Will FHA’s “High Risk” Status Impact Healthcare Lending?

Valentine’s Day may be a little less sweet for the Federal Housing Administration (FHA) this year after getting added to the Government Accountability Office’s (GAO) “high risk” list, but with the spotlight on the agency’s single-family insurance fund, healthcare lending isn’t likely to be impacted.

“The assignment to a “high risk” category is being driven by concerns over the FHA single-family portfolio, especially certain discontinued loan programs which allowed for seller down-payments,” says Michael Vaughn, Senior Vice President, FHA Finance, at Walker & Dunlop. “Unfortunately policymakers don’t always go to the level of distinguishing among the FHA’s different loan programs.”

GAO has a program that pays attention to government operations it identifies as “high risk” due to their “greater vulnerabilities to fraud, waste, abuse, and mismanagement or the need for transformation to address economy, efficiency, or effectiveness challenges.” In a February report, GAO highlights the FHA as a problem area because of its current financial position of being $16.3 billion in the red, according to 2012 actuarial audit.

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“A new challenge for the markets has evolved as the decline in private sector participation in housing finance that began with the 2007-2009 financial crisis has resulted in much greater activity by the FHA, whose single-family loan insurance portfolio has grown from about $300 billion in 2007 to more than $1.1 trillion in 2012,” GAO writes. “Although required to maintain capital reserves equal to at least 2 percent of its portfolio, FHA’s capital reserves have fallen below this level, due partly to increases in projected defaults on the loans it has insured.”

Unless the U.S. government becomes a credit risk, says Bill Kauffman, Managing Director at Oak Grove Capital, he doesn’t foresee senior housing and healthcare loans posing any significant risk.

“I don’t see [FHA’s high risk status] as a major risk to investors, and it shouldn’t have an impact on FHA-insured healthcare lending,” he says. “FHA insurance is backed by the federal government, so anyone who invests in an FHA-insured loan is looking to the government as a backstop.”

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While elements of the single-family portfolio can be considered risky, that’s not true of all FHA loan programs, says Vaughn, who served as director of the Office of Residential Care Facilities within the Office of Healthcare Programs at the Department of Housing and Urban Development prior to joining Walker & Dunlop.

“The healthcare loan portfolio has historically had a very low loss rate, which in recent years has been running at about one-tenth of 1% of the outstanding balances,” he says. “Since the annual mortgage insurance premium is at least .45%, the program is clearly in the black, as well as holding down the cost basis for this industry which is funded primarily by Medicare and Medicaid payments.”

The FHA issued a record $6.5 billion in commitments in fiscal year 2012 for its healthcare programs, encompassing hospitals, nursing homes, assisted living communities, and personal care homes, according to the written testimony of Shaun Donovan, HUD secretary, for a December 2012 hearing before the Senate Banking Committee.

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As of September 2012, the FHA’s portfolio of healthcare loan guarantees had an unpaid principal balance of $29.0 billion on 2,957 loans and counting, he said.

“Because of [the healthcare loan portfolio’s strength] I hope and believe that FHA healthcare programs for seniors’ facilities will continue to operate as they have been,” Vaughn says. “Their share of the overall market is by no means dominant—[at] approximately 12%—but provides needed capital to the industry.”

The FHA’s “high risk” status is “not a healthcare issue,” agrees Jeff Davis, chairman and president of Chicago-based Cambridge Realty Capital Companies. “However, who knows the final outcome.”

Written by Alyssa Gerace