The cracks in the foundation of a Chicago nursing-home business began to appear almost immediately.
The owners stopped making mortgage payments on their crown jewel, the Rosewood Care Centers, barely a year after buying it in 2013. Paperwork about the chain’s finances was never filed with the government. Some money meant for the 13 nursing homes and assisted-living facilities went to prop up another investment.
In the end, the business defaulted last year on $146 million in government-backed mortgages — the biggest collapse in the history of a little-known loan-guarantee program run by the Department of Housing and Urban Development.
The Rosewood debacle demonstrates the problems plaguing the HUD program, which helps nursing homes obtain affordable loans and has become a linchpin of the American elder-care system.
By the government’s own admission, the federal agency’s stewardship of the program has been haphazard. Its oversight of nursing homes has been weak. When HUD officials have spotted problems, they often have been slow to respond. Sometimes it has taken years to intervene, allowing the finances at certain facilities to unravel to such an extent that the quality of care was undermined.
HUD officials described Rosewood as an outlier, saying that only 1 percent of the guaranteed loans end up defaulting. “Mortgage defaults in this program are exceedingly rare, yet reaching an acceptable resolution requires an owner’s willingness and ability to work on behalf of their residents,” the department said in a statement.
But the program — run by a department better known for fostering affordable housing — is a vulnerability for the federal agency. The nursing home industry is increasingly being run by for-profit operators facing dwindling margins. Some homes — especially those in rural areas — are struggling to stay open, with operators blaming low occupancy and insufficient payments from Medicaid and Medicare.
At the Rosewood chain, which houses more than 1,100 people, the housing department has been forced to take control of the 13 facilities in Illinois and Missouri. It is paying a million dollars a month to keep them afloat.
When the program was created in 1959, its goal was to help ensure that Americans had access to affordable nursing homes by bankrolling the construction of new facilities. The program has evolved, and it now provides financial guarantees on loans that banks make to elder-care facilities. By making the loans less risky for banks, lenders could charge lower interest rates, thus reducing the fees that the nursing homes needed to charge patients.
The result now is that the agency manages a portfolio of loans that are at risk of going bad. HUD, and therefore taxpayers, could be on the hook for money-losing facilities around the United States — just as waves of aging baby boomers are likely to prompt a surge in America’s nursing-home population.
Today, the program guarantees $20 billion in mortgages to more than 2,300 nursing homes — about 15 percent of the country’s total, up from about 5 percent a quarter-century ago. Most of the nursing homes it backs are private, for-profit enterprises.
The problems with the program go back decades.
A report from the Government Accountability Office in 1995, when the program supported about 800 nursing homes, found that loan-management staff members “generally do not focus attention on nursing home loans unless financial trouble appears imminent or a default occurs.” The report said this left a gap in oversight, because other state and federal regulators focus on the quality of care and not on the homes’ financial viability.
Reports by the HUD inspector general last year found similar issues. An audit of 18 “financially challenged” nursing homes concluded that the housing department “did not always identify and address the root causes of a nursing home’s financial or operational challenges” and failed to “penalize operators that did not submit accurate and complete data in a timely manner.”
Another 2018 report focused on the agency’s lack of oversight of the homes’ physical conditions to ensure they would remain viable over the course of the federally backed loan. The inspector general said some facilities “were neglected and generally run down.”
Edward Golding, a former top official with HUD during the Obama administration, defended the loan-guarantee program as essential to helping nursing homes and assisted-living facilities get access to credit.
But, he said, the program “could benefit from more transparency and public awareness.”
The housing department took Rosewood to court last summer, but it had known early on that the chain was struggling to pay its bills and possibly mismanaging the program’s money.
Rosewood never filed the financial statements required by the program. Because HUD had insured the loans, it had to sign off when Rosewood was bought in December 2013 by a group of investors led by Zvi Feiner. Mr. Feiner, 48, a rabbi with a business degree, found most of his investors in the Chicago-area Orthodox Jewish community.
Mr. Feiner’s firm, Feiner Investment, is in the same office building in Skokie, Ill., as Bais Medrash Binyan Olam, the congregation where he presided over weekday prayer services. He was also president of a Jewish elementary school and served for several years as a mayoral appointee to a neighborhood business improvement district in Chicago.
