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DISASTERS | The waters have receded in Grand Forks, But the FINANCIAL SCARS run deep.

AT 3 A.M. on a chilly April morning, warning sirens sounded, signaling the worst: The swollen Red River was cascading over a 52-foot-high flood wall and onto the pancake-flat terrain of Grand Forks, N.D.

In their home atop a gentle knoll 400 feet from the river's edge, Tom Reiten and his wife, Joan Abraham, had barely fallen asleep, having worked late into the night lugging as many of their belongings as possible to the second floor. They got up, and after driving Joan to stay with friends on the outskirts of town, Tom returned home to finish moving their possessions.

When he finally left 22 hours later, the floodwaters had breached the protective ring of 4,000 sandbags he had painstakingly built around his house and were lapping at his front door. In the street, ice chunks raced by in the current.

Tom, who once served in the Army Special Forces, was unfazed. Wearing a life preserver and fisherman's waders, he wound a skein of rope around one shoulder and waded into the frigid, thigh-deep water. The current almost knocked him off his feet. It took nearly 20 minutes to walk the few blocks to higher ground, where he had left his car. Helicopters hovered overhead, and whitecaps foamed in the flooded streets. "It was bizarre," Tom recalls. "Like something out of that movie Apocalypse Now."

The date was April 19, 1997. The Red River, usually about 15 feet deep, crested at a towering 54 feet (the height of a five-story building) and forced 47,000 Grand Forks residents--90% of the town--to flee. Downtown, 11 buildings were destroyed by fires caused by a natural-gas leak. In the Lincoln Park neighborhood adjacent to the river, home to 380 families, only the rooftops of two-story houses peeked out above the murky water.

The Red River Valley flood, as it came to be known, ranks among the ten costliest natural disasters in the U.S. since 1989. Statistically, a flood of that magnitude is supposed to occur only once every 210 years. The devastation it spawned spread across three states and into Canada. In Grand Forks alone, flood-damage estimates exceeded $1.5 billion.

Four years later, the city's recovery is a resounding success--at least on the surface. Given the speed with which the city rebuilt, Grand Forks has rebounded "faster than any other community I've seen," says Ed Conley of the Federal Emergency Management Agency (FEMA). About $500 million in aid poured into the city from federal and state governments and private sources, much of which the city used to replace its infrastructure without raising taxes. A citywide building boom includes hundreds of new houses, a collegiate-level hockey arena and a convention center.

Yet despite the outward signs of recovery, it could be five more years before the Grand Forks economy fully returns to normal, says Conley. Right now the city is in a fallow period after the infusion of new capital that immediately followed the disaster. A number of new downtown storefronts sit vacant. And the spanking-new houses conceal what Hal Gershman, president of the city council, calls a "hidden hurt": Many families have yet to dig themselves out of the debt they took on to rebuild their homes and their lives. Some residents whose houses survived the flood became victims of its aftermath, as the city's new flood-prevention program claimed hundreds of homes left standing.

About 90% of natural disasters in the U.S. are flood-related, and people are four times more likely to experience a flood than a fire in their lifetime. Yet flood damage isn't covered by standard homeowners insurance. Only one in 16 Grand Forks households was protected by the federal government's National Flood Insurance Program (see "UNCLE SAM TO THE RESCUE"), and even that didn't cover the contents of basements. So residents had to tap other financial resources.

The Small Business Administration, for instance, made low-interest loans, generally at 3% to 4%, to cover the losses of individuals with good credit. In Grand Forks, where the median household income hovers at $36,000 a year, the typical family of four owes $12,000 in SBA loans. That doesn't count credit card debt, the larger mortgages families had to take on to buy new homes, and other private borrowing. Many families raided their retirement savings. At the Village Family Service Center, financial counselor Marybeth Vigeland continues to see an average of four or five new clients a month who are drowning in debt. If budgets were tight before, the flood "just pushed them over the edge," says Vigeland.

Assessing the damage

IT TOOK NEARLY a month for the floodwaters to recede enough to allow residents to return home to survey the damage. The Reitens' house was still standing, although the basement had completely flooded and water had stood more than a foot deep on the first floor. While there was a chance that the city would buy and raze their house to build a new system of dikes, that wasn't supposed to happen till 2003. So Tom and Joan borrowed a camping trailer from her parents, parked it in their driveway, and began to renovate their home. One of the few families that had flood insurance, the couple used their $67,000 settlement to repair structural damage and buy new appliances, while they prepared meals in the trailer and slept in a bedroom on the top floor of the house. Because they did most of the refurbishing themselves, they spent less than $5,000 out of pocket to repair damage not covered by insurance. Just before the first snows of autumn in 1997, they moved back in.

Across town, Linda and Mark Magness weren't as fortunate. They returned as the floodwaters subsided to find their house uninhabitable, with hardwood floors buckled, joists compromised, and the three-car garage a pile of rubble. It took a day and a half just to pump all the water out of the basement. For the next week, the Magnesses and their two sons, who came home from college to help, put in 12-hour days mucking out the mud and salvaging what few belongings they could.

Compounding the damage was the loss of Linda's downtown antiques shop, with about $100,000 of inventory. The Magnesses needed not Only a place to live but also a new home for the business. They were lucky enough to find scarce retail space for rent downtown, and for a year they lived in a small apartment above the shop. The Magnesses, who were still making payments on a $100,000 mortgage on their destroyed house, relied on $685 a month in rental assistance from FEMA to cover the apartment. With no income while her business remained closed, Linda borrowed $20,000 from Mark's parents (which she repaid later in 1997 after her business reopened) and took out a $52,000 SBA loan to replace about 70% of her inventory.

Because Grand Forks had been declared a disaster area by the President, residents became eligible for two types of FEMA assistance. For those whose homes had suffered minimal damage, there were grants of up to $10,000 for repairs. Displaced families, like the Magnesses, were given rental assistance to cover the full cost of renting while they waited for their homes to be repaired or bought out. So few rental properties were left habitable that FEMA also set up mobile homes.

The city still had to decide how to spend the $171 million it had received in federal housing aid. Pat Owens, Grand Forks' mayor at the time, had two concerns: to provide permanent housing and to ensure that the city wouldn't be so vulnerable to flooding in the future. "The federal government couldn't keep bailing us out," says Owens.

The tension builds

AT A TOWN meeting in May, barely a month after the flood, residents packed into a school auditorium to hear the city's plans. For residents of three neighborhoods adjacent to the river, the scene of the worst devastation, the news was grim. The city would not issue building permits for those areas, but would purchase more than 800 houses and turn the land into a park for the river to reclaim whenever it flooded. Displaced families could buy new houses in three subdivisions to be built well outside the flood plain. "Everybody was in shock," says Joan Abraham. It was the first indication that she and her husband might lose their house, at the edge of the Lincoln Park neighborhood.

The city would first purchase those houses nearest the river that had been the most heavily damaged, followed by houses whose damages totaled 50% or more of their preflood value. Finally, the city would buy out homes with less than 50% damage that had to be torn down to make way for the new system of dikes.