sharing of mortgage insurance to finance the new construction or rehabilitation of hospitals or improvements to hospitals was submitted to the HUD IG for signoff but was rejected. The IG did not approve the draft final rule on the grounds that the regulation lacked sufficient detail about the elements and parameters of a risk-sharing transaction. The HUD Deputy Secretary agreed with the IG and, according to FHA officials, has not given approval to move ahead. Therefore, according to FHA, it will no longer pursue this issue.

    Recommendation: To improve the reliability of the FHA loan loss reserve estimate, ensure future compliance with federal performance measurement requirements, and minimize potential financial losses from future projects, the Secretary of Housing and Urban Development should pursue risk-sharing arrangements in which a private or public entity would share in potential financial losses from hospital defaults on future FHA-insured projects only after a thorough evaluation of the benefits and drawbacks of risk-sharing ventures, taking into account past experiences of FHA multifamily housing programs.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: The Office of Insured Health Care Facilities (OIHCF) developed overall program performance measures, including: (1) amount of claims paid, with a target for each fiscal year of zero; (2) elapsed time from receipt of a complete application to decision, with a target for each fiscal year of under 120 days for 75 percent of all new applications; and (3) elapsed time from receipt of a complete loan modification request to decision, with a target for each fiscal year of under 30 days for 75 percent of all loan modification requests. HUD officials reported that OIHCF and HHS are collecting data to track performance. The July 1998 HHS Activity Report includes key dates for each application and loan modification. These dates are used to calculate elapsed time from receipt of application or loan modification request to decision.

    Recommendation: To improve the reliability of the FHA loan loss reserve estimate, ensure future compliance with federal performance measurement requirements, and minimize potential financial losses from future projects, the Secretary of Housing and Urban Development should develop performance measures and begin collecting the data needed to track the performance of the Hospital Mortgage Insurance Program.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: Although HUD has not performed the specific comprehensive analysis that GAO recommended, HUD officials stated that they are monitoring each individual loan and, to date, have not had a claim. Further, they said that the HUD Inspector General's 1997 audit report did not disclose any problem with the approach being used.

    Recommendation: To improve the reliability of the FHA loan loss reserve estimate, ensure future compliance with federal performance measurement requirements, and minimize potential financial losses from future projects, the Secretary of Housing and Urban Development should perform a comprehensive analysis of individual loan loss exposure when default is considered probable.

    Agency Affected: Department of Housing and Urban Development

  5. Status: Closed - Implemented

    Comments: FHA officials stated that they had established a $200-million general health care reserve for hospital and nursing home programs to account for rapidly changing events.

    Recommendation: To improve the reliability of the FHA loan loss reserve estimate, ensure future compliance with federal performance measurement requirements, and minimize potential financial losses from future projects, the Secretary of Housing and Urban Development should consider newly developed events, such as health care trends and policy changes, that can affect the performance of loans in estimating loan loss reserves.

    Agency Affected: Department of Housing and Urban Development

 

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