Tuesday, December 4, 2007

Fraud Investigators Brace for Arsons from Subprime Mortgage Crisis


Insurance fraud investigators are girding for an expected rash of arson's by cash-strapped homeowners trying to avoid foreclosures and ballooning monthly payments as the sub prime mortgage crisis deepens.

"Home arson's for insurance money by mortgage-burdened owners are hardly new. The question is whether a new and virulent spike looms," says the Coalition Against Insurance Fraud.

Falling home values and tighter lending are making it difficult for many people to finance their way out of trouble. More than $50 billion in adjustable-rate mortgages were reset last month, thus intensifying the financial crunch on homeowners, says the coalition's Executive Director Dennis Jay.

"The sub prime mortgage crisis is crushing untold thousands of homeowners under heavy mortgage payments they can't afford—especially as many monthly payments adjust upward sharply after introductory teaser periods of low-interest rates," he writes in an article in its publication, Fraud Focus.

Only a few suspected home torchings have surfaced so far. Samuel White allegedly burned down his Houston home for insurance money to dodge a scheduled foreclosure. An African-American, he allegedly spray-painted racial slurs around the interior to make the suspected crime appear to be a hate crime.

Suspected mortgage-related home arson's already have jumped 50 percent above the 2006 rate in California, though the numbers are still relatively small, the insurance department says.

The industry's Rocky Mountain Insurance Association also is watching its region closely. In fact, one Woodland Park owner allegedly torched his home just days before he was scheduled to evicted in a foreclosure.

"I don't believe that it's had time to ripple through the market yet to the point that many people have reached the point of desperation," EFI Global fire investigator Alex Ahart says. "But I absolutely think it's coming."

Can anyone explain how this would benefit the home debtor? If the house is burned to the ground won't the insurance company simply rebuild the house? It would seem The sub prime borrower would still owe the full mortgage amount, he would just get a new house. Am I missing something? How would a fire, assuming it were actually legitimate, relieve the mortgage holder of his obligations?


Anonymous said...

Okay, I'll bite.
Many people insure their homes at the replacement cost plus the replacement cost of their belongings, not just the purchase price. Even in a crashing market, the total insurance value is still probably more than the original mortgage.

So let's say I purchased a house for $200,000 five years ago, and last year it was worth $250,000. So I bought a $300,000 insurance policy (250k for replacement and then 50k for belongings). Then the house burns down. The insurance company gives me $300,000, I pay off the mortgage, now I have an empty plot of land and no stuff, and a little extra cash left over.

I can try to sell or auction the empty land, keep working, and pay less for housing by renting instead of buying a new home. Whee, now I'm out ahead.

Chris said...

Great answer :)


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