5/18/08 1

Helping Homeowners in the Gulf: The Road Home

Eileen NorcrossMercatus Center at George Mason University

Preserving the American Dream ConferenceHouston May 16-18 2008

5/18/08 2

2005 Gulf Hurricanes

Over 300,000 homes destroyed or damaged

Louisiana: jack o’lantern effect

Mississippi: erased entire sections

Greater magnitude of destruction in Louisiana

5/18/08 3

Early goal: help homeowners

Compensate property owners making up insurance gap.

Federal allocation (CDBG)

Louisiana: $10.4 billionMississippi: $5.52 billion

5/18/08 4

Two scenarios

Mississippi 68,000 homes destroyed or damaged

Louisiana 205,000 homes destroyed or damaged 65 percent of 147,000 NOLA properties

flooded Over half sustained severe damage

5/18/08 5

Mississippi Homeowners Assistance Program

Narrow eligibility at first (Phase I)

Compensate those who “relied to their detriment on inaccurate NFIP flood maps” and didn’t get flood insurance.

Calculated: 31,000 homeowners lived outside the flood plain. 19,000 relied on NFIP. Another 7,800 carried some insurance. Target first.

No strings attached.

Covenant: must carry insurance in perpetuity; build to code.

5/18/08 6

Mississippi Phase II

Nov 2006 expand program

Those inside or outside flood plain without insurance.

Max award = $100,000

Same formula, 30% penalty for failure to carry insurance

5/18/08 7

5/18/08 8

Phase I: those with homeowner’s insurance, but without NFIP or carrying insufficient NFIP. Of these, 19,000 lived outside designated flood plain, and therefore told NFIP was unnecessary, though they did possess homeowner’s policies. 7,800 had both homeowner’s and some level of NFIP.

Phase II: insured or uninsured inside or outside flood plain.

Mississippi: Homeowner’s Assistance Program

5/18/08 9

Road Home goals and design

Broad eligibility: included wind damage

Get residents to fix houses: exit penalty for leaving state

Escrow account: ensure spent on home repairs

Complex ID verification to minimize on fraud

Additional affordable housing goals

5/18/08 10

Louisiana: Exit Penalty

If leaving Louisiana or renting:Pre-storm value of house

MinusInsurance payouts, SBA loans, grants

Penalties30% failure to have insurance40% exit penalty (elderly exception)

5/18/08 11

Calculating the Award: Louisiana

If staying (repair house, or sell and buy another LA house)

Pre-storm value of houseMinus

Insurance payouts, SBA loans, grantsPenalty

30% failure to have insurance

5/18/08 12

Exit penalty effects?

$6.3 billion disbursed

$58,534 avg. grant

156,135 eligible

108,006 closings

Stay and fix

136,899

Sell and buy in LA

16,363

Sell and leave LA *or rent

2,310

Undecided 21,096

N/A 8,438

5/18/08 13

Covering Wind Damage

Added $3 to $6 billion (shortfall)

Encourages Moral Hazard

De-concentrates effects

Adds applicants. Slows down system.

5/18/08 14

Louisiana spread funds over time and space

Percent of units with severe or major damage compared to percent of Road Home closings by Parish

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Pct occupied Units with Major/Severe Damage

Percent of Road Home Applications Closed

5/18/08 15

De-concentrating funds

Parish Major/Severe Minor Damage

Total Damage

Closings

St. Bernard

19,686 561 20,247 39%

East Baton Rouge

238 16,915 17,153 22%

West Baton Rouge

15 1064 1079 33%

Orleans 105,323 29,241 134,564 51%

5/18/08 16

A Gentilly Resident

“We didn’t get a response back for one and half years.

I know a guy who lives on the north shore. He had

wind damage. He applied a year later [than I did].

He got $70K worth of damage he thought cost $15K.

He added a room to his house with the extra money.

They were giving out money on the outer outskirts…

to people who had minor damage. What about

people in the epicenter who lost everything?”

5/18/08 17

Administrative Uncertainty

Frequent policy changes

Confusing State Auditor, “can’t determine

which changes were implemented”

60/40 rule

5/18/08 18

The Escrow Account

At first, held grants in accounts Dole out upon proof of completed

work HUD classified it as a “rebuilding”

not “compensation” subject to federal reviews.

Removed Escrow account April 2007

5/18/08 19

Funding shortfalls

Including wind damage claims led to shortfall

Uncertainty: Residents unsure if they’d get funds

Some did not apply

5/18/08 20

Red Tape: Hazard Mitigation Funds (FEMA)

Oct 2006, “grantees may get elevation money”

Conflict with federal regulations FEMA didn’t like Road Home penalties

and exceptions Some have elevated in anticipation…

waiting for grants (29,000)

5/18/08 21

Stay or Go: Tipping Points

Louisiana’s intent: engineer a “tipping point.”

Get enough people to return for fast recovery

Instead compounded uncertainty for residents, clouded decision-making

5/18/08 22

Stay or Go?

Resident must see signal of others returning to know if it’s beneficial.

Early returnees face high risks

Slow payouts, scattering funds: diminish gains from exit penalty effects.

The longer the wait, opportunity costs grow

5/18/08 23

Policy Lessons

Disaster relief isn’t efficient

Need accurate flood maps, private insurance markets (levees and residual risk)

Cause and Culpability

Target tightly, award quickly, no strings

Social engineering, community rebuilding, affordable housing goals, scatter and weaken relief

Issue of personal autonomy

Ironically, rebuild faster without penalties and broad eligibility

Covering wind damage = moral hazard

5/18/08 24

Phase I: those with homeowner’s insurance, but without NFIP or carrying insufficient NFIP because they were told they lived outside of a flood plain.

Phase II: Those who lived inside designated flood plains and were told to carry NFIP

Proposed Louisiana Targeting

5/18/08 25

Ongoing issues

Taxes

Contesting award = “recovery purgatory”

Buyouts

5/18/08 26

References

Dwight Jaffee and Thomas Russell, “Should Governments Provide Catastrophe Insurance?” Fisher Center Working Papers, University of California, Berkeley (2005).

Patricia Grossi and Robert Muir-Wood, “Flood Risk in New Orleans: Implications for Future Management and Insurability” Risk Management Solutions (December 2006)

“Post Katrina Insurance Issues Surrounding Water Damage Exclusions in Homeowners’ Insurance Policies,” Rawle O. King Congressional Research Service March 22, 2007.

“Hurricane Katrina: Insurance Losses and National Capacities for Financing Disaster Risk,” Rawle O. King, CRS, September 15, 2005

“Flood Risk Management: Federal Role in Infrastructure” Nicole T. Carter, CRS, October 26, 2005

“The New Orleans Hurricane Protection System: What Went Wrong and Why” American Society of Civil Engineers, June 2007