# Presentation: 486511

## Macro Economic & Banking Trends:Focus on The Effects of Recent Hurricanes

**November 30, 2005****FDIC Division of Insurance and Research**
**Dallas Regional Office**

- Contact: Alan Bush (972 761 2072)

## REBUILDING PROCESS

## Discussion Topics

- Economic Fallout
- The Housing Market
- The Demographic Shift
- The Hurricanes’ Challenge: Factors of a New Paradigm
- Drilling Down to Determine FDIC Risk

## An Analytical Starting Point:Economic Concerns Are Focused On The “Red Zone” Particularly Areas Nearest To The Coast

**An Analytical Starting Point:****Economic Concerns Are Focused On The “Red Zone” Particularly Areas Nearest To The Coast**

- Source:  FEMA, Declared disaster areas as a result of Hurricane’s Katrina and Rita

**Notes:**
During this presentation, any reference to “The Red Zone” will concern the area shaded red on this map.  

Note:  In some instances in Louisiana, some counties/parishes were designated for both Katrina and Rita.  In this case, whichever designation was most severe is the one that was illustrated on the map.

For this presentation, we will focus on hurricane’s Katrina and Rita, not Wilma.

## Slide 5

## A Major Demographic Shift Has Occurred

- What Are The Implications?

## Slide 7

**Notes:**
Reported Locations of Katrina/Rita Applicants
from Louisiana, Mississippi, Alabama and Texas disasters as of 10-31-05
This report reflects the applicants’ reporting of their locations, including those who have evacuated outside of the hurricane-impacted areas.  It is as current as any subsequent change of address notifications they have given to FEMA. There are approximately 600,000 additional applicants who gave current addresses outside U.S. Census Metropolitan Statistical Areas.  
RankingCBSAMetropolitan Statistical Area Name*StateNumber of Applicants126420Houston-Baytown-Sugar Land, TXTX304,232235380New Orleans-Metairie-Kenner, LALA281,006312940Baton Rouge, LALA202,042413140Beaumont-Port Arthur, TXTX110,922533660Mobile, ALAL89,059625060Gulfport-Biloxi, MSMS88,646727140Jackson, MSMS80,255826380Houma-Bayou Cane-Thibodaux, LALA66,854929340Lake Charles, LALA61,2601019100Dallas-Fort Worth-Arlington, TXTX59,617

## The Number Of Houses Damaged Is Staggering

- Hurricane Katrina alone destroyed an estimated 350,000 homes and damaged 300,000 more along the Gulf Coast.
- At the state level, the percentage of dwellings that were destroyed, damaged, or affected by Hurricane Katrina represents 33% and 20% of Louisiana and Mississippi housing stock, respectively.
- A note about data quality and consistency.

**Notes:**
Rita numbers are still being tallied.

The Red Cross, noting an error in its figures, revised its housing numbers on Oct. 6, saying that Katrina and Rita combined destroyed 137,502 homes and caused major damage to 73,846 in Louisiana. 

I have a request with the American Red Cross Liason Activity Coordinator to access the most current data which will be published December 2nd.  I have also asked for this data on a county/parish basis.

By comparison, Hurricane Andrew which struck the Florida coastline in 1992 destroyed only 28,000 homes. 

Within the city of New Orleans roughly 160,000 homes, or about 74 percent of the city’s housing stock, experienced some degree of damage as a result of flooding and severe wind damage caused by Hurricane Katrina; an estimated 50,000 homes will need to be bulldozed.

## Recovery Will Be a Three Step Process

- The Recovery & Remediation Stage
- The Reconstruction Stage
- Ultimately will be determined by the return of existing critical economic drivers – energy, trade, and tourism.
- The Return to Normalcy Stage - But What will Normal Be?

**Notes:**
Recovery & Remediation:  Beyond the evacuations, rescue and recovery aspects of this stage the defining characteristics are the start of initial damage assessments, attempts to restart critical functions by businesses including insured institutions and government entities, and start of debris removal and demolition of unsafe structures. We are currently in this phase.

The Reconstruction Stage:  This stage is characterized by completion of at least temporary repairs for many critical components of the infrastructure, completion of many damage assessments and an increase in funds resulting from that work (particularly insurance), and a shift from cleanup toward rebuilding.  The flow of funds into the area is expected to be so strong as to insulate the area from any economic weakness that may befall the rest of the nations economy.  Businesses and various governmental groups will use the increased understanding gained from damage assessments to adjust strategic plans.  The economic features of this stage will be a rapid increase in construction related jobs, the reopening of some businesses and the permanent closing (failure) of others.  A clearer picture of the economic and demographic changes that have occurred will come into focus. 

The Return to Normalcy Stage, but What will Normal Be?:  This stage will have many characteristics of stage Two with construction activity remaining relatively strong but not providing the same level of growth to the area.  The flow of external funds will remain noteworthy, but will not afford the same level of protection from typical fluctuations in the economy.   The essential elements supporting tourism should be advanced to the point that the area will be able to test its competitiveness for conferences, sporting events, and leisure travelers.   A picture of the potential barriers to further economic growth will come into focus including: the extent of environmental damage; the limits of private insurance; the affects of demographic changes; and affect of possible changes in perception by businesses and individuals; the impact of subsequent storms particularly on a system of levees weakened by the storm. 

