Despite the impending “silver tsunami” headed toward the U.S. as the baby boomers approach old age, two related factors are making lenders wary of lending to the skilled nursing industry: declining occupancy rates and competition from increased senior care options.
That hesitancy is increasingly forcing skilled nursing operators having trouble getting traditional financing for mortgages to turn to the Federal Housing Administration’s loan insurance, says a recent article in The Wall Street Journal.
To get by, nursing-home operators increasingly are lining up to get FHA-secured loans, mostly to refinance existing mortgages. But that is raising the possibility that taxpayers may be on the hook if the nursing homes begin defaulting on these loans at a much higher rate.
The agency insured 458 mortgage loans worth roughly $3 billion during its fiscal year ending Sept. 30. That marked the highest number of loans in at least a decade and a 46% jump from fiscal-year 2011. Nursing-home loans also comprised 64% of the 700 loans in health care that the FHA insured in the same period.
An FHA spokesman says the risk to the agency and taxpayers remains very low from its nursing-home lending, which is a fraction of the more than the $200 billion of the home loans FHA backs annually. He points out that the annual foreclosure claims of nursing home loans has consistently stayed below 1% and that the FHA helps reduce the costs of health care by making mortgage financing more available for operators.
Many operators prefer to borrow from private banks without FHA backing to avoid the cumbersome FHA bureaucracy. For instance, a conventional loan usually takes half the time process including the time it takes to review the credit risk and making the commitment to financing. Also, the FHA loans can be more restrictive: Borrowers can’t take on new debt or make additions to their properties without the agency’s consent.
But borrowers are running out of choices because banks are getting more cautious.
A factor contributing to that cautiousness is occupancy rates for the skilled nursing industry declining from about 90.5% at the end of 2005 to 88% by the fourth quarter of 2012, according to the National Investment Center (NIC) for the Seniors Housing & Care Industry, and it’s due at least in part to competition from assisted living, the article says.
Added to that is an uncertain healthcare environment, driven mainly by fluctuating Medicare reimbursement rates and tight Medicaid budgets, making big banks more hesitant to lend to nursing homes. Skilled nursing facilities with high Medicaid and Medicare census may be especially risky, as cuts to reimbursement can affect their ability to repay loans.
Most nursing home loans are still coming from private banks, and the FHA estimates it has backed about $14 billion of loans made to the industry that are currently outstanding, says the WSJ, with the overall market size at about $90 billion according to Walker & Dunlop LLC.
Written by Alyssa Gerace