oversight

HUD's Office of Residential Care Facilities Did Not Always Have and Use Financial Information to Adequately Assess and Monitor Nursing Homes

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-09-17.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

     U.S. Department of Housing and
       Urban Development, Office of
         Residential Care Facilities
    HUD’s Monitoring of the Financial
    Performance of Section 232 Nursing
                  Homes


Office of Audit, Region 1   Audit Report Number: 2018-BO-0001
Boston, MA                  September 17, 2018
To:            Timothy Gruenes, Director, Office of Asset Management and Lender Relations,
               HI
               //Signed//
From:          Ann Marie Henry, Regional Inspector General for Audit, 1AGA
Subject:       HUD’s Office of Residential Care Facilities Did Not Always Have and Use
               Financial Information to Adequately Assess and Monitor Nursing Homes


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of HUD’s monitoring of the financial performance of
Section 232 nursing homes.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG website. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
617-994-8380.
                    Audit Report Number: 2018-BO-0001
                    Date: September 17, 2018

                    HUD Did Not Always Have and Use Financial Information to Adequately
                    Assess and Monitor Nursing Homes



Highlights

What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD) monitoring of the
financial performance of Section 232 nursing homes based on the size of their program, the
inherent risks in the program, the length of time since our last audit, and the inclusion of this
review in the annual audit plan. Our audit objective was to determine whether HUD had
sufficient financial information and used this information to adequately assess and monitor the
financial status of the nursing homes.

What We Found
HUD did not always have and use sufficient financial information to adequately assess and
monitor nursing homes. Specifically, it (1) allowed four defaulted nursing homes to remain in its
portfolio for up to 6½ years; (2) made a partial payment to help one nursing home return to
solvency, and it went bankrupt 14 months later; (3) insured a nursing home that did not operate
as a single-asset entity and a nursing home that did not submit a marketing plan; (4) did not
enforce its regulatory agreements at six nursing homes; and (5) did not properly classify nine
nursing homes as troubled. In addition, HUD did not require owners, operators, and lenders to
routinely submit financial data that were sufficient, accurate, complete, and timely. These
deficiencies occurred because HUD’s actions did not always identify and address the root causes
of a nursing home’s financial challenges. As a result, HUD could lose more than $32.1 million
for the defaulted mortgages and owed more than $10 million in carrying costs. It did not act on
ineligible expenses of more than $7.8 million, unsupported expenses of more than $8.9 million,
and accrued expenses of more than $44.4 million. Additionally, nine nursing homes, with more
than $82.4 million in HUD-insured mortgages, were at risk of default.

What We Recommend
We recommend that the Director of Asset Management and Lender Relations, Office of
Residential Care Facilities, (1) develop, implement, and enforce action plans with defined
completion dates to address each nursing home’s challenges; (2) require support for more than
$8.9 million in expenses and documentation for the validity of the more than $44.4 million in
accounts payable; (3) require repayment of more than $7.8 million in ineligible expenses; and (4)
follow up on inaccurate, incomplete, conflicting, and late financial data.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding 1: HUD’s Monitoring Was Not Effective in Addressing Problems at 18
         Financially Challenged Nursing Homes.......................................................................... 5
         Finding 2: HUD Did Not Hold Owners, Operators, and Lenders Accountable for
         Submitting Inaccurate, Incomplete, Conflicting, and Untimely Financial Data ...... 15

Scope and Methodology .........................................................................................19

Internal Controls ....................................................................................................21

Appendixes ..............................................................................................................22
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 22
         B. Auditee Comments and OIG’s Evaluation ............................................................. 23
         C. Analysis of Individual Nursing Homes ................................................................... 42
         D. Schedule of Mortgages .............................................................................................. 69
         E. Tables of Questioned Costs and Funds To Be Put to Better Use by Nursing
            Home .......................................................................................................................... 70
         F. HUD’s Investment by State ..................................................................................... 73




                                                                     2
Background and Objective
In 1959, Congress created Section 232 of the National Housing Act, which authorized the United
States Government to insure mortgages for nursing homes. The U.S. Department of Housing and
Urban Development (HUD) has handled these mortgages since its creation in 1965. Since then,
Congress has made many changes to the Section 232 program. Currently, eligible mortgages may
be for purchase, refinance, new construction, substantial rehabilitation, or a combination of
these. HUD also insures mortgages to install fire safety equipment in such properties.

As of March 8, 2018, HUD had insured 2,458 nursing home mortgages, with a collective
principal balance exceeding $19.6 billion. HUD had insured mortgages in 48 States and the
District of Columbia. HUD did not insure nursing homes in North Dakota and Wyoming. 1

                                                                                                                                                          122
                                    HUD’s investment in insured nursing homes in millions of dollars                                       215
                  274                                                                                                               55
                                                                                                                                                         730
                                      65                     0            173
                170                                                                                                    2831
                                                                                                         321
                        36
                                     0                       10                              159
                                                                                                                                          748             142
                                                                             3                                                                           453
                                                                                            1771                1366
      1122       72                                              33                                      831
                                                                                                                                                        1303
                              114                                                                                            199
                                         199                                                                                                             151
                                                                                 372                            94
                                                                                                                                                        268
                                                                      137
                                                                                                                                                  DC 65
                              265                                                                  200
                                      64                                                                                                          282
                                                                            80
                                                                                                                                            314
                                                                                       90
                                                                                                                       162           190
                                                                  1262


                                                                                                          183
                                                                                  266
                         12                                                                        173


                                                                                                                                   1440



                                                 7




1
    Appendix F lists HUD’s investment by State.



                                                                      3
Nursing homes must have a regulatory agreement. Regulatory agreements among HUD, the
owners, and the operators 2 govern the operation of the nursing home. Each regulatory agreement
is executed at the initial closing of the HUD-insured mortgage. This regulatory agreement
continues while HUD is the insurer, holder, or owner of the mortgage. Over the life of the
Section 232 program, HUD has changed the format and language in its regulatory agreements.
The version of the regulatory agreement signed at the closing of the mortgage applies for the
duration of the mortgage. Nursing home owners and operators are responsible for any violations
of the regulatory agreements and may be subject to adverse actions if violations occur. The
lender holding the mortgage is not a party to the regulatory agreement. HUD services insured
mortgages, monitors risk, and minimizes claims.3 HUD’s goal is to work in partnership with the
owner and lender to ensure that (1) each HUD-insured mortgage is financially and operationally
strong; (2) each nursing home provides a safe, quality place of residence; and (3) the mortgage
remains viable for its term. Nursing homes generate revenue by filling beds with patients, caring
for those patients, and billing responsible parties for the patients’ care. These responsible parties
include Medicare, Medicaid, private insurers, and patients.

Our audit objective was to determine whether HUD had sufficient financial information and used
this information to adequately assess and monitor the financial status of the nursing homes.
Specifically, we evaluated financial indicators, including utilization,4 payments, profitability, and
solvency, and determined what monitoring and actions HUD had taken to protect its investment.




2
    Not every HUD-insured mortgage has an operator.
3
    If the owner fails to make a mortgage payment and the mortgage is in default for more than 30 days, the lender
    may file an insurance claim with HUD.
4
    Utilization is the percentage of beds occupied versus available.



                                                         4
Results of Audit

Finding 1: HUD’s Monitoring Was Not Effective in Addressing
Problems at 18 Financially Challenged Nursing Homes
HUD’s monitoring was not effective in addressing problems at any of the 18 financially
challenged nursing homes reviewed. Specifically, HUD (1) allowed four defaulted nursing
homes to remain in its portfolio for up to 6½ years; (2) made a partial payment to help one
nursing home return to solvency, and it went bankrupt 14 months later; (3) insured a nursing
home that did not operate as a single-asset entity as required and a nursing home that did not
submit a marketing plan as required; (4) did not enforce its regulatory agreements at six nursing
homes; and (5) did not properly classify nine nursing homes’ mortgages as troubled. 5 These
deficiencies occurred because HUD’s actions did not always identify and address the root causes
of a nursing home’s financial or operational challenges. HUD actively pursued a strategy of
delaying assignment 6 while it worked with the lenders, owners, operators, and management
agents (as appropriate) to turn around the mortgage. As a result, HUD could lose more than
$32.1 million for the four defaulted mortgages and owed more than $10 million in carrying costs,
lost more than $9.7 million in a bankruptcy sale, and placed more than $82.4 million at increased
risk of default. Also, HUD did not take action on ineligible expenses of more than $7.8 million,
unsupported expenses of more than $8.9 million, and accrued expenses of more than $44.4
million.




5
    The numbers do not total to 18 because some properties had multiple issues.
6
    Assignment occurs when a nursing home owner does not pay its HUD-insured mortgage and the lender decides
    to claim the insurance benefits. If a lender notifies HUD that it is eligible for the insurance benefits but has
    decided to work with the owner to refinance the mortgage, it is delaying assignment of the HUD-insured
    mortgage.



                                                          5
Defaulted Mortgages Remained in HUD’s Portfolio After the Date of Default
HUD allowed four defaulted nursing homes to remain in its portfolio for up to 6½ years.
Collectively, these nursing homes had an unpaid principal balance of more than $40.4 million.

      Property name          Date of default       Days - years 7 since        Unpaid principal
                                                        default                   balance
       Plaza Village             9/1/2011             2,380 - 6.52               $9,904,519
       Senior Living
     Immanuel Campus             7/1/2012               2,076 - 5.68               12,411,882
          of Care
        Mary Scott              12/1/2012               1,923 - 5.26                3,564,128
      Nursing Center 8
      Bel-Air Nursing            5/1/2016                676 - 1.85                14,600,659
           Home
           Total                                                                   40,481,188

In these four cases, HUD, the lenders, the owners, the operators, and the management agents (as
appropriate) 9 discussed refinancing or modifying the HUD-insured mortgage. These nursing
homes experienced a combination of low utilization, issues in billing for services, issues in
collecting revenues due, owners and operators with difficulty in committing to a course of action,
violations of their regulatory agreements, and unresolved notices of violation. 10
For the purpose of an insurance claim, regulations 11 define default as the failure of the owner to
make any payment due under the HUD-insured mortgage. If a default continues for 30 days, the
lender is entitled to get the benefits of the insurance provided for the mortgage. 12 HUD requires
lenders insuring nursing homes to request a 90-day extension before filing an insurance claim,
which HUD may further extend at the written request of the lender. 13 If HUD grants the
requested extension, HUD also requires that lenders assist the owner in arranging refinancing to
cure the default and avoid an insurance claim. This criterion also includes the requirement that
lenders cooperate with HUD in taking reasonable steps to avoid an insurance claim. The
regulation states that HUD is responsible for taking actions other than refinancing to avoid a
claim, while the lender is responsible for working with the owner to refinance to avoid a claim.
HUD’s criteria do not limit how long lenders and owners may take to refinance. Additionally,
HUD does not have specific criteria to address delinquent 14 or defaulted mortgages that would
not benefit from refinancing.



7
      This is the number of days and years between the date of default and March 8, 2018.
8
      We issued the Mary Scott Nursing Center, Dayton, OH, audit report number 2017-CH-1009 on
      September 30, 2017.
9
      Not every HUD-insured property has an operator or a management agent.
10
      Appendix C discusses each nursing home.
11
      This definition is available at 24 CFR (Code of Federal Regulations) 207.255(a)(1)(i).
12
      This regulation is available at 24 CFR 207.255(a)(3).
13
      This regulation is available at 24 CFR 207.258(a)(2).
14
      A HUD-insured mortgage is delinquent when the owner does not make a mortgage payment on time.



                                                       6
When the owners default and the lenders properly notify HUD as the defaults occur, HUD is
responsible for the accumulating interest and fees. For these properties, HUD was responsible
for accrued interest of more than $6.9 million and other carrying costs of more than $3 million. 15

                                                          Mortgage
                          Date of         Accrued
     Property name                                        insurance           Taxes         Insurance       Total
                          default         interest
                                                          premiums
 Plaza Village            9/1/2011        $3,201,662         $336,293         $262,961        $131,511    $3,932,427
 Senior Living
 Immanuel                 7/1/2012         1,760,439           159,826                 0      1,106,611    3,026,876
 Campus of Care
 Mary Scott              12/1/2012           734,794             53,501           5,643        228,474     1,022,412
 Nursing Center 16
 Bel-Air Nursing          5/1/2016         1,291,599           153,938         310,031         328,709     2,084,277
 Home
               Total                     6,988,494          703,558          578,635         1,795,305    10,065,992


These deficiencies occurred because HUD’s actions did not always identify and address the root
causes of a nursing home’s financial or operational challenges. Additionally HUD actively
pursued a strategy of delaying assignment while it worked with the lenders, owners, operators,
and management agents (as appropriate) to turn around each mortgage. As of March 8, 2018,
HUD had not paid a claim on these four mortgages totaling more than $40.4 million. To
determine the potential loss to HUD for defaulted nursing homes, we calculated the loss ratio for
nursing homes sales. From 2011 to 2018, HUD sold 22 nursing homes, with a total unpaid
principal balance exceeding $87.4 million. In these sales, HUD recovered more than
$17.3 million, or 20 percent, of the unpaid principal balance. With a loss ratio of 80 percent,
HUD could lose more than $32.1 million for these mortgages.

                                                     Unpaid principal
              Property name                                                      Estimated loss to HUD
                                                         balance
       Plaza Village Senior Living                     $9,904,519                          $7,923,615
       Immanuel Campus of Care                         12,411,882                           9,929,506
       Mary Scott Nursing Center 17                     3,213,139                           2,570,511
         Bel-Air Nursing Home                          14,600,659                          11,680,527
                     Total                             $40,130,199                         $32,104,159

As part of the auditee comments 18, HUD advised that the owners of two other nurisng homes,
Prospect Height Care Center and Medford Care Center, had brought their mortgages current in
July 2018. Propect Heights Care Center’s three HUD-insured mortgages had been in default


15
     Interest and other carrying costs were as of February 2018.
16
     We issued Mary Scott Nursing Center, Dayton, OH, audit report number 2017-CH-1009 on September 30, 2017.
17
     We issued Mary Scott Nursing Center, Dayton, OH, audit report number 2017-CH-1009 on September 30, 2017.
     This figure includes a deduction of $350,989 for principal that we reported in a prior audit of the nursing home.
18
     The auditee comments are available in Appendix B,



                                                           7
from August 2016 to July 2018 with a total unpaid principal balance of more than $33.3 million
while Medford Care Center’s HUD-insured mortgage had been in default from November 2017
to July 2018 with an unpaid principal balance of more than $5.4 million. Since regulations 19
allow a nursing home owners to cure a default with a payment, we reduced the estimated loss to
HUD and the interest and carrying costs to be paid by HUD. This reduced HUD’s estimated loss
to more than $32.1 million and the interest and carrying costs to more than $10 million.20
Partial Payment Did Not Help a Nursing Home Return to Viability
In 2009, HUD insured a $20.2 million mortgage at Hebrew Home, which refinanced a previous
HUD-insured mortgage from 1987. HUD had documented financial problems at Hebrew Home
since 2001. The owner defaulted on the HUD-insured mortgage in September 2012. In
June 2015, HUD attempted to limit an insurance claim by paying the lender more than
$11 million (a partial payment of more than $8.3 million and interest of more than $2.7 million).
To recover its payment to the lender, HUD created a second mortgage for more than $11 million
in June 2015. On August 15, 2016, just over a year later, the owners voluntarily filed for
bankruptcy relief. In December 2016, the bankruptcy court sold the property to a new entity,
which assumed the mortgage with the lender. The bankruptcy discharge, dated
December 13, 2016, granted HUD $1.3 million and eliminated the second mortgage with HUD;
therefore, HUD lost more than $9.7 million.

Regulations allow HUD to make partial payments on a mortgage. 21 Whenever HUD receives
notice that a lender intends to file an insurance claim and assign the mortgage to HUD, HUD
may request that the lender accept partial payment of the claim and modify the mortgage.
However, HUD has to follow specific criteria when making a partial payment of claim, and one
of these criteria is that the partial payment would be sufficient to restore the financial viability of
the project. This deficiency occurred because HUD did not ensure that the partial payment
would sufficiently reduce monthly mortgage payments to restore the financial viability of the
project. Details on this nursing home and HUD’s actions to assist the nursing home are in
appendix C.
Two Nursing Homes Did Not Adequately Complete the Insurance Process
Nursing homes go through a process to obtain a HUD-insured loan. HUD did not ensure that
two nursing homes completed all of the steps of this process.

In 2007, HUD insured Jamaica Hospital 22 Nursing Home’s mortgage of $43.1 million. HUD and
the owner signed a regulatory agreement in February 2007, which included a rider. 23 This rider
granted a 6-month waiver of the HUD requirement that the nursing home be a single-asset



19
     This regulation is available at 24 CFR 207.256a.
20
     We did not update the outstanding interest and carrying costs on the remaining four loans. These amounts are
     still as of February 2018.
21
     This regulation is available at 24 CFR 232.256.
22
     Despite its name, Jamaica Hospital Nursing Home is not a hospital.
23
     A rider is an addition to a document (in this case a mortgage), which is often attached on a separate piece of
     paper.



                                                           8
entity. 24 Nursing homes must be single-asset entities to participate in HUD’s Section 232 insured
mortgage program. Before obtaining HUD insurance, this nursing home was consolidated with a
related company, a nearby hospital. The waiver granted the nursing home time to change its
legal structure so that it could be eligible for the Section 232 program. The hospital provided the
nursing home with services and supplies, which the hospital charged to the nursing home on an
estimated-cost basis. Although the related companies (the nursing home and the hospital)
changed their legal structure to allow the nursing home to become a single-asset entity, these
companies did not change their financial operations. The nursing home used the estimated costs
in its December 31, 2016, audited financial statements. In these statements, the nursing home
identified that it owed the hospital more than $44.4 million in accounts payable and allowed the
hospital to charge more than $8.9 million in unsupported expenses to the nursing home.

HUD’s regulatory agreement with the nursing home requires that expenses charged to the
nursing home be necessary to the operation and reasonable in price. A single-asset entity, as a
stand-alone company, should not pay expenses based on estimates.

This nursing home had submitted annual audited financial statements to HUD since 2011. These
statements identified that the nursing home paid a related company based on estimates instead of
actual expenses, but HUD did not question the use of estimates. These statements identified that
there was a large payable, but HUD did not question the large payable. When we brought these
issues to HUD’s attention, it stated that the nursing home must renegotiate its relationship with
the related hospital and retroactively adjust the amounts charged from 2007 through 2018. As of
March 8, 2018, Jamaica Hospital Nursing Home had not defaulted and owed more than
$36.5 million on its HUD-insured mortgage.

