NEW ORLEANS  11 24 2008 The four-unit shotgun house that Sandra Marshall bought after decades of double shifts has sat untouched since the flooding of Hurricane Katrina, while nearly $850 million in federal aid for her and thousands of other mom-and-pop landlords sits on a bureaucratic shelf.

"I have old tenants calling me all the time asking when I'm going to get the place back up and running. I wish I knew," said Marshall, 56, who worked days as a postal clerk and nights as a housekeeping manager to buy her property.

She has applied for a repair loan from the nearly forgotten Louisiana Small Rental Property Program, created in the aftermath of Katrina to provide financial help to as many as 13,000 live-in owners of the shotgun and cottage conversions that kept rents cheap here for generations.

So far, it has put money in the hands of only 352 landlords. The hurdles have been its flawed implementation, limited financial resources among applicants, and lately, the national credit crunch. Now, the state is seeking to overhaul the program and divert the funds.

Housing advocates say the program's failure has contributed to a 40-percent spike in rents citywide. That has forced the federal government to pour even more Band-Aid relief into the recovery, including a $28-million-a-month Disaster Housing Assistance Program that helps 31,000 families pay the inflated rents.

"The rental market in New Orleans will never be the same," said Annie Clark, co-author of a New Orleans housing report released in August by the research group PolicyLink.

The failure of the small rental program is one reason why, three years after Katrina, many blue-collar New Orleans residents find themselves no longer able to afford life in their beloved hometown. It also illustrates how the billions of taxpayer dollars thrown at the hurricane recovery effort have yielded limited progress.

The rental program was launched under former Gov. Kathleen Blanco as a companion to the $10.3 billion Road Home program, which has issued 120,000 rebuilding grants to Gulf Coast homeowners despite its own persistent errors and bureaucratic delays.

But if the Road Home has moved glacially, the Small Rental Property Program is dead in the water.

Unlike the Road Home, which grants money up front, the rental program works on reimbursements. Landlords who own rental properties with a maximum of four units are given a "commitment letter" that states the amount of aid they qualify for, which they must take to the bank as collateral for a loan. The loans are forgivable if the landlords rent their property below market rates. But they must get the loan first, and that's the rub.

Banks, lacking confidence in the program, have ignored the commitment letters. The financial crisis has magnified the problem, and now none of the 13 lenders recommended by the program use a letter as collateral.

"Basically, it's no more than a piece of paper," said Wayne Turner, of Mortgage Market Inc. in nearby Metairie, one of the 13 lenders contacted for this story.

Other lenders said many of the landlords relied on their renters as a main source of income and did not have the credit to receive a loan even before the financial downturn.

Bradley Sweazy, state supervisor of the rental program, acknowledged the problem with banks.

"A lot of times you look at a property owner as someone with the financial record," needed to qualify for a loan he said. "The small mom and pops didn't have the same finance ability as was thought."

State records show the Small Rental Property Program did not issue a single rebuilding grant in its first year.

Like the larger Road Home program, the rental effort is run by Fairfax, Va., contractor ICF International, and overseen by the Louisiana Recovery Authority, the state's hurricane rebuilding arm.

ICF spokeswoman Gentry Brann referred inquiries to the LRA, where spokeswoman Christina Stephens said the program suffered from a computer system that limited caseworkers' ability to update and examine files.

"They were building the ship while you sailed it," Stephens said. "They were developing software as the program moved forward."

Still, the Road Home Web site optimistically states: "the Rental program has nearly $594 million in outstanding conditional awards, which will produce 12,792 units, including 10,951 affordable rental units in a total of 6,835 rental properties."

Sweazy and Stephens said the numbers reflect commitment letters, not aid actually given to landlords.

The most direct measure of the program's impact is the number of grants issued, found in monthly progress reports by the state. That number was 352 in the most recent report at the beginning of November, accounting for about $23 million in the hands of Katrina victims. That leaves $846 million of the $869 million allocated to the rental program in traction.

Ideas abound for what to do with that money.

The state is now trying to divert about $115 million into programs for low-income, first-time homeowners. Sweazy said other possible uses include cutting out bank middlemen and giving money directly to landlords; a rent stabilization program; or having the government buy up the properties and sell them off to developers who commit to build affordable housing.

But the U.S. Department of Housing and Urban Development has strict guidelines for how the money can be used, including a requirement that 50 percent be spent on lower-income applicants, and one that prohibits a "duplication of benefits" with other recovery efforts, meaning Sweazy's idea of giving the money directly to landlords could face obstacles because it would mirror the upfront grants of the Road Home.

Critics also caution against creating another program that would take months to administer, while the gutted rentals contribute to blight across the city.

None of the proposals will help Marshall any time soon.

Her credit scores are too low to qualify for a loan that will cover the $180,000 in repairs contractors say her property needs.

So she lives in the restored front living room of her property in the spottily rebuilt Gentilly neighborhood. The rest of her owners' quarters and the apartments remain gutted from a storm that hit 39 long months ago.

"I'm in limbo, after all I put into buying this place," Marshall said.

"But I don't want to sell. This is my home."