Reconstructing Housing
After A
Natural Disaster
Angela M. Christy, Faegre & Benson LLP, Minneapolis, MN
Reconstructing Housing After A Natural Disaster
I.
Introduction
The combined effects of Hurricanes Katrina and Rita in the late summer of 2005 displaced more
than one million persons in the Gulf Coast Region. Hundreds of thousands of housing units were
destroyed. While the focus was largely on New Orleans, there was also massive devastation
along the Mississippi and Alabama coastlines and in southwest Louisiana. Some estimates
indicate that 80% of the housing in New Orleans may have to be rebuilt. Providing temporary
and replacement housing for that over one million people challenged the capacity of America’s
emergency response to a housing crisis and may provide new perspectives about how the country
approaches major urban redevelopment.
Prior to the hurricane the population of New Orleans was about 435,000. The population of
Greater New Orleans was more than 1,300,000 in 2000, placing it thirty-fifth among United
States metropolitan areas. The poverty rate in the city is exceptionally high. The census data
indicates that more than twenty-eight percent of the city’s residents were living in poverty before
the hurricane descended upon the city. Of the 245 large cities in the nation (those with
populations of 100,000 or more), New Orleans tied for the sixth poorest in the 2000 census. The
hurricane damaged significant portions of the City where the lowest income households resided.
Over fifty percent (50%) of the households in New Orleans had over four (4) feet of flood water.
Rebuilding will be a long and costly process. To date, the focus has been on providing
temporary housing and rebuilding the utility infrastructure. In December 2005, four months after
Katrina, a number of evacuees continued to live in mass shelters and some experts have
estimated that 40% of New Orleans was still without power. As the focus changes to permanent
reconstruction, a process needs to be defined to plan the redevelopment, and the funds need to be
assembled to accomplish the rebuilding. In December 2005, numerous proposals were pending
in the U.S. Congress to begin financing the reconstruction. More funds will be needed and, with
the reduced tax base in the area impacted by Katrina and Rita, a substantial portion of the initial
funds will have to come from federal sources.
This paper addresses the initial federal response to meet immediate housing needs, the interim
governmental actions, the Congressional proposals in December 2005 to commence rebuilding
and the long-term challenges and opportunities.
II.
Immediate Housing Needs
A.
Using Mobile Homes and Recreational Vehicles as Temporary Housing
The initial response to the disaster was to use the typical FEMA approach of providing mobile
homes as temporary housing. It quickly became apparent that the traditional approach would not
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work with this magnitude of disaster. Even if sufficient mobile homes and recreational vehicles
could be found, identifying sites, obtaining the local governmental approval for the new housing
sites, and installing the necessary utilities would delay the housing for an unacceptable period.
As of October 6, 2005, more than 60,000 people were still in mass shelters and 435,000 were in
hotels or motels.
B.
A New Approach – Rental Housing Assistance
FEMA revised its strategy. While some mobile homes and three cruise ships were used to
provide temporary housing, FEMA turned to using existing rental units as a mechanism for
housing displaced persons. FEMA provided initial cash payments of $2,358 under its
Individuals and Household Assistance Program to families located in the eight coastal counties
most damaged by Katrina. The initial payment was intended to provide assistance for three
months and was based on the average national rent for a two bedroom unit. There was no
adjustment of the payment based on family income or size. Additional assistance is expected to
be available to provide temporary housing for up to eighteen months, although there is some
uncertainty about whether funds will be available for that entire time period. In addition,
families living in subsidized housing prior to Katrina and homeless persons were offered
temporary housing assistance vouchers under the Katrina Disaster Housing Assistance Program
(KDHAP). Public housing authorities and private owners were allowed to give priority to
KDHAP eligible residents over other persons on subsidized housing waiting lists. Rent for
KDHAP eligible persons was totally subsidized with no tenant required payment. On
December 1, 2005, HUD issued Public and Indian Housing Notice 2005-36, which is a formal
presentation of HUD’s Katrina Disaster Housing Assistance Program (KDHAP) Operating
Requirements.
The
Notice
can
be
found
at
www.hud.gov/offices/pih/publications/notices/05/pih2005-36.pdf
C.
