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Helping Homeowners in the Gulf: The Road Home

Helping Homeowners in the Gulf: The Road Home. Eileen Norcross Mercatus Center at George Mason University Preserving the American Dream Conference Houston May 16-18 2008. 2005 Gulf Hurricanes. Over 300,000 homes destroyed or damaged Louisiana: jack o’lantern effect

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Helping Homeowners in the Gulf: The Road Home

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  1. Helping Homeowners in the Gulf: The Road Home Eileen Norcross Mercatus Center at George Mason University Preserving the American Dream Conference Houston 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 billion Mississippi: $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. Mississippi: Homeowner’s Assistance Program Phase II: insured or uninsured inside or outside flood plain. 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. 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 Minus Insurance payouts, SBA loans, grants Penalties 30% failure to have insurance 40% 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 house Minus Insurance payouts, SBA loans, grants Penalty 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 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 5/18/08

  15. De-concentrating funds 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. Proposed Louisiana Targeting Phase II: Those who lived inside designated flood plains and were told to carry NFIP 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. 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 5/18/08

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