My diabetic terrier has eaten all of the hair off of his backside- what's wrong?

I thought it could be due to fleas, because one of my dogs recently stayed at a pet hotel and acquired fleas. However, he was eating his hair before the fleas. Does this have something to do with his diabetes, or is it related to something else? He is 10 years old and is almost completely blind. In addition to eating his hair, he has quarter-sized red spots (almost like lighter red surrounded by a darker red ring) on his skin, and when you pet him, you can feel lumps all over his body. What can I do to help him? What could this possibly be?