Call it mortgage lightning
A storm of home arson is expected as owners' loan rates reset and payments jump.
By TOM ZUCCO, Times Staff Writer
Published December 8, 2007
It's one of the most drastic consequences of the mortgage meltdown - people who burn down their homes so they can collect the insurance money and wiggle out from under their loan.
The premise is hardly new - dozens of homes in New Orleans mysteriously caught fire in the weeks after Hurricane Katrina when homeowners apparently discovered they had fire, but not flood, insurance.
What has fraud investigators worried now is whether the growing mortgage crisis will lead to another, far more widespread, spike in arson cases.
The Coalition Against Insurance Fraud, a Washington, D.C.-based group that includes regulators, consumer groups, and most major insurers, thinks that it could.
"Whenever the economy hits a rough spot, insurance schemes by desperate policyholders begin to spike as sure as the sun sets in the west," said James Quiggle, a spokesman for the group. "The current mortgage crunch may also ignite a spike in mortgage related arsons by homeowners who can't afford to live in their houses.
"They're looking for an easy way out."
Quiggle cited a Houston homeowner who not only burned down his house recently to dodge a scheduled foreclosure, he allegedly spray-painted racial slurs around the interior to make it appear to be a hate crime.
Only a few mortgage-related house fires have been documented nationally, but investigators think that may change as an estimated 2-million subprime mortgages are scheduled to reset by the end of next year. Those resets will take a typical mortgage payment to $1,550 a month from $1,200.
One place investigators will be watching closely: Florida.
"Florida has some of the largest fraud problems of any state," Quiggle said.
In theory, if an insured home burns down, the lender is paid and the homeowner is off the hook. Maybe.
In most cases, the price of a home includes the lot. But homeowner's insurance pays only to replace the structure; land is almost never insured. So unless the homeowner has a relatively small mortgage balance, tens of thousands of dollars could still be owed.
"Torching your house may not be a perfect solution," Quiggle said. "But people think it gets them closer to solvency. It beats bankruptcy or foreclosure and a destruction of your credit rating."
Beating the system is another matter. If records show an owner is behind in the mortgage, hasn't paid property taxes or lost their job, Quiggle said alarms go off "like loud gongs." Investigators also look at the cause of the fire, and whether the owner removed personal possessions beforehand.
They've seen it all before, especially after Katrina.
"There were a lot of suspicious fires coming out of the Katrina damage area," Quiggle said. "People were also filing claims for possessions they didn't own or flooded cars they'd hidden elsewhere. I saw claims for homes people didn't own."
Don Johnson, who manages the special investigation unit of State Farm, said insurers are also watching for spikes in auto claims - particularly fires and thefts.
"When you've got so many payments, and you need to get rid of something, a car payment can be a big one, so automobiles are another area we're keeping an eye on."
Johnson said State Farm, Florida's largest private insurer, hasn't seen a dramatic increase in home fire claims. "But we're watching.
"We have to be very careful to make sure that if we deny a claim," he said, "it's for the right reason."
Arson is a felony, punishable by fines, jail time, or both, and most of those convicted must make restitution. Still, the Insurance Information Institute estimates that fraud costs the property insurance industry about $30-billion a year.
"When people get desperate," Johnson said, "they'll try anything."
Tom Zucco can be reached at zucco@sptimes.com or (727) 893-2847.