In 2012, HUD insured an $8.1 million mortgage for Mainland Manor Rehab and Nursing Center,
which refinanced a previous HUD-insured mortgage. As part of the refinance, HUD’s
underwriter recognized that the property had low utilization. The underwriter recommended that
HUD require a marketing plan that included strategies, timelines, and goals. HUD provided no
evidence that it ensured that a marketing plan was implemented at the 2012 refinance. HUD’s
2014 and 2015 risk assessments identified that the property continued to have utilization issues.
In October 2016, the owner transferred all patients from this nursing home to nearby facilities
and closed the nursing home. The owner informed HUD that the decision to close the facility
temporarily was due to the 3-year loss of more than $4.5 million. Despite closing the facility, the
owner continued to pay the mortgage, although this nursing home was not generating revenue.
As of March 8, 2018, the owner had not defaulted and owed more than $7.4 million on the HUD-
insured mortgage.

These deficiencies occurred because HUD did not evaluate whether the related nursing home and
hospital changed their financial operations after the nursing home became a single-asset entity.
In addition, HUD did not address the underwriter’s recommendation to implement a marketing
plan to increase utilization. As a result, HUD had more than $43.9 million in two HUD-insured
mortgages with an increased risk of default. Addititionally, a nursing home paid more than $8.9

24
     As a single-asset entity, the mortgaged nursing home must be the only asset of the borrower.



                                                          9
million in unsupported expenses and allowed a questionable accounts payable of more than
$44.4 million.
Regulatory Agreements at Six Nursing Homes Were Not Enforced
Every HUD-insured nursing home is required to have a regulatory agreement among HUD, the
owners, and the operators 25 that governs the operation of the nursing home. This regulatory
agreement continues while HUD is the insurer, holder, or owner of the mortgage. When the
owner pays off the mortgage, the regulatory agreement ends.

Regulatory agreements require owners and operators to pay expenses that are reasonable in price
and necessary for the operation of the nursing home. Regulatory agreements also require that
nursing homes maintain proper financial records and prohibit owners and operators from
removing assets from the nursing home without HUD’s approval. Owners may not withdraw
assets or income unless the nursing home has surplus cash available. Withdrawals are limited to
the amount of surplus cash available and the frequency of withdrawals is defined in the
regulatory agreement. Surplus cash is the amount of cash remaining after the nursing home pays
its mortgage, deposits a required amount into its reserve for replacement account, pays its bills,
and makes any other deposits required of the nursing home.

We found the following issues signifying that HUD did not enforce its regulatory agreements at
six nursing homes.


 Name                             Issues                                                Amount
 Bishop Wicke Health and Unreasonable or unnecessary expenses                         $2,924,477
 Rehabilitation Center   Improper financial records                                   $3,177,634
 Shawnee Christian
                         Subtraction from real or personal property                     $815,973
 Nursing Center
 Golden Hill Health Care Unreasonable or unnecessary expenses                         $1,419,218
 Center                  Unauthorized distributions                                     $242,702
 Plaza Village Senior
                         Encumbrance with additional loan                             $2,330,000
 Living
 Immanuel Campus of
                         Unreasonable or unnecessary expenses                           $110,892
 Care
 Mainland Manor Rehab
                         Subtraction from real or personal property               Not monetized
 and Nursing Center
                         Total                                                      $11,020,896

For example, HUD insured a $9.6 million refinance of a non-HUD-insured mortgage for the
Bishop Wicke Health and Rehabilitation Center in 2012. In 2013, HUD’s Real Estate
Assessment Center identified that the owner donated more than $3.1 million to a related


25
     Not every HUD-insured mortgage has an operator.



                                                       10
foundation and repaid more than $2.9 million on a loan. HUD’s Real Estate Assessment Center
referred these two matters to HUD’s Departmental Enforcement Center staff, which contacted
the independent auditor and the nursing home. The independent auditor stated that the donated
funds were not project funds, but funds from bequests and the accumulated earnings on the
bequests. The repayment of the loan from a related company was made between
September 30, 2011, and September 30, 2014. The nursing home was in a non-surplus-cash
position and should not have made payments on this loan. HUD’s Departmental Enforcement
Center staff directed the owner to reimburse the nursing home. The nursing home had not
recovered the funds. According to the regulatory agreement, the owner must maintain proper
financial records. Additionally, the regulatory agreement requires either that transfers of project
funds have HUD approval before the transfer or that transfers are made only from surplus cash.
Bequests from third parties to a related company should not be included in the nursing home’s
financial records. As of March 8, 2018, the owner had not defaulted and owed $8.3 million on
the HUD-insured mortgage.

As another example, in 2007, HUD insured the $6.6 million mortgage of Shawnee Christian
Nursing Center, which refinanced a prior non-HUD-insured mortgage of this 159-bed nursing
home. In 2015, the owner violated the regulatory agreement when it removed 27 beds from the
nursing home without HUD’s required written approval. These 27 beds represented 17 percent
of the revenue production. Removing beds subtracts from the nursing home’s ability to generate
revenue. In 2016, HUD identified that the nursing home also commingled its accounts with
multiple related companies, also a violation of the regulatory agreement. According to the
regulatory agreement, all rents and receipts of the project must be deposited in the name of the
project to be disbursed for the expenses of the project or distribution of surplus cash. While
HUD identified these issues, it did not direct the nursing home to correct them. HUD should
have required the nursing home to return the 27 beds to operation or pay down the mortgage by
17 percent ($815,973). In addition, HUD should have required that the owner stop commingling
accounts. These issues increased the risk of default of the HUD-insured mortgage. As of
March 8, 2018, the owner had not defaulted and owed more than $4.8 million on its HUD-
insured mortgage.

In a third example, HUD insured the refinance of Golden Hill Health Care Center 26 for more than
$5.6 million in 2010. HUD identified more than $1.4 million in loan payments and $242,702 in
unauthorized distributions between 2013 and 2015. HUD’s Departmental Enforcement Center
identified that the loans were inappropriate unless they were made before HUD insured the
mortgage. The owner stated that the loans were made before HUD insured this mortgage.
However, the nursing home was in a non-surplus-cash position and should not have made
payments on these loans. HUD formally referred the unauthorized distributions to HUD’s
Departmental Enforcement Center on May 30, 2017. According to the regulatory agreement,
transfers of project funds required either prior HUD approval or that such transfers be made only
from surplus cash. The transfers did not have HUD approval, and the nursing home did not
generate surplus cash during this time. While HUD properly identified the issues of the


26
     While this property is part of a master lease, the property did not make these loans or transfer these funds to
     other properties within the master lease.



                                                           11
inappropriate loans, the unauthorized payments on these loans, and the unauthorized
distributions, HUD did not enforce its regulatory agreement by directing the owner to return the
funds to the nursing home. The unauthorized loan payments and the unauthorized distributions
increased the risk of default for this HUD-insured mortgage. As of March 8, 2018, the owner
had not defaulted and owed more than $4.5 million on its HUD-insured mortgage. The details
for Plaza Village Senior Living, Immanuel Campus of Care, and Mainland Manor Rehab and
Nursing Center are in appendix C.

These deficiencies occurred because HUD did not enforce all of its rights under the regulatory
agreements with the owners. As a result, nursing homes paid more than $7.8 million in
ineligible expenses. See appendix E.
HUD Misclassified Nursing Homes’ Mortgages as Potentially Troubled
HUD classified nine nursing homes as potentially troubled, when each property had significant
challenges that should have classified it as troubled. These nine nursing homes are Middlesex
Health Care Center, Bishop Wicke Health and Rehabilitation Center, Golden Hill Health Care
Center, Jamaica Hospital Nursing Home, Mainland Manor Rehab and Nursing Center,
Mecklenburg Health Care Center, Shawnee Christian Nursing Center, The Highlands Health
Care Center, and West River Health Care Center.
HUD had a team of experienced staff members who gave extra attention to troubled nursing
homes. This attention varied depending on the nature of the trouble at the nursing home but
generally included monthly conferences with the lender, owner, and operator and additional
reports from the owner-operator to HUD. Potentially troubled nursing homes did not receive this
extra attention from HUD. Therefore, if HUD had properly classified these nine nursing homes
as troubled, it would have provided additional monitoring to these properties.
For example, the independent auditors who conducted the 2016 audit of Jamaica Hospital
Nursing Home reported substantial doubt about the nursing home’s ability to continue to operate.
HUD categorized this nursing home as potentially troubled in September 2014 and did not
change its assessment based on this ongoing concern. When a nursing home’s ability to continue
operations is questioned, HUD’s investment in the insured mortgage is at risk of default.

Also, HUD insured a mortgage at West River Health Care Center for $6.4 million in 2010, which
refinanced a prior mortgage. HUD did not insure the prior mortgage. HUD categorized this
nursing home as potentially troubled in September 2014 but did not assess its owner annual
financial statements from 2010 through 2016. In 2015, HUD began collecting and reviewing
quarterly operator financial statements in addition to the owner financial statements but did not
pursue the owner and operator for submitting inaccurate operator financial data. In this operator
data, the operator reported 5 quarters of utilization from 104 to 109 percent. Utilization in excess
of 100 percent is not possible because multiple people may not occupy the same bed at the same
time. Nursing homes generate revenue by filling beds with patients; caring for these patients;
and billing Medicare, Medicaid, and private insurers for the patients’ care. Without accurate
utilization data, HUD cannot properly evaluate a nursing home’s financial condition and
determine whether HUD’s investment in the insured mortgage is at risk of default. As of




                                                12
March 8, 2018, the owner had not defaulted and owed more than $5.7 million on its HUD-
insured mortgage.

In 2011, in a third example, HUD insured a mortgage for Middlesex Health Care Center 27 for
$8 million, which refinanced a prior HUD-insured mortgage. HUD identified this nursing home
as potentially troubled in October 2017 despite 4 years of owner financial scores that were well
below the baseline. HUD established a baseline of 70 for scores on owners’ audited financial
statements, and this nursing home’s scores ranged from a high of 33 to a low of 10 from 2013 to
2016. These quarterly data showed continued operating losses. With this continued pattern of
operating losses, HUD’s investment in the insured mortgage was at risk of default. As of
March 8, 2018, the owner had not defaulted and owed more than $7.2 million. Details for the
other seven nursing homes are in appendix C.
This condition occurred because HUD did not routinely reevaluate nursing homes to ensure that
it correctly classified each nursing home’s troubled status. As result, HUD had more than
$82.4 million 28 in nine HUD-insured mortgages with an increased risk of default.

Conclusion
HUD’s monitoring had not been effective in addressing issues at 18 financially challenged
nursing homes. These deficiencies occurred because HUD’s actions did not always identify and
address the root causes of a nursing home’s financial or operational challenges. HUD actively
pursued a strategy of delaying assignment while it worked with the lenders, the owners, the
operators, and the management agents (as appropriate) to turn around the mortgage. Further,
HUD did not routinely reevaluate nursing homes to ensure that it correctly classified each
nursing home’s troubled status. As a result, HUD could lose more than $32.1 million for the
four defaulted mortgages and owed more than $10 million in carrying costs, lost more than
$9.7 million in a bankruptcy sale, and placed more than $82.4 million at increased risk of default.
Also, HUD did not take action on ineligible expenses of more than $7.8 million, unsupported
expenses of more than $8.9 million, and accrued expenses of more than $44.4 million.

Recommendations
We recommend that the Director of Asset Management and Lender Relations, Office of
Residential Care Facilities,

      1A.      Work with the owners, lenders, operators, and management agents (as applicable) to
               develop and implement an action plan for potentially troubled and troubled nursing
               homes. 29 Each plan should include an analysis of the root causes of that nursing
               home’s challenges and define specific and measureable steps that address the root
               causes. Each step should have a defined completion date.



27
     We issued, Middlesex Health Care Center, Middletown, CT, audit report number 2014-BO-1004 on
     June 29, 2018.
28
     With a loss ratio of 80 percent, HUD could lose more than $65.9 million in claims (appendix D).
29
     Two properties, Chatsworth at Wellington Green and Moran Manor Healthcare Center, paid off their HUD-
     insured mortgages.



                                                       13
       1B.      Implement the action plan for the four defaulted nursing homes to protect HUD’s
                investment of $41,435,357. 30 This amount represents the collective funds put to
                better use for these nursing homes. Appendix E lists the funds to be put to better use
                by nursing home.

       1C.      Develop and implement policies and procedures to address delinquent or defaulted
                mortgages that would not benefit from refinancing.

       1D.      Refer regulatory agreement violations to the Departmental Enforcement Center
                within 30 days of HUD having identified it and work with the Departmental
                Enforcement Center to develop a plan for resolving the violation. Any revisions to
                the plan must be accepted by the Departmental Enforcement Center.

       1E.      Review and revise the policies and procedures for making partial payments of claims
                to check that each decision to make a partial payment of claim ensures that the
                payment restores the subject nursing home to financial viability to avoid a repeat of
                the situation that led to the loss on Hebrew Home.

       1F.      Require Jamaica Hospital Nursing Home to provide support for $8,974,000 paid to
                its related company. Any amount that the owner cannot support as reasonable in
                price and necessary to the nursing home should be repaid to the nursing home.

       1G.      Require Jamaica Hospital Nursing Home to provide support for $44,483,000 in
                accounts payable. Any amount that the owner cannot support as reasonable in price
                and necessary to the nursing home should be removed from the accounts payable.

       1H.      Require the owners of Bishop Wicke Health and Rehabilitation Center, Plaza Village
                Senior Living, Golden Hill Health Care Center, Immanuel Campus of Care, and their
                related companies to reimburse the nursing homes for the ineligible expenses of
                $7,027,289.

       1I.      Require Shawnee Christian Nursing Center to return 27 beds to operation or pay
                down the mortgage by $815,973.

       1J.      Define the troubled and potentially troubled classifications for nursing homes and
                develop specific measures to identify when and how nursing homes are classified.

       1K.      Develop and implement policies and procedures to revisit the classifications at least
                annually.


30
     This figure includes a deduction for principal and interest at a particular nursing home, which we reported in a
     prior audit of that nursing home (Mary Scott Nursing Center, Dayton, OH, Section 232 Loan Program, audit
     report number 2017-CH-1009 on September 30, 2017). This total amount includes HUD’s estimated loss and
     carrying costs ($32,104,159 + $10,065,992 = $42,170,151). In addition, we deducted the $734,794 recognized
     in the prior report for an adjusted total of $41,435,357.



                                                          14
Finding 2: HUD Did Not Hold Owners, Operators, and Lenders
Accountable for Submitting Inaccurate, Incomplete, Conflicting,
and Untimely Financial Data
HUD did not require owners, operators, and lenders to routinely submit financial data on nursing
home operations that were accurate, complete, and timely as required. This condition occurred
because HUD did not routinely evaluate the submissions for accuracy, completeness, and
timeliness. In addition, HUD had no policy to penalize operators and did not impose penalties
on owners that did not submit accurate and complete data in a timely manner. Inaccurate,
incomplete, conflicting, and untimely data limit HUD’s ability to make decisions about nursing
home performance.
Operators and Lenders Submitted Inaccurate, Incomplete, Conflicting, and Late Data to
HUD
Quarterly financial data did not provide accurate, complete, and timely information about the
financial operations of nursing homes. HUD developed the 232 Healthcare Portal to collect
operator financial data and process business transactions. Since 2015, HUD had collected and
reviewed quarterly financial data. HUD required operators to submit the quarterly financial data
to their lenders within 60 days of the end of each quarter, except for the fiscal yearend quarter,
which was 90 days. Lenders entered the data into the 232 Healthcare Portal using a template,
definitions, and a data format developed by HUD. The definitions and data format described
how lenders should enter data into the 232 Healthcare Portal.

Of the 18 nursing homes reviewed, only 16 were required to submit financial data to HUD
because the other two loans were paid off before HUD began requiring submission of quarterly
data. In our analysis of these 16 nursing homes, we found that the operators and lenders for 10
nursing homes provided inaccurate data, 12 provided incomplete data, 12 provided data that
conflicted with data in other HUD systems, and 16 provided data after the required due date.




                                                15
      Insured property         Inaccurate Incomplete Conflicting                            Late
 Mary Scott Nursing Center  31
                                    1          1         1                                   1
  Immanuel Campus of Care           1          1         1                                   1
    Bel-Air Nursing Home            1          1         1                                   1
        Hebrew Home                 1          1         1                                   1
  Plaza Village Senior Living       1          1         1                                   1
    Middlesex Health Care
                                    0         1          0                                   1
             Center
   Bishop Wicke Health and
                                    1         0          0                                   1
     Rehabilitation Center
    Golden Hill Health Care
                                    1         0          1                                   1
             Center
   Jamaica Hospital Nursing
                                    0         0          1                                   1
             Home
  Mainland Manor Rehab and
                                    0         0          1                                   1
        Nursing Center
     Medford Care Center            1          1         1                                   1
   Mecklenburg Health Care
                                    0         1          1                                   1
             Center
 Prospect Heights Care Center       0          1         1                                   1
  Shawnee Christian Nursing
                                    0         1          0                                   1
             Center
  The Highlands Health Care
                                    1         1          0                                   1
             Center
    West River Health Care
                                    1         1          1                                   1
             Center
             Totals                10         12        12                                  16
           Note: The number 1 indicates a data deficiency, and 0 indicates no deficiency.

As an example of inaccurate data, the Golden Hill Health Care Center reported a negative $6
million in expenses, while Hebrew Home reported a quarterly mortgage payment that was more
than four times the total mortgage amount. Expenses represent the cumulative amount that a
nursing home pays to vendors for goods and services. Having a negative expense account
balance is generally unusual because it indicates income rather than an expense. Monthly
mortgage payments should not exceed the total amount of the mortgage. Incomplete data were
evidenced by blank fields and/or missing quarterly statements. As an example of conflicting
data, the nursing homes reported that they made mortgage payments in their operator financial
data, while the lenders reported that they did not make mortgage payments in their Multifamily
Delinquency and Default Reporting System reports. Untimely data are data reported after the
required date. For example, Bel-Air Nursing Home submitted its operator financial statements
116 to 299 days after the end of the quarter. In addition, Bel-Air Nursing Home submitted only
three of the six required financial statements. The combination of inaccuracies, omissions,

31
     We issued Mary Scott Nursing Center, Dayton, OH, audit report number 2017-CH-1009 on September 30, 2017.



                                                          16
conflicts, and untimeliness made the data unreliable and insufficient to report on the financial
operations of the nursing homes.
HUD requires operators to submit financial statements quarterly within 60 to 90 calendar days
after the end of each fiscal quarter. HUD did not ensure that the data in the submitted operator
financial statements were accurate and complete. Properly implemented with accurate data,
HUD and lenders could use the 232 Healthcare Portal to identify which nursing homes faced
challenges. This condition occurred because HUD did not routinely evaluate the quarterly
financial submissions for accuracy, completeness, and timeliness. In addition, HUD had no
policy to penalize operators that did not submit accurate and complete data in a timely manner.

