Tight credit markets appear to be raising interest among healthcare borrowers in a little-used federal financing option.
Crisis wins converts to FHA insured mortgages
For four decades, the Federal Housing Administration has insured hospital mortgage loans for construction or costly equipment, typically to those hospitals too risky to secure debt elsewhere. But until recent years, borrowers faced lengthy delays to win approval and deals were heavily concentrated in New York.
That has changed with successful efforts to speed up approval and expand the agencys reach beyond the Northeast, and dealmakers and housing officials say disjointed credit markets appear to be further fueling interest.
No question about it, said Eric Mestemaker, a director with health and housing lender Red Capital Group in Columbus, Ohio. Options for borrowers have sharply contracted amid financial market volatility, he said. Bond insurers exposure to risky mortgages has left hospitals without one option to bolster their credit strength for investors, he said. Meanwhile, credit guarantees from banks are harder to secure and more expensive. And investors have less appetite for hospital deals. The FHA remains among the few affordable alternatives, he said.
Nobody wants to take risk by lending to hospitals, and if they do take risk they surely want to be paid for it by demanding higher interest rates, said Tom Green, CEO at banker and financial adviser Lancaster Pollard & Co., of the costly market that all but the strongest healthcare borrowers face. Green said he has seen a marked interest in the FHA mortgage insurance as the credit crisis has raised the cost of borrowing. The loan insurance is known commonly as 242 for the section in the National Housing Act that authorized the program.
I would say to you that almost every discussion with a hospital about financing has to include, or does include, the 242 simply because the numbers are compelling, Green said.
Indeed, the American Hospital Association is pushing to expand and simplify the housing agencys mortgage insurance as one measure to alleviate tight credit markets for hospital borrowers. Recent approval from Congress to give the Federal Home Loan Banks power to back tax-exempt bonds with letters of credit has done little to expand access to capital, said Mike Rock, a lobbyist for the Chicago-based trade group (Aug. 4, 2008, p. 6). Its still out there, but its not useful, Rock said.
The AHA has urged Congress to consider expanding eligibility for the insured hospital mortgages. To qualify, at least half a hospitals patient days must be attributable to acute care. The trade group is also seeking $500 million through 2011 to help hospitals offset the costs of construction planning and funding a mandatory two-year reserve of loan payments, Rock said.
Officials with the federal housing agency said more hospitals are seeking the federal loan insurance and among those are hospitals that have been squeezed out of private markets by the economic downturn and tight credit markets.
Just as many hospitals have sought mortgage insurance in the first eight months of this fiscal year, which started in October, as in all of the prior year, said Charles Davis, director of operations for the FHA Office of Insured Health Care Facilities. Another six are expected by the end of June, Davis said. The 25 deals submitted for review so far this year are worth a combined $2.3 billion. He also noted growing interest from hospitals with credit ratings at the low end of investment-grade that could previously turn more readily to private markets.
The agency is expected to approve at least nine insured mortgage loans this year, the same as last year, but may approve as many as 14, Davis said.
Roger Miller, director of the agencys Office of Insured Health Care Facilities, credited the economy and efforts to bolster the programs efficiency, which has cut time to review complete applications to a median of 60 days from nine months.
Last week, the agency closed its first deal of the yearand its largest-ever insured mortgage loanwith a New Jersey health system.
Capital Health will use the $756 million to finance the 223-bed replacement hospital for Capital Health at Mercer in Trenton, N.J., and renovate the systems second hospital, 195-bed Capital Health at Fuld, also in Trenton.
Al Maghazehe, Capital Healths president and CEO, said the system opted for the first time to seek the federal mortgage insurance after bond insurers began faltering in late 2007 (Jan. 7, 2008, p. 22).
Construction on the Hopewell Township, N.J., replacement hospital is already under way and expected to finish in late 2011, Maghazehe said.
The federal insurance extends the governments gilt-edged credit to Capital Health and will cut roughly $538 million of its interest costs over the 25-year life of the loan, according to the housing agency. Standard & Poors rated Capital Health BBB in April 2008.
FHA borrowers with Red Capital Group are typically hospitals with fewer than 75 beds with no credit rating or ratings considered weak or speculative, Mestemaker said. Crumbling credit markets in early 2008 shut out one clients $29 million deal, which is now under review by FHA officials, he said.
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