Fracing = no mortgage

Is the below article old news?  Because the mortgage agencies in this quote are even stronger that the EPA.  I find this quote interesting.  "It also specifies that owners must "take affirmative steps to prevent the renewal or expansion" of a current gas lease."

Fracking leaves property values tapped out by Jason Notte

Depending on where you stand and what's beneath the ground you're standing on, fracking is either paving the way toward American energy independence or dooming it to methane-addled water and man-made tremors.

The one certainty about fracking, however, is that it doesn't exactly do wonders for property values.

As reported by The Atlantic, mortgage lenders are becoming more cautious about approving loans for properties near fracking sites. Lawyers, real estate agents, public officials and environmentalists have noted that banks and federal agencies are revisiting their lending policies to account for the potential impact of drilling on property values. In some cases they are refusing to finance property with or even near drilling activity.

That's particularly problematic, considering that many home insurance policies do not cover residential properties with a gas lease or gas well, though all mortgage companies require home insurance from their borrowers. Part of the problem stems from uncertainty over the effects of the process itself.

As MSN Money writer Charley Blaine explains, fracking is technically "hydraulic fracturing," which means using small explosions and lots of water and smaller amounts of chemicals to free up oil and gas resources locked in rocks far below the earth's surface. Fracking was largely responsible for a 14.4% jump in U.S. oil production in 2012 to 6.47 million barrels a day -- the most since 1995 -- and has set off a huge boom in natural gas exploration and production in Texas, North Dakota (pictured), Montana and the Appalachians.

As a result, the U.S. imported just 41% of its oil in the first five months of 2013, the Energy Department says, down from 65% in 2005. Some projections say the combination of new supplies from fracking and alternative sources and energy savings from conservation could make the U.S. energy self-sufficient by 2030, although the country will still be an oil importer.

Critics don't have to look very hard to find reason to fear the process, however. In the 2005 Energy Policy Act, the fracking industry was specifically exempted from violations under the federal Safe Drinking Water Act. State regulations weren't affected, but the question is whether state regulators have the will or resources to act.

A New York Times report documented a contamination in Jackson County, W. Va., in the mid-1980s. And a Vanity Fair magazine article documented groundwater contamination issues around Dimock Township, a small town in northeast Pennsylvania, from wells drilled by Cabot Oil & Gas (COG +0.27%). The controversy was the basis for the anti-fracking movie "Gasland."

Brian and Amy Smith live across the street from a new gas well in Daisytown, Pa., just an hour south of Pittsburgh. Last year, when they applied for a new mortgage on their $230,000 home and hobby farm, they were denied. ABC affiliate WTAE notes it's the first case in western Pennsylvania of a homeowner being denied a mortgage because of gas drilling on a neighbor’s property.

Mortgage provisions prohibiting gas drilling, meanwhile, are becoming more common. The "mineral, oil and gas rights rider" on the loan paperwork at Sovereign Bank says the mortgage will be recalled automatically if the property owner transfers any oil or gas rights or allows any surface drilling activity. It also specifies that owners must "take affirmative steps to prevent the renewal or expansion" of a current gas lease.

The Federal Housing Administration's lending guidelines prohibit the financing of homes within 300 feet of a property with an active or planned drilling site. Mortgage lenders Fannie Mae and Freddie Mac also prohibit property owners from signing a gas lease or keeping hazardous materials on their property. Doing so puts their mortgages in "technical default."

While drilling companies tend to pay well for drilling rights, that's of little use to homeowners if  the property they're sitting on can't be sold or isn't eligible for a mortgage if it does.

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2p6y7ycljui0uPermalink Reply by 2p6y7ycljui0u on August 21, 2013 at 7:50

While drilling companies tend to pay well for drilling rights, that's of little use to homeowners if  the property they're sitting on can't be sold or isn't eligible for a mortgage if it does.

Sobering thought. Rural tract or urban, drilling on or near your land decreases the value forever. In addition, leverage is lost, if needed, on your property. Interesting article and very funny how it states that "drilling companies tend to pay well for drilling rights......" Articles like this should wake landowners up to what a fair leasing bonus should be. Better be at least the appraised value of your tract, especially if your tract will be a drilling location. Looks like they got you landowners at both ends. Shorted on bonus, and then shorted on royalties.

Permalink Reply by Andrew on August 21, 2013 at 18:18

Virtually every mortgage, at least in Louisiana, has a boilerplate provision prohibiting the alienation or lease of the minerals without the lender's consent, and violation of the clause could technically trigger a default and cause the balance of the loan to become immediately due. Some mortgages are less stringent on leases, but they still entitle the bank to all bonuses and royalties from any leases. However, at the end of the day, if potential mineral development would substantially increase the creditworthiness and future borrowing capacity of the borrower, most banks are happy to lay out the red carpet for mineral development.

