The federal government has approved Mississippi’s $350 million plan to produce thousands of housing units on the hurricane-ravaged Gulf Coast.

U.S. Housing and Urban Development Secretary Steve Preston approved the proposal on Wednesday. The money comes from the $5.4 billion in Katrina aid authorized by Congress after the August 2005 storm.

HUD said tens of thousands of Mississippi homes were damaged or destroyed by the storm, and the vast majority of the displaced earn low to moderate incomes. The long-term work force housing plan is designed to ensure affordable units are created within mixed-income neighborhoods, HUD said.

Under the plan, the state would provide grants and loans to local communities, nonprofit organizations and private developers to produce some 12,000 affordable homes in Hancock, Harrison, Jackson, and Pearl River counties.

Preston’s decision comes months after HUD approved another state plan to divert $600 million in federal money earmarked for housing to a port expansion project. The diversion drew sharp criticism from recovery advocacy groups and some congressional leaders who contended the coastal housing crisis should have been the priority.

As of Wednesday, 5,503 people were living in federal trailers and mobile homes, according to the Mississippi Emergency Management Agency. Another 2,701 were in Katrina cottages.

Reilly Morse, an attorney with the Mississippi Center for Justice, applauded HUD’s decision, but said he’s continuing to push congressional leaders to reverse the port decision.

Morse was among a group of hurricane recovery advocates who traveled to Washington this month to testify about the coast’s housing crisis. He said a two-bedroom apartment now rents for an average of $811 a month, compared to about $592 before Katrina.

“If we had fulfilled all of our housing needs already, we wouldn’t need to have a long-term work force housing project,” Morse said Wednesday.

Gov. Haley Barbour called the federal approval “a major milestone in Mississippi’s Katrina recovery effort,” and credited Mississippi’s Congressional delegation.

Last week, U.S. Rep. Bennie Thompson, D-Miss., was among a group of legislators who sent a letter to House leaders asking that language be inserted in an appropriations bill to prevent the state from using housing money for the port expansion.

The letter said transferring money from housing to the port “is unreasonable in light of the fact that the state has not met all of its unmet housing needs.”

State officials said the port, located in Gulfport, is the third busiest container port operating on the Gulf of Mexico and the 17th nationally. According to the plan submitted to HUD, the port’s infrastructure, equipment and facilities were crippled by the storm.

The leader of a union for port workers has asked Thompson to reverse his position on the port funding. Donald Evans, president of the International Longshoremen’s Association Local 1303, said the port’s reduced capacity is keeping hundreds of people from earning a living.

“We not only lost our homes, but due to the destruction of the port, there was limited need for the services of the ILA Local 1303. Coupled with that, we had outstanding mortgages, huge medical expenses, loss of our benefits and more,” Evans wrote.

Thompson likely won’t reverse his stance on the port diversion, the congressman’s chief of staff, Lanier Avant, said Wednesday.

“When it comes to the issue of the port, and whether we should program that money for an expansion to provide housing, obviously the priority is for people to have safe, affordable housing,” Avant said.