The Double Arson Divorce

Divorces often get ugly. Some even escalate to murder.

Few, however, involve a husband who burns down not one, but two, marital residences, with the arson in each case calculated to circumvent court orders awarding the residence to the wife, in addition to taking his ex-wife hostage at gunpoint while she was en route to a court proceeding, giving false tips to the IRS, and committing life insurance fraud, all in the span of about three years of divorce proceedings.

The wife escaped safely, after being held hostage for more than eleven hours today, at about eight-thirty this evening. As of just before ten p.m. this evening, the husband, age 60 and possibly diagnosed with cancer, had fired dozens of shots at public safety officers (apparently without injuring anyone) and remained inside the house that he had set on fire half an hour earlier, as the fire raged out of control. He tried to commit "suicide by cop," but ended up in an ambulance instead.

For this wife, the worst is probably over. She escaped being held hostage safely. Her ex-husband appears to have acted along in each instance (even his lawyer quit early into the case), and is now headed for the rest of his life in prison, a mental institution, or a hospital. The crimes committed in this case alone would probably provide more than enough fodder for a bar exam question, before even reaching the tort, insurance contract, civil procedure, asset protection, legal ethics, mental health and family law issues raised. There is a good chance that casualty insurance will cover the damage done to the second home, at least, from the arson. The youngest child of the couple was seventeen or eighteen when the divorce began. With some time off to recover from the shock, therapy, and some grit, she can probably rebuild her life and move on.

The big questions are why this happened in this case, and how this husband managed to stay at large so long. Perhaps warning signs that would have prompted police to intervene with arrests and prosecutions weren't sufficient in this case precisely because it otherwise seems an unlikely case to escalate to such violence.

Many extremely contentious and drawn divorces involve custody disputes, but apparently that was not the case in this divorce. The couple have a twenty year old child, married four or five years after that child was born (the divorce was so contentious that the date of the marriage is disputed), and adopted her two children from a prior marriage (one of whom is a law student).

The Connecticut couple was quite affluent. He was an advertising executive and she is an attorney. Normally, one associates affluence acquired through white collar work with a degree of self-control sufficient to be functional. And, Connecticut is not known for a culture of violence. This is the land of insurance company executives and actuaries, not blood feuds.

Violent criminal acts are mostly the province of the young, not the old. Much of this is due to youthful impulsive behavior and gang involvement. The lies and timing of the violent acts in this case, however, do not seem impulsive or connected with gang activity, in the way that much violent crime does. Instead, they seem to suggest psychopathy, or behavior akin to it, although diagnosis at such a distance from the facts is surely an impossible thing to do with great accuracy.

Some people seem to just snap after long periods of relative normalcy when too many parts of their life fall apart. Husbands and wives that develop insane rage at the courts and their ex-spouses in the course of divorce proceedings aren't that unusual, although prolonged ranting at cocktail parties, depressing country music, passive non-responsiveness to court orders to pay money, and semi-coherent letters directed to anyone who will listen, are more common manifestations of these emotions. What makes one person give up or try to address their complaints within the law, and another turn to violence and fraud isn't obvious, nor is it obvious how these situations can be prevented or nipped in the bud. I'm sure this has been studied, but if the results are definitive, they aren't widely known.

California Collapsing

California's state constitution requires supermajorities to approve certain budget matters in California (like tax increases), due to citizen initiatives. This has made it politically impossible for California to bridge its $23 billion plus gap in its state budget in a time of collapsing state revenues. But, tax revenues have fallen, while demand for government services have risen in California, which is the epicenter of the global financial crisis.

As a result, the State of California has run out of cash and its paying its obligations with IOUs instead. This strategy does not appear to be working. Starting Friday, the leading banks in the state will stop accepting State of California IOUs.

While the United States can always issue more debt to pay for its obligations, and so far, there have always been buyers for that debt, state and local governments cannot. State and local goverments do business in a currency, the U.S. dollar, over which they have no control, just like private businesses. Typically, state and local governments must balance their budgets and need either supermajority approval or a vote of the people to issue additional debt. As California is the biggest governmental entity in the country other than the United States government itself, its inability to balance its budget and complete lack of liquid funds is a big problem.