## Location Will Dictate Recovery Patterns ... and They Will Vary Greatly

- Storm Surge, Flooding and Wind Damage
- Proximity to Failed Levees
- Insurance:  Recovery, Renewal and Availability
- New Building Codes
- Decisions and financial ability to return and/or rebuild

**Notes:**
The historical or normal pattern of post-hurricane recovery is a 2.5 month clean up period needed before reconstruction efforts can begin.  Initial estimates that placed Katrina related clean-up activities in the 2.5 to 4 month range are now appearing to be far short of the time that will be required to remove storm debris and clear damaged and destroyed properties in the most critically damaged areas.

For the areas that sustained less severe damage and more similar to a “normal” hurricane experience, the recovery pattern will be shorter and more predictable.  Initial property damage, population dislocation and job losses will be shorter lived.  This will be followed by the infusion of capital from federal assistance, insurance proceeds and willing investors.  Recent data and anecdotal reports from LA and MS banking commissioners suggest that many areas in the storms’ path will experience this kind of recovery.

The most severely damaged areas experienced the triple whammy:  storm surge, wind damage and repeated flooding from failed levees.  Not only in the most populated area, but also the area with the most property value.  Moreover, this area has the most problematic issues that must be resolved before questions about recovery and repopulation can be fully answered.

For the City of New Orleans (as of 11.21) 36 percent of the electrical customers are still without power and 50 percent of the gas customers have restored service. (New Orleans Situation Report).

## Reasons for an Uncertain Footprint

**Notes:**
The most severely damaged areas present many dilemmas that make the city future footprint uncertain:

The most critical element to restoring New Orleans is housing.  But the return rate is uncertain – here’s why:  the clean-up period will be a protracted process and many people will have to “move on” with their lives.  They simply cannot wait.  Many will find new jobs elsewhere and begin to establish a new life.  Many will not have the financial resources to return, or they will not be able to pay mortgages and will have to “walk away.”  Some that will want to return will not be able recover enough insurance to rebuild and escalated construction costs.  Others will not be able to attain financing or insurance because of the uncertainties surrounding the fragile levee system.

Without housing, the critical labor stock will not be available to staff businesses.  Several stories of staffing shortages are in the news.  The labor intensive leisure and hospitality industry is under great strain.  Similarly, the N.O. port and many oil and gas operations are short staffed because their workers homes were destroyed.

Bottom line:  diminished housing equals diminished labor supply and results in a substantial contraction in the areas economy.  This has obvious implications for banks credit quality and future business.  

## Learning about the Damage Severity...

## ...and applying that to our own use.

- ...and applying that to our own use.

## Work in Process:  Applying Banking, Demographic and Economic Data to Focus on Heightened Areas of Risk

**Notes:**
With Geospatial Information System analytics we can overlay a myriad of geo-coded data to generate illustrations and aggregated data to analyze various issues.  In this example we see Census data plotted to determine housing units per square mile.  This data can be manipulated to various geographies and overlayed with other data such as house price ranges, income levels, population, median income, or population living in poverty. We will also be able to plot insured institutions and branch locations.  We are making efforts to acquire data about the number of flood insurance policies issued by the National Flood Insurance Program at various geographies and we will express this concept as a share of total housing stock.  

Once we have the digital files that categorize the damage severity geographically, we will be able to overlay this data and determine the population, houses, jobs, and/or business located in each of these categories.

A note of caution:  this is new territory and the tools have to do this have been on a trial basis.  I believe we have permission to acquire the tools and data, but there may be a time lag between purchase commitment and acquisition.  

## Leveraging Data and Drilling Down to Analyze Economic Expectations and FDIC Risk

## Focusing on Insured Institutions: 

**Focusing on Insured Institutions: **

## Learning More Via Direct Contact and Other Data, FDIC Identified Insured Institutions Exhibiting Elements of Heightened Risk

**Learning More Via Direct Contact and Other Data, FDIC Identified Insured Institutions Exhibiting Elements of Heightened Risk**

## Slide 18

## The Banking Industry Faces A Confluence Of Issues

- Insurance (property casualty and business continuity)
- Environmental damage to real estate collateral
- Changing finances of borrowers
- Assessing asset quality, customer base and local economy
- A bifurcated loan portfolio
- Does the business model still apply?

**Notes:**
Insurance:  who was covered, what was covered, what happened when (is it important to establish a time line – does a flood cut off certain benefits), how large were deductibles, when will proceeds be received, how will coverage compare to rising reconstruction costs.  Who will underwrite property/casualty and business interruption insurance in the future, how much will it cost.

Borrower Finances: many had too little or the wrong type of insurance, what will this do to there finances, how about living on credit cards during the initial evacuation, will they be able to find new jobs at a similar or higher pay, if they rebuild and insurance is insufficient for replacement costs how much can they afford especially if insurance costs rise.  On the business side, is past performance any indication as to sales, costs, profit margins, and cash flow?  Are revised projections reasonable, upon what are retailers basing projections? 

Bifurcated Portfolio: What is the impact of having a rapid growth and a big collection outfit under one roof, managing disbursements in construction with rising prices, possibly new and unscrupulous contractors/subs, are certain areas to risky to re-enter, might environmental issues present an underwriting risk in the event of future or current foreclosure.