Owner Annual Financial Statements Were Not Adequately Assessed or Poor Results
Persisted
Owners must submit annual audited financial statements in accordance with their regulatory
agreement with HUD. HUD used the owner financial statement data to calculate five ratios.
Based on the ratio values and the established thresholds for each ratio, HUD calculated a
performance score between 10 and 100, which established the financial risk for a nursing home.
A score below 60 meant that the nursing home was high risk. For the sampled properties, HUD
generally received these financial statements but in some instances, did not assess these financial
statements. In addition, HUD assessed some financial statements as high risk in multiple years.
For example, the owners of West River Health Care Center submitted annual audited financial
statements yearly for 2010 through 2016, but HUD did not assess these financial statements. In
another example, the owners of Middlesex Health Care Center submitted annual audited
financial statements for 2002 through 2016. HUD did not assess these statements for 2002
through 2012. HUD assessed the financial statements for 2013, 2014, 2015 and 2016 as 33, 10,
10, and 21, respectively. These examples and others described in appendix C show that HUD
did not address poor financial statement scores.

Conclusion
HUD did not ensure that owners, operators, and lenders routinely submitted accurate, sufficient,
complete, and timely financial data on nursing home operations as required. This condition
occurred because HUD did not routinely evaluate the financial submissions for accuracy,
completeness, and timeliness. In addition, HUD had no policy to penalize operators and did not
impose penalties on owners that did not submit accurate and complete data in a timely manner.
Inaccurate, incomplete, conflicting, and untimely data limit HUD’s ability to make informed and
timely decisions on how to help nursing homes ensure that they repay their HUD-insured
mortgages.
Recommendations
We recommend that the Director of Asset Management and Lender Relations, Office of
Residential Care Facilities,
       2A.     Develop and implement computerized controls to flag blank data fields and
               illogical financial data.

       2B.     Develop and implement procedures to require owners, operators, and lenders to
               submit accurate and complete financial data.


                                                17
2C.   Develop and implement internal controls to routinely compare financial data on
      mortgage payments to Multifamily Delinquency and Default Reporting System
      data on mortgage payments and follow up on any conflicting data.

2D.   Develop and implement procedures for referring operators who fail to provide
      required financial statements to the Departmental Enforcement Center.

2E.   Develop and implement metrics to evaluate each nursing home’s financial data
      for changes in utilization, payments, profitability, and solvency (debt service
      credit ratios).




                                      18
Scope and Methodology
We performed our work at our office at 10 Causeway Street, Boston, MA, and HUD’s office at
451 Seventh Street SW, Washington, DC, between April 2017 and May 2018. Our audit covered
the period October 1, 2011, through September 30, 2016, but was expanded to include
information on the selected nursing homes to show a complete picture of HUD’s monitoring
actions from October 1, 1998 to March 8, 2018.
To accomplish our objective, we

•    Reviewed applicable laws, regulations, HUD handbooks, and other HUD policies and
     procedures posted on websites.

•    Obtained and analyzed the regulatory agreements, mortgage notes, management agent
     agreements (if any), and master lease agreements (if any).

•    Evaluated the public land records and corporate filings for the sampled nursing homes in
     comparison with the data filed with HUD.

•    Reviewed electronic and paper correspondences among HUD, lenders, owners, operators (if
     applicable), and management agents (if applicable).

•    Interviewed and followed up with HUD personnel.

•    Selected a focused sample of 18 nursing homes experiencing financial challenges. We
     decided to use a focused sample because we knew enough about the nursing home population
     to identify a relatively small number of items of interest that were higher in risk. We
     identified nursing homes experiencing low utilization, mortgage delinquencies, late
     payments, profitability issues, solvency issues, unpaid principal balances exceeding
     $29 million,32 legal issues, concurrent HUD-insured mortgages, participation in a portfolio, 33
     or any combination of these items. Because this is not a statistical sample, the results of our
     work cannot be projected.

•    Reviewed and analyzed the available information in HUD’s Integrated Real Estate
     Management System, TransAccess System, Multifamily Delinquency and Default Reporting
     System, Financial Assessment Subsystem for the Federal Housing Administration, and
     Online Property Information and Integration Suite.

•    Obtained and analyzed operator financial data in the 232 Healthcare Portal.


32
     Mortgages with a large unpaid principal balance represent greater risk to the insurance fund if there is an
     insurance claim.
33
     A portfolio is two or more nursing homes that have common owners. If one nursing home in a portfolio is in
     default, other nursing homes owned by the same owner may be at greater risk of default.



                                                         19
To achieve our audit objective, we used the computer-processed data from HUD’s Integrated
Real Estate Management System, Multifamily Delinquency and Default Reporting System,
Financial Assessment Subsystem for the Federal Housing Administration, TransAccess data
repository, and Healthcare Portal. These systems rely on data provided to HUD by lenders,
nursing home owners, and nursing home operators participating in the origination or operation of
nursing homes with HUD-insured mortgages. We did not access computer systems and source
documents available at the lenders, owners, operators, and management agents. 34 However, we
determined that it was reasonable to use this information because this is the information that
HUD used to monitor the financial performance of its insured nursing homes.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




34
     Not every nursing home has an operator or a management agent.



                                                       20
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

•   effectiveness and efficiency of operations,
•   reliability of financial reporting, and
•   compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

•   HUD’s enforcement of the regulatory agreement that defines the relationships among HUD,
    the owner, and the operator (as applicable).
•   HUD’s oversight of the financial data that operators submit to HUD each quarter.
•   HUD’s oversight of the audited financial statements that owners submit to HUD each year.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

•   HUD’s actions did not always identify and address the 18 nursing homes’ financial and
    operational challenges (finding 1).
•   HUD did not routinely evaluate the owners’, operators’, and lenders’ financial submissions
    for accuracy, completeness, and timeliness (finding 2).




                                                  21
Appendixes
Appendix A

                  Schedule of Questioned Costs and Funds To Be Put to Better Use


             Recommendation                                                         Funds to be put
                                        Ineligible 1/       Unsupported 2/
                 number                                                             to better use 3/

                      1B                                                           $41,435,357 35
                      1F                                      $8,974,000
                      1G                                                             44,483,000
                      1H              $7,027,289
                      1I                  815,973

                    Totals              7,843,262              8,974,000             85,918,357


1/        Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
          that the auditor believes are not allowable by law; contract; or Federal, State, or local
          policies or regulations.
2/        Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
          or activity when we cannot determine eligibility at the time of the audit. Unsupported
          costs require a decision by HUD program officials. This decision, in addition to
          obtaining supporting documentation, might involve a legal interpretation or clarification
          of departmental policies and procedures.
3/        Recommendations that funds be put to better use are estimates of amounts that could be
          used more efficiently if an Office of Inspector General (OIG) recommendation is
          implemented. These amounts include reductions in outlays, deobligation of funds,
          withdrawal of interest, costs not incurred by implementing recommended improvements,
          avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
          that are specifically identified. By implementing these recommendations, HUD will
          avoid paying more than $41.4 million to lenders for defaulted mortgages, interest, and
          carrying costs, and a nursing home will avoid paying more than $44.4 million for
          ineligible or unreasonable expenses.


35
     This figure includes a deduction for principal and interest at the Mary Scott Nursing Center, 2017-CH-1009,
     issued September 30, 2017, which we reported in a prior audit of that nursing home.



                                                         22
Appendix B

             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




                                 U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

                                                  WASHINGTON, DC 20410-8000
                                                     OFFICE OF HOUSING

             OFFICE OF HOUSING

                                                    August 24, 2018


             MEMORANDUM FOR: Ann Marie Henry, Regional Inspector General for Audit,
                                     1AGA

             FROM: Roger M. Lukoff, Deputy Assistant Secretary, Healthcare Programs, HP


             SUBJECT:                Response to Draft Audit Report, “HUD’s Monitoring of the
                                     Financial Performance of Section 232 Nursing Homes—Office of
                                     Residential Care Facilities” (ORCF)


             This memorandum responds to your draft audit report titled, “Office of Residential
             Care Facilities Did Not Always Have and Use Financial Information to Adequately
             Assess and Monitor Nursing Homes.” ORCF pursues continuous improvement and
             welcomes any information and constructive recommendations that can foster
             improvement. However, ORCF is providing clarification and correction to some of
             the conclusions in the draft report and we respectfully request adjustments to the
             findings and audit recommendations as detailed below.

             Response to Draft Finding 1: “HUD’s Monitoring Was Not Effective in
             Addressing Problems at 18 Financially Challenged Nursing Homes”

             ORCF requests that the finding be reworded. The finding suggests that monitoring
             can address a facility’s financial problems. ORCF emphasizes monitoring, not only
             internally but also by the servicing lender. Also, ORCF continuously looks for
             ways to improve monitoring as part of a broader effort to manage and mitigate
             risks. Ultimately, it is the borrower and its operator who must address financial
             challenges. ORCF’s actions were not consistently documented regarding
Comment 1    financially challenged nursing homes.




                                           23
Ref to OIG
Evaluation
             ORCF’s detailed response to the project-specific conclusions are included in our
             Appendix C Response. Some questionable findings are repeated in numerous
             project summaries, and thus ORCF is also broadly addressing some of those
             immediately below. Moreover, OIG’s narrative discussion in “Finding 1” includes
             various questionable generalizations, which also follow.

             Throughout this finding, the OIG asserts that for many properties financial
             statements were “not assessed” before a project’s risk classification was
Comment 2    determined. Having examined iREMS, ORCF understands how OIG might have
             made this conclusion. A column on the iREMS Financial Statements page entitled
             “Performance Value/Color” in many cases, indicates “Not Assessed” on some or all
             of the borrower’s audited financial statements. In fact, that column is populated
             through an automated calculation designed for multifamily projects; the column
             often will not populate for a skilled nursing facility’s AFS due to its unique
             attributes (e.g., how a lessee operator is reflected in the statement). ORCF does,
             however, utilize the final column on that page to show that the financial statement
             has been reviewed and closed.

             Regarding the assertion that no “root cause analysis” was performed on ORCF
Comment 3    properties, the OIG may have concluded this because the tabs in the iREMS Risk
             Mitigation section entitled “Root Problem/Mitigation Strategy were not populated.”

             ORCF was not involved in designing the “Root Problem/Risk Mitigation” tab,
             which Multifamily apparently requested as part of its transformation-related SPICE
             analysis effort (Score, Prioritize, Investigate, Classify, Execute), and ORCF does
             not know the extent to which the tab still has some Multifamily applicability.
             However, the fact that ORCF does not use that particular tab in no way suggests
             that its AEs fail to consider causes of decline when examining a
             borrower/operator’s mitigation strategy. Former positions of our Risk Mitigation
             Branch include SNF Chief Financial Officer, SNF Director of Nursing, SNF
             Administrator, and DEC analyst. They certainly would not consider the parties’
             mitigation or turnaround strategies without cognizance of how or why performance
             had become weak. As review of iREMS confirms, AEs routinely use the Problem
             Statement and Project History tabs to memorialize discussions and actions.

             As discussed in response to the OIG’s recommendations, ORCF does have very
             well considered procedures for having parties analyze performance problems and
             implement appropriate strategies to address them.

             The OIG’s broad generalizations in Finding 1 include the statement, “Defaulted
             Mortgages Remained in HUD’s Portfolio After the Date of Default.” While
             even a well-managed mortgage insurance program will generally have a small




                                      24
             percentage of mortgages in default, the OIG suggests that ORCF has allowed six
Ref to OIG   defaulted loans to remain in its portfolio for an unwarranted amount of time. In
Evaluation   fact, two of those six loans have now been brought current, whereas insisting on
             earlier assignments would have led to certain claims of nearly $40,000,000.
             Regarding the remaining four properties (with total combined UPB also
Comment 4    approximately $40,000,000), the OIG suggests that one or more other (unspecified)
             alternatives should have been pursued. This conclusion involves the benefit of
             hindsight. Disposition strategies are based on professional evaluations of the
             project data and holding costs available at the time to the Risk Mitigation division.
             Ultimately these strategies do not come without risk, and the overall measure of a
             successful job should acknowledge that a certain fail rate is normal in relation to
             the universe as a whole. The specifics of these loans are addressed in the Appendix
             C Response.

             In its Finding 1 Narrative, the OIG also addresses a partial payment of claim,
             stating “Partial Payment of Claim Did Not Help a Nursing Home.” ORCF
             believes that this assertion is mistaken. Although the facility did experience post-
             PPC financial problems, the record reflects that the PPC decision was supported
Comment 5    when the PPC was made. Moreover, despite the post-PPC difficulties, ORCF
             sustained a much smaller loss than would have occurred (using the OIG’s recovery
             estimate methodology) in the absence of a PPC. The facility is now operational
             and current on its mortgage. Details are contained in the Appendix C Response.

             In its Finding 1 Narrative, the OIG also asserts, “Two Nursing Homes Did Not
             Adequately Complete the Insurance Process.” A key OIG assertion as it relates
             to Jamaica Hospital Nursing Home (namely, that the borrower was not a single
Comment 6    asset entity as required) involves a transaction that occurred before ORCF was
             involved and that did not involve ORCF processes. As the record reflects,
             however, the borrower did subsequently come into compliance with the single asset
             entity requirement. ORCF recognizes that there have been questions with the
             allocation of expenses between the subject facility and a related facility, but as the
             record reflects ORCF is working to address these issues, and the mortgage remains
             current. ORCF requests this assertion be removed; ORCF views this audit as an
             opportunity to consider and improve existing processes, and this concern predates
             ORCF involvement.

             The second of the two nursing homes referenced is Mainland Manor Rehab. The
             OIG asserts that the underwriter recommended that HUD require a marketing plan
             but that one was not forthcoming. That is not accurate, as discussed in the
Comment 7    Appendix C Response. The draft audit goes on to state that "since HUD did not
             take appropriate and timely action to correct issues at Mainland Manor Rehab and




                                              25
Ref to OIG
Evaluation

             Nursing Center," the principal balance was at risk of default. On the contrary,
             HUD's actions diminished the risk of default brought upon by significant market
             changes, as discussed in the Appendix C Response.

             The narrative discussion of Finding 1 goes on to state, “Regulatory Agreements
Comment 8    at Six Nursing Homes Were Not Enforced.” These projects are addressed
             individually in the Appendix C Response, but in general (a) the DEC’s conclusions
             are often inconsistent with ORCF’s and the DEC’s conclusions, and (b) where there
             has been an improper distribution or expenditure, it has been or is being addressed.

             The OIG’s final point in the narrative discussion of Finding 1 is that “HUD
Comment 9    Misclassified Nursing Homes’ Mortgages as Potentially Troubled” and, more
             specifically, that the OIG found nine properties listed as potentially troubled that
             the OIG believes should have been designated as troubled. The OIG discusses two
             of these properties in its Finding 1 narrative section and the other seven in
             Appendix C. In reaching this conclusion, the OIG relies on its review of financial
             statements. ORCF has a very extensive set of criteria for designating a project as
             troubled, which involves consideration of a number of other factors, and the
             determination is not exclusively tied to the financial statements. ORCF discusses
             this in response to the Finding 1 recommendations, below.



             Response to Draft Recommendations in Finding 1



             Draft Recommendation 1A. Work with the owners, lenders operators and
             management agents (as applicable) to develop and implement an action plan for
             potentially troubled and troubled nursing homes. Each plan should include an
             analysis of the root causes of that nursing home’s challenges and define specific
             and measurable steps that address the root causes. Each step should have a definite
             completion date.

             ORCF Response to Draft Recommendation 1A:

             We request this Recommendation be revised. Based on our detailed Appendix C
Comment 10   Response, we believe ORCF has demonstrated that it has effectively worked with
             lenders, operators, and other project parties as appropriate to develop effective
             actions to address troubled and high-risk properties. We agree that a summation of
             plans and action steps should be more consistently memorialized in iREMS.




                                     26
Ref to OIG
Evaluation

             Turning around a troubled or high risk property requires that the AE work closely
Comment 10
             with the lender, and that the lender and HUD seek cooperation from the borrower
             and operator using available leverage while recognizing that breach of the FHA
             loan’s controlling documents is often not the primary concern of either the
             borrower or operator, who may be faced with more impactful CMS penalties,
             licensure issues, marketing concerns, etc. Depending on the circumstances, this
             may involve the lender and HUD discerning not what OIG terms “the root cause”
             but the multitude of converging circumstances leading to the downturn, the parties’
             current operational and financial capacity, and the market and regulatory
             environment.

             A turnaround effort thus involves the plan proffered by the borrower/operator and
             also the strategy of HUD and the lender in the event they determine the borrower’s
             plan is not working. The borrower’s plan may initially emerge only verbally, with
             confirming notation only by the lender or HUD. The HUD/lender strategy involves
             the ongoing evaluation of the borrower’s plan and borrower’s progress, and an
             ongoing weighing of whether further steps to avoid a claim are warranted. If the
             OIG reviews the Problem Statement and Project History screen of projects in the
             draft audit that are currently with the Risk Mitigation Division, OIG will see
             illustrations of these ongoing efforts.

Comment 11   ORCF has a very detailed Monthly Surveillance Report and accompanying punch
             list that guide AE’s in identifying root causes and addressing emerging risks and
             provides criteria for referring higher risk projects to the Turnaround Team. ORCF
             also has a newly drafted Turnaround Punchlist that provides an even more
             prescriptive approach for evaluating the seriousness of Troubled projects referred to
             that team and walks the AE through specific action and documentation steps that
             we believe address OIG’s overall concern. ORCF is confident this punchlist will
             help assure broad consistency in action steps while also allowing for the uniqueness
             of each project’s circumstances. Although ORCF has not yet implemented that
             Punchlist, ORCF would be amenable to an OIG recommendation for its prompt
             implementation.

             ORCF also would like to highlight that our prescriptive approach is supplemented
             and enhanced by guidance on specific actions that often involve troubled and high
             risk projects. Examples include:

                 •    CMS Notification of Imposition Process
                 •    REAC-FASS – Late filer protocol
                 •    REAC-PASS – Process for Elective Referrals to DEC




                                    27
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                 •    REAC-PASS – Below 31 Pre- and Post-Site Visit review punch list
                 •    REAC-PASS – 31 and Over Inspection Score review punch list
                 •    REAC-PASS – Notice of Violation Letters to Borrower/Operator and AE
                      Procedures
                 •    REAC Guidance for Lenders
                 •    Risk Notification & Improvement Plans – Lender’s & Operator’s risk
                      notification docs


             Additional guidance is contained in the AE Standard Work Reference Guide, which
             is being provided to the OIG. Thus, ORCF has guidance covering the continuum of
             risk conditions on a property that is not assigned to the Risk Mitigation Branch.

