What Drives People to Arson? Falling House Pricesmw-arson-628x354

 
By Elliot Blair Smith | Mar 21, 2017
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Ross Compton Jr.’s luck was about to turn from bad to worse.

The 59-year-old man with a heart condition had seen his law license suspended, lost his home, and liquidated assets in a Chapter 7 bankruptcy before moving into his mother’s former residence. And then the Middletown, Ohio, dwelling erupted in flames, lighting the sky over a tree-lined cul de sac on the night of Sept. 19, 2016.
Compton told police he’d packed some belongings, called 911 to alert authorities, and climbed out his bedroom window. But doubts surfaced almost immediately.

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A forensic review of his heart pacemaker indicated he’d been awake when he claimed to be asleep, and a cardiologist said the disabled man was unlikely to be able to “carry numerous large and heavy items to the front of his residence during the short period of time he has indicated due to his medical conditions,” court records state.

A grand jury indicted Compton on charges of aggravated arson and insurance fraud. He pleaded not guilty. And the case is scheduled to go to trial March 21. As to the medical evidence, he told me, “There’s an interesting constitutional question as to whether this is a privileged conversation between a lawyer and his physician, but I really can’t comment right now.”

A court will decide one man’s tragedy as innocence or guilt.

But some old-fashioned sleuthing might have brought police and fire investigators to the same conclusion without raising the privacy debate over his medical records.

The assessed value of Compton’s house declined almost 20% after the market peak in 2007, including a 3% drop since he gained control of his mother’s former residence in 2012, Butler County courthouse records show.

Declining home values coincide with increases in arson, according to new research in The Journal of Risk and Insurance .

No small matter, arson caused 570 deaths, 1,677 injuries and nearly $1 billion in damage in 2015 alone, according to the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives.

Of the fatalities, only a handful are identified as suspects. The rest are categorized as victims, or fire fighters and law enforcement officers.

Until now, a relationship between falling real estate prices and higher arson rates was suspected but not strongly supported by an FBI database known as Uniform Crime Reports.

John Hall Jr., the retired head of the National Fire Protection Association ’s research and analysis division, wrote in 2010: “In hard times, it is not unusual for local fire officials and insurance adjusters in some communities to report apparent jumps in some types of arson. The national statistics, however, do not show evidence of a significant link.”

Greater evidence emerges from a lesser known database compiled by fire officials instead of police, according to Michael Eriksen, an assistant professor of real estate at the University of Cincinnati, and University of Georgia professor of insurance James Carson.

Eriksen told me he spent six months obtaining records of 4.8 million fires between 1986 and 2010 from the U.S. Fire Administration.

Whereas police records compiled by the FBI identify 0.670 arson offenses a month per 1 million residents, the National Fire Incident Reporting System puts the arson rate nearly 10 times greater, at 6.465 arson offenses per 1 million residents.

In states such as Ohio that allow mortgage lenders to sue homeowners to recover losses after foreclosure, arson is more frequent, the research shows.

“A 10%-15% decrease in local house prices” over six months time “was associated with an additional 3.8 fires per 1 million (Metropolitan Statistical Area) residents per month, and a 2.2% increase in probability an individual fire was due to arson or misuse,” the scholars write. This produced “an 85.5% increase in reported property damage due to fire, or up to $2.9 million per 1 million MSA residents each month.”

Arson is difficult to prove, and police reporting to the FBI is voluntary, which might explain the gap in agency records. But I wondered whether Eriksen and Carson’s arson theory would be reflected in the claims-paying history of property and casualty insurers.

I inspected the regulatory filings of three big insurers—Allstate ALL, -0.58%, Liberty Mutual, and Nationwide Mutual —focusing on fire and homeowners insurance losses before, and after, the mortgage-induced financial markets crisis of 2007 and 2008.

What I found is the ratio of claims-to-premiums on fire and homeowners policies at all three insurance companies spiked in 2008, just before the economic recovery began in mid-2009. This came amid an 18% decline in the S&P/Case-Shiller U.S. national house price index between January 2007 and January 2009.

Insurance claims flared again in 2011 and 2012, as home prices fell 7.5% further between January 2010 and January 2012.

Eriksen warns that real estate markets vary—“house prices peaked in D.C. in 2005, but 2008 in Atlanta,” he said—complicating efforts to draw conclusions from national data.

Then again, he said, “House fires due to incorrectly frying frozen turkeys hit a peak in Georgia around 2009—right after local prices (bottomed).”

The picture might be inexact, but Allstate losses on homeowners policies—a big book of business that covers many forms of losses, including fire damage—spiked to 79% of premiums paid in 2008, up from 41% two years earlier, regulatory records show.

Claims at Liberty and Nationwide rose by nearly the same magnitude.

Allstate and Nationwide also recorded bumps in losses on policies strictly covering fires. And Liberty Mutual’s losses on fire policies more than doubled to 105% of premiums paid in 2008, up from 45% the previous year.

In 2009, Allstate began to slow disbursements, as unpaid fire losses in the year incurred soared to 70% of premiums; rising further to 86% in 2010; and 78% in 2011; before dropping to a pre-crisis level of 54% in 2012. The apparent upward trend in delayed payments could signal that Allstate grew suspicious about some claims.

Allstate spokesman Justin Herndon said “we can’t validate or speculate on” the relationship between arson and home prices. However, he said, the insurer “experienced a correlating decrease in fire claims as home prices have increased” in recent years.

Liberty declined to comment. Nationwide couldn’t be reached for comment.

It’s unclear why a second spike in homeowners and fire insurance claims occurred two and three years into the economic recovery; unless, perhaps, Eriksen and Carson’s arson theory can be explained as occurring in two waves: initial financial or mortgage distress at the height of the recession, and cumulative (or delayed) distress later.

Under this interpretation, some homeowners who absorbed the first shock might have grown exhausted, and walked away from their mortgages, or converted household goods to cash, by burning down their houses and seeking to collect insurance.

Of course, when insurers pay out, premiums go up.

I have no view as to Compton’s guilt or innocence on the charges of arson and insurance fraud, but a court soon will decide whether the ruins of a family home with an estimated $400,000 in property damage, fits the picture.

I think it’s safe to reach a broader conclusion. An overlooked casualty of the receding mortgage crisis is the desolation to lives and neighborhoods left behind by distraught homeowners driven to incinerate their residences, and the memories inside them.

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