The current composition of the program’s portfolio with the concentration of insured loans in New York, changes in state policies, trends in the health care market, and the probability of future changes in federal health care policies pose risks that may threaten the future stability of the program. 2). The portfolio has an aggregate unpaid principal balance of about $5 billion. Also, 9 of the 10 largest hospital mortgages are in New York. Several officials stated that New York hospitals rely on FHA mortgage insurance, in part, because the state’s reimbursement system hinders hospitals’ ability to access capital in the private market. The net effect of the methodological flaws on the reserve estimate is unclear because FHA’s default assumptions and their exclusion of market trends could overstate or understate the loan loss reserve estimate. Although FHA officials believe that the hospital program is consistent with HUD’s mission, the extent to which the program accomplishes the department’s goals and thereby supports its mission is not routinely measured. FHA Program Management Responsibilities Shared With HHS Staff

FHA has limited health care expertise to independently manage the program. FHA did not consider the full loss exposure in estimating reserves for hospitals that it identified as having high default probabilities. Therefore, these loss rates do not provide a reliable basis for estimating FHA’s reserves. Financial Performance of FHA’s Hospital Mortgage Insurance Program, Fiscal Years 1969-94

Net cash flow from operations for the year ($1) (12) (50) (86) (133) (26,867) (159) (21,985) (169) (243) (337) (363) (378) (12,105) (418) (516) (548) (663) (673) (869) (876) (5,351) (898) (901) (34,606) (844) (11,324) (21,240) (872) (91,179) (883) (66,687) (828) (4,202) (773) (4,180) (714) $370,110 ($199,730) ($13,207)

FHA-Insured Hospital Projects’ Unpaid Principal Balances, by State, August 1995

(continued) (continued) (continued)
Total (100 projects)

HUD’s and HHS’ Responsibilities in FHA’s Hospital Mortgage Insurance Program Loan Cycle

Provide applicant guidance and assistance (including preapplication conference)
Conduct initial site visit to hospital Review and approve construction plans, specifications, and contracts Recommend to HUD approval or disapproval of hospital’s application Make final underwriting determinations, conduct any needed legal reviews, issue firm commitment, close and initially endorse loan Conduct preconstruction conference, monitor construction work, and process requests for advances of mortgage proceeds Review cost certification, inform lender of maximum insurable mortgage amount, and process final advance Arrange final closing and finally endorse mortgage Monitor hospital’s financial performance by reviewing financial statements and conducting periodic site visits Receive, review, and recommend to HUD approval or disapproval of special requests and loan modifications (for example, partial release of security, transfer of physical assets, bond refundings, or major capital projects)
Approve special requests and loan modifications Conduct site visits to troubled hospitals to determine actions needed to prevent or cure defaults Review quality and condition of insured hospital loan portfolio and determine amount of loan loss reserve Receive/process assignment of loan and pay insurance claim Review assigned hospital’s operational performance and financial condition and conduct site visits as needed Receive, review, and recommend to HUD approval or disapproval of proposed workout agreements or mortgage modifications Bill for and collect mortgage payments Analyze hospital’s situation, evaluate alternative uses, secure appraisal, make decision to foreclose, and arrange and hold foreclosure sale (continued)

Objectives, Scope, and Methodology

The specific objectives of our review were to (1) identify factors, including those related to health care market trends, that could affect the stability of the program’s portfolio and provide information on the program’s financial performance; (2) evaluate the methodology FHA used to estimate the program’s fiscal year 1994 loan loss reserve; (3) evaluate the relationship between the purpose of the hospital mortgage insurance program and HUD’s mission; and (4) determine whether FHA has the expertise to manage the program.
Why GAO Did This Study

Pursuant to a legislative requirement, GAO reviewed the Federal Housing Administration's (FHA) Hospital Mortgage Insurance Program, focusing on: (1) factors that could affect the stability of the program's portfolio and financial performance; (2) FHA 1994 loan loss reserve estimate; (3) how the program relates to the Department of Housing and Urban Development's (HUD) mission; and (4) whether FHA has the expertise to manage the program.

What GAO Found

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.