Issue Overview
HUD traditionally waits for default before intervening in troubled nursing facility loans. But by the time a borrower misses payments or fails to meet reserve obligations, the project is already in decline—and options are limited.
The warning signs usually arrive much earlier: persistent operating losses, poor CMS survey results, declining census, or reliance on interim operators and management arrangements. These indicators are not anomalies—they’re forecasts. HUD has the data to see trouble coming. What it lacks is a structured system for acting on it.
The Case for Reform
The current reactive approach increases risk and delays meaningful intervention. By the time HUD acts, the borrower is out of options, the facility has deteriorated, and better operators may have lost interest in taking over. A smarter oversight model would flip the sequence: intervene earlier, monitor more closely, and create performance-linked requirements that either guide the project back to stability—or trigger a structured transition.
This is not about being punitive. It’s about preserving resident care, taxpayer funds, and the long-term viability of the HUD loan portfolio.
Proposed Solutions
1. Create a Pre-Default Watchlist Program
HUD should formalize an “At-Risk Watchlist” for loans showing early signs of operational or financial deterioration, such as:
- CMS 1-star rating or two consecutive cycles at 2 stars
- Debt Service Coverage Ratio (DSCR) below 1.0 for two or more quarters
- Declining census over three consecutive quarters
- Repeat survey deficiencies, including IJ citations or pattern-level findings
Projects meeting these criteria would be designated as “at risk,” triggering closer HUD oversight.
2. Require Monthly Reporting and Corrective Plans
Watchlisted borrowers should be required to:
- Submit monthly financial performance reports
- Provide a written corrective action plan, including timeline, staffing strategies, census development initiatives, and compliance improvement goals
- Identify whether they are pursuing turnaround internally or preparing for a sale
HUD and its lenders should evaluate these updates quarterly and document whether sufficient progress is being made.
3. Impose Performance-Linked Reserve Requirements
To ensure accountability, HUD should require at-risk projects to fund an additional debt service reserve or operational escrow. These funds:
- Serve as a buffer to stabilize cash flow
- Incentivize the borrower to improve performance
- Can be drawn upon by HUD or the lender in the event of further deterioration
The reserve would be required until the project demonstrates three consecutive quarters of:
- DSCR ≥ 1.0
- CMS rating of at least 3 stars
This framework rewards sustained improvement—not temporary gains.
4. Strengthen Guarantee Requirements
HUD should require additional credit support for borrowers whose assets are on the watchlist. This may include:
- Personal or corporate guarantees that go beyond the traditional “bad boy” carveouts
- Demonstration of creditworthiness and real financial capacity
- Guarantees structured to apply during the turnaround period and release upon improvement
This ensures that owners have skin in the game—not just a shell entity in place.
5. Establish a Clear Exit Path for Good Operators
If an at-risk borrower is unwilling or unable to improve performance, HUD should provide a structured path to transition the asset. This could include:
- Encouraging sale or management transfer to a prequalified high-quality operator
- Facilitating expedited assumption or short sale approvals
- Conditioning continued FHA mortgage insurance coverage on meaningful improvement or transition
HUD’s goal should be to stabilize the project—whether with the current owner or a new one.
Why It Matters
Delaying action until default isn’t neutral—it’s expensive. Every quarter of delay reduces resident safety, erodes asset value, and increases the claim HUD may ultimately pay.
A proactive oversight model—based on data, accountability, and pathways to stability—protects the public interest and gives deserving providers a chance to step in before it’s too late.
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