             ORCF does recognize the value of assuring overall consistency with how plans are
             memorialized. Towards that end, ORCF would propose that Draft
Comment 12   Recommendation 1A be revised to read as follows:

                      To help assure close attention to high risk properties, implement the newly
                      drafted Troubled Property Punchlist. Continue to train AEs on punchlists
                      and procedures related to servicing as needed, including memorializing
                      action steps and target dates in iREMS for addressing project challenges.



             Draft Recommendation 1B: Implement the action plan for the six defaulted
             nursing homes to protect HUD’s investment of $74,839,181. This amount
Comment 13   represents the collective funds to be put to better use for these nursing homes.
             Appendix E lists the funds to be put to better use by nursing home.

             ORCF Response to Draft Recommendation 1B:

             We request this recommendation be reworded for clarity. In particular, the
             recommendation suggests that currently no project-specific plan is being
             implemented for these six projects. In fact, ORCF has worked and continues to
             proactively work to mitigate the risk at these projects, including active involvement
             of and reliance on the Departmental Enforcement Center where appropriate.
             Moreover, two of these six properties, accounting for approximately half of the
             UPB cited by OIG, have been brought current.

             In ORCF’s response to the detailed conclusions of fact set forth in Appendix C,
             ORCF corrects and provides context for many of the OIG’s conclusions upon
             which this recommendation is based and summarizes each project’s current status.




                                     28
Ref to OIG
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             ORCF would suggest the recommendation be reworded as follows:

                     Review and update the action plan for each of the six defaulted projects,
                     edit the plan as appropriate to assure that it is specific and is consistent
                     with the current Troubled Properties Punchlist, and continue to implement
                     the plan as revised.

             Draft Recommendation 1C: Develop and implement policies and procedures to
             address delinquent or defaulted mortgages that would not benefit from refinancing.

             ORCF Response to Draft Recommendation 1C:

             We request this recommendation be removed. These matters are addressed in the
Comment 14   extensive policies referenced in response to Draft Recommendation 1A. Additional
             examples would relate to change in parties or to collateral, including:

                 •   Change of Participant/Ownership (formerly TPA Lite/Modified/Full) –
                     Lender checklist, Lender narrative, and AE review punch list
                 •   Change of Operator (formerly part of TPA docs) – Lender checklist,
                     Lender narrative, and AE review punch list
                 •   Change of Management Agent (formerly part of TPA docs) – Lender
                     checklist, Lender narrative, and AE review punch list
                 •   Change in Collateral/Capital Improvements – Lender checklist and
                     narrative and AE review punch list


             Draft Recommendation 1D: Enforce its regulatory agreements and take all
             measures available to HUD for any nursing home that does not implement its
             specific defined, measurable steps by its completion date.

             ORCF Response to Draft Recommendation 1D:

             This recommendation cannot be acted upon appropriately as currently worded. We
             request several edits:

                 •   Reference to Departmental Enforcement Center. HUD enforcement of a
Comment 15           regulatory violation occurs through the Departmental Enforcement Center,
                     generally via OGC representatives working with the DEC. Directing
                     ORCF to “enforce its regulatory agreements” does not accurately reflect
                     the responsible enforcement party and therefor this should be edited
                     accordingly.




                                    29
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Evaluation

                 •    The language “all measures available” is overly broad in the context of
                      mutually exclusive alternatives and since prudent risk mitigation can
                      sometimes call for ongoing revision to a contemplated course of action.
                 •    ORCF requests amending Recommendation 1D to state:

                               Refer to the Departmental Enforcement Center regulatory
                               agreement violations when, within 30 days of HUD having
                               identified the violation, the party committing the violation has
                               neither (a) resolved the violation nor (b) provided ORCF an
                               acceptable plan for resolving the violation. When an acceptable
                               plan (or incremental elements of the plan) are not timely met,
                               evaluate whether a DEC referral is appropriate or whether, for
                               reasons stated in the internal record, a revision to the plan of
                               resolution is warranted.

             Draft Recommendation 1E: Review and revise policies and procedures for
             making partial payments of claims to check that each decision to make a partial
             payment of claim ensures that the payment restores the subject nursing home to
             financial viability to avoid a repeat of the situation that led to the loss on Hebrew
             Home.

             ORCF Response to Draft Recommendation 1E:

             We request this recommendation be removed for several reasons. First, ORCF now
             has a thorough detailed punchlist addressing procedures for partial payments of
             claims, a punchlist aht post-dates the date of this PPC and is available to the OIG.
Comment 16   Second, this PPC did in fact follow established guidelines and was appropriate
             based on information then available. The file supports the underwriting conclusions
             then reached.

             Additionally, the OIG recommendation appears based on an inference that in not
             warranted. The OIG infers that if a project does not fully perform post-PPC, then
             the approval of the PPC was made in violation of program requirements. Yet,
             nothing in the CFR or other policy publications suggests this, and underwriting
             findings for a PPC are necessarily prospective. In this regard, per the CFR
             language, one of the findings on which a decision to make a PPC is based, is:

                      The relief resulting from partial payment, when considered with other
                      resources available to the project, would be sufficient to restore the
                      financial viability of the project.
                      (24 CFR 232.256(b)(2) (emphasis added)




                                     30
Ref to OIG
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             Finally, ORCF notes that the draft report cites 24 CFR 207.258b with respect to
Comment 17
             partial payment of claims. If retained, this reference should be amended to be 24
             CFR 232.256, a provision published to deal specifically with partial payments of
             claims on Section 232 loans.



             Draft Recommendation 1F: Require Jamaica Hospital Nursing Home to provide
             support for $8,974,000 paid to its related company. Any amount that the owner
             cannot support as reasonable in price and necessary to the nursing home should be
             repaid to the nursing home.
Comment 18
             ORCF Response to Draft Recommendation 1F:

             Although the facts presented by the OIG are incomplete, ORCF concurs in general
             with the recommendation that the mortgagor must be able to support fees paid for
             services to the IOI hospital.



             Draft Recommendation 1G: Require Jamaica Hospital Nursing Home to provide
             support for $44,483,000 in accounts payable. Any amount that the owner cannot
             support as reasonable in price and necessary to the nursing home should be
             removed from the accounts payable.

             ORCF Response to Draft Recommendation 1G:

             Although the facts presented by the OIG are incomplete, ORCF concurs in general
             with the recommendation that the mortgagor must be able to support fees charged
             as accounts payable to the IOI hospital.



             Draft Recommendation 1H: Require the owners of Bishop Wicke Health and
             Rehabilitation Center, Plaza Village Senior Living, Golden Hill Health Care
Comment 19   Center, Immanuel Campus of Care, and their related companies to reimburse the
             nursing homes for the ineligible expenses of $7,027,289.

             ORCF Response to Draft Recommendation 1H:

             We request this recommendation be removed. ORCF disagrees with the
             recommendation as to each property. Specifically:




                                    31
Ref to OIG
Evaluation

                 •    Bishop Wicke Health and Rehabilitation Center—ORCF disagrees with
                      this recommendation. See explanation in Appendix C Response, including
                      explanation of DEC referral and DEC conclusion.
                 •    Plaza Village Senior Living-- ORCF disagrees with this recommendation.
                      See explanation in Appendix C Response, including explanation of DEC
                      referral and DEC conclusion.
                 •    Golden Hill Health Care Center-- ORCF disagrees with this
                      recommendation. See explanation in Appendix C Response, including
                      explanation of DEC referral and DEC conclusion.
                 •    Immanuel Campus of Care-- ORCF disagrees with this recommendation.
                      See explanation in Appendix C Response, including explanation of DEC
                      referral and DEC conclusion.


             Draft Recommendation 1I: Require Shawnee Christian Center to return 27 beds
             to operation or pay down the mortgage by $815,973.

             ORCF Response to Draft Recommendation 1I:

             We request this draft recommendation be removed. The factual conclusions on
             which this is based are erroneous, as fully explained in the ORCF response to
Comment 20   Appendix C. The number of licensed beds did not change, and the conversion from
             double occupancy to single occupancy rooms was accounted for in the loan
             modification.



             Draft Recommendation 1J: Define the troubled and potentially troubled
             classifications for nursing homes and develop specific measures to identify when
             and how nursing homes are classified.

             ORCF Response to Recommendation 1J:

             We request this recommendation be removed. ORCF has a very thorough system
Comment 21   in place for determining whether a project should be designated troubled and
             transferred to the Risk Mitigation Branch. “See Transfers to the Risk Mitigation
             Branch” in the AE Reference Guide. Additionally, ORCF has the Monthly
             Surveillance Report, which provides AEs with information on key variables, and a
Comment 11   punchlist provides detailed guidance for using that data in evaluating a property’s
             risk rating. See more extensive discussion in response to Recommendations 1A
             and 1C, above




                                    32
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             Draft Recommendation 1K: Develop and implement policies and procedures to
             revisit the classifications at least annually.
Comment 22   ORCF Response to Recommendation 1K: We request this recommendation be
             removed as ORCF is monitoring its properties for trends and risk classification on
             an ongoing basis, not merely annually.



             Draft Finding 2: HUD Did Not Hold Owners, Operators, and Lenders
             Accountable for Submitting Inaccurate, Incomplete, Conflicting and Untimely
             Financial Data

Comment 23   ORCF requests that the reference to owners be removed from this finding. The
             portion of this finding related to owners is the OIG’s determination that “Owner
             Annual Financial Statements Were Not Assessed or Poor Results Persisted.”
             The determination rests heavily on the conclusion that ORCF does not assess owner
             financial statements. As noted in ORCF’s response to Finding 1, ORCF
             understands how OIG might have reached this conclusion, but the conclusion is not
             accurate. A column on the iREMS Financial Statements page entitled
             “Performance Value/Color” in many cases, indicates “Not Assessed” on some or all
             of the borrower’s audited financial statements. In fact, that column is populated
             through an automated calculation designed for multifamily projects; the column
             often will not populate for a skilled nursing facility’s AFS due to its unique
             attributes (e.g., how a lessee operator is reflected in the statement). ORCF does,
             however, utilize the final column on that page to show that the financial statement
             has been reviewed and closed.

             With regard to the Finding 2 discussion of owner financial statements and the
             conclusion that in some instances “Poor Results Persisted,” ORCF is of the opinion
             that responses to poor borrower performance are much more closely within the
             scope of Finding 1 and should be not be also included as part of Finding 2.

             Obtaining timely and accurate operator financial statements is, however, a
Comment 24   challenge that needs to be addressed, and ORCF welcomes the OIG’s role in
             illuminating this issue.

             We believe it is worthy of calling out that until ORCF itself initiated significant
             regulatory reform (the “Accountability Rule”), no operator had an obligation
             (separate from a borrower role) to report financial data to either the lender or HUD.
             Through regulatory reform, ORCF changed that. The magnitude of that change has




                                     33
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Evaluation


             been hugely beneficial to our risk monitoring and management capability, but we
             acknowledge and concur that it is essential that the quarterly operator data received
             is accurate and reliable and that we continue our improvement efforts towards that
             end.



             Draft Recommendation 2A: Develop and implement computerized controls to
             flag blank data fields and illogical financial data.

Comment 25   ORCF Response to Draft Recommendation 2A: ORCF requests that this
             recommendation be combined with Recommendation 2B because the two processes
             are inextricably related.

             Implementing computerized controls and flags appears to be the most effective way to
             ensure that lenders (servicers) are submitting “accurate and complete financial data.”
             Overall, we agree with the recommendation and have already proposed several
             computerized enhancements for the Healthcare Portal that would evaluate the data
             inputs and immediately provide feedback to the lenders about numbers that are
             missing or fall outside expected variance and would provide them with an opportunity
             for correction.


             Draft Recommendation 2B: Develop and implement procedures to require
             owners, operators, and lenders to submit accurate and complete financial data.

             ORCF Response to Draft Recommendation 2B: We request that
Comment 25   Recommendations 2A and 2B be combined, or that 2B be eliminated; the
             successful implementation of 2A will help to ensure that lenders submit more
             accurate and complete financial data by providing instant feedback as mentioned
             previously. We suggest they be combined to read:

                      Develop and implement computerized controls to flag blank dta fields and
                      illogical financial data to ensure owners, operators, and lenders submit
                      accurate and complete financial data.


             Draft Recommendation 2C Develop and implement computerized controls to flag
             blank data fields and illogical financial data to ensure owners, operators, and
             lenders submit accurate and complete financial data.




                                     34
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Comment 26   ORCF Response to Draft Recommendation 2C: ORCF requests this
             recommendation be removed. This recommendation cannot be implemented as
             presented. The quarterly financial statements submitted are of the operator
             (typically lessee-operator), and the operator is generally making a lease payment
             rather than a mortgage payment. The financial statements of the borrower entity
             itself are typically only annual and are submitted ninety days after the end of the
             borrower’s fiscal year. In addition, ORCF utilizes the Multifamily Delinquency
             and Default Reporting (MDDR) system data at least twice monthly to evaluate late
             payments and defaults and there is little value to be derived from comparing this
             data to other sources as it is the official record of late mortgage payments for HUD.



             Draft Recommendation 2D: Develop and implement policies and procedures to
             ensure that owners and operators pay penalties for failing to provide accurate and
             complete data in a timely manner.

Comment 27   ORCF Response to Draft Recommendation 2D: ORCF requests this
             recommendation be revised. Neither ORCF nor Housing more broadly is vested
             with the authority to impose civil money penalties. Moreover, referrals to the DEC
             already occur per established protocols with respect to owner financial statements.
             Accordingly, this draft recommendation should be amended to state:

                      Develop and implement procedures for referring to the Departmental
                      Enforcement Center operators who fail to provide required financial
                      statements.

             Draft Recommendation 2E: Develop and implement metrics to evaluate each
Comment 28   nursing home’s financial data for changes in utilization, payments, profitability,
             and solvency (debt service credit ratios).

             ORCF Response to Draft Recommendation 2E: ORCF requests this
             recommendation be removed. ORCF has already developed metrics to evaluate
             each nursing home’s financial data in the form of its Monthly Surveillance Report,
             also referenced as the Risk Surveillance Dashboard (RSD). The dashboard is
             posted to the ORCF Asset Management SharePoint and is refreshed monthly. The
             RSD is compiled from several data sources, including the quarterly operator
             statements from the Portal, the MDDR (delinquency) report, REAC physical
             scores, CMS Star Ratings, Special Focus Facility and Critical Tags. The RSD
             calculates debt service coverage (DSC) ratios from the Portal data and uses this as a
             key metric for determining project solvency. The RSD calculates an overall score




                                     35
                          OIG Evaluation of Auditee Comments


Comment 1.   HUD acknowledged the findings and recommendations. HUD provided an
             appendix and additional supporting documentation, which we evaluated and made
             the necessary revisions to our report. This information can be made available
             upon request.

             We did not reword the finding because HUD works in partnership with the owner
             and lender to ensure each FHA-insured mortgage is financially and operationally
             strong, that each property provides a safe, quality place of residence, and that the
             HUD-insured mortgage remains viable for the term of the mortgage. While the
             borrower is responsible for repaying the HUD-insured mortgage, HUD faces the
             risk of default for the duration of the HUD insured mortgage and must monitor
             the operation of the nursing home to minimize that risk and ensure the viability of
             the HUD-insured mortgage. HUD agreed that it did not consistently document its
             actions. Without a proper history of the actions taken to address an issue, HUD’s
             ability to address financial challenges at a nursing home and minimize a claim is
             diminished.

Comment 2.   HUD’s assertion that it uses financial data that was assessed does not address the
             finding that its monitoring was not effective. We did not rely on the column
             “Performance Value /Color” in the Integrated Real Estate Management System,
             but rather determined through our complete assessment of the available data that
             the assessment, even if it were done, was not sufficient.

Comment 3.   We did not use the “Root Problem/Risk Mitigation” tab as the basis for our root
             cause analysis. Again, our conclusion was based on an assessment of all available
             data. HUD’s failure to memorialize discussions and actions could explain the
             lack of this information.

Comment 4.   The two borrowers whose loans have been in default for the shortest duration
             have made payments to bring their loans current in July 2018. At March 8, 2018,
             these loans for Medford Care Center and Prospect Heights Care Center totaled
             $38,819,705. HUD’s loss ratio has been 80% of the unpaid principal balance.
             We adjusted recommendation 1B by $31,055,764, which is the estimated loss for
             Medford Care Center and Prospect Heights Care Center (80% of $38,819,705
             unpaid principal balance). However, HUD did not address the other four
             defaulted mortgages whose delinquencies were at least 2 years and, in one case,
             7 years.
             HUD’s response also did not address the $12 million in interest and carrying costs
             that became its responsibility because it delayed the assignment at six defaulted
             loans. We adjusted recommendation 1B by $2,348,060, which is the interest and


                                              36
             carrying costs for Medford Care Center and Prospect Heights Care Center. HUD
             remains responsible for more than $10 million in interest and carrying costs for
             the other four properties, as of February 2018. As HUD points out, its strategy of
             delaying assignments has risks. These risks include the unpaid principal balance
             of the loans that HUD recognizes and the interest and carrying costs that become
             HUD’s responsibility due to its strategy of delaying assignment. The longer a
             mortgage’s assignment is delayed the higher the amount of the outstanding
             interest and carrying costs and most likely, the greater chance of a claim.
             Additionally, we examined the appendix and supporting documentation that HUD
             provided. This information did not change our conclusions regarding the four
             defaulted mortgages.
Comment 5.   We disagree with HUD’s belief that our Finding 1, which stated that Partial
             Payment Did Not Help a Nursing Home Return to Viability, was a mistake. HUD
             asserts that Hebrew Homes experienced financial challenges after the partial
             payment of claim in 2015; however, Hebrew Homes experienced financial
             challenges for the preceding 14 years. HUD identified this in its consistent low
             scores for the owner’s audited financial statements from 2001 to 2014. HUD also
             did not have a smaller loss on the mortgage for Hebrew Homes. For Hebrew
             Homes, HUD had two loans in 2016–a HUD-insured, first loan for $11 million
             and a second loan directly with HUD for another $11 million. In December 2016,
             the bankruptcy court awarded HUD $1.3 million and discharged the second loan,
             so HUD lost 88 cents on every dollar of unpaid principal balance. This is more
             than the 80 cents on every dollar that is HUD’s average loss in other sales of
             nursing home loans. The bankruptcy court also sold the nursing home to a new
             entity who, with HUD’s agreement, assumed the HUD-insured, first loan then
             valued at more than $10.7 million. HUD stated that the transfer of the first loan to
             a new entity means that HUD will not have to pay on that HUD-insured
             mortgage; however, the July 2018 surveillance report identified that Hebrew
             Homes, operating under the new owner, was troubled with an unpaid principal
             balance of more than $10.1 million. Since the transferred mortgage was
             HUD-insured, HUD may have to pay another insurance claim for this troubled
             nursing home.

