By Arthur Q. Frank, director, and James M. Manzi, analyst, Mortgage Research, Nomura Securities International, Inc.

The relatively high defaults experienced by health care-related loans (financing nursing homes and assisted living facilities) in CMBS conduit deals in the late 1990s led CMBS conduits to avoid such loans in the last few years. In 1997, Congress changed Medicaid reimbursement policy for nursing homes from "cost plus" reimbursements, which guaranteed the nursing home owner a modest margin above actual patient care costs, to flat per diem payments regardless of provider costs. However, FHA-backed nursing homes have caps on unit construction costs, so they are built more cheaply, with fewer amenities than the nursing homes with higher fixed costs typically financed in the 1990s by CMBS conduits and other conventional financing. Consequently, the change in Medicaid reimbursement policy was less onerous for the health care projects in GNMA project loan pools. The graph below gives default rates by production year for health care loans (Section 232 and 232/223(f)) in GNMA pools versus the rest of the GNMA project loan universe, consisting almost entirely of apartment complexes of some kind. There is no clear pattern of health care facilities having consistently higher default rates than apartment complexes; it varies year-to-year, but overall default rates are comparable for health care and non-health care pools within the GNMA project loan market.

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