FHA Hospital Mortgage Insurance Program

The Federal Housing Administration's (FHA) Hospital Mortgage Insurance Program insures loans to finance hospital renovation and construction. FHA mortgage insurance protects lenders against losses they might incur if hospitals fail to make their mortgage payments. Although the hospital program had made a positive dollar contribution to the General Insurance Fund as of fiscal year 1994, the accumulation of more than $4 billion worth of insured projects and the large loan amounts in New York threaten the program's stability. The continued buildup in New York may exacerbate this risk. Further, trends in health care and changes in state and federal health care policies that reduce hospitals' revenues will affect hospitals participating in the program. Although FHA estimated its loan loss reserve at nearly $460 million as of September 1994, this is not a reliable measure of program losses because of methodology limitations. The implications of health care trends for program hospitals were not factored into FHA's methodology for estimating potential loan losses. In addition, FHA's approach to determining default and loss rate assumptions was unreliable. FHA did not consider the full loss exposure in estimating reserves for hospitals that it had identified as having high default probabilities. As a result of these flaws, the loan loss reserve estimate could be understated or overstated.

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.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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