Comment 6.   HUD is responsible for HUD-insured mortgages for the duration of the mortgage
             insurance up to 40 years. While HUD has changed its organizational structure,
             the current organizational structure is responsible for nursing homes from prior
             organizational structures and addressing any challenges created. Also, HUD
             requested that the assertion that the owner did not become a single asset entity be
             removed. We did not remove it because the audit showed that the hospital and
             nursing home have behaved as a consolidated entity through 2016, even though
             the nursing home legally established itself as a single asset entity in 2009, as
             required. The nursing home and hospital demonstrated this behavior by allowing
             the hospital to charge expenses to the nursing home using estimated costs.
             Additionally, in 2016, the independent public auditors for this nursing home



                                              37
               reported their concerns about the nursing homes’ ability to continue to operate. If
               the owner defaults, HUD will face a claim of more than $36.5 million.

Comment 7.     While we note the activities HUD has undertaken, they did not return this nursing
               home to a financially sound operation. Also, we did not change our conclusion
               because HUD did not provide any evidence of a marketing plan.

Comment 8.     While we agree that working across divisions may pose challenges, HUD must
               ensure that its collective actions protect its investments. HUD did not provide
               evidence that improper distributions or improper expenditures were returned to
               the nursing homes. The supporting documentation that HUD provided did not
               change our conclusions.

Comment 9.     We did not rely solely on a review of financial statements in reaching our
               conclusions. We also reviewed regulatory agreements, mortgages, problem
               statements, project histories, and correspondence between HUD, lenders, owners,
               operators, and management agents. HUD advised that its criteria to determine
               whether a project is troubled included regulatory agreement violations, but it did
               not classify projects with regulatory agreement violations as troubled.

Comment 10. HUD’s appendix and supporting documentation did not provide a basis for
            changing recommendation 1A. While a summation of plans and actions in a
            consistent location in HUD’s Integrated Real Estate Management System is a
            good starting point, HUD needs to establish and implement defined steps with
            defined completion dates and consequences to owners who do not return to
            paying their mortgage on time. Again, our assessment was not based solely on
            financial statement analysis.

Comment 11. While the surveillance report is generated monthly, some of the factors used in its
            creation come from annual reports and rely on the owners and operators promptly
            reporting changes in their circumstances. As HUD pointed out, owners and
            operators are not always prompt at identifying and reporting changes in their
            circumstances. While HUD has a number of punch lists to track the status of a
            nursing home, the existence or addition of a punch list does not return a nursing
            home owner to paying the mortgage on time or hold a nursing home owner
            accountable for not paying a mortgage on time. In addition, there is no definitive
            criteria for the classifications of troubled or potentially troubled or timeframes for
            review and updating.

Comment 12. We did not revise recommendation 1A as HUD suggested. Implementing a
            newly-drafted troubled property punch list is a starting point. HUD also needs to
            ensure that each plan has defined steps, defined completion dates, and defined
            consequences for owners who do not complete steps on time. In addition, these
            actions need to be documented to ensure corrective action is taken and in a timely
            manner.



                                                38
Comment 13. We did not revise recommendation 1B as HUD suggested. We agree that HUD
            has taken action on the defaulted nursing homes. However, without a definitive
            action plan we cannot comment on the plan or its progress. In addition, for the
            remaining four defaulted mortgages, these mortgages have been in default for
            anywhere from 2 to 7 years. We revised the value in recommendation 1B to
            recognize that the owners of Medford Care Center and Prospect Heights Care
            Center brought their mortgages current. We reduced recommendation 1B by
            $31,055,764, which was the estimated loss for Medford Care Center and Prospect
            Heights Care Center. We also reduced recommendation 1B by $2,348,060, which
            was the interest and carrying costs for Medford Care Center and Prospect Heights
            Care Center.

Comment 14. We did not remove recommendation 1C as HUD suggested. HUD’s checklists
            address tasks associated with nursing homes and can be useful tools in specific
            situations. These checklists do not specifically address delinquent or defaulted
            mortgages that would not benefit from refinancing.

Comment 15. We have amended recommendation 1D to include the Departmental Enforcement
            Center. The enforcement measures available are time sensitive and the Office of
            Residential Care Facilities and the Departmental Enforcement Center will need to
            work together with parallel proceedings to ensure that HUD’s interests are
            properly protected.

Comment 16. HUD asserts that the partial payment of claim followed guidance and
            recommendation 1E be removed. However, our concern with the partial payment
            of claim was the fact that it did not result in the financial viability of the project
            for fourteen months. Even though HUD disagreed, they provided a new punch
            list to amend its guidance. While this punch list addressed financial viability, it
            does not identify anything different from the existing handbook.

Comment 17. We amended the reference from 24 CFR 207.258b to 24 CFR 232.256; which is a
            provision published to deal specifically with partial payments of claims on
            Section 232 loans.

Comment 18. For both recommendations 1F and 1G, HUD states that our facts are incomplete,
            but agreed with the recommendation. HUD did not state what facts it believes are
            missing; however, we believe that the significant facts have been presented in the
            audit report.

Comment 19. We did not remove or modify recommendation 1H as HUD suggested because
            HUD did not provide sufficient evidence to change our assessment for these
            properties.




                                                39
Comment 20. We did not remove recommendation 1I as suggested. The regulatory agreement
            does not reference the number of beds licensed. Converting rooms from double
            occupancy to single occupancy, without prior HUD approval, is a violation of the
            regulatory agreement. HUD did not provide evidence that it waived this
            requirement.

Comment 21. We did not remove recommendation 1J as suggested because our report points out
            nine instances where HUD’s very thorough system classified nursing homes as
            potentially troubled, when each property had significant challenges that should
            have classified it as troubled.

Comment 22. We did not remove recommendation 1K as suggested because HUD agreed that it
            did not consistently document its actions regarding the monitoring of its
            properties. HUD revisiting its classification at least annually can add to a history
            of HUD’s evaluations of a nursing home and minimize the claims. HUD can use
            its existing Integrated Real Estate Management System to record and track these
            classifications and the reasons for any changes.

Comment 23. Our conclusion did not rely solely on the owner financial statements. Again, it
            was based on an assessment of all available data. We have revised the report to
            state “Owner Annual Financial Statements Were Not Adequately Assessed or
            Poor Results Persisted.” However, HUD needs to address the limitations of its
            system to record its assessment of the owner’s annual financial statements. For
            example, the independent public auditors for Jamaica Hospital Nursing Home
            reported their concerns about the nursing homes’ ability to continue to operate in
            2016. If the owner defaults, HUD will face a claim of more than $36.5 million.
            HUD’s opinion that responses to poor borrower performance aligns with Finding
            1 does not address how HUD is holding owners and operators accountable for
            inaccurate, incomplete, conflicting, and untimely Financial Data; therefore, we
            did not amend the audit report.

Comment 24. Until HUD amended the regulations, an operator that was independent of the
            owner had no obligation to report operator financial data to HUD. This change
            benefits HUD’s ability to monitor the risk of HUD-insured mortgage default, but
            it is essential that operator report accurate and reliable quarterly operator financial
            data. HUD acknowledged and concurred that it is essential that HUD receives
            accurate and reliable quarterly operator data. HUD stated that it continues its
            efforts to improve its use of the operator financial data. In addition, HUD needs
            to continue to monitor the changes in the industry and identify other regulatory
            changes needed to protect its investment.

Comment 25. We disagree with the combination of the two recommendations.
            Recommendation 2A deals with developing computerized controls to assess the
            data while 2B deals with developing procedures to require the submission of
            accurate and complete data.



                                                40
Comment 26. We did not remove recommendation 2C as requested. HUD insured mortgages
            where the owner is the operator and HUD insured mortgages where the owner and
            operator are separate entities. Since operators do not make mortgage payments,
            there should be no confusion. When the operator is the owner, the owner submits
            the quarterly financial statements. The owners’ quarterly financial statements
            should equal the total of the three monthly payments in the Multifamily
            Delinquency and Default Report.

Comment 27. We have updated the recommendation to develop and implement procedures for
            referring operators who fail to provide required financial statements to the
            Departmental Enforcement Center.

Comment 28. We did not remove recommendation 2E as requested. While the surveillance
            report is generated monthly, some of the factors used in its creation come from
            annual reports and rely on the owners and operators promptly reporting changes
            in their circumstances. With accurate, systemic, quarterly operator data, HUD has
            access to quarterly utilization, payments, profitability, and solvency at the
            operator level. This is a powerful tool available to HUD to allow HUD to begin
            its intervention.




                                             41
Appendix C
                                   Analysis of Individual Nursing Homes
As part of our audit, we examined the effectiveness of HUD’s actions to address financial
challenges at 18 nursing homes. We examined HUD’s actions to address the nursing homes’
financial challenges regarding utilization, payments, profitability, and solvency. To accomplish
this objective, we examined quarterly operator financial data, owners’ annual financial scores,
HUD’s electronic and paper correspondence, public land records, corporate filings, regulatory
agreements, mortgages, mortgage notes, management agent agreements, and master lease
information. 36

HUD insured 2,458 mortgages for nursing homes that had a collective unpaid principal balance
of more than $19.6 billion as of March 8, 2018. For each insured mortgage, HUD conducted a
risk assessment in which it determined the riskiness of each mortgage and entered this
assessment into its Integrated Real Estate Management System. In this assessment, HUD
evaluated utilization, defaults, delinquencies, and the personal knowledge of its staff to
determine the risk associated with each mortgage. Using this assessment, HUD identified 985
troubled or potentially troubled nursing homes with an unpaid principal balance of more than
$7.7 billion as of March 8, 2018.


                              HUD nursing home mortgage investment
                                                   (in millions)
                                            $217                       $787
                                          17                                  118




                                                                                         $6,949

                                                                                           867


                  $11,665

                    1,456



                            Troubled    Potentially troubled       Not troubled     Not classified




36
     Not every nursing home has an operator or a management agent.



                                                          42
Utilization is the percentage of beds filled in relationship to the number of beds available.
Nursing homes generate revenue by filling beds with patients, caring for those patients, and
billing responsible parties for the patients’ care. Nursing homes do not generate revenue if they
do not fill their beds. Utilization may not exceed 100 percent because nursing homes may not
fill beds with more than one patient at a time. For an insurance claim, regulations 37 define
default as the failure of the owner to make any payment due under the HUD-insured mortgage.
If a default continues for a minimum of 30 days, the lender may receive the benefits of the HUD
insurance identified in the mortgage. 38 Regulations 39 allow a nursing home to cure a default with
a payment.

Profitability measures whether a nursing home reported that it earned a profit in its audited
financial statements. HUD’s regulatory agreement with each nursing home requires owners to
submit annual audited financial statements. Nursing homes that do not earn a profit have a
greater risk of not paying their mortgage on time as required. Solvency, sometimes called debt
service credit ratio, measures a nursing home’s ability to meet its long-term financial obligations,
such as a HUD-insured mortgage. Solvency is essential to staying in business as it represents a
nursing home’s ability to continue operations into the near future. Solvency values greater than
one identify that a nursing home’s assets exceed its debt obligations and it has sufficient assets to
pay its debts.

HUD regulations 40 require operators to submit financial data quarterly within 60 calendar days
after the end of the quarter, except for the quarter that ends the fiscal year. For the final fiscal
yearend, HUD requires operators to submit financial data within 90 calendar days. When a
nursing home owner is the same legal entity as the operator, the owner must submit the operator
financial data.

In addition to the owner-operator structure, HUD has nursing homes that are part of a master
lease. HUD approves mortgages for individual properties. However, HUD noticed that an
increasing number of mortgages had a common or corporate ownership structure, which
significantly increased the concentration risk should the ownership entities encounter financial,
market, or legal risks. To counteract these additional risks, HUD began requiring owners of
multiple properties to provide additional support in the form of a master lease. HUD uses
portfolios to indicate a group of nursing homes with common ownership. HUD has 314
portfolios of nursing homes with 2,282 mortgages, while its total inventory 41 is 2,458 mortgages.
Because HUD set the regulatory environment at the initial closing of the HUD-insured mortgage,
some ownership entities have mortgages that are part of a master lease, while other mortgages
with the same ownership entity are not part of the master lease. The master lease structure
allows any financial deficiency at one facility to be supported by income from other facilities
included in the master lease. However, a master lease does not pool the assets of all nursing


37
     This definition is available at 24 CFR 207.255(a)(1)(i).
38
     This regulation is available at 24 CFR 207.255(a)(3).
39
     This regulation is available at 24 CFR 207.256a.
40
     This regulation is available at 24 CFR 232.1009.
41
     This inventory includes skilled nursing facilities, assisted living facilities, and board and care facilities.



                                                              43
homes for underwriting a single mortgage loan for multiple nursing homes. The mortgage for
each nursing home must meet HUD’s underwriting standards on its own merit.

Mary Scott Nursing Center, Dayton, OH
In 2001, HUD insured a $5 million mortgage for Mary Scott 42 Nursing Center, a 108-bed
nonprofit nursing home in Dayton, OH. In 2012, the owner defaulted on its HUD-insured
mortgage, but HUD did not classify this nursing home as troubled until October 2014. This
nursing home was selected because of its delinquency of more than 1,000 days, 5 years of low
utilization and insolvency, and 4 years of unprofitability.


                         Profit or (loss)                                                   Solvency
                                                                      $2.00
       $500,000                                                                    $1.00      $1.00     $1.00    $1.00    $1.00
                                                            $77,557
                                                                      $1.00
              $0
                                                                                                                         $0.92
                                                                      $0.00
      ($500,000)                                                                                                 $0.39
                                                       ($311,229)
     ($1,000,000)
                                                                      ($1.00)                                              Solvency
                                                                                ($0.17)    ($0.38)
                    ($783,648) ($872,409)                                                             ($0.95)
                                            ($1,054,770)              ($2.00)
                                                                                                                           Baseline
     ($1,500,000)
                        2011     2012       2013     2014     2015              2011       2012       2013      2014       2015


HUD did not take action when it did not get data in a timely manner, and changes in lenders’
complicated turnaround and delaying assignment increased HUD’s future outlay.

HUD did not take action when it did not get data in a timely manner. HUD did not receive
information from the lender or the owner in a timely manner. The owner and lenders explored
obtaining a new loan, refinancing the existing loan, or modifying the existing loan. When the
correction plan involves a loan, the timeline to correct the situation is dependent on the timeline
for the lender to complete the refinancing. The owner and lenders had not refinanced or
modified the existing loan in 5 years. HUD also had not foreclosed on the defaulted loan in 5
years. Additionally, the operator financial data for this nursing home were inaccurate,
incomplete, conflicting, and late.

Changes in lenders complicated HUD’s ability to obtain information. HUD works through the
lenders to monitor properties. Changes in the lender can complicate the turnaround of a nursing
home, as each new lender must become familiar with the nursing home, its challenges, and the
actions already taken. HUD insured the mortgage with the first lender in 2001. In 2005, the first
lender assigned the mortgage to a second lender, which assigned it to a third lender in 2008.
That lender assigned it to a fourth lender in 2013. HUD’s insured mortgage for this nursing
home did not limit transfers by lenders.




42
       We issued Mary Scott Nursing Center, Dayton, OH, audit report number 2017-CH-1009 on September 30, 2017.



                                                                        44
HUD is responsible for the accumulating interest and carrying costs in addition to the unpaid
principal balance. The owner defaulted on December 1, 2012. The lender elected to delay
assignment and work with the owner to remedy the default. HUD approved this action and
delayed assignment from 2012 to 2018. While delaying assignment delays when HUD pays an
insurance claim, HUD assumes responsibility for the unpaid interest and carrying costs,
including the mortgage insurance premiums, taxes, and insurance. The interest and carrying
costs continue to accrue until the owner pays the delinquent amounts or HUD pays an insurance
claim.
HUD did not take appropriate and timely action to correct issues. As a result, the mortgage
balance was at a high risk of being assigned to HUD. If the owner did not make the mortgage
payments, HUD would have to pay the lender more than $3.5 million in unpaid principal balance
as of March 8, 2018. Additionally, HUD would have to pay $734,794 in delinquent interest,
$53,501 in mortgage insurance premiums, $5,643 in taxes, and $228,474 in insurance according
to figures as of February 2018.

Immanuel Campus of Care, Peoria, AZ
In 2006, HUD insured a $14.8 million mortgage at the 338-bed nursing home, Immanuel
Campus of Care, located in Peoria, AZ. In addition to the nursing home, the property has 190
assisted living units on the same site. This nursing home defaulted in July 2012, but HUD did
not classify it as troubled until October 2016. This nursing home was selected because of 3 years
of utilization below 80 percent, its delinquency of more than 1,000 days, 5 years of
unprofitability and solvency issues.