Hotels and Motels – A Successful Legal Challenge
A large number of evacuees moved into hotels and motels, the only available “housing” units
located close to their former homes. In November, FEMA announced that as of December 1,
2005, it would stop paying the hotel costs for approximately 150,000 hurricane evacuees living
in about 40,000 to 53,000 hotel rooms primarily in Texas, Louisiana, Georgia and Mississippi.
At one point, evacuees occupied about 85,000 hotel or motel rooms. On December 12, 2005,
Judge Stanwood Duval of the U.S. District Court for the Eastern District of Louisiana issued a
ruling that temporarily stopped FEMA from ending its hotel/motel subsidy. Judge Duval ordered
FEMA to continue subsidizing hotel and motel residents until at least January 7, 2006.
III.
Agency Waivers
At the same time that FEMA was determining how to house the evacuees, various federal
agencies were granting waivers or modifying programs to accommodate the needs of displaced
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persons. Many of the waivers were granted in areas outside of housing, but this article addresses
only the housing related regulatory actions.
A.
The Internal Revenue Service
First, the Internal Revenue Service modified rules related to the low-income housing tax credit
(LIHTC) program. The IRS allowed state agencies to waive the income limits for LIHTC
projects and permit individuals who are not income qualified under the LIHTC program to
occupy vacant units. Each state’s LIHTC allocator is permitted to determine an appropriate
period for the provision of temporary housing to non-income qualified persons, but the period
cannot extend beyond September 30, 2006. Technically, the displaced household is treated as an
income qualified household for the purpose of the minimum set-aside test and to determine
qualified basis. There was some concern that this change would result in denying housing to
low-income persons outside the disaster area. While the IRS made it clear that existing tenants
in an LIHTC project could not be displaced to provide housing for evacuees, there was still
concern that low-income residents of areas in the South were denied housing opportunities
because units were occupied by market rate tenants displaced by Hurricanes Katrina and Rita.
The IRS also relaxed some of the deadlines for filing reports and returns related to tax-exempt
bonds.
B.
HUD Waivers
HUD issued waivers of more than forty requirements designed to permit relief to flow to
individuals impacted by the hurricanes. Typically, a jurisdiction can spend only fifteen percent
of its Community Development Block Grant (CDBG) funds on public service expenditures.
Public service expenditures include the provision of temporary shelter and food. On September
5, 2005, HUD issued a temporary waiver of the fifteen percent limit on public service
expenditures. Legislation has been introduced to extend that waiver.
HUD also modified the HOME Program requirements to allow self-certification of income and
permit preferences for evacuees. HUD provided some additional flexibility under the Housing
for Persons with AIDS Program and the Emergency Shelter Grant program so that they could
more effectively be used to provide assistance to hurricane victims.
IV.
Lender Response
A.
HUD Foreclosure Moratorium
Numerous lending agencies and financial institution regulators adopted policies to provide relief
to hurricane victims. On October 24, 2005 HUD issued Mortgagee Letter 2005-41 which
addressed a number of issues related to servicing mortgages in the hurricane damaged areas.
Most important to borrowers was the ninety day moratorium on all foreclosure actions in
federally declared disaster areas. On November 23, 2005 Housing and Urban Development
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Secretary Alphonso Jackson announced an extension of the foreclosure moratorium to
February 28, 2006.
B.
Fannie Mae and Ginnie Mae
Fannie Mae also provided guidance for forbearance of loans. The most recent lender letter
03-05 issued on December 2, 2005 provides guidance for hurricane-related special relief efforts,
and addresses forbearance, repayment plans, mortgage modifications, and foreclosures.
On November 30, 2005 Ginnie Mae announced that it was extending its mortgage foreclosure
suspension in the hurricane impacted areas until February 28, 2006.
C.
Other Financial Institutions
On November 30, 2005 the Federal Financial Institutions Examination Council (FFIEC) issued
an announcement that the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the National Credit Union Administration, the Office of the
Comptroller of the Currency, and the Office of Thrift Supervision are encouraging insured
depository institutions to consider all reasonable and prudent actions that could help meet the
critical financial needs of customers and communities affected by Hurricane Katrina. The
agencies encouraged lenders to work with borrowers affected by the storm. Lenders initially
agreed to defer loan payments 90 days and many lenders are agreeing to additional deferrals and
structured repayment schedules. The position of FFIEC is important because financial
institutions need assurance that the deferrals and restructurings will not adversely impact their
ratings with the regulators. However, not all mortgage companies are acting responsibly and
Louisiana Attorney General Charles Foti announced on December 29, 2005 that the Consumer
Protection Division was investigating the excessive prepayment penalties being charged by some
lenders when insurance proceeds were applied to repay loans. He also questioned whether some
lenders were withholding insurance checks issued to repair homes.
