I know I’m late getting this posted but I was super busy when the NY Times article, Rush to Drill for Natural Gas Creates Conflicts With Mortgages was published. I’m just now starting to comb through the juiciest stuff that is in the documents posted with the article.
Certain important items were specifically pointed out by someone who is smarter than I am.
- Many borrowers aren’t getting permission from lenders/Fannie Mae, Freddie Mac, Farmer Mac before signing gas leases. There are potentially undisclosed risks if a mortgage has a gas lease, especially if these mortgages are sold on the secondary market. It seems like lenders or mortgage services companies should have an interest in keeping close tabs not only on how many borrowers have signed leases, but also on environmental damages done to property by drilling companies. Check out this legal research memo from Congress and this letter from a real estate attorney to the FHFA.
- The use of surface rights seems like another huge issue. Drilling has only just begun in many places. For example, in Pennsylvania, there have been a few thousand Marcellus shale wells drilled so far, but companies plan to drill 50,000-plus more over the next two decades, according to the PA DEP. That’s a lot of wellpads, wastewater pits or tanks, tanks of flammable natural gas liquids, volatile organic compounds, pipelines, access roads etc. The question is not just how that impacts people’s ability to sell the land before, during and after drilling, it’s also whether just signing a lease that allows these activities is a breach of a borrower’s mortgage. Realtors in New York are just starting to pay attention to these issues. Believe it or not, even some Texas Realtors are tuned in.
- Property value and appraisals: It seems like the extent of a bank’s exposure to these problems could hinge on the specific terms of the oil and gas lease. Does it grant surface rights? Is there a buffer zone between a well and a home in the lease? Fannie Mae has rules about how the impact on property values should be evaluated. There’s also a guide to doing appraisals after a lease is signed that is really interesting, says appraisers should be consulting with geologists and engineers to figure out the value of a leased property:
- There’s more to figure out, of course. This report gives a really full overview of possible trouble-spots.