It isn't inconceivable that the State of California would have to resort to bankruptcy. Governmental bankruptcies are normally handled under the little known Chapter 9 of the bankruptcy code, but it isn't clear if this applies to states. No state has ever filed for bankruptcy in U.S. history, to the best of my knowledge, and Section 109(c) of the Title 11 of the United States Code (the Bankruptcy Code) provides that:

An entity may be a debtor under chapter 9 of this title if and only if such entity -
(1) is a municipality;
(2) is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter;
(3) is insolvent;
(4) desires to effect a plan to adjust such debts; and
(5)(A) has obtained the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(B) has negotiated in good faith with creditors and has failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(C) is unable to negotiate with creditors because such negotiation is impracticable; or
(D) reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of this title.

It isn't clear that a state can be a municipality within the sense of Section 109(c), and there is little precedent to guide this determination. Special federal bailout legislation might be required if California can't manage to work out its problems on its own.

Orange County, California filed for bankruptcy under Chapter 9 in December, 2004 in the largest bankruptcy filing under Chapter 9 ever, when it was burned to the tune of $1.7 billion of losses in financial derviatives transactions not directly related to county business.

A New Business Model For News

The Rocky Mountain Independent is launching a reporter owned online news venture, with member support and advertising, in Denver, Colorado. It is a second attempt to create a successor online news provider to the Rocky Mountain News by former employees there (the Rocky Mountain News archives were transferred to the Denver Public Library and Colorado State Archives), with the previous attempt using an investor owned corporation model. I wish them, and their business model, great success.

Lack Of Equity As The Primary Foreclosure Factor

[B]y far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. . . . A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures. . . .

Causes of mortgage foreclosures, 2nd half of 2008 . . .

Negative Equity: 285,305
Down Payment of Less Than 3%: 130,014
Mortgage Rate Reset Upward: 60,942
Subprime FICO Score (<620): 148,697
Unemployment Increase In 2008: 183,447 . . .

Further, because it is difficult to account for second mortgages in this data, my measurement of negative equity and its impact on foreclosures is probably too low, making my estimates conservative.

What about upward resets in mortgage interest rates? I found that interest rate resets did not measurably increase foreclosures until the reset was greater than four percentage points. Only 8% of foreclosures had an interest rate increase of that much. Thus the overall impact of upward interest rate resets is much smaller than the impact from equity.

To be sure, many other variables — such as FICO scores (a measure of creditworthiness), income levels, unemployment rates and whether the house was purchased for speculation — are related to foreclosures. But liar loans and loans with initial teaser rates had virtually no impact on foreclosures, in spite of the dubious nature of these financial instruments.

Instead, the important factor is whether or not the homeowner currently has or ever had an important financial stake in the house. Yet merely because an individual has a home with negative equity does not imply that he or she cannot make mortgage payments so much as it implies that the borrower is more willing to walk away from the loan.

From here

The regression analysis supporting the analysis above is based upon "loan-level data from McDash Analytics, a component of Lender Processing Services Inc. It is the largest loan-level data source available, covering more than 30 million mortgages."

Others (at the same link, but with a different person quoted) argue that while loan to value was a factor, that its dominance is overstated, as other factors were also important.

MBA data from September 2008:

For prime loans, foreclosure starts on fixed rate loans were 0.34 percent, an increase of five basis points, while prime ARM foreclosure starts were 1.82 percent, a 26 basis point increase. For subprime loans, fixed rate foreclosure starts increased 27 basis points to 2.07 percent and subprime ARM foreclosure starts increased 31 basis points to 6.63 percent

Sub-prime worse than Prime, ARMs much worse than fixed.

The average loss a bank suffers when a subprime loan goes to a foreclosure sale is currently 64.7%. Thus, the loans were typically written for something close to three times what the property was actually worth, post-bubble collapse.