V.
Flood Insurance
Only about forty percent of the homeowners in New Orleans had flood insurance. The numbers
are better outside the City where officials for the National Flood Insurance Plan (NFIP)
estimated that roughly 74% of the affected properties in Louisiana have flood insurance. For
those that did, there is some hope for rebuilding their homes. However, limits on coverage and
delays in payment are impediments to complete reconstruction even for those individuals. Flood
insurance provides full replacement cost up to the policy limit assuming that the property is
insured for up to 80% of its value. In general, there is an overall limit of $250,000 for each
dwelling and $100,000 for contents. The flood insurance policy contains a mortgagee clause to
issue checks directly to the mortgagee in the event the loan is in foreclosure. Otherwise,
insurance funds will be issued co-payable to the mortgagee and the home owner. It is important
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that lenders permit proceeds to be used for rebuilding rather than to repay the loans if the
rebuilding effort is going to proceed efficiently.
VI.
Legislative Action
There is a three-pronged legislative approach to the reconstruction of the Gulf Coast region after
Katrina. First, there needs to be a plan and funding for the modification and reconstruction of
the levee system. People are waiting on a decision to rebuild based on this. Second, there needs
to be a plan to restructure or forgive the debt that cannot be repaid on flood damaged housing
and provide for a coordinated approach to land development. Finally, there needs to be a
package of financial incentives and cash available to catalyze the development that will reestablish a tax base in the stricken areas.
A.
The Louisiana Recovery Corporation
The Louisiana Recovery Corporation Act (H.R. 4100, also known as the Hurricane Katrina
Response Act, introduced by Representative Richard Baker) would establish a Louisiana
Recovery Corporation. Although the bill did not pass in 2005, there is some indication that
similar legislation will be considered in 2006. The bill addresses land use management,
economic development, property acquisition, property management, property disposition and
“urban homesteading and community and faith-based organizations.”
The bill includes
authorizations for $13 billion of CDBG funds, $1.5 billion for the HOME program, $100 million
for HOPE VI, $100 million for public housing capital repair and $2.5 billion for emergency
Section 8 voucher assistance. The Corporation would be authorized to negotiate to acquire title
to real property and to compensate any owner, mortgagee or primary lien holder. The
Corporation expressly would not be granted the power of eminent domain. In no case could the
payment for any property exceed $500,000 and in no case could the Corporation pay less than
60% of the individual’s equity in the property. The bill also provides that in no case can a
purchase payment to a lien holder be more than 60% of the value of the lien. Previous owners
may have right of first refusal to purchase properties subsequently sold by the Corporation.
The Corporation would be able to assemble sites and turn them over to private entities for
redevelopment. Any land sales proceeds would be returned to the federal government. This
would enable large sections of the damaged areas to be reconstructed using a comprehensive
plan. A developer would be more likely to structure a transaction using the various federal
incentives included in other legislative proposals. However, one concern is that the
redevelopment could operate like earlier urban renewal programs displacing the previous lowincome residents in favor of commercial development and market-rate housing.
B.
Additional Financial Assistance
On December 21, 2005, President Bush signed a tax relief package for rebuilding of the Gulf
Coast (H.R. 4440). Public Law 109-135 provides additional low income housing tax credit and
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tax exempt bond authority for states affected by Hurricane Katrina. In Louisiana, Mississippi
and Alabama from 2006 through 2008, the housing credit ceiling of each state would be
increased to $18.00 multiplied by the population in the areas in those states designated by the
President to warrant federal assistance (the “Gulf Opportunity Zone”). These additional credits
could only be used to build housing in the affected areas. The credit could be issued between
January 1, 2006 and December 31, 2008. The bill also creates special rules to make it easier to
use the credits in the Gulf Opportunity Zone. National gross incomes would be used to
determine income limits. All of the Opportunity Zone would be classified as a difficult
development area entitling projects to a 30% increase in credits. The bill also proposes that
certain demolition and environmental remediation costs may be expensed. and authorizes the
issuance of tax-exempt bonds for the reconstruction of homes, businesses and utilities.
