Gas Leases Affect Mortgages Elsewhere
Area banks have not denied loans, but look into rights
Morgantown Dominion Post
27 November 2011
By David Beard
The Marcellus industry is taking a toll on mortgages and affecting
other property issues in New York and Pennsylvania, various
authorities report.
The problems may be creeping closer to this area, but haven’t
arrived yet, local bankers say.
The reported effects — banks denying mortgages on gas-leased
property, denial of title and homeowner insurances, property
appraisals and assessments, and more — are complex and
intertwined.
Future stories will look at other aspects but this will focus on
one: Banks denying mortgages on gasleased land.
Along with interviews with sources, facts for this story come from
media reports and documents from banks and official sources
published on the Internet — some of those are posted by major
media outlets, including The New York Times.
Linda A. Hirvonen, a real estate broker in Ithaca, N.Y., told The
Dominion Post that she has had clients interested in buying homes
on properties with gas leases who were denied mortgages.
Unlike in West Virginia, where more often than not, surface rights
are severed from mineral rights, New York property titles
generally carry both, Hirvonen said.
She has spoken with banks in her area that told her they won’t
grant mortgages on properties with gas leases, but will mortgage a
home if the rights are severed.
She has had clients list such properties — one is now under
contract and two others are still awaiting interested buyers.
Of all the banks in her area, Hirvonen said, only one small local
bank said it is willing to mortgage gasleased property.
In a presentation to other bankers, two executives from New
York-based Tioga State Bank said, “Gas/oil leases are generally
not accepted by lenders such as Wells Fargo, Bank of America ...
GMAC.”
Maryland’s Attorney General Douglas F. Ganser published a letter
warning:
“Marylanders need to protect themselves from unintentionally
putting their homes and farms at risk. If a mineral rights lease
is on the table, take it to your bank or mortgage lender first and
have them sign off on it.”
Why the problem?
Experts offer several reasons for the mortgage challenge. Much
of it has to do with the federally backed lenders Fannie Mae and
Freddie Mac, called government-sponsored enterprises (GSEs).
In a publicly available letter, David H. Carpenter, with the
Congressional Research Service, explains that the GSEs are
secondary lenders — meaning they buy up mortgages from banks that
issue the mortgages, which gives the banks money to provide more
mortgages. The GSEs also invest in mortgage-backed securities and
guarantee the performance of those securities.
The GSEs have rules governing the eligibility of properties to be
considered, Carpenter wrote.
They retain the right to foreclose on the properties, and secure
the mortgages with all the surface and subsurface portions of the
plot, plus all the buildings and fixtures on the plot. Generally,
borrowers may not sell a portion of the land without the GSE’s
permission.
Leasing the mineral rights, Carpenter wrote, amounts to a
violation of the contract and a default on the loan.
The GSEs do not permit leased surface or subsurface rights within
200 feet of a residential structure, according to the Tompkins
County (N.Y.) Council of Governments and Greg May, of the Tompkins
Trust Co.
In addition, the Federal Housing Administration (FHA) loans forbid
leases within 300 feet.
A review of the GSE and FHA rules verifies this.
The GSE rules forbid environmentally hazardous substances,
particularly gas, from being stored, used, disposed of, discharged
or released on mortgaged property.
If primary lenders can’t get the GSE money, May wrote, they can
only lend based on their assets at hand, and would have to wait
until a mortgage is paid off before offering another.
Leases pose another set of problems, May explained. The person
holding the lease (in New York where the rights aren’t severed)
gives up some rights to quiet enjoyment.
There are restrictions on the use of the property and associated
structures.
Leases often come with automatic renewals.
In addition, he wrote, leases can affect the value and
marketability of the property. The local impacts of this issue
will be explored in a later story.
What’s up locally?
Wells Fargo spokesman Jason Menke explained his company’s
policy in an email exchange.
“Wells Fargo has no set policy regarding lending decisions on
properties where gas or other drilling and mining operations
exist, and it’s very difficult to provide a blanket answer in
these situations. Each lending decision is made independently and
considers a variety of factors that are property and transaction
specific. We have made loans on properties where leases exist, but
these loans often require additional research and documentation
before an approval can be given.