                   Profit or (loss)                                                                  Solvency
                                                                                                                         Solvency        Baseline
          $0
                                                                                $2.00
                                                                                          $1.00      $1.00       $1.00         $1.00   $1.00
 ($1,000,000)                                                                   $1.00
                                                            ($1,612,354)
                   ($1,383,652)                                                              $0.16
                                                                                $0.00
 ($2,000,000)
                                                 ($1,598,120)
                                                                                ($1.00)                                                ($0.05)
                                                                                                                             ($0.08)
 ($3,000,000)
                                                                                ($2.00)                              ($1.51)
                   ($3,220,451)
                                  ($3,070,602)                                                         ($1.99)
 ($4,000,000)                                                                   ($3.00)
                2011    2012        2013         2014           2015                      2011       2012        2013          2014     2015



HUD did not pursue the owner and operator for submitting conflicting data. The owner reported
to HUD 3 years of utilization below 80 percent between 2011 and 2015; however, the operator
also reported that utilization was between 99 and 101 percent for the quarters between March
2016 and March 2017. Utilization in excess of 100 percent is not possible because multiple
people may not occupy the same bed at the same time. Operator financial statements showing
that the property had paid its mortgage contradicted HUD’s documentation on delinquencies.
HUD and the lender focused on modifying the existing mortgage. In February 2013, HUD and
the lender began discussing low utilization concurrent with a loan modification. HUD
documented the low utilization from February 2013 through January 2017. The owner’s initial



                                                                           45
default was in March 2012. The owner made a late payment and then defaulted again in June
2012 and had not made a payment since July 2012. This nursing home generated income that
ranged from $205,619 as of March 31, 2017, to $767,787 as of June 30, 2016; however, this
income was not sufficient to pay the nursing home’s expenses. From the default in July 2012 to
October 2013, HUD and the lender focused on modifying the existing mortgage without
addressing how to increase the declining utilization. Changes in the lender also delayed the
processing of the proposed loan modification and refinancing due to the need for the new lender
to become familiar with the nursing home.
Loan modification was not viable. HUD and the lender reported that the loan modification was
difficult due to the nursing home’s revenue not supporting the cost of operations, a prepayment
penalty, declining utilization, the addition of a behavior unit, and a lockout provision. 43 With
revenue not supporting the cost of operations and declining utilization, any refinance of the
mortgage would not support the long-term viability of the property.
HUD is responsible for the accumulating interest and carrying costs in addition to the unpaid
principal balance. While the owner defaulted on July 1, 2012, the lender elected to delay
assignment and work with the owner to remedy the default. HUD approved this action and
delayed assignment from 2012 to 2018. While delaying assignment delays when HUD pays an
insurance claim, HUD assumes responsibility for the unpaid interest and the carrying costs,
including the mortgage insurance premiums, taxes, and insurance. The interest and carrying
costs continue to accrue until the owner pays the delinquent amounts or HUD pays an insurance
claim.
HUD did not address owner complacency. HUD’s efforts were hampered by owner
complacency, as the owner did not provide HUD with accurate financial data, would not commit
to a course of action, did not develop industry contacts, and stated that correction of the
property’s issues was in “God’s hands.”
HUD did not pursue a regulatory agreement violation. The nursing home violated its regulatory
agreement by paying $110,892 to a third party for debt service for bonds issued by an entity
related to the nursing home. Paying debt service on bonds issued by a related company was a
transfer of project funds. According to the regulatory agreement, transfers of project funds must
be made only from surplus cash. Surplus cash is the amount of cash remaining after the nursing
home pays its mortgage, deposits a required amount into its reserve for replacement account,
pays its bills, and makes any other deposits required of the nursing home. Because this nursing
home did not generate surplus cash, any payment was not appropriate.
HUD did not take appropriate and timely action to correct these issues. As a result, the mortgage
balance was at a high risk of being assigned to HUD. If the owner did not make the mortgage
payments, HUD would have to pay the lender more than $12.4 million in unpaid principal as of
March 8, 2018. Additionally, HUD would have to pay more than $1.7 million in delinquent



43
     Lockout is a provision in some HUD-insured mortgages in which the mortgage does not allow the owner to
     refinance for a defined period.



                                                       46
interest, $159,826 in mortgage insurance premiums, and more than $1.1 million in insurance
according to figures as of February 2018.

Bel-Air Nursing Home, Milwaukee, WI
In 2010, HUD initially endorsed Bel-Air Nursing Home’s mortgage of more than $15.6 million
at the 185-bed nursing home in Milwaukee, WI. HUD identified this nursing home as troubled
in December 2015, and the owner defaulted in May 2016. Bel-Air Nursing Home was selected
for review because it was delinquent on its mortgage and had profitability and solvency issues
for 4 years.
HUD did not assess the owner-audited financial statements. HUD did not assess the owner
financial statements for 5 consecutive fiscal years from 2012 through 2016.
Bel-Air Nursing Home had low utilization. In October 2014, HUD stated that through
September 2014, utilization was at 50 percent. In September 2015, HUD stated that utilization
had plateaued around 60 percent. Review of the quarterly operator financial statements
determined that this pattern continued, with utilization at 61 percent for the quarter ending March
31, 2016, and 60 percent for the next 2 quarters. In November 2017, HUD documented that the
Bel-Air Nursing Home had struggled since its construction in 2010.
Available operator financial statements showed intermittent income and losses. Bel-Air Nursing
Home showed net operating income of $533,962 for the quarter ending March 31, 2016. It
showed a net operating loss of $992,145 for the quarter ending June 30, 2016, and a net
operating loss of $581,531 for the quarter ending September 30, 2016. In addition, Bel-Air
Nursing Home’s quarterly operator financial statements did not include all debt for 3 quarters.
Additionally, its quarterly operator financial data were 59 to 239 days late.
HUD is responsible for the accumulating interest and carrying costs in addition to the unpaid
principal balance. The owner defaulted on May 1, 2016. The lender elected to delay assignment
and work with the owner to remedy the default. HUD approved this action and delayed
assignment from 2016 to 2018. While delaying assignment delays when HUD pays an insurance
claim, HUD assumes responsibility for the unpaid interest and carrying costs, including the
mortgage insurance premiums, taxes, and insurance. The interest and carrying costs continue to
accrue until the owner pays the delinquent amounts or HUD pays a claim.
HUD did not take appropriate and timely action to correct the issues. As a result, the mortgage
balance was at a high risk of being assigned to HUD. If the owner did not make the mortgage
payments, HUD would have to pay more than $14.6 million in unpaid principal balance as of
March 8, 2018. Additionally, HUD would have to pay more than $1.2 million in delinquent
interest, $153,938 in mortgage insurance premiums, $310,031 in taxes, and $328,709 in
insurance according to figures as of February 2018.

Hebrew Home, West Hartford, CT
In 2009, HUD insured a $20.2 million mortgage at the 334-bed nursing home in West Hartford,
CT, which refinanced a previous HUD-insured mortgage from 1987. The owner defaulted in
September 2012, but HUD did not identify the nursing home as troubled until September 2016.


                                                47
Hebrew Home was selected for review because it was delinquent on its mortgage and had
profitability and solvency issues for 4 years.

                                           Profit or (loss)                                                                        Solvency
                                                                                                                                      $0.72
          $0                                                                                             0.80
  ($500,000)
                                                ($1,145,203)                                             0.40
 ($1,000,000)                                                                      ($1,473,364)
                                                                                                                                                                      ($0.09)
 ($1,500,000)                                                                                            0.00
 ($2,000,000)
                                                                                                        (0.40)      ($0.20)
 ($2,500,000)
                           ($2,266,955)
                                                                  ($2,538,701)
 ($3,000,000)                                                                                           (0.80)                                         ($0.60)
                                    9/30/2012      9/30/2013       9/30/2014        9/30/2015                       9/30/2012      9/30/2013          9/30/2014       9/30/2015


Annual financial statements showed a pattern of financial problems. Under the regulatory
agreement(s), the owners must submit annual financial statements. HUD assesses these
statements each year with a score of 70 as a baseline. HUD assessments for fiscal years 2001
through 2015 were below the baseline and showed a high risk of mortgage default.

                                                                      Owner financial statements
                                    100
                Performance value




                                     80

                                     60     70      70     70       70      70       70    70      70      70      70     70     70     70     70       70     70     70

                                     40

                                     20

                                       0
                                            1999    2000   2001     2002    2003    2004   2005   2006     2007    2008   2009   2010   2011   2012     2013   2014   2015
                                                                                                  Financial year

                                                                           Acceptable risk                       Performance value


The owner of Hebrew Home defaulted on the August 2012 payment. HUD decided to pay part
of the mortgage to the lender to reduce the debt at Hebrew Home. HUD calls this a partial
payment of claim. (See subsection – “HUD paid more than $11 million to the lender.”)
The owner attempted to impose conditions on HUD’s partial payment of claim. During the
partial payment process in August 2013, the owner attempted to impose six conditions on the
modified mortgage, including defining the maximum amount of the modified mortgage,
providing a new definition of surplus cash, and eliminating the prohibition on borrowing. The
owner stated that the modified mortgage could not exceed $9.4 million at 2.9 percent interest for
30 years because the owner estimated that the nursing home would not generate sufficient cash



                                                                                                   48
to service a larger debt. Defining the maximum amount of the modified mortgage would have
required additional HUD funds to pay down a larger partial payment of the mortgage. HUD
rejected all six conditions.
HUD paid more than $11 million to the lender. In June 2015, HUD paid the lender more than
$11 million and modified the June 2009 mortgage to an unpaid principal balance of just over
$11 million for 26.25 years 44 at 3.35 percent interest. HUD created a second mortgage with the
owner in June 2015 for just over $11 million. The owner filed for voluntary bankruptcy in
August 2016. In December 2016, the bankruptcy court sold the nursing home, and the new
owner paid HUD $1.3 million to eliminate the second mortgage and assumed the HUD-insured
mortgage with the lender. As a result, HUD lost more than $9.7 million in the bankruptcy
proceedings.
HUD did not address incomplete and conflicting operator financial data. Assessment of the
quarterly operator financial data for utilization, delinquency, profitability, and solvency for the
quarters ending March 31, 2016, through June 30, 2017, showed that Hebrew Home did not
submit data for 2 quarters and conflicting data were submitted.
The nursing home had utilization issues.

                                                                 Utilization
                                      175%

                                      150%          145%

                                      125%                    118%
                         Percentage




                                      100%
                                                                                                      74%
                                      75%
                                                                                                                  70%
                                      50%

                                      25%
                                                                     0%                        0%
                                       0%
                                             3/31/2016   6/30/2016    9/30/2016   12/30/2016   3/31/2017   6/30/2017
                                                                          End of quarter

Utilization may not exceed 100 percent because more than one person may not occupy a bed at
the same time. Hebrew Home’s five operator financial statements ranged from 15 to 52 days
late.
HUD did not take appropriate and timely action to correct issues at Hebrew Home and lost more
than $9.7 million in the bankruptcy sale of the nursing home.

Plaza Village Senior Living, National City, CA
In 2010, HUD insured a $10.6 million mortgage at the 85-bed nursing home, Plaza Village
Senior Living, located in National City, CA. HUD classified this property as troubled in July

44
     HUD kept the original term of the mortgage.



                                                                            49
2011, and the owner defaulted in September 2011. Plaza Village Senior Living was selected due
to its delinquency of more than 1,000 days.
HUD is responsible for the accumulating interest and carrying costs in addition to the unpaid
principal balance. The owner defaulted on September 1, 2011. The lender elected to delay
assignment and work with the owner to remedy the default. HUD approved this election and
delayed assignment from 2011 to 2018. While delaying assignment delays when HUD pays an
insurance claim, HUD assumes responsibility for the unpaid interest and the carrying costs,
including the mortgage insurance premiums, taxes, and insurance. The interest and carrying
costs continue to accrue until the owner pays the delinquent amounts or HUD pays a claim.
The owner violated the regulatory agreement. In 2010, the owner violated this agreement when
it secured a $2.3 million loan and pledged Plaza Village Senior Living as collateral for this loan.
The owner defaulted on this loan, and that lender foreclosed in January 2012 and claimed a
percentage of the property. Pledging the HUD-insured nursing home as collateral without prior
HUD approval was a violation of the regulatory agreement. HUD worked with its Departmental
Enforcement Center to draft a notice of violation but did not send the notice. If HUD had
foreclosed on its insured mortgage when the owner defaulted in 2011, the second lender would
not have had the opportunity to foreclose on its loan in 2012. No action against the owner had
occurred as of February 2018.
HUD did not assess annual financial statements. HUD did not assess Plaza Village Senior
Living’s annual owner financial statements from 2011 through 2015. Assessment of the annual
owner financial statement could have identified the inappropriate loan before the foreclosure.
The nursing home had severe utilization issues. HUD identified that Plaza Village Senior Living
had severe utilization issues from April 2011 through November 2016. In April 2013, the owner
filed for bankruptcy, which was dismissed in January 2014.
The nursing home did not meet the criteria for a partial payment of claim. In May 2014, HUD
permitted a transfer of physical assets to a new owner. HUD identified that the new owner was
slowly increasing utilization. The management agent changed in February 2016. In the fall of
2016, HUD attempted to make a partial payment of claim concurrent with a transfer to a new
owner. In November 2016, this new company backed out of the deal. In December 2016, the
lender submitted a request for a partial payment of claim; however, HUD had questions
regarding utilities, management fees, and the financial data to support the requested amount.
Once HUD’s questions were resolved, the financial data showed that the facility did not meet the
criteria for a partial payment of claim.
Quarterly operator financial data were not accurate or timely. Plaza Village Senior Living’s
quarterly operator financial data from January 2016 through March 2017 did not report all of the
debt in 4 of 5 quarters. Its five quarterly operator financial statements ranged from 24 to 31 days
late.
HUD did not take appropriate and timely action to correct issues at Plaza Village Senior Living.
We determined that the mortgage balance was at a high risk of being assigned to HUD. If the
owner did not make the mortgage payments, HUD would have to pay more than $9.9 million in



                                                50
unpaid principal balance as of March 8, 2018. Additionally, HUD would have to pay more than
$3.2 million in delinquent interest, $336,293 in mortgage insurance premiums, $262,961 in
taxes, and $131,511 in insurance according to figures as of February 2018.

Chatsworth at Wellington Green, Wellington, FL
In 2011, HUD initially endorsed a $31.8 million mortgage at the 120-bed nursing home,
Chatsworth at Wellington Green, located in Wellington, FL. The owner declared bankruptcy in
April 2014, but HUD did not classify this property as troubled until September 2014.
Chatsworth at Wellington Green was selected due to its not reaching final endorsement, its
delinquency on its mortgage, and its large mortgage balance.
The owners violated the regulatory agreement by signing two settlement agreements. After the
initial endorsement, the general contractor building the nursing home declared bankruptcy and
did not complete the nursing home. The insurance company, which had executed a performance
bond for the general contractor, stepped in as the general contractor. In August 2012, the owner
and the insurance company entered into a settlement agreement, which identified that the nursing
home owed more than $1.2 million and required payment within 30 days. Chatsworth at
Wellington Green did not pay as required. After a year, the insurance company pursued legal
action to require the nursing home to pay the $1.2 million. In November 2013, the owner of
Chatsworth at Wellington Green and the insurance company entered into a new settlement
agreement, which granted more time to the nursing home to finalize its refinance efforts. It
planned to use the proceeds from refinance to pay the settlement agreement. During 2014, the
owner paid nearly $700,000 to the insurance company. The owner did not obtain HUD approval
for either settlement agreement. Each of the settlement agreements is an encumbrance of the
nursing home. The regulatory agreement between HUD and the owner, signed
February 24, 2011, did not permit any encumbrance of the nursing home without the prior
written approval of HUD.
The owner declared bankruptcy and decided to sell the property. In February 2014, HUD stated
that the general contractor’s bankruptcy was the root cause of the rolling delinquency and that
cash flow was tight due to the owner’s paying construction expenses. These construction
expenses were part of the settlement agreement. 45 The owner declared personal bankruptcy in
April 2014. In September 2014, HUD identified that the settlement agreements with the
insurance company violated the regulatory agreement because the owner did not obtain prior
HUD approval. At the same time, the owner presented HUD with an agreement to sell the
nursing home and pay off the HUD-insured mortgage. HUD prioritized clearing the sale to
recover the unpaid principal balance of the mortgage instead of pursuing the regulatory
agreement violation.
The owners paid off the HUD-insured mortgage. In October 2014, the owners sold the nursing
home and paid off the HUD-insured mortgage. Paying off the mortgage eliminated the
regulatory agreement with HUD. With the payment of the HUD-insured mortgage, HUD


45
     Typically, owners use the proceeds obtained at final endorsement of the HUD-insured mortgage to pay
     construction expenses. This property did not go to final endorsement.



                                                        51
suffered no financial loss but did not take appropriate and timely action to address the issues at
Chatsworth at Wellington Green.

Middlesex Health Care Center, Middletown, CT
In 2011, HUD insured an $8 million mortgage at the 150-bed nursing home, Middlesex Health
Care Center, located in Middletown, CT. Middlesex Health Care Center was selected for review
because it had 5 years of profitability and solvency issues and was part of a portfolio.

                              Profit or (loss)                                                                Solvency
          $0                                                                        $1.00
                                                                                                                   $0.79
  ($400,000)                                                                        $0.50                                     $0.44
                                                                                                      $0.37
                                 ($319,314)
  ($800,000)                             ($479,431)                                 $0.00                                                 ($0.06)
                                                 ($723,888)
 ($1,200,000)            ($1,071,867)                                              ($0.50)
                                                             ($1,242,955)
 ($1,600,000)                                                                      ($1.00)                                                      ($0.91)
                2011                    2012     2013    2014     2015                         2011       2012         2013        2014        2015


The owner operates additional properties under a master lease, but Middlesex Health Care Center
is not part of this master lease.
HUD identified the property as potentially troubled despite financial scores. HUD identified
Middlesex Health Care Center as potentially troubled in October 2017. Under its regulatory
agreement, the nursing home owner must submit annual financial statements. HUD assesses
each financial statement with a numeric score from 10 to 100. HUD considers scores above 70
to be an acceptable risk. HUD assessments for 2013 through 2016 were well below the baseline.

                                                        Owner financial statements
                                      100


                                      80
                 Performance values




                                      60        70          70              70               70               70              70

                                      40
                                                                                   33                                         21
                                      20       Not assessed for                              10               10
                                                2011 to 2012
                                       0
                                               2011        2012             2013             2014             2015         2016
                                                                              Fiscal year

                                                         Perfomance values                   Acceptable risk




                                                                              52
In 2015, HUD began collecting and reviewing quarterly operator financial data from Middlesex
Health Care Center. These data showed that this nursing home continued to have operating
losses. Additionally, the operator’s financial statements did not include all of the debt for 5
quarters, and the owner submitted its data 15 to 30 days late.

                                           Net operating income - loss
                              $2,000,000
                                                                  $1,864,222
                              $1,500,000
                     Amount




                              $1,000,000

                               $500,000
                                                    ($92,356)                   $173,210
                                     $0

                              ($500,000) ($180,692)            ($180,520)
                                           3/31/2016 6/30/2016   9/30/2016 12/31/2016   3/31/2017

                                                  End of quarter


HUD should have identified this nursing home as troubled. From 2011 to 2015, the owner’s
audited financial statements reported to HUD that this nursing home was not profitable and did
not have sufficient assets to service its debt. Additionally, the operator financial data submitted
for 2016 and 2017 showed that the operating losses continued. Continued operating losses and
insufficient assets to meet its debts increased the risk that the owner might default on the HUD-
insured mortgage. HUD needs complete and timely data to make informed and timely
monitoring decisions. HUD did not take appropriate and timely action to correct the issues at
Middlesex Health Care Center, and more than $7.2 million in unpaid principal balance was at
risk of default.

