U.S. Department of Housing and Urban Development (HUD) Secretary Shaun Donovan has announced that HUD's Federal Housing Administration (FHA) will now provide mortgage loan insurance for hospital refinancing. Prior to this, hospitals could only get FHA insurance on loans that included a substantial construction component such as replacing, rebuilding, or renovating existing structures.
"This refinance program will help hospitals struggling with skyrocketing interest rates and limited credit options," said HUD Secretary Shaun Donovan. "The savings provided through FHA refinancing should also help hospitals decrease the cost of healthcare, which is a major priority of the Obama Administration."
The primary focus of the program is to help those hospitals that have seen the cost of borrowing increase as a result of the demise of AAA bond insurance, downgrades of commercial banks, and the disappearance of financing alternatives.
HUD is prepared to accept refinancing applications as soon as lenders are prepared to submit them. The application process will be similar to that for construction loans, but it is expected to be significantly faster with fewer required steps. HUD anticipates that full applications will start to be received in August and that, following application review, insurance commitments for refinancing will start to be issued in October.
HUD estimates that in FY 2010 it will receive between 25 and 40 applications for refinancing hospital debt through FHA. These will be in addition to between 10 and 15 construction-related loan applications in the pipeline.
FHA's Section 242 Mortgage Insurance Program for Hospitals provides HUD-insured mortgages made by private lending institutions. The eligible applicants can be public, proprietary, or nonprofit hospitals certified by the responsible State agency. With FHA insurance, hospital borrowers can achieve the equivalent of at least a AA credit rating and access lower interest rates.
Since 1969, FHA has insured 367 loans totaling $14.9 billion to hospitals in 42 states and Puerto Rico. Currently, there are 87 active loans with a total principal balance of $7.3 billion. The average loan size is $96 million, and the principal balances of individual loans in the portfolio range from $1.9 million to $756 million.
The Section 242 program serves the full spectrum of acute care hospitals, including small rural hospitals, inner-city hospitals, and large academic medical centers. The total number of hospital beds in HUD's hospital portfolio is approximately 19,800.
The program contributes to HUD's community development mission because hospitals are major employers, community anchors, and essential for quality of life. Also, with a claim rate of 0.64% (net of recoveries), the program is a net contributor to FHA's General Insurance Fund.Once a hospital is in the insured portfolio, it is monitored closely and if signs of financial decline are detected, FHA employs proven strategies to help the hospital regain financial stability. Also, hospitals are required to make monthly payments into a Mortgage Reserve Fund that builds to a balance equal to two years of debt service after ten years.
Should mortgage default cause FHA to pay a claim, recovery of losses is facilitated by the requirement that the FHA-insured lender must have a first mortgage lien on the hospital's property, plant, equipment, and receivables. The combination of careful underwriting, proactive portfolio management, and program requirements has made the program's low claim rate possible.
To read more about FHA's new hospital refinance program, click here.