Partners (Number 1, 2006)

New Orleans Welcomes Visitors, but Recovery Is Slow

Debris removal and infrastructure repairs still dominate reconstruction activity on the Gulf Coast. Beyond the festive French Quarter and resplendent uptown Garden District, the phenomenon of flood damage, depopulation, delayed reconstruction and policy uncertainty has transformed much of residential New Orleans into a dismal place.

Although locals continue to deal with the daily inconveniences of early store closures and abandoned neighborhoods, visitors can still find spicy food and hot entertainment in the shrunken city. Policymakers are very concerned that residents now working and schooling their children elsewhere will not return.

Uncertainty about federal levee protection
Flooding caused by levee failures accounts for roughly 90 percent of destroyed homes in metro New Orleans. If the levees had held (particularly federal floodwalls inside the city), Katrina would have been just another close call for New Orleans, a tragic Mississippi storm-surge story, and a typical Florida hurricane. No wonder Louisiana homeowners have deposited their insurance checks and waited. The U.S. Army Corps of Engineers (USACE) expects to complete a massive $2 billion emergency levee repair project by early summer—a requirement for this year’s hurricane season and an initial step towards fulfilling the President’s pledge to protect the city.

The project underway will bring federal and municipal levees up to pre-Katrina design specifications, which were not in effect at the time Katrina hit because of settling, design flaws, and other issues. Moreover, USACE released a report recommending substantial upgrades to the system because pre-Katrina specifications did not provide adequate protection to meet standards for levee protection under the National Flood Insurance Program. The Corps is required to “certify” that levees meet Federal Emergency Management Agency (FEMA) standards.

Congress approved only a portion of the $11 billion price tag submitted by the Corps for beefing up levee protection in the four worst-affected parishes. However, the cost of prevention is trivial compared to the payout of $14.7 billion in national flood insurance claims and at least $50 billion in emergency assistance to displaced residents and flooded communities. Private insurers paid claims of $22.6 billion in Louisiana.

Many analysts say that FEMA has lost its focus and status after being placed under the Department of Homeland Security (DHS). According to a July 2005 report from the U.S. Government Accountability Office (GAO), DHS has channeled disaster planning resources to preparations for terrorist attacks using chemical, biological and nuclear weapons. Nevertheless, the most common national disaster is flooding.

Good news in New Orleans
New Orleans has experienced several milestones in its recovery over the past six months. The city was able to throw a scaled-back Mardi Gras fete in February. The port is operating at roughly 70 percent capacity and cruise ships are returning to the city. The convention industry is gradually recovering; and the convention center has partially reopened.

Federal mortgages are available. Owners of damaged homes are able to obtain construction loans that are rolled into permanent financing after repairs are completed and inspected. The city is issuing permits but requires that substantially damaged homes be demolished or rebuilt to the safe flood elevations established by FEMA. The agency issued long-awaited advisory building guidelines in early April. FEMA guidelines assume partial levee flood protection in Orleans and St. Bernard, based on progress made so far and expected congressional funding.

Shortly after the storm there were predictions that New Orleans would be inundated with floodwaters contaminated by toxic waste. The “toxic soup bowl” hypothesis has been proven false by the U.S. Environmental Protection Agency (EPA). The EPA’s final report states that the levels of pollutants in the worst-affected parishes have not changed and remain on par with other urban areas (except the area in St. Bernard Parish affected by the Murphy Oil Spill). Most toxins carried in the floodwaters appear to have washed out to sea or evaporated.

Housing shortage
Housing losses and a large renter population pose unique recovery challenges to the New Orleans metropolitan area. In total, Katrina destroyed ten times more homes than either hurricane Andrew or the four major storms that battered Florida in 2004. Katrina and Rita resulted in major or severe damage to a total of 266,000 homes—61,000 in Mississippi and 205,000 in Louisiana, including 77,000 rental units.

