REQUIRED READING: Healthcare Loans Now Streamlined Under HUD Reorganization


In the musical ‘My Fair Lady,’ an exasperated Professor Henry Higgins vainly deals with an issue that has perplexed humankind for as long as anyone can remember. ‘Why,’ he asks, ‘can't a woman be more like a man?’

Rhetorical ruminations like this question belong in their own special category with questions like ‘Why can't running the government be more like running a business?’ Usually, efforts to come up with suitable answers fail to get us very far. Therefore, it is truly remarkable when events conspire to make seemingly imponderable questions like this appear more mundane.

Thanks to surprising recent developments at the Federal Housing Administration (FHA) and Department of Housing & Urban Development (HUD), our ideas regarding what can be achieved by career bureaucrats may never be the same again.

In what most of us once believed to be a highly unlikely scenario, the FHA and HUD agencies are currently poised to show the world how they plan to utilize the most successful, customer-centric management ideas used by private industry to streamline the way capital is funneled into FHA-insured healthcare loans for nursing homes and assisted-living properties.

What is at stake in this remarkable experiment is nothing less than a revolutionary New Deal that could cause us all to rethink the way we view the competency and creativity of those who are expected to deliver government services in a timely and efficient fashion. The hope with the FHA and HUD plan is that a formula may have been found that will enable federal agencies to eliminate bureaucratic snarls and function more proficiently in an increasingly competitive world.

Against a backdrop of steadily deteriorating conditions in the financial markets, FHA Commissioner Brian Montgomery recently teamed with officials at HUD to make a bold announcement.

The commissioner agreed with everyone who has complained that the underwriting process for HUD Section 232 healthcare loans is administratively tedious and slow. He then described the changes that have radically altered the way loan applications are now being processed and approved.

Specifically, by restructuring the organization and adopting the highly touted ‘Lean’ management concept pioneered by Toyota Motor Corp., Montgomery says the processing of HUD loans is now on a timetable that borrowers everywhere should find more acceptable.

No more MAP
In a major organizational change, the responsibility for processing HUD Section 232 loans has passed to the FHA's Office of Insured Healthcare Facilities (OIHCF), based in Washington, D.C.

With this move, FHA believes it has created a unified single source for program and policy development. The agency also says the switch makes for a more consistent and user-friendly platform for borrowers, lenders and operators.

Historically, Section 232 policies and procedures for nursing homes and assisted living facilities were developed by FHA's housing professionals rather than by healthcare professionals. The major concern with this setup has been that policies often were oriented to multifamily rental projects and were unevenly implemented in the field.

In announcing the organizational changes, HUD officials acknowledged that the old arrangement created conflicting interpretations of program guidelines and, in many cases, restrictive policies on healthcare facilities, such as prohibitions on accounts receivable financing and ancillary programs and services.

Administrators at HUD were aware that some HUD offices were more knowledgeable and better equipped to work with healthcare borrowers than others. Likewise, everyone in the industry knew, understood and accepted these discrepancies as part of the challenge of doing business with the agency.

In an effort to streamline the system several years ago, FHA created the Multifamily Accelerated Processing (MAP)-approved lenders program to process applications and handle the initial underwriting steps.

But even MAP-approved lenders experienced problems dealing with certain local issues, and not all MAP-approved lenders were as familiar with the HUD 232 product as others.

Effectively, these issues have been resolved by the more logical administrative placement of the HUD 232 program with OIHCF. This group also manages HUD's Section 242 hospital mortgage insurance program and, with its new responsibilities, is currently expanding its professional staff with individuals experienced in nursing home and assisted living development, finance operations and management.

As part of the reorganization, FHA is also phasing out its MAP lender program. The need for astute, highly specialized lenders familiar with the Section 232 underwriting process, however, remains unchanged.

The goal of the Lean management process is to simplify the application process and substantially reduce the time it takes qualified borrowers to obtain funding. As before, experienced HUD lenders will be called upon to use their special training and underwriting expertise to screen qualified program candidates.

Importantly, HUD officials assure us that the desirable terms and conditions traditionally identified with the HUD product remain unchanged.

In addition, change is pressing forward without compromising the conservative underwriting guidelines that have contributed to investor confidence and market stability in an era when these intangible commodities have been in short supply.