The Act increases the 10% rehabilitation tax credit to 13% and the 20% historic rehabilitation tax
credit from 20% to 26%. Additional new markets tax credits totaling $1 billion were allocated
in the Gulf Opportunity Zone, $300 million for 2005, $300 million for 2006 and $400 million for
2007.
A hurricane spending reallocation package was included in the FY06 defense appropriations
legislation, along with additional supplemental funds for hurricane relief. The bill included $29
billion for hurricane recovery. In addition to $2.9 billion for levee repairs and upgrades, the bill
includes $11.5 billion of community development block grants, $1.6 billion to help rebuild and
repair schools damaged by Hurricanes Katrina and Rita and to reimburse schools, both public
and private, that took in students displaced by the storms. However, $6 billion in coastal
restoration funding was not included in the final legislation.
C.
State Legislation
The state legislatures are also working to adopt legislation to resolve various problems. The
Louisiana Legislature adopted Act No. 37 which requires lenders to deposit insurance proceeds
on homeowners policies in an interest-bearing account. Act No. 12, adopted by the Louisiana
Legislature, establishes a State Uniform Construction Code. Act No. 56 addresses the unique
problems posed by abandonment and eviction in rental properties impacted by Hurricanes
Katrina and Rita. The state legislatures in Louisiana, Alabama and Mississippi continue to
evaluate ways to deal with the unexpected consequences of the storms.
VII.
A Vision for the Future
A.
Flood Control Planning
The first step in the reconstruction process will be to decide where rebuilding should occur. The
decision about where to rebuild will depend on a thorough evaluation of the elevations that can
be protected and areas that should be converted to parks or open space because they cannot
reasonably be protected from future flooding. A plan needs to be developed for reconstructing
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levees in a location that will reasonably protect areas from a future comparable flood. This plan
is essential if lenders are going to provide financing for new developments in New Orleans.
Lenders are going to suffer massive losses as a result of the recent disasters and development
will need a sound plan for minimizing the risk of flooding and adequate insurance protection if
new financing is going to be obtained.
The time frame for rebuilding the levees is a question, as well. While New Orleans’ Mayor Ray
Nagin announced in December 2005 that it was time to return to New Orleans, Donald Powell,
the Federal Coordinator for Gulf Coast Rebuilding indicated that although some work would be
completed by June 2006, many of the improvements to the levee system would take two years to
complete. Other experts predict that the necessary improvements to the levee system will be
much more expensive than projected and with 350 miles of levees and floodwalls, could take up
to a decade to complete. It is hard to envision how rebuilding can begin until developers and
homeowners can be assured that new developments will not be flooded in the next hurricane.
Plans for flood control and levee reconstruction will be controversial. At least initial plans by
the seventeen member citizen commission, the Bring New Orleans Back Commission, propose
that at least initially, portions of the City will not be rebuilt, including portions of eastern New
Orleans, the Lower 9th Ward, Gentilly and Lakeview. This means that some of the low-income,
culturally diverse neighborhoods may not be rebuilt. There is concern that the plan will result in
massive displacement of low-income persons who lived in those neighborhoods. Some allege
there is a hidden agenda to permanently relocate low-income persons outside the City. This
makes it even more important that the land use redevelopment plan include plans to incorporate
affordable housing and community development.
B.
Land Use Planning
Once an acceptable flood protection plan is developed, the process of planning the actual
developments needs to occur. This includes site acquisition, development of a comprehensive
plan and approval of individual site plans. This process will be hindered some by the lack of
planning staff in New Orleans and other cities. Some employees were displaced and have not
returned. In addition, with substantially reduced revenues, cities have had to cut back on staff at
a time when there will be massive increases in workload. Not only will the City have to process
individual applications for developments, but it is anticipated that zoning ordinances will need to
be amended, major portions of the City will have to be reclassified and new subdivisions will
have to be approved. While entities like the Louisiana Recovery Corporation and Urban Land
Institute may help with the plan for rebuilding, it is essential that there be adequate local staff to
evaluate development proposals.
There is universal consensus that local input is essential for successful development. However,
this is not as easy as it sounds. Traditionally, notice of land use approvals is given by mail to
neighboring residents. Here, the residents have been relocated to remote locations frequently
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outside the municipality. Mailing lists are meaningless. A concerted effort needs to be made to
include community residents in the planning process.