2p6y7ycljui0uPermalink Reply by 2p6y7ycljui0u on August 22, 2013 at 0:49

And what if at the end of the day, if after legal battles and/or frustration with royalty shell games and declining prices, the landowner decides to sell or develop his tract? Perhaps the landowner would desire to leverage his land? Guess that red carpet would have some dog droppings on it.

People with property should not blithely accept assurances when signing a mineral lease agreement.   

Permalink Reply by Joe Aldridge on August 22, 2013 at 0:49

Andrew,

I agree with you. I've never heard of a Louisiana bank or banker objecting to oil and gas exploration and development on mortgaged property.

2p6y7ycljui0uPermalink Reply by 2p6y7ycljui0u on August 22, 2013 at 0:51

Yet.

Permalink Reply by Joe Aldridge on August 22, 2013 at 0:56

I think that article has more to do with those Yankee bankers that don't have a clue about oil and gas E&P.

2p6y7ycljui0uPermalink Reply by 2p6y7ycljui0u on August 22, 2013 at 1:00

And exactly when have banks been selectively excluded from the CSA, Mr. Aldridge? Last time I checked LBT, CNB, FNB, Pioneer Bank and Trust, and SBT were overrun by dastardly "Yankees." Also, things do not seem to start out in the sunny south. They commence elsewhere, just ask General Sherman.

Permalink Reply by Joe Aldridge on August 22, 2013 at 1:15

First, I said Louisiana bank. I deal with a small local bank that I've done business with for 50 years. As long as I tell them what I'm doing they have no problems be it timber cutting or leasing for O&G E&P. I went to them before Katrina and told them we wanted to cut timber. We like to do a cut every 15 years or so.They know we only do a selective cut; we don't clear cut and they had no problem with that. They have been GREAT to work with. We have a second property that we did not cut and when Gustave came through we lost all of that timber. On the property that we had cut there was minimal damage. So a good bank that understands the situation and the people they deal with makes a big difference. That's why I said Louisiana Bank. 

2p6y7ycljui0uPermalink Reply by 2p6y7ycljui0u on August 22, 2013 at 2:42

This is a trend and some trends cannot be controlled locally. Do not think the industry is unaware, and it does not figure into recent moves. The only thing the landowner has control over are his minerals until he/she signs. In Louisiana, he/she has no control over assignment unless he/she puts it into the agreement. You could be comfortable with your present operator but not with his assignment. Once you have been cheated and schemed on, fighting for your royalties as your land value decreases, it would be tough to face a lessened option as far as development, leveraging, or sales. This is simple reality, no slam on any industry workers. This is fact. When you sign a mineral lease agreement you are giving up more than minerals, if you are a landowner. Do not sell yourself or your children short. 

Permalink Reply by cole causey on August 22, 2013 at 17:48

This means a mortgage company is buying into democratic fear tactics.  There are no signs of tremors  scaring people away from paying a certain amount from a house.  There are not enough cases of water catching on fire due to methane gas from fracking areas for the morgage companies to be scared of property values dropping. With tremors and water fires not reallly happening like in the movie Gasland, it would only be the mortgage companies that are pro democrat that would try to pull such a stunt on a landowner.  All of Shreveport, La property values are going up in many areas where fracking is going to be going on for a hundred years in the Haynesville Shale.  The mortgage companies are not defaulting on these loans, and just about every square inch has been under Oil and Gas lease since 2010.  The tremors we need to be worried about are the ones coming from democratic fear mongering for waaayy to long now. I hope I live another 50 years,  when all the fear mongering is proven to be just that, because with no earthquakes, and no polution of water killing property values due to fracking is settled due to overwhelming evidence.  The overwhelming evidence will be that there hasn't been any earthquakes, and all the water is clean in shreveport, la where there is as much drilling going on as anywhere in the U.S. in the past 50 years.  Then I will be happy if one democrat will standup and say OK, I see it, we are a gutless bunch of terrorist that use dirty fear tactics for votes.  Then if your a democrat you have to say in front of the world that the marrying of first cousins should be legal, because you can't say one unnatural act should be legal and not the other.

Permalink Reply by tc on August 23, 2013 at 0:33

My problem with this issue is that people lump drilling and fracing together.  While fracing is safe IF done correctly, drilling has issues.  I personally won't want to live next to a drill site, or an electrical substation, coal mine or fly ash dump.  While 300 feet is nothing in a rural setting, it becomes more of an issue in more densely populated sub-divisions.  For example, an issue in Pittsburgh is whether we should allow drilling next to county parks and the issue is about the safety of fracing and not drilling.  The parks are 1000x more likely to be harmed by the above ground drilling process than by fracing.

2p6y7ycljui0uPermalink Reply by 2p6y7ycljui0u on August 23, 2013 at 2:34

Yes, and being from the state where it all started, I am sure you are just as well versed as our Southern brethren. As in anything else, more issues will arise and it is very thoughtful of you to post what is happening on the financing front. This issue will grow and is a consideration for any landowner or investor.

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