The New Orleans MSA lost over 200,000 jobs and 403,000 residents. This population loss equals the entire city of Atlanta or Tulsa—or the combined population of Orlando and Richmond. The rollout of FEMA trailers has so far barely made a dent in this figure. Thousands remain doubled-up with nearby friends and relatives. More than 200,000 displaced Louisianans reside in nearby southeastern states and Texas.

Catastrophic damage along the three-county Mississippi coast initially displaced 48,000 residents, and 42 percent had still not returned by January 2006. Over 26,000 owner-occupied Mississippi homes were destroyed or rendered uninhabitable.

Rebuilding a low-wage economy
Judging by the number of closed restaurants, a lot of crawfish have escaped Big Easy kitchens—less than half the city’s restaurants have reopened. The loss of jobs and income has severely eroded public finances as well as demand for goods and services. Many businesses, including the city’s major hospitals, have pared staffing and hours or closed down.

Recovering the large number of low-wage service workers (who often rent) is a major planning problem. Unless wages increase significantly, the state may have to subsidize new affordable housing units for a large low-wage workforce made up predominantly by renters. Along with the school district and the police department, the local housing authority has a poor track record for managing funds and avoiding corruption scandals.

So far the worker shortage has led to modest wage increases. Hourly wages in the restaurant industry have risen 10 to 30 percent; a worker who formerly made $8 per hour now earns about 25% more and overtime is plentiful according to local trade associations.

Housing policy
Most recent data for the fourth quarter of 2005 show alarmingly high mortgage delinquency rates of 20.8 percent in Louisiana and 16.9 percent in Mississippi, compared to the national rate of 5.1 percent. Deferrals have thus far helped keep foreclosure rates low, but as they expire, the rate of foreclosures is expected to rise, especially since these states had very high foreclosure rates before Katrina. Many lenders are extending initial six-month deferrals on a case-by-case basis because consumers may lack the means to become current on mortgage payments.

Unlike Fannie Mae and Freddie Mac, FHA guarantees only the credit of the borrower and stipulates that a lender must convey a “marketable” house to FHA. This requirement would compel foreclosing lenders to make costly repairs to flooded homes. The same is generally true for private mortgage insurance. Will lenders steer borrowers away from FHA financing in flood-prone areas nationwide? If so, this could affect housing affordability throughout the District.

In the case of a prolonged recovery period following a natural disaster, will lenders choose not to report adverse credit events associated with the disaster to credit bureaus?

A substantial number of flooded housing units (64,000) were outside the 100-year floodplain, where flood insurance is required for borrowers obtaining mortgages from federally regulated financial institutions. Louisiana accounted for 90 percent of owner-occupied homes that suffered severe damage in the 100-year floodplain and 59 percent of those outside the floodplain.

Consumer issues and prices
Unlike federally sponsored flood insurance, which remains readily available, private homeowners insurance has become scarce—a problem being faced by many coastal areas. This is hurting local housing markets. Many private insurers have stopped writing new policies in Louisiana. Policies are now more expensive and also typically include very high deductibles for wind damage. Even the insurer of last resort, the state-sponsored “Fair Plan,” is often prohibitively expensive for prospective buyers. Katrina and Rita produced more than $1 billion in losses for Louisiana’s Fair Plan.

Some realtors in New Orleans now require borrowers to find insurance shortly after signing the contract because acquiring insurance can no longer be taken for granted.

Damage-adjusted property prices appear to be holding up in most areas, but lot values in some low- and moderate-income areas have already fallen below pre-Katrina levels. In the most severely damaged areas, home sales are few and dominated by cash transactions, which will lower comparable sale prices. General concern exists about downward pressure on prices that could result from an excess supply of lots, foreclosures and other forced sales.

Although extreme poverty exists in New Orleans, photos that appeared in the media grossly distort the overall condition of housing stock prior to Katrina in many of the city’s severely flooded areas, which included vibrant working- and middle-class neighborhoods. One can only hope for a bright future for the Big Easy.

This article was written by Bryan Gobin, financial analyst in the Supervision and Regulation Division at the Atlanta Fed.

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