There are fair housing concerns that also need to be kept in mind throughout the process. Simply
recreating the old communities and relocating prior residents may violate fair housing laws.
However, concerns with concentrating low-income minority individuals need to be balanced
with concerns about permanently displacing residents and destroying the unique character of
local neighborhoods.
.On January 11, 2006, the Urban Planning Committee of the Bring New Orleans Back
Commission issued its proposals. Those proposals were controversial. First, the committee
recommended a ban on development in the flooded areas of the City until at least May 20, 2006.
During that time, neighborhoods are to present plans for redevelopment and if no viable plan
emerges, then the City may use eminent domain to acquire properties and demolish damaged
buildings. The plan would create green spaces and parks in areas prone to flooding. This will
mean that certain homes will not be rebuilt in their current locations. The plan proposes an
independent agency, the Crescent City Recovery Corporation, to manage redevelopment. The
City Charter would also take away from the City Council the ability to reverse decisions by the
City Planning Commission. Finally, the Plan includes a light-rail system to spur development.
C.
Sustainable Mixed-Use Development
The total rebuilding that needs to be done in some areas does present the opportunity to create
mixed-income, mixed-use communities while retaining the unique character of the Gulf Coast
region. Communities lost public facilities, office space, and commercial facilities at the same
time that they lost housing units. There are models from around the country that successfully
combine various uses in the same development. Some of the creative HOPE VI developments
around the country may provide good examples to use as starting points. Police stations,
community centers and libraries can be in the same building with housing. Jobs and
transportation systems should be part of an integrated housing plan. Inclusionary zoning should
be part of the plan so that displaced residents will have a wide variety of housing options
throughout the area. The best ideas from around the country should be considered while
tailoring the ideas to the unique character of the region. The solution cannot be to simply change
New Orleans and the surrounding region into something else. The plan must be to combine the
elements that make the area unique with proven methods for sustainable development.
D.
Assembling the Resources
Successful redevelopment will require using all of the economic tools that are available for
redevelopment as enhanced by recent federal action. Historic credits, low-income credits, new
markets tax credits, HOME funds, CDBG funds and cash infusions must be combined to
accomplish development. CDBG and HOME funds could be essential for clearance, demolition,
and site assembly as well as rebuilding new facilities. The historic buildings can be renovated
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using the 10% or 20% historic credit, as appropriate, although only the 20% credit for historic
structures can be used with residential development. As many as 25,000 of the 38,000 buildings
in the nineteen historic districts in New Orleans were damaged which means that historic credits
could be a powerful tool for redevelopment. The new market credit can be used for the
commercial portions of development in qualified low-income neighborhoods, and much of the
damaged area qualifies. Low-income housing tax credits can be used for the affordable housing
components of projects and can result in equity contributions for fifty percent or more of that
portion of the development. While the task will not be easy, the combination of the increased
resources committed to the Gulf Coast region could result in sustainable, vibrant neighborhoods
that will be a model for future development across the country.
The vast amount of redevelopment that will need to occur and the substantial resources targeted
for that redevelopment will provide opportunities to address problems that existed in New
Orleans and other Gulf Coast communities prior to Hurricane Katrina. The public housing in
New Orleans had a long history of management problems and its public housing was in poor
condition. In 2002, HUD took over control of the public housing authority in New Orleans.
There were few resources available to correct the deficiencies. Many small towns and cities in
the Gulf Coast had inadequate housing and lacked essential community facilities. The current
situation provides vacant land and economic resources to create developments that could be
models for solving similar problems in other communities.
It is hard to imagine the new development as people are still focused on debris removal and
reimbursement for temporary housing. That vision should emerge over the next year and be
implemented over the next several years. As Kristina Ford, the former planning director for the
City of New Orleans, noted in The Times-Picayune on December 25, 2005, “It is a horrible
opportunity because of the destruction that caused it and the lives that are being blasted apart, but
it also offers a chance to think about things that in the past were unthinkable.” The Action Plan
for New Orleans: The New American City issued on January 11, 2006 stated, “New Orleans will
be a sustainable, environmentally safe, socially equitable community with a vibrant economy.
Its neighborhoods will be planned with its citizens and connect to jobs and the region. Each will
preserve and celebrate its heritage of culture, landscape, and architecture.
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