Published — November 13, 2014 Updated — February 13, 2015 at 2:50 pm ET

Poorly rated nursing homes got HUD-guaranteed mortgages anyway


Hundreds of homes with lowest possible ratings from the federal government received HUD assistance worth billions


Nursing home magnate Floyd A. Schlossberg had to be happy with the Department of Housing and Urban Development on March 30, 2012.

Nursing home residents and the American taxpayer, perhaps, not so much.

It was on that day that Cambridge Realty Capital gave initial approval to a mortgage application for $12 million for the Alden Alma Nelson Manor nursing home in Rockford, Illinois.

The Department of Housing and Urban Development (HUD) insured the loan through a little-known federal program started in 1959.

The single-story facility that sits on a tree-lined street was recently renamed Alden Debes. It is one of dozens of nursing homes the sturdy, bespectacled Schlossberg has come to own since starting out in the industry in the 1970s.

A refinance, the $12 million loan had an interest rate of just 3.63 percent — close to the average rate for participants in the HUD program and nearly 2 percentage points less than the rate Cambridge had granted Alden Alma Nelson Manor in 2004 for a similar HUD-backed mortgage.

But a lot had happened at the home in the years between the two loans.

For one thing, the state fined the facility a total of $145,000 for its role in three residents’ deaths. It is unclear from publicly available records whether those fines were reduced on appeal.

In addition, Alden Alma Nelson Manor earned the lowest possible overall quality rating — a one star on a five-star scale — from the federal Department of Health and Human Services (HHS) in 2009. The overall quality mark is determined by rankings on health inspections, staffing levels and metrics like the percent of high risk residents with pressure ulcers. A one-star rating, HHS says, indicates that the care provided is “much below average,” in the bottom 20 percent within a particular state. The score for the Rockford home remained unchanged for seven consecutive reporting cycles into 2011, one of relatively few in the country to retain such a low ranking for that long, according to a 2012 analysis by USA Today.

Nevertheless, Cambridge Realty granted that mortgage refinance.

And HUD guaranteed it.

Business as usual

An unusual situation? Not really. Nursing homes providing poor care routinely have received HUD-insured acquisition, construction, refinancing and improvement loans all over the country. In fact, since 2001 hundreds of the nation’s worst-ranked nursing homes have received one, and in many cases two, low-cost, HUD-backed mortgages worth close to $2.5 billion, according to the Center for Public Integrity’s analysis of loan and ratings data.

Even though HUD restructured the office that runs the program in 2008 to streamline the mortgage application process and requires submission of the latest quality reports in evaluating potential construction and rehabilitation loans, the number and volume of one-star facilities that got HUD insurance rose each year from 2009 to 2012. Almost two decades of stinging government reports about the program — from the Government Accountability Office and HUD’s Office of the Inspector General — don’t seem to have made much difference.

HUD spokesman Brian Sullivan wrote in an email that the average overall quality rating of newly-insured skilled nursing facilities has improved every year since 2011, and Dr. David Gifford, senior vice president of quality and regulatory affairs at the American Health Care Association, the leading for-profit nursing home advocacy organization, pointed to the higher percentages of all skilled nursing facilities that have earned the top score, a five-star rating, from the federal government from 2009 to 2013.

But U.S.Jan Schakowsky, D-Ill., a leading legislator on senior issues, called the findings “outrageous.” And Charlene Harrington, an emeritus nursing professor from the University of California at San Francisco, says that the insurance pattern raises serious questions about the allocation of public resources, communication between agencies and what she called a shocking lack of supervision.

“There’s no public scrutiny, no oversight, no coordination,” said Harrington, who contracted with HUD to look at market data for the mortgage program for five years last decade. HUD, she said, is an “agency running amok and it’s been that way since it’s started.”


Part of the National Housing Act of 1959, the nursing home mortgage program was created because Congress believed that for-profit nursing homes were having trouble securing loans on reasonable terms.

In 1964 the program expanded to include nonprofit nursing homes.

HUD officials and lenders generally viewed nursing homes as risky ventures prior to 1965, a government report said, but the inception of the Medicaid program that year provided a more reliable income stream for nursing homes.