Mr. Feiner raised tens of millions of dollars from investors, including a 90-year-old Holocaust survivor and several teachers at a Jewish day school. Mr. Feiner also bought nursing-home companies in Illinois, New Jersey and Indiana.
Rosewood’s financial problems were compounded by legal battles over its debts, including money it owed vendors. Investors sued in state, federal and religious courts contending that Mr. Feiner misappropriated millions of dollars, an allegation his lawyer disputed. Last year, a rabbinical court in Chicago awarded one investor $13 million.
By 2015, Mr. Feiner and his partners were missing mortgage payments and had improperly diverted $7 million of federally insured funds to at least one other nursing home, according to court documents.
Ariel Weissberg, a lawyer for Mr. Feiner, said Rosewood’s financial woes stemmed in part from disputes with business partners.
“Zvi is trying to get back on his feet,” Mr. Weissberg said. “He’s trying to pay these people back.”
Even as Mr. Feiner’s investors and vendors sued, HUD mostly remained on the sidelines. The agency was aware in 2015 of Rosewood’s mounting monetary problems, including the diversion of funds, according to court filings. But the housing department did not force the facility to shore up its finances or press Mr. Feiner and his partners to sell to a stronger operator.
Last August, Rosewood’s corporate parents defaulted on $146 million of mortgage loans, which meant the housing department’s insurance fund had to pay that amount to Rosewood’s lender. The agency filed a lawsuit seeking to appoint a receiver to run the nursing homes. In court filings, HUD described a toxic brew of litigation, infighting and financial mismanagement that “contributed to an environment of uncertainty and risk for the patients at the Rosewood facilities.”
In October, the agency filed a complaint against Mr. Feiner seeking nearly $1 million in penalties for failing to file required financial reports. Mr. Feiner’s lawyer said they had agreed to settle the case.
In a statement, the agency said its “foremost concern is always the health and safety of the residents.” It added, “Following a number of time-consuming and exhaustive attempts to resolve these defaults, foreclosure could not be avoided.”
The federal department is now stuck running the Rosewood properties. About half are losing money, and several have problems with mold and faulty sprinkler systems, according to court papers.
The agency plans to auction them off, with bids due on Friday. If they don’t sell, HUD will have to run them until a buyer can be found.
Since August, HUD has spent more than $15 million to keep the facilities open — plus the $146 million it dispensed to Rosewood’s lender. The agency estimates that the facilities are worth no more than $95 million, according to public documents soliciting bids.
Substantial losses are common when loans in the program fail. The department has incurred an average loss of 80 percent on defaulted mortgages in recent years, according to government documents.
A nursing home’s financial woes risk hurting residents.
“Nursing homes’ financial difficulties almost inevitably impact resident care,” said David Stevenson, a professor of health policy at the Vanderbilt University School of Medicine. He said agencies like HUD needed to “figure out ways to act before people are harmed.”
At Rosewood, health and safety problems developed soon after Mr. Feiner’s group took over.
Between 2014 and 2018, the Illinois Department of Public Health imposed $213,000 in fines against the facilities — more than five times the amount levied in the last five full years under the previous owner. And six of the Rosewood nursing homes, including those in Moline, Ill., and Inverness, Ill., had one- or two-star ratings on the federal Medicare website, which rates them on health and safety on a five-star scale.
It is part of a broader pattern at HUD-supported facilities. A New York Times analysis of all nursing homes with mortgages backed by HUD found that more than 850 facilities received one- or two-star Medicare ratings — more than one-third of the total.
There are nearly three dozen still-active personal injury lawsuits, including a number of wrongful death actions, filed by families of Rosewood patients. Lawyers for the estate of a 93-year-old dementia patient, Dorothy Dainty, said she died of complications from a fall at the facility in Rockford, Ill., because staff members failed to properly supervise her.
At another nursing facility that Mr. Feiner ran in Decatur, Ill., regulators imposed about $280,000 in fines after a patient died of an untreated wound. That home has since closed.
Sean Murray, whose law firm is representing Ms. Dainty’s estate, said she had fallen out of bed and broken her hip because some workers had been pulling double shifts.
“For-profit homes are understaffing their facilities,” said Mr. Murray, whose firm is also representing the estates of two other Rosewood residents.
Rob Gebeloff contributed reporting. Alain Delaquérière contributed research.