HUD’s Senior Living Refi Boom is Over

After a blockbuster year for The Department of Housing and Urban Development’s (HUD) lean mortgage insurance program in senior housing, volume fell more than 25% in fiscal year 2014, marking the end of a boom for government financing in the sector.

But the news isn’t all bad, say the finance companies that work regularly with HUD, noting that they see continued finance activity on the horizon, albeit not at its previous levels. While the majority of HUD volume has comprised refinance transactions, lender are seeing a major uptick ahead in new construction financing.

HUD’s lean mortgage insurance program, utilized to finance seniors housing properties under the department’s healthcare finance program, finished fiscal year 2014 with $4.21 billion of loan volume, a reduction of 27.8% as compared to the previous year’s record of $5.82 billion.


“We’re coming out of a year when we saw record breaking volume and deals [in 2013],” Erik Lindenauer, director and founder of Housing & Healthcare Finance (HHC Finance), tells SHN. “It’s not realistic to maintain transaction volume at that level. So, I think we’re seeing great HUD volume in fiscal year 2014.”

HHC Finance led all lenders in total dollars loaned under HUD’s Section 232 LEAN Program with a total of $748.4 million in loans, representing close to 18% of the program’s $4.21 billion of fundings, the company said.

Nearly 90% of HHC Finance’s closed loans came from organic growth through refinancing conventional loans into HUD loans, leading to a record year for the company.


“Our clients have been very active with merger and acquisitions which we believe will lead to more financing opportunities,” Lindenauer says.

Lancaster Pollard also boasted positive transaction volume this year, with the company closing the largest number of HUD loans with 88 loans across 31 states. HUD’s overall 2014 loan activity comprised 484 loans spanning 43 lenders.

Following close behind Lancaster Pollard’s lead in high transaction count in fiscal year 2014 were HHC Finance, Berkadia Commercial Mortgage and Capital Funding LLC, HUD data show.

In addition to HUD data, HHC Finance considers other market factors as key when evaluating the senior housing finance landscape, Lindenauer says, such as the increased access to capital, liquidity returning to the market and the increase in REIT activity in the market.

When evaluating why HUD volume has decreased, Nick Gesue, senior vice president and chief credit officer at Lancaster Pollard, adds that many lenders have been taking advantage of the Note Modification program to reduce interest rates, “which has cannibalized the 223(a)(7) volume since it doesn’t show up as new loan volume.”

“The other [reason] is that there is a finite number of loans available for either the 223(a)(7) or Note Modification programs, and most have already been refinanced,” Gesue says.

Although refinance loans still represent the majority of the HUD Lean volume, there was a considerable uptick in new construction and substantial rehabilitation loan volume, Gesue says.

About 9.6% of the HUD Lean’s volume in 2014 comprised new construction or substantial rehabilitation transactions, an increase of 90% from 2013, Lancaster Pollard said.

Lancaster Pollard’s share of market in those programs increased significantly in 2014 to 20%.

“In light of the current overall development activity, coupled with HUD improving their timing for construction transactions, I think we will continue to see this increase into 2015, both on an absolute level and relative to overall volume,” Gesue says about new construction.

Looking ahead, lenders say they do expect a favorable finance environment, even as HUD loan volume may continue to fall.

“We don’t believe that loan volume is going to be as strong as this past year, but business will still be good, especially with the recent merger and acquisition activity and the continued low interest rate environment,” Lindenauer says.

While it’s difficult to predict fiscal year 2015 volume, Robert Baxter, vice president at Lancaster Pollard, points to past data to indicate the slowing of HUD finance activity in the sector.

“Through the first two weeks of fiscal year 2014, there were 144 projects in the queue,” Baxter says. “Through the first two weeks of fiscal year 2015, there are 22 projects in the queue, a decrease of 555%. This suggests a decline in program volume in 2015 due to the reduction in 223(a)(7) activity, the increased number of Note Modifications and HUD’s success in eliminating the queue.”

Written by Cassandra Dowell

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