“When considering loans on properties where gas leases are
present, we must consider how the lease may impact use, value,
safety and habitability of the home.
Ultimately, each loan must be underwritten according to investor
guidelines.
“Some factors that can cause loans on properties with gas leases
to be denied include:
“The lease agreement adversely impacts our lien position; the
borrower is unable to obtain hazard insurance for the property; or
the insurance premiums for the required coverage cause the monthly
payment to exceed normal debt-toincome ratios.”
He did not have information about impacts on West Virginia at
hand, but said he would obtain it for a later story.
GMAC Mortgage spokeswoman Susan Fitzpatrick wrote in an email
exchange: “GMAC Mortgage thoroughly reviews each mortgage
application and makes decisions on a case by case basis. If there
is knowledge of a gas lease, we examine it carefully to ensure it
does not impact the salability of the loan to investors or our
ability to obtain title insurance insuring that we are in first
lien position.”
Centra Bank operates in north-central West Virginia, southwest
Pennsylvania and Western Maryland. It recently merged with
Charlestonbased United Bank, which also operates in Virginia,
Maryland and Washington, D.C.
Ann O’Neal, who heads the combined banks’ home mortgage
department, wrote in an email: “As of right now, this has been a
non-issue for us. I have not seen any loans in which this has been
an issue. I’ve been on the phone with our mortgage teams outside
of Morgantown and it has not been an issue for them either.”
WesBanco spokesman Doug Molnar wrote, “While we have experienced
some issues related to oil and gas leases, primarily in the early
days of Marcellus activity, we have been able to devise solutions
to deal fully with all of those issues. Over the course of
Marcellus activity, and now Utica Shale activity in eastern Ohio,
the bank has been active in our outreach to individuals and
community groups in the distribution of information on managing
mineral interests and natural resource royalties related to tax,
trust and investment strategies.”
Bill Goettel, president and CEO of Mannington-based First Exchange
Bank, said he has seen no change in mortgage-denial rates based on
leases or other Marcellus issues.
Brian Thomas, president and CEO of Clear Mountain Bank, told The
Dominion Post that the areas affected by the mortgage issue appear
to be a lot farther along in their extraction activity.
“I don’t think we’ve seen much of it yet,” he said, “but I think
there’s a possibility that we will as the industry continues to
evolve.”
Property owners have leased rights for many years, he said, but
the Marcellus activity is presenting a whole new face, with a
potential for a lot of drilling. “I think that will change the
fabric a little bit of how we look at these things.”
But he’s optimistic, to a point. “I don’t think it’s going to have
a negative effect on mortgages.” He’s talked to secondary buyers,
and the question is, “will it negatively impact the marketability
of the collateral?” The appraiser who sees a drill rig 500 feet
away from a house will have to weight that marketability.
“A lot of it’s untested yet. It’s a case by case situation.”
Clear Mountain has had some applicants, upon finding a gas lease
recorded on a property, raise some questions. But no one has been
declined a mortgage because of a gas lease.
Some lease tips
Thomas and Hirvonen offer similar tips on signing gas leases
and on considering property with a gas lease.
It’s always good to get the advice of an attorney who’s a
professional and is knowledgeable in these matters,” Thomas said.
“There is probably a fair number of people who don’t know mineral
rights are severed. I would encourage buyers to become informed
buyers.”
Hirvonen also advises clients to consult a lawyer regarding leased
property.
People may not know they can alter proposed leases before signing.
For instance, a lease may contain a clause for automatic renewal
after five years. If you don’t want it, she said, “cross it out.”
“We just have to make sure people understand this,” she said. “The
educated person can turn that around so its more in their favor.”
Thomas also offers a few other tips for buyers exploring
properties in Marcellus areas: Talk to neighbors to find out what
they’ve heard about drilling plans; ask appraisers about potential
impacts; and check the Department of Environmental Protection’s
gas well permit database
(dep.wv.gov/oil-and-gas/databaseinfo/Pages/OGD.aspx) to see if any
drilling is planned.