WASHINGTON -- The Department of Housing and Urban Development, after some prodding by Congress, is considering allowing nursing homes with uninsured mortgage loans to refinance with federal insurance, a HUD spokesman said this week.
Permitting the Federal Housing Administration to back the loans would significantly improve credit ratings and interest rates on hundreds of millions of dollars in tax-exempt, small-issue industrial development bonds issued in the early 1980s that are secured by repayment of the loans.
Congress passed legislation in 1987 allowing insurance on nursing home refinancings, but HUD never implemented the statute. When Congress drafted the omnibus housing bill passed late last year, it inserted a provision that directs the department to end the delay and begin writing the regulations.
The HUD spokesman's statement that the department is considering putting the change into effect "is a major step forward," said Robin Salomon, a housing lobbyist with the law firm of Brownstein, Zeidman & Schomer.
"If HUD's review is done promptly, the new program should be of major benefit to both the government and project owners" because "there are significant amounts of high-coupon unrated tax-exempt bonds that financed construction of the affected projects," Mr. Salomon said. He did not have an exact figure for the amount of bonds affected by such a change in HUD policy.
The loans in question were made using the proceeds of small-issue commercials IDBs -- some with coupons as high as 14% -- issued before the Tax Reform Act of 1986 eliminated the use of those bonds. The act does, however, allow for current refundings of commercial IDBs.
Before 1987, federal law only allowed nursing homes to obtain Federal Housing Administration insurance for new construction or renovation of facilities. Nursing homes initially financed with an uninsured loan could not obtain FHA insurance when they refinanced. Those with uninsured loans who wanted to refinance when interest rates dropped later in the 1980s had difficulty doing so.
In the 1990 housing bill Congress noted it changed the 1987 law because it believed that allowing nursing homes to obtain a lower interest rate on their mortgage loans by offering them federal insurance helps to further the public policy goal of reducing health-care costs.
In March, the HUD spokesman said the department had never implemented the 1987 law because officials did not believe the wording of the statute specifically required them to allow insured refinancings of uninsured loans to go forward. When asked about the 1990 housing bill provision, the spokesman said he was not familiar with it.
But HUD may also have balked because the Federal Administration has been hit hard by housing defaults in the last several years and wants to avoid increasing its exposure, industry sources have said.
The HUD spokesman did not say the department had decided to go ahead and implement the law, but that the department is considering it. Even so, mortgage market participants are confident it will happen.
"I think they will" implement the law, said Steven Rother, president of Related Mortgage Corp. "It's just a question of when," he said, adding, "I'm confident that as long as people who have an interest continue to prod them, they will ultimately do it."
When asked why the department seems to be revising its position, the HUD spokesman said department officials were responding to the provision in the 1990 housing bill directing them to move forward.