An early warning system to help prevent arson, which helped uncover an alleged arson ring in the Boston area, could lead to major changes in commercial real estate selling and insurance practices if instituted nationwide, proponents said on Capitol Hill this week.
With the backing of local and state officials, members of a Boston neighborhood group are now seeking $180,000 in federal grants to establish a computer-based warning system. The project would use 75 to 80 variables in a complex mathematical formula to determine which buildings are most likely to burn.
Some of the factors in the program would include the number of ownership changes in a short period, the number of mortgages on a property, the proportion of cash invested, and the fire experience, if any, of the current owners.
Massachusetts police said the arson ring in the Boston area used false sales contracts, sham mortgages, and bogus insurance claims to generate some $6 million in profits. Among the 33 people indicted were two fire chiefs, six attorneys and several insurance adjustors and property owners. Three people were killed in fires allegedly set by the arsons and hundreds were left homeless.
The Housing Early Warning System (HEWS) concept had its origin in a middle-income Boston neighborhood when 29 of 74 apartment houses in the Symphony Road area burned. A local civic group, the Symphony Tenants Organizing Project (STOP), began investigating the fires. With time the group found that a pattern seemed to exist from which they could predict apartment fires.
Arson is a major problem in several cities besides Boston. In Detroit, 10,000 homes have been destroyed by fire in recent years while New York is losing 300 to 400 buildings to arson each month. The arson rate for Los Angeles has risen 500 per cent in the past five years and the rate in Chicago has increased 300 per cent in three years.
In Washington, after reaching a high point in 1975-76, both the arson rate and the absolute number of cases have declined. Nevertheless, the city arson squad has just been enlarged from four to eight investigators.
"There are all kinds of arson cases going on," according to Howard D. Tipton, head of the National Fire Prevention and Control Administration. "Our best numbers that we have today say that about 20 to 25 per cent of what is arson is for profit. So the larger part of arson is still very much a behavorial problem. But even 25 per cent is significant."
"Arson is a business decision, made at a specific point in the history of rental housing," said David Scondras, an economist and STOP member who talked about the project in a special presentation before federal officials here Tuesday.
The group developed a chart showing five stages of rental property decline:
Stage One; The property is stable, earns income, and is well maintained.
Stage Two: Often with a change of ownership services are reduced, some deterioration occurs, and poorer tenants move in.
Stage Three: More ownership changes. A second mortgage is obtained to take cash out of the property while rents are raised and services are reduced to cover the increase financing costs.
Stage Four: At this point the building becomes a liability and the owners stop paying taxes and mortgage loans. Maintenance is curtailed completely while rent collections continue.
Stage Five: Here the owners may sell at a loss, renovate the property, let the bank foreclose, condemn the structure or decide to burn the building.
If the decision is made to burn the building a series of complex financial and title transactions may occur. In a short period, say one or two years, the property may be sold several times. The catch is in the nature of the sales.
The building is sold with little or no cash. A "buyer" may purchase a property for $1 while assuming the old mortgage. The seller, to make a "profit," provides a second mortgage.
Now the new owner has two mortgages to pay. He must also have fire insurance to cover the liability for the loans. It matters little that the "buyer" may be a partner of the first seller, or, as in one case cited by STOP, the first owner's secretary.
One building the neighborhood group examined had seven outstanding mortgages.
The process of buying and selling the building continues with little cash and new mortgages at each transaction. What is actually happening is that the value of the building is being raised for insurance purposes alone since the income and tax benefits of ownership could not possibly pay for the increasing costs of financing.
Then, at some appropriate moment, the building catches fire. To collect insurance it is necessary for the building to burn completely. For this reason there may be several fires until the structure is totally destroyed, the Boston group said.
The fire insurance payments, which are not taxable, must first be used to satisfy the claims of the mortgage holders. By selling the building back and forth among insiders mortgages have been created that are unrelated to the economic worth of the property, the citizens group found.
Often the value of a particular property rises even as the worth of other buildings in an area remain constant or decline, the group said.
Scondras says the group can predict which properties will burn, as well as the probability of fire and the probability of deterioration. "That's never been done before," he added.
In instituted, the computer system would augment model laws that have been proposed in Massachusetts. The Statutes would require the payment of all tax liens before private insurance claims could be settled. This would force mortgage holders to require tax payments before financing could be permitted while limiting the value of insider real estate transactions.
Complete appraisals would be required before insurance companies could be committed to issuing a policy. THe nature and size of the policy would be filed with other property information as a matter of public record. Properties which are over-insured would face higher tax assessments tin line with the value claimed by owners.
Scondras maintains that an early warning system could alert city officials to particular buildings before they became blighted. Officials would then be in a position to assist the landlord through refinancing programs, tax abatements, and other incentives to up-grade the property.
While the HEWS proponents argue that their system can point to specific instances of residential decay that may lead to arson, the problem of detection remains. The Law Enforcement Assistance Administration believes that known arson cases have increased 325 per cent in the past decade - more than any other form of serious crime.
The Insurance Service Office, an industry advisory group, estimates that the direct cost of arson was $4 billion in 1976. The overall expense, in terms of higher insurance premiums, medical expenses, welfare and tax losses, and other costs may total more than $10 billion annually.