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Federal mortgage policy: Has LTC escaped the storm?

October 1, 2007
by MICHAEL J. STOIL
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Spokesmen for the long-term care industry often remind audiences that a facility for people in need of nursing services is “not just bricks and mortar.” And it is true: Employees are indeed at the heart of long-term care, whether it takes the form of home care or residential care. Nevertheless, skilled nursing facilities (SNFs) and assisted living programs differ from home care in one significant way: Their operation requires a building to house residents. That means SNFs and assisted living facilities are being affected by the shocks currently disrupting the real estate market.

Essentially, the United States—and other countries—are experiencing loss of investor faith in financial instruments that previously allowed people to borrow much more money for real estate than they could previously afford. In previous decades, mortgage interest rates generally ranged between 5% and 11%. That meant that the interest payments on a $100,000 building varied between $420 and $900 per month, effectively limiting purchases of a building at that price to buyers earning at least $25,000 per year. Changes in U.S. government policy during the 1980s and 1990s, however, created new types of financial instruments that allowed increasingly expensive real estate purchases by people and corporations with relatively little income. These included so-called “no-interest” and “no-money-down” mortgages that allowed buyers to trade low initial costs for much higher future interest rates.

These financial instruments helped to fuel a dramatic rise in the cost and the profitability of real estate properties. As millions of American households and businesses suddenly found it possible to buy rather than rent housing units and office space, the risk of being unable to afford future interest payments seemed to vanish. In a worst-case situation, if the cost of mortgage interest was too high, investors assumed that they could resell the property at a profit. Some mortgage companies even began to plan on generating their profits from closing cost transactions rather than interest payments—which made sense only if real estate properties were repeatedly resold and re-mortgaged.

Nursing homes, hospitals, and other residential medical facilities did not benefit directly from the changes in the mortgage market. There was little real estate speculation in such facilities because Medicare and Medicaid reimbursements limit the amount of revenue that they can generate on a per-patient basis. In fact, the bull market in real estate on long-term care facilities encouraged companies to convert nursing homes, small hospitals, and board-and-care facilities into more marketable housing and hotel units. Moreover, soaring home prices, coupled with forgiveness of capital gains taxes, enabled elderly homeowners to generate the funds they needed to move to assisted living facilities or SNFs.

The party ended in 2006, when real estate prices reached the point that even innovative mortgage instruments could not make housing costs affordable to new home-buyers. Foreclosure rates in 2006 were the highest since the brief economic recession of 1992–93. Nationally, in 2006, only 6 out of every 500 mortgages went into foreclosure, but the problems with real estate costs were severe in some regions; Ohio, for example, experienced a default rate nearly three times higher than the national average, leaving tens of thousands of unwanted real estate properties in the hands of mortgage holders. Investors, alarmed at the rising foreclosure rates and the declining value of the U.S. dollar against other currencies, fled the mortgage market. Falling home prices and a spike in payment defaults have scared investors away from mortgage debt, including bonds and other securities backed by home loans.

By spring 2007, declining home prices and rising foreclosure rates had forced low-income families to sell their homes for less than they expected. In most cases, however, elderly homeowners continued to reap large profits from sales of long-held properties. Dropping real estate prices generally hurt buyers who purchased homes or business properties during the past 10 years. Those who purchased a home before 1990 with a traditional 30-year fixed-rate mortgage are still good candidates for being able to fund assisted living or other residential long-term care by selling (or even renting) their residences.

The mortgage crunch has its greatest impact on long-term care providers who want to expand their facilities. Market forces generally have frustrated the efforts of the Federal Reserve to make more mortgage funds available to would-be real estate buyers. In August 2007, the nation's 10th largest mortgage lender, American Home Mortgage Investment, filed for bankruptcy protection. During the same month, two other national mortgage lenders declared they would not accept new applications. Finding mortgage funds at a reasonable rate to construct new long-term care facilities may be a challenging task for months to come.

President George W. Bush has not proposed any new federal initiatives to address the loss of access to mortgage funding. In a nationwide address on the topic, he urged reliance on market forces in combination with tax relief for homeowners who are granted forgiveness from mortgage debt. Some Democrats have argued that the President's position is naive because, they claim, the mortgage crisis was caused in part by the policies of the Federal Reserve under its longtime chairman Alan Greenspan. They tend to support corrective federal action, such as Sen. Hillary Clinton's (D-N.Y.) proposals to establish a national registry of mortgage brokers, mandate disclosure of the terms of broker compensation, and establish a $1 billion federal fund for local and state programs that help at-risk homeowners avoid foreclosures.

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