Bishop Wicke Health and Rehabilitation Center, Shelton, CT
In 2012, HUD insured a $9.5 million mortgage at the 120-bed nursing home, Bishop Wicke
Health and Rehabilitation Center, located in Shelton, CT. Bishop Wicke Health and
Rehabilitation Center was selected for review because it was part of a portfolio and had
profitability and solvency issues for 5 years.
The owner violated the regulatory agreement. In 2013, HUD identified that the owner donated
more than $3.1 million to a related foundation and repaid more than $2.9 million on a loan.
When HUD followed up on the issue, it was told that the donated funds were not project funds,
but funds from bequests and the accumulated earnings on the bequests. Bequests from third
parties to a related company should not be included in the nursing home’s financial records.
HUD’s regulatory agreement with the owner requires the nursing home to maintain proper
financial records and that either transfers of project funds have HUD approval before the transfer
or transfers are made only from surplus cash. The nursing home did not have prior HUD
approval for the donation and did not generate surplus cash. The loan repayments to a related
company happened between September 30, 2011, and September 30, 2014. This nursing home



                                                            53
was in a non-surplus-cash position and should not have made payments on a loan to a related
company. HUD directed the owner to reimburse the nursing home in July 2015, but it had not
done so.
HUD identified the property as potentially troubled in September 2017 despite financial scores
and a patient care issue. HUD assesses each owner’s financial statement with a numeric score
from 10 to 100. Scores above 70 are an acceptable risk, scores from 60 to 70 are a cautionary
risk, and scores below 60 are a high risk. HUD assessments for 2013 through 2016 were well
below the baseline.

                                                      Owner financial statements
                                 100

                                  80       70                70               70               70      70
             Performance value




                                  60
                                                                              41
                                                                                               35      35
                                  40
                                                             21
                                  20
                                       Not assessed
                                   0
                                          2012              2013              2014            2015     2016
                                                                         Fiscal year
                                                       Acceptable risk             Performance value


Additionally, a patient fell, suffered head trauma, and later died due to this injury. The Centers
for Medicare & Medicaid Studies stated that the nursing home’s provider agreement was at risk
as a result. Loss of the provider agreement would negatively impact revenue as the nursing
home could not bill Medicaid or Medicare for services provided to patients. In 2017, HUD
learned that the Centers for Medicare & Medicaid Service had decided not to penalize this
nursing home.
The operator financial data were not complete or timely. In 2015, HUD began collecting and
reviewing quarterly operator financial data. These data showed that the nursing home had 3
quarters of losses and 4 quarters of profits. The operator financial data from October 2015
through June 2017 also did not accurately report the debt in each of the 7 quarters. In addition,
the seven operator financial statements ranged from 16 to 121 days late.
HUD should have identified this nursing home as troubled. From 2012 to 2016, the owner’s
audited financial statements reported to HUD that this nursing home was not profitable and did
not have sufficient assets to service its debt. HUD should have identified this nursing home as
troubled due to the regulatory agreement violations, the 5-year pattern of unprofitability and
insolvency, the submission of inaccurate and late operator financial data, and the death of a
patient, which risked the loss of this nursing home’s ability to participate in the Medicare and
Medicaid programs. Violations of the regulatory agreement, the potential loss of the ability to


                                                                         54
participate in Medicare, and continued operating losses and inability to pay its debts all increased
the risk that the owner might default on the HUD-insured mortgage. HUD needs accurate and
timely data to make informed and timely monitoring decisions. Since HUD did not take
appropriate and timely action to enforce correction at Bishop Wicke Health and Rehabilitation
Center, the unpaid principal balance of more than $8.3 million was at risk of default.

Golden Hill Health Care Center, Milford, CT
In 2010, HUD insured a $5.6 million mortgage at the 120-bed nursing home, Golden Hill Health
Care Center, located in Milford, CT. HUD classified this nursing home as potentially troubled in
September 2014. Golden Hill Health Care Center was selected for review because it was part of
a portfolio and had profitability and solvency issues for 5 years. It is part of a master lease that
includes two other properties reviewed.
The owner violated the regulatory agreement. Between 2013 and 2015, HUD identified more
than $1.4 million in inappropriate loan payments to a related party and $242,702 in unauthorized
distributions. HUD told the nursing home that the loans were inappropriate unless they were
made before the HUD-insured mortgage. The nursing home stated that the loans predated the
HUD-insured mortgage but provided no evidence to support its claim. HUD’s regulatory
agreement requires that expenses be reasonable in price and necessary to the nursing home’s
operations. HUD did not obtain evidence that these loans were necessary to the nursing home’s
operations. The regulatory agreement also requires that transfers of project funds either have
prior HUD approval or be made from surplus cash. The transfers did not have HUD approval,
and the nursing home did not generate surplus cash. HUD formally referred the unauthorized
distributions to HUD’s Departmental Enforcement Center on May 30, 2017. While HUD
properly identified the issues of the inappropriate loans, the unauthorized payments on these
loans, and the unauthorized distributions, HUD did not enforce its regulatory agreement by
directing the owner to return the funds to the nursing home.
The nursing home had utilization issues. Golden Hill Health Care Center had a history of low
utilization.

                                                        Utilization
                                  100

                                   80                                                           72
                                                                                    66
                     Percentage




                                           58
                                   60                  48             47

                                   40

                                   20

                                    0
                                        6/30/2016   9/30/2016     12/31/2016     3/31/2017   6/30/2017
                                                                End of quarter




                                                                 55
Quarterly financial data showed that income and loss varied from quarter to quarter. Golden Hill
Health Care Center’s quarterly net operating income and loss ranged from ($4.9 million) to
$8 million.

                                                Net operating income - loss
                                 $10,000,000                             $8,011,066
                                                $5,033,486
                                  $5,000,000
                                                                                                    $48,936
                        Amount




                                          $0
                                                                                       ($10,529)
                                 ($5,000,000)                       ($4,928,034)

                            ($10,000,000)
                                                 6/30/2016   9/30/2016    12/31/2016    3/31/2017   6/30/2017

                                                             End of quarter


Golden Hill Health Care Center’s quarterly operator financial statements did not include all of
the debt for 4 of 5 quarters. In addition, the five operator financial statements ranged from 15 to
25 days late.
HUD should have identified this nursing home as troubled. From 2011 to 2015, the owner’s
audited financial statements reported to HUD that this nursing home was not profitable and did
not have sufficient assets to service its debt. HUD should have identified this nursing home as
troubled due to the regulatory agreement violations, the 5-year pattern of unprofitability,
insolvency, and the low utilization. Additionally, the operator financial data submitted to HUD
were inaccurate, conflicting, and late. Violations of the regulatory agreement, continued
operating losses, and the inability to pay its debts all increased the risk that the owner might
default on the HUD-insured mortgage. HUD needs accurate and timely data to make informed
and timely monitoring decisions.
Since HUD did not take appropriate and timely action to correct issues at Golden Hill Health
Care Center, the unpaid principal balance of more than $4.5 million was at risk of default.

Jamaica Hospital Nursing Home, Richmond Hills, NY
In 2007, HUD insured a $43.1 million mortgage at the 226-bed nursing home, Jamaica Hospital 46
Nursing Home, located in Richmond Hills, NY. HUD classified this nursing home as potentially
troubled in September 2014. Jamaica Hospital Nursing Home was selected for review because
its unpaid principal balance was above $29 million and it had profitability and solvency issues
for 4 years.
HUD granted a waiver to allow this nursing home to receive a HUD-insured mortgage. HUD
granted this nursing home a 6-month waiver of the HUD requirement that participants be a

46
     Despite its name, Jamaica Hospital Nursing Home is not a hospital.



                                                                     56
single-asset entity. 47 Before obtaining the HUD-insured mortgage, this nursing home was
consolidated with a related company, a nearby hospital. The waiver granted the consolidated
entity time to change its legal structure so that its nursing home could become a single-asset
entity to be eligible for the Section 232 program.

Even after the related companies changed their legal structure, the hospital continued to provide
the nursing home with services and supplies, which the hospital charged to the nursing home on
an estimated-cost basis. The nursing home used the estimated costs in its December 31, 2016,
audited financial statements to HUD. In these statements, the nursing home identified that it
owed the hospital more than $44.4 million in accounts payable and paid more than $8.9 million
in expenses to the nursing home. HUD’s regulatory agreement with the nursing home requires
that expenses charged to the nursing home be necessary to its operation and reasonable in price.

HUD did not use available information. This nursing home had submitted annual audited
financial statements to HUD each year since 2011. HUD did not identify or question the use of
estimates or the large payables. HUD stated that the nursing home must renegotiate its
relationship with the related hospital in a manner acceptable to HUD and retroactively adjust the
amounts charged to the nursing home from 2009 through the current year. Properly
implemented, this plan could ensure that the expenses charged to the nursing home were
necessary to its operation and reasonable in price. In addition to identifying that the nursing
home owed the hospital more than $44.4 million, as of December 31, 2016, the independent
public accountant reported that it had substantial doubt about the nursing home’s ability to
continue to operate.




47
     As a single-asset entity, the mortgaged nursing home must be the only asset of the borrower.



                                                          57
Quarterly operator financial statements showed that losses continued. Jamaica Hospital Nursing
Home’s expenses exceeded its revenue for 5 of 6 quarters.

                   Quarterly revenue and expenses
 $10,000,000
                                                                 $9,561,138     $9,368,304
                                                                                             $9,226,114
  $9,500,000                                     $9,237,101
                      $9,393,672

  $9,000,000                 $8,818,189


  $8,500,000
                                                      $8,278,361
  $8,000,000                                                                                 $8,160,373
               $8,056,559

  $7,500,000                         $7,507,340                $7,714,220      $7,761,799


  $7,000,000
               3/31/2016     6/30/2016          9/30/2016     12/31/2016      3/31/2017      6/30/2017

                            Quarterly revenue            Quarterly operating expenses


Jamaica Hospital Nursing Home’s operator submitted five of six financial statements 3 to 30
days late and submitted one statement in a timely manner.
HUD should have identified this nursing home as troubled. HUD should have identified this
nursing home as troubled due to the independent auditor’s doubt about the nursing home’s ability
to continue to operate, the violations of the regulatory agreement, and the 4-year pattern of
unprofitability and insolvency. Additionally, the operator financial data submitted to HUD were
conflicting and late. When independent auditors question a nursing home’s ability to continue
operations, HUD’s investment in the insured mortgage is at risk of default. Violations of the
regulatory agreement, continued operating losses, and the inability to pay its debts also increased
the risk that the owner might default on the HUD-insured mortgage. HUD needs accurate and
timely data to make informed and timely monitoring decisions.
HUD did not take appropriate and timely action to correct issues at Jamaica Hospital Nursing
Home. This inaction placed the remaining mortgage of more than $36.5 million at risk of
default. Also, HUD did not question more than $8.9 million in unsupported expenses to a related
company and more than $44.4 million in unreasonable accounts payable to a related company.

Mainland Manor Rehab and Nursing Center, Pleasantville, NJ
In 2012, HUD insured the $8.1 million mortgage at the 140-bed nursing home, Mainland Manor
Rehab and Nursing Center, located in Pleasantville, NJ. HUD classified this property as
potentially troubled in March 2017. Mainland Manor Rehab and Nursing Center was selected




                                                    58
for review because it had utilization issues for 3 years and profitability and solvency issues for 5
years.
The owner closed the facility without HUD’s permission, violating the regulatory agreement.
The owner closed Mainland Manor Rehab and Nursing Center in October 2016, and HUD was
unaware of the closure until the owner informed HUD 5 months later. Changing the inherent
nature of the nursing home without prior HUD approval is a violation of the regulatory
agreement. In response to HUD, the owner stated that the decision to close the facility was due
to a 3-year loss of more than $4.5 million. As of December 2017, the owner planned to sell the
property or convert it to another use, such as a drug rehabilitation facility. Selling the property
would remove the nursing home from the Section 232 portfolio.
The nursing home had utilization issues. When the nursing home refinanced in 2012, HUD’s
underwriter recognized that the nursing home had low utilization and recommended a marketing
plan. HUD did not require or implement a marketing plan, and the property continued to have
utilization issues.

                                                           Utilization
                                100%


                                75%
                   Percentage




                                50%    46%              47%
                                                                      43%

                                25%

                                                                                  1%           0%        0%
                                 0%
                                       3/31/2016   6/30/2016   9/30/2016   12/30/2016   3/31/2017   6/30/2017
                                                               End of quarter

With the nursing home closed, it did not generate any revenue; however, the owner continued to
pay the mortgage.




                                                                 59
Operating income and loss varied greatly. Mainland Manor Rehab and Nursing Center had 5
quarterly net operating losses and 1 quarter of net operating income. Profitability ranged from a
quarterly profit of $136,890 to a quarterly operating loss of $591,488.

                                          Net operating income - loss
                                                              $136,890
                             $200,000

                                    $0                                                       ($149,706)
                                                                          ($149,609)
                    Amount



                             ($200,000)
                                          ($441,107)
                             ($400,000)
                                                           ($441,107)
                             ($600,000)                                         ($591,488)

                             ($800,000)
                                           3/31/2016 6/30/2016 9/30/2016 12/31/2016 3/31/2017 6/30/2017
                                                                End of quarter


Mainland Manor Rehab and Nursing Center had 6 quarters of solvency issues. Its six quarterly
operator financial statements ranged from 3 to 39 days late.
HUD should have identified this nursing home as troubled due to the violation of the regulatory
agreement and the 5-year pattern of unprofitability and insolvency. Additionally, the operator
financial data submitted to HUD were conflicting, and late. Violations of the regulatory
agreement, continued operating losses, and the inability to pay its debts also increased the risk
that the owner might default on the HUD-insured mortgage. HUD needs accurate and timely
data to make informed and timely monitoring decisions.

Since HUD did not take appropriate and timely action to correct issues at Mainland Manor
Rehab and Nursing Center, the unpaid principal balance of more than $7.4 million was at risk of
default.

Medford Care Center, Medford, NJ
In 2002, HUD insured a $6.9 million mortgage at the 180-bed nursing home, Medford Care
Center, located in Medford, NJ. This nursing home had defaulted a number of times, including
December 2016 and most recently November 2017, but HUD classified this property as
potentially troubled in October 2014. Medford Care Center was selected because it had
utilization, profitability, and solvency issues for 5 years. The business that owned Medford Care
Center had parties in common with the business that owned Prospect Heights Care Center.
HUD’s analysis of the owner’s audited financial statements showed that risk had increased
dramatically between 2012 and 2016. Under its regulatory agreement with HUD, the owner
must submit annual audited financial statements. HUD assesses these statements each year with
a score of 70 as a baseline. Medford Care Center’s owner annual financial statements showed
that the mortgage was at a high risk of default from 2012 through 2016.



                                                               60
                                                                 Owner financial statements
                                     100
                 Performance value                             79        76        78
                                      80                                                             71      71

                                      60                                                                             68
                                                       58                                    61
                                      40
                                                47                                                                           47
                                      20                                                                                            33                 10
                                                                                                                                              19              16
                                       0
                                                2003

                                                        2004

                                                                2005

                                                                          2006

                                                                                    2007

                                                                                             2008

                                                                                                      2009

                                                                                                              2010

                                                                                                                     2011

                                                                                                                             2012

                                                                                                                                    2013

                                                                                                                                              2014

                                                                                                                                                       2015

                                                                                                                                                              2016
                                                                                                    Fiscal year

                                                                       Acceptable risk                       Performance value


Operator financial data showed no utilization data and variability in profitability and solvency.
Medford Care Center reported no utilization data for 6 quarters. It had 4 quarters of net
operating losses and 2 quarters of net operating income.

                                                                         Net operating income - loss
                                                $750,000                                     $515,231

                                                $250,000                                                                    $86,812
                                       Amount




                                                ($250,000)             ($236,940)
                                                                                                             ($65,952)
                                                                                                                                        ($186,014)
                                                ($750,000)                                 ($808,035)

                                            ($1,250,000)
                                                               3/31/2016         6/30/2016      9/30/2016    12/31/2016     3/31/2017      6/30/2017

                                                                                      End of quarter

Medford Care Center had 4 quarters of solvency issues, 1 quarter of missing data, and 1 quarter
with no issues. Its quarterly operator financial statements ranged from 12 to 78 days late.
HUD should have identified this nursing home as troubled due to the November 2017 default on
its mortgage 48 and the 5-year pattern of unprofitability and insolvency. Additionally, the
operator financial data submitted to HUD were inaccurate, conflicting, and late. HUD did not
recognize how troubled this nursing home was before its owner defaulted in November 2017;
however, the owner brought the mortgage current in July 2018.



48
     In July 2018, the owner brought the mortgage current.



                                                                                                    61
Mecklenburg Health Care Center, Charlotte, NC
In 2012, HUD insured a $2.4 million mortgage at the 100-bed Mecklenburg Health Care Center
located in Charlotte, NC. Mecklenburg Health Care Center was selected for review because it
was part of a portfolio, had profitability issues for 4 years, and had solvency issues for 5 years.
The operator did not submit complete operator financial data. Mecklenburg Health Care Center
did not report utilization data for 5 quarters and for 1 quarter, reported utilization of 91 percent.
It did not report delinquency data for 3 quarters; reported incomplete data for 2 quarters; and for
one quarter, the data showed that it made mortgage payments. It did not report profitability data
for 5 quarters and for 1 quarter, had an operating loss of $148,789. It did not report solvency
data for 5 quarters, and for 1 quarter, the data showed a solvency issue. It did not submit data for
3 quarters of operator financial statements, and 3 quarters of data ranged from 30 to 121 days
late.
HUD identified the nursing home as potentially troubled in February 2016 despite the drop in
owner annual financial scores. Under the regulatory agreement with HUD, each owner must
submit annual audited financial statements. HUD assesses these statements each year with a
score of 70 as a baseline. The owner annual financial statements for this nursing home showed
that scores were well below baseline and the mortgage was at a high risk of default from 2012
through 2016.

                                                Owner financial statements
                                  100
                                                              76 75 72 76 72 72 74
              Performance value




                                   80                   71 75

                                   60                                                         50
                                           Not     62
                                   40   Assessed:                                                  29        29
                                        99, 00, 01
                                   20                                                   35              32

                                    0



                                                                    Fiscal year

                                                  Acceptable risk         Performance value


HUD should have identified this nursing home as troubled due to the 4-year pattern of
unprofitability and 5-year pattern of insolvency. Additionally, the operator financial data
submitted to HUD were incomplete, conflicting, and late. Continued operating losses and the
inability to pay its debts also increased the risk that the owner might default on the HUD-insured




                                                                    62
mortgage. Additionally, HUD needs accurate and timely data to make informed and timely
monitoring decisions.
Since HUD did not take appropriate and timely action to correct issues at Mecklenburg Health
Care Center, the unpaid principal balance of more than $1.9 million was at risk of default.