Because HUD guarantees the mortgages, the public pays when a nursing home defaults. Costs include the original loan amount, premium payment requirements and recoveries from the sale of notes and properties, according to a 1995 report by the Government Accountability Office. The report said that HUD data showed that losses of about $187 million, adjusted for inflation, had been incurred since the nursing home program’s inception.

The program insures mortgages for nursing-home acquisition, construction, refinancing, and improvement. HUD has granted mortgage insurance to more than 7,000 nursing facilities since the mortgage program began. As of August 2014 more than 2,000, or about 13 percent, of all nursing homes held HUD-insured mortgages. The mortgages HUD backed had an average interest rate of 4.2 percent and a combined worth of more than $16 billion.

In 2012 HUD said the mortgage insurance was part of a group of programs that “strengthen communities across the country.”

“The role of these programs is especially significant in the current economic climate,” HUD said.

Seeing stars

Since 2009, 240 facilities in 38 states and Washington, D.C. have received HUD-backed mortgages worth nearly $2 billion the month after receiving a low, one-star rating from the federal government. Ohio had the largest number, 30, of these homes. Illinois, with 20 homes, was second. California was third. With $242 million worth of HUD mortgage insurance, New York had the highest value of mortgage insurance for nursing homes.

For-profit corporations were overrepresented among the ranks of one-star homes with the low-cost mortgage loans guaranteed by HUD. Corporations owned a little more than half of all nursing homes, but just over two-thirds of poorly-rated HUD-guaranteed mortgage recipients — a trend criticized by Harrington of USCF. “I think [the HUD-guaranteed mortgages] should be restricted to only doing nonprofits,” she said. “There’s certainly no reason the government should be financing for-profit corporations.”

For dozens of facilities, the poor quality of care was also not limited to a single inspection cycle, either. More than 30 of the one-star mortgage recipients were among the 564, or about 5 percent of facilities USA Today identified in 2012 as having earned the lowest possible rating from Nursing Home Compare, a government website the public can consult to gain information about nursing homes, for seven consecutive ratings cycles.

The nursing home industry has argued that the federal five-star rating system is inaccurate and excessively punitive, but HUD-guaranteed mortgage recipients also fared poorly on home safety, according to a 2009 GAO report. About two dozen were on a list of 580 nursing homes that the watchdog agency said should get extra regulatory attention.

Alden Alma Nelson Manor, which also received state fines for incidents of residents’ sexually abusing and beating up other residents, was a one-star home that was also on the GAO list. So, too, was a facility under different ownership, the former Woodstock Residence in suburban McHenry County, Illinois, now known as Crossroads Care Center Woodstock.

In 2008 the state of Illinois levied nearly $360,000 in fines against the Woodstock facility after learning about the suspicious deaths of six residents. The penalty was the largest of hundreds the state issued during the decade starting in 2004. Marty Himebaugh, a nurse at the facility who allegedly was called “the Angel of Death” by supervisor Penny Whitlock, later faced charges that she deliberately overmedicated residents. Himebaugh pleaded guilty to felony criminal neglect in the ensuing criminal proceedings.

Yet in January 2013, even with the low ratings and the case having generated widespread media attention, the facility received a $4.4 million loan backed by HUD at 2.86 percent. Woodstock was also among a group of 70 of the one-star nursing homes that received at least two HUD-backed mortgages since 2001. The value of those mortgages was more than $530 million.

But care issues with HUD-guaranteed mortgage recipients extended beyond the one-star facilities.

In 2009 Bennie Saxon, an 84-year-old World War II veteran known by friends and family for his gentle manner and natty dress, fell four stories to his death at the Alden Wentworth Rehabilitation nursing home, a Schlossberg-owned property on Chicago’s South Side.

Floyd A. Schlossberg, CEO of the Alden Network. Screenshot/Youtube

Saxon’s death led to black seniors’ protesting residents’ conditions and to state Sen. Jacqueline Collins convening a hearing about nursing home safety.

On July 7, 2010, another Alden Wentworth resident died after receiving narcotics there for three weeks, contrary to the instructions of the physician who previously treated him, state records said. The state levied a fine of $20,000 on the facility.