What Lean means
Effectively, the Lean management process is a concept of synthesizing current procedures into a much larger set of procedures. The process is driven from the bottom up, and everyone involved in a Lean operation looks at the process and tears apart every activity to see how even the smallest element can be improved.

HUD hired a Lean-trained consultant to analyze and improve the process, and a group of individuals at the agency literally took apart an application, walking it through every aspect of processing and documenting the findings in intricate detail.

As defined by Toyota, the Lean management process introduces four fundamental rules:

  • All work shall be highly specified as to content, sequences, timing and outcome;
  • Every customer-supplier connection must be direct, and there must be an unambiguous yes-or-no way to send requests and receive responses;
  • The pathway for every product and service must be simple and direct; and
  • Any improvement must be made in accordance with the scientific method, under the guidance of a teacher, at the lowest possible level in the organization.

The rules may seem simplistic, but try to imagine what the outcome would be if every unit of the federal government were to suddenly embrace the management concept and support its implementation with appropriate technological tools. What might the Pentagon or the Office of Management and Budget, for instance, be able to achieve if they were able to streamline the process of purchasing goods and services in this way?

For now, we can only speculate about the larger picture. What we know for certain is that the program outlined for healthcare borrowers is exceptionally impressive.

For example, the new program includes an automated workflow and approval process, submission of applications via an Internet portal, electronic payment and a standardized work product that includes a submission that can, in most cases, be reviewed by only one HUD staff person. Applications now require fewer exhibits, and conventional market-based appraisals will be used instead of HUD-specific reports.

By applying the Lean methodology, HUD was able to eliminate redundant exhibits and streamline or consolidate others, substantially reducing the application's sheer volume. Incredibly, a 57-step process was trimmed to 16 steps. The goal for processing a properly prepared and submitted application is now 15 days compared to the 211 days previously required.

Although we have not yet seen any estimates, it is reasonable to assume that administrative costs for the HUD 232 program will be substantially trimmed. Arguably, however, the more important measure is how quickly funding will now flow to qualified HUD 232 applicants.

It is anticipated that borrowers will now typically move from application to closing in 40 days, compared with the four- to six-month timetable that had been standard for the course.

That such a development might come to fruition in the waning months of a conservative lame duck administration that has shown little enthusiasm for dealing with regulatory processes of any kind is truly remarkable.

If this change becomes the impetus for a larger trend, comparisons with FDR's New Deal and other significant developments that have radically altered the role of government in society would not be far-fetched.

After all, in our culture, government efficiency is widely presumed to be an oxymoron. FHA Commissioner Montgomery, OIHCF Director Roger Miller and other insightful individuals at HUD deserve everyone's heartfelt thanks for their successful efforts to undermine this perception.

The new Lean process does provide more challenges for the HUD lending specialist during the due diligence and loan underwriting stages. Specifically, lenders are now required to provide a comprehensive credit narrative that articulates and assesses the unique characteristics of the project and makes the case why the loan will be an acceptable credit risk for HUD.

Meanwhile, from the perspective of commercial mortgage brokers and bankers who, from time to time, target and work with healthcare clients, there is this practical consideration: In recent years, HUD has increasingly positioned itself as a mainstream lender for the seniors housing/healthcare industry, and it makes a major statement with the organizational and administrative changes recently announced.

With consistency and common sense carrying the day, it will be possible for mortgage brokers or bankers to partner with highly motivated HUD lending specialists to capitalize on opportunities virtually anywhere in the country, without the usual concerns about timing or geographical considerations.

A pilot version of the new Lean program has been running since June in Seattle. On September 1, the new program became available to borrowers applying for the HUD 232 pursuant to the 223 (f) funding program, which is used for refinancing and acquisition loans.

OMHD will continue work to on a number of applications that already are in the 232 pipeline. HUD officials estimate that it could take six months to a year to transfer all 232 activity to the full-time OIHCF staff.

HUD receives about 200 applications per year from around the country, with more than 2,000 long-term care facilities currently in the program. Based on enthusiasm for the program that he has observed, William J. Lammers, health systems advisor at OIHCFC, believes that the number of applications could easily double in the first year.

Jeffrey A. Davis is chairman and president of Cambridge Realty Capital Cos., a Chicago-based debt and equity financing firm specializing in seniors housing and healthcare properties. He can be contacted at (312) 521-7600 or

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