Moran Manor Healthcare Center, Westernport, MD
In 2008, HUD insured the $8.5 million mortgage at the 130-bed nursing home, Moran Manor
Healthcare Center, located in Westernport, MD. HUD identified this nursing home as not
troubled in 2012. Moran Manor Healthcare Center was selected for review because it had
utilization issues for 2 years and profitability and solvency issues for 4 years.
Nursing home utilization declined. Moran Manor Healthcare Center reported utilization of 88
percent in 2013, which dropped to 78 percent in 2014. Utilization had dropped, but there was no
evidence of corrective action. Meanwhile, Moran Manor Healthcare Center had a net operating
loss in 2013 of $770,480 and net operating loss in 2014 of $439,179.
The owner paid off the mortgage. Moran Manor Healthcare Center’s owner decided to prepay
the mortgage in December 2015, and the nursing home is no longer in HUD’s portfolio. We did
not identify any questioned costs related to Moran Manor Healthcare Center. With the payment
of the HUD-insured mortgage, HUD suffered no financial loss, but it did not take appropriate
and timely action to address the issues at Moran Manor Healthcare Center.

Prospect Heights Care Center, Hackensack, NJ
In 2009, HUD insured three mortgages at Prospect Heights Care Center with a combined total of
more than $36.3 million at the 210-bed nursing home located in Hackensack, NJ. HUD
identified this nursing home as troubled in September 2016. Prospect Heights Care Center was
selected for review because its three HUD-insured mortgages had an unpaid principal balance
above $29 million and 5 years of utilization issues. The business that owned Prospect Heights
Care Center had parties in common with the business that owned Medford Care Center.
Quarterly operator financial data identified utilization issues. Its quarterly financial statements
showed that utilization ranged from 30 to 36 percent.




                                                 63
                                                            Utilization
                                 100%

                                 80%

                    Percentage   60%
                                         34%                      36%                      36%           35%
                                 40%

                                 20%                  30%                      32%

                                  0%
                                        3/31/2016    6/30/2016   9/30/2016   12/31/2016   3/31/2017    6/30/2017

                                                           End of quarter


The nursing home had 6 quarters of operating losses. Prospect Heights Care Center had 6
continuous quarters of net operating losses ranging from $52,272 to $490,725.

                                                    Net operating loss

                                   $0                                                         ($52,272)

                                            ($176,403)
                          ($150,000)                                 ($193,591)
                 Amount




                          ($300,000)
                                                                                                      ($266,053)
                          ($450,000)

                          ($600,000)                ($490,725)                 ($479,481)
                                        3/31/2016    6/30/2016   9/30/2016   12/31/2016   3/31/2017    6/30/2017

                                                           End of quarter


Prospect Heights Care Center had 5 quarters of solvency issues.
 The owner defaulted on August 1, 2016. The lender elected to delay assignment and work with
the owner to cure the default. HUD approved this measure and delayed assignment from 2016 to
2018. The owner brought the mortgage current in July 2018.

Shawnee Christian Nursing Center, Herrin, IL
In 2007, HUD insured a $6.6 million mortgage at the 159-bed nursing home, Shawnee Christian
Nursing Center, located in Herrin, IL. Shawnee Christian Nursing Center was selected for
review because it had profitability and solvency issues for 5 years.
The owner violated the regulatory agreement. Shawnee Christian Nursing Center violated its
regulatory agreement when it removed 27 beds without HUD’s permission. It removed 12 beds
in April 2015 and another 15 beds in July 2015. Removing beds subtracts from the nursing
home’s ability to generate revenue. By removing these beds, the nursing home removed 17



                                                                   64
percent of the revenue-producing facilities. The regulatory agreement prohibited owners and
operators from subtracting from the personal or real assets of the nursing home. In 2016, HUD
identified that the nursing home also commingled its accounts with multiple related companies,
another violation. The regulatory agreement also required that all nursing home receipts be
deposited in its name to be disbursed for nursing home expenses or distribution of surplus cash.
While HUD identified these issues, it did not direct the nursing home to correct them. HUD
should have required the nursing home to return the 27 beds to operation or pay down the
mortgage by 17 percent. Seventeen percent of the mortgage of $4.8 million is $815,973. HUD
should also have required the owner to stop commingling accounts.
HUD identified the nursing home as potentially troubled in July 2016 despite a drop in financial
scores. Shawnee Christian Nursing Center’s owner financial statement scores ranged from 10 to
78, showing the financial status as high risk from 2013 to 2017.

                                                Owner financial statements
                                     100
                 Performance value




                                                      78
                                      80                     71

                                      60   70   70    70     70         70   70    70    70      70   70
                                                                   51
                                      40                                           25    24
                                           Not                               10                  10   10
                                      20
                                           assessed
                                       0
                                           2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
                                                                    Fiscal year

                                                 Acceptable risk             Performance value




The operator did not submit all required financial data. Shawnee Christian Nursing Center did
not submit quarterly operator financial data for the quarters ending March 31, 2016, and March
31, 2017, and did not report all of the debt in 3 quarters. Its four quarterly operator financial
statements ranged from on time to 61 days late. It submitted incomplete data for the quarter
ending June 30, 2017, and HUD took no action to obtain the missing data.
Available operator financial data showed low utilization and operating losses. The available
operator financial data showed that utilization ranged from 68 to 72 percent.




                                                                    65
                                                               Utilization
                                100%


                                75%                                     70%
                                                             68%                       72%
                   Percentage
                                50%


                                25%


                                     0%           0%                                           0%        0%
                                           3/31/2016 6/30/2016     9/30/2016 12/30/2016 3/31/2017 6/30/2017
                                                                     End of quarter


Shawnee Christian Nursing Center was not profitable.

                                                  Net operating income - loss
                                     $100,000
                                                                                $28,536
                                      $25,000
                                                        $0
                            Amount




                                      ($50,000)                                               $0        $0
                                                                           ($32,647)
                                     ($125,000)

                                     ($200,000)

                                     ($275,000)                    ($254,725)
                                                  3/31/2016 6/30/2016 9/30/2016 12/31/2016 3/31/2017 6/30/2017
                                                                       End of quarter


HUD should have identified this nursing home as troubled due to the violations of the regulatory
agreement and the 5-year pattern of unprofitability and insolvency. Additionally, the operator
financial data submitted to HUD were incomplete and late. Violations of the regulatory
agreement, continued operating losses, and the inability to pay its debts all increased the risk that
the owner might default on the HUD-insured mortgage. HUD needs complete and timely data to
make informed and timely monitoring decisions. The reduction in revenue potential, the
commingled accounts, and the omitted operator financial data increased the risk of default of the
HUD-insured mortgage. As of March 8, 2018, the owner had not defaulted and owed more than
$4.8 million on its HUD-insured mortgage. Also, HUD did not require the nursing home to
return the 27 beds to operation or pay down $815,973 on its mortgage.
The Highlands Health Care Center, Cheshire, CT
In 2010, HUD insured a $6.8 million mortgage at the 120-bed nursing home, The Highlands
Health Care Center, located in Cheshire, CT. The Highlands Health Care Center was selected
for review because it was part of a portfolio and had profitability and solvency issues for 5 years.



                                                                      66
The Highlands Health Care Center was part of a master lease, and we reviewed two other
nursing homes, Golden Hill Health Care Center and West River Health Care Center, which
operated under the same master lease.
HUD identified the nursing home as potentially troubled in September 2014 without assessing
annual owner financial statements. HUD identified this property as potentially troubled in
September 2014 but did not assess this nursing home’s annual owner financial statements from
2010 through 2016. By not assessing the financial statements, HUD could have missed
opportunities to identify and correct issues at The Highlands Health Care Center.
Quarterly operator financial data showed profits and negative expenses. HUD began collecting
and reviewing quarterly operator financial statements in addition to the owner financial
statements. We examined 6 quarters of operator financial statements. The operator submitted
five of six quarterly operator financial statements late and did not submit one. The Highlands
Health Care Center’s quarterly operator financial statements for the period ending September 30,
2016, reported a net operating loss of more than $5.4 million. Its quarterly operator financial
statements in the other four periods reported a profit. The quarterly operator financial statements
for the period ending December 31, 2016, reported inaccurate expenses of negative $8.3 million.
Its quarterly operator financial statements also did not report all debt in 3 quarters. Additionally,
the quarterly operator financial statements ranged from 15 to 25 days late.
HUD should have identified this nursing home as troubled due to the 5-year pattern of
unprofitability and insolvency. Additionally, the operator financial data submitted to HUD were
inaccurate, incomplete, and late. Continued operating losses and the inability to pay its debts
also increased the risk that the owner might default on the HUD-insured mortgage. HUD needs
accurate and timely data to make informed and timely monitoring decisions. Because HUD did
not take appropriate and timely action to correct issues at The Highlands Health Care Center, the
mortgage of more than $5.8 million was at risk of default.

West River Health Care Center, Milford, CT
In 2010, HUD insured a $6.4 million mortgage at the 120-bed nursing home, West River Health
Care Center, located in Milford, CT. West River Health Care Center was selected for review
because it was part of a portfolio and had profitability and solvency issues for 5 years. West
River Health Care Center was part of a master lease, which included Golden Hill Health Care
Center and The Highlands Health Care Center.
HUD identified the nursing home as potentially troubled in September 2014 without assessing
owner annual financial statements. HUD identified this property as potentially troubled in
September 2014 but did not assess West River Health Care Center’s annual owner financial
statements from the fiscal year ending December 31, 2010, through December 31, 2016. By not
assessing the owner financial statements, HUD could have missed opportunities to identify
issues at the nursing home.
HUD did not pursue the owner and operator for submitting inaccurate and unreliable operator
financial data. West River Health Care Center had 5 quarters of utilization from 104 to 109




                                                 67
percent. Utilization in excess of 100 percent is not possible because multiple people may not
occupy the same bed at the same time.

                                                              Utilization
                                      125%
                                      100%
                         Percentage

                                              104%          108%          109%         108%          105%
                                      75%
                                      50%
                                      25%
                                       0%
                                             6/30/2016     9/30/2016 12/31/2016 3/31/2017           6/30/2017
                                                                    End of quarter

The solvency data for West River Health Care Center were also unreliable. The debt service
credit ratio ranged from 150 to negative 57. West River Health Care Center’s five operator
financial statements were 15 to 26 days late.
Operating income and loss varied greatly. West River Health Care Center had quarterly
operating results that ranged from an operating loss of more than $5.8 million to operating
income of more than $13 million. The quarterly data were unreliable, and HUD did not
document why there were variations in the quarterly operating results.

                                               Net operating income - loss
                           $17,500,000
                                                                                 $13,078,051
                           $10,000,000       $7,200,038
                Amount




                               $2,500,000
                                                                                                       $419,505

                                                                                       $175,264
                            ($5,000,000)
                                                           ($5,896,257)
                         ($12,500,000)
                                               6/30/2016     9/30/2016    12/31/2016    3/31/2017       6/30/2017

                                                             End of quarter

HUD should have identified this nursing home as troubled due to the 5-year pattern of
unprofitability and insolvency. Additionally, the operator financial data submitted to HUD were
incomplete, inaccurate, conflicting, and late. Continued operating losses and the inability to pay
its debts also increased the risk that the owner might default on the HUD-insured mortgage.
HUD needs accurate, consistent, and timely data to make informed and timely monitoring
decisions. Because HUD did not take appropriate and timely action to correct issues at West
River Health Care, the HUD-insured mortgage of more than $5.7 million was at risk of default.




                                                                     68
Appendix D
                                              Schedule of Mortgages
                           Schedule of estimated losses for defaulted mortgages

             Property name                     Date of           Unpaid principal          Estimated loss to HUD
                                               default           balance defaulted                (80%)
     Plaza Village Senior Living               9/1/2011               9,904,519                     7,923,615
     Immanuel Campus of Care                   7/1/2012              12,411,882                     9,929,506
     Mary Scott Nursing Center 49             12/1/2012             $3,213,139 50                  $2,570,511
       Bel-Air Nursing Home                    5/1/2013              14,600,659                    11,680,527
                Totals                                               40,130,199                    32,104,159


                                         Schedule of mortgages at risk

                                                    Unpaid principal balance            Estimated loss to HUD
                Property name
                                                            at risk                            (80%)
       Middlesex Health Care Center                       $7,221,468                         $5,777,174
         Bishop Wicke Health and                                                              6,706,218
                                                                8,382,772
           Rehabilitation Center
      Golden Hill Health Care Center                             4,540,699                       3,632,559
      Jamaica Hospital Nursing Home                             36,502,430                      29,201,944
     Mainland Manor Rehab and Nursing                                                            5,970,393
                                                                 7,462,991
                  Center
      Mecklenburg Health Care Center                             1,952,134                      1,561,707
     Shawnee Christian Nursing Center                            4,805,178                      3,844,142
     The Highlands Health Care Center                            5,874,054                      4,699,243
       West River Health Care Center                             5,732,794                      4,586,235
                  Totals                                        82,474,520                     65,979,615 51




49
      We issued Mary Scott Nursing Center, Dayton, OH, audit report number 2017-CH-1009 on September 30, 2017.
50
      This figure includes a deduction of $350,989 for principal that we reported in a prior audit of the nursing home.
51
      This total is $1 less due to rounding.



                                                           69
Appendix E
    Tables of Questioned Costs and Funds To Be Put to Better Use by Nursing Home
                                Table of questioned costs

          Property name            Ineligible       Unsupported       Total
     Immanuel Campus of
                                        110,892                   0     110,892
     Care
     Plaza Village Senior
                                      2,330,000                   0    2,330,000
     Living
     Bishop Wicke Health and
                                      2,924,477                   0    2,924,477
     Rehabilitation Center
     Golden Hill Health Care
                                      1,661,920                   0    1,661,920
     Center
     Jamaica Hospital Nursing
                                                0       8,974,000      8,974,000
     Home
     Shawnee Christian
                                        815,973                   0     815,973
     Nursing Center
     Totals                           7,843,262         8,974,000     16,817,262




                                           70
Appendix E
                                      Table of funds to be put to better use

                     Estimated
                                               Mortgage                          Unreasonable
                      loss on     Delinquent
 Property name                                 insurance   Taxes     Insurance     accounts       Total
                     defaulted     interest
                                               premiums                            payable
                     mortgages

      Mary Scott
        Nursing      $2,570,511      $0 53      $53,501    $5,643    $228,474        $0         $2,858,129
       Center 52
      Immanuel
      Campus of      9,929,506    1,760,439     159,826      0       1,106,611        0         12,956,382
          Care
        Bel-Air
                     11,680,527   1,291,599     153,938    310,031    328,709         0         13,764,804
     Nursing Home
     Plaza Village
                     7,923,615    3,201,662     336,293    262,961    131,511         0         11,856,042
     Senior Living
        Jamaica
       Hospital          0            0            0         0          0         44,483,000    44,483,000
     Nursing Home
        Totals       32,104,159   6,253,700     703,558    578,635   1,795,305    44,483,000    85,918,357




52
      We issued Mary Scott Nursing Center, Dayton, OH, audit report number 2017-CH-1009 on September 30, 2017.
53
      A prior OIG audit reported the interest so we reduced this figure to $0. As of February 28, 2018, there was
      interest of $734,794.



                                                           71
Appendix E
                                              Summary table

                                         Questioned         Funds to be put to
            Property name                                                               Grand total
                                           costs               better use
       Mary Scott Nursing
                                                      $0              $2,858,129           $2,858,129
       Center 54
       Immanuel Campus of
                                                110,892               12,956,382           13,067,274
       Care
       Bel-Air Nursing Home                            0              13,764,804           13,764,804
       Plaza Village Senior
                                              2,330,000               11,856,042           14,186,042
       Living
       Bishop Wicke Health and
                                              2,924,477                           0          2,924,477
       Rehabilitation Center
       Golden Hill Health Care
                                              1,661,920                           0          1,661,920
       Center
       Jamaica Hospital Nursing
                                              8,974,000               44,483,000           53,457,000
       Home
       Shawnee Christian
                                                815,973                           0            815,973
       Nursing Center
       Totals                               16,817,262                85,918,357          102,735,619




54
     We issued Mary Scott Nursing Center, Dayton, OH, audit report number 2017-CH-1009 on September 30, 2017.



                                                      72
Appendix F
                              HUD’s Investment by State

                                                    HUD’s outstanding
                      State           Quantity
                                                      investment
             New York                         180         $2,831,436,056
             Illinois                         191          1,771,220,879
             Florida                          158          1,439,580,373
             Ohio                             221          1,365,695,198
             New Jersey                        92          1,302,756,809
             Texas                            192          1,261,825,175
             California                       162          1,121,974,669
             Indiana                          121            830,745,039
             Pennsylvania                      74            747,988,950
             Massachusetts                     83            729,955,974
             Connecticut                       59            453,293,237
             Missouri                          61            371,691,057
             Michigan                          52            320,807,453
             North Carolina                    55            314,139,944
             Virginia                          40            282,263,122
             Washington                        50            274,289,681
             Maryland                          37            268,273,720
             Louisiana                         40            266,405,933
             Arizona                           30            264,544,709
             New Hampshire                     18            214,860,678
             Tennessee                         41            200,282,152
             Colorado                          32            198,657,015
             West Virginia                     23            198,654,199
             South Carolina                    32            189,573,345
             Alabama                           35            183,112,408
             Minnesota                         21            172,636,593
             Mississippi                       32            172,608,418
             Oregon                            29            170,259,114
             Georgia                           34            161,801,832
             Wisconsin                         25            158,899,323
             Delaware                          12            150,504,785
             Rhode Island                      25            141,784,192
             Kansas                            27            136,661,520
             Maine                             33            121,620,361
             Utah                              19            114,078,274
             Kentucky                          13             94,420,163
             Arkansas                          18             89,797,089
             Oklahoma                          13             79,764,383



                                         73
                                        HUD’s outstanding
          State              Quantity
                                          investment
Nevada                              7             72,447,394
District of Columbia                4             65,368,697
Montana                            16             64,522,613
New Mexico                          9             64,275,410
Vermont                            12             54,839,182
Idaho                               6             35,708,886
Nebraska                            7             32,951,408
Iowa                               10             31,425,613
Alaska                              1             11,907,424
South Dakota                        5              9,643,964
Hawaii                              1              6,766,201
North Dakota                        0                      0
Wyoming                             0                      0
                    Totals      2,458         19,618,720,614




                               74