In August 2012 the facility, which had a two-star rating in July, got a $10.6 million HUD-backed loan at just a 2.5 percent rate.

A third Schlossberg property, Alden Village North, was the focus of a searing series of articles by the Chicago Tribune throughout 2010 chronicling 13 questionable deaths that led to citations from the state over the previous decade. That facility had been granted a $12.96 million HUD guaranteed mortgage in December 2009, and later got a HUD-guaranteed refinance for the same amount in August 2013.

The Tribune project prompted the state to revoke Alden Village North’s license in 2011, according to state records. But the facility was able to stay open after a judge ruled that the state had botched its chance to close the home, according to the Tribune.

A 2011 report by HUD’s inspector general’s office criticized the low priority HUD officials placed on regulatory enforcement. Because the Somerset Place nursing home in Chicago was current on its mortgage, the report said, HUD was not aware of pressing health and safety issues until the state revoked its license.

That facility, which received a $28.8 million mortgage that HUD guaranteed in June 2003, had a two-star rating throughout 2009.

“Had staff been aware of the issues identified by CMS [the Centers for Medicare and Medicaid Services], they may have been able to address the issues prior to the property’s failure,” the report said.

In its response HUD emphasized its immediate and aggressive actions after learning about the regulatory violation, but others were skeptical.

Years of critiques

The 2011 report by the HUD inspector general was but the latest in a series going back more than 15 years that questioned the agency’s stewardship of the mortgage insurance program. HUD’s accounting methods, the hundreds of millions of dollars in defaults, a lack of follow-through on suggested improvements and the monitoring of quality of care were all found wanting.

“We believe it is unlikely that HUD will be able to effectively manage the nursing home and retirement service center programs in the near future,” the GAO wrote in 1995.

But HUD spokesman Sullivan said the agency’s management of the program has indeed improved. He said a new handbook for the mortgage program that took effect September 1, 2014, was designed specifically in response to the criticisms contained in the 2011 inspector general report.

Among the changes: considering the quality of care provided at other homes owned by the same owner of the facility seeking a HUD-insured mortgage.

The new criteria could present a problem for Schlossberg, one of the state’s largest nursing home operators.

His homes racked up more than four dozen violations and more than $900,000 in fines from the state of Illinois during the years 2004 to 2014 for more than 10 deaths, maggots growing in wounds, and a wait of 29 days to evaluate a pressure sore, state records said. In many cases the fines were reduced on appeal.

As of August 2014 Schlossberg held 18 active, HUD-backed mortgages worth about $230 million at an average rate of about 3.5 percent. Cambridge Realty provided all but two of the loans.

Rep. Jan Schakowsky, D-Ill., speaks during a Debt Commission meeting on Capitol Hill in Washington, in December, 2010. (Alex Brandon/AP)

The septuagenarian nursing home owner has also been an active political player. Since 1997 Schlossberg has made hundreds of donations worth close to $700,000 to federal and state candidates, officeholders and organizations affiliated with both major parties nationwide, according to the Center’s analysis of donations data.

Recipients include Schakowsky, D-Ill., former Speaker of the House Dennis Hastert, R-Ill., and Sen. Mike Crapo, R-Idaho, a member of the Senate’s Banking, Housing, and Urban Development Committee, which oversees HUD.

Schlossberg did not respond to multiple requests for an interview. His lawyer Ariana Fisch did not respond to requests for comment.

In a 2013 interview with media startup company CEO Intronet, Schlossberg said the Alden chain plans to build small campuses. If the past is a predictor of future behavior, the longtime CEO is likely to apply for additional HUD backing. More than 20 Alden properties received HUD-guaranteed mortgages since 2001, according to HUD records.

Michael Thamer, a California lawyer who was the lead attorney in a landmark nursing home staffing case against the Skilled Healthcare nursing home chain, said stern measures are necessary to alter owner conduct.

“If you’re not eligible for HUD funds unless you have a sterling record, that would have a significant impact on behavior,” Thamer said.

The story was written with support from the Fund for Investigative Journalism.

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