Natural Gas Drilling Near Homes Raise Red Flags

October 25, 2011

Energy industry representatives are increasingly making an offer to home owners across the country: Let us drill for your natural gas on your land, and we’ll pay you for the lease. 

The offer is increasingly being made to home owners in Texas, Pennsylvania, and New York. Drilling officials say home owners can earn extra income that can be used to pay off their mortgages and that the gas royalties can even help increase their property values. 

But not so fast, say mortgage officials, who are increasingly being concerned over home owners signing these lease agreements with gas companies without getting permission from their lender first. 

Home owners need to check with their mortgage banker before they ever sign such a lease, experts say. Besides refinancing hurdles that may arise, real estate professionals say it also might make it more difficult to sell your home and devalue your home. 

“When you decide to sell your house you may find it difficult to do so because many banks, here and elsewhere, will not mortgage properties with gas leases, which, in turn, limits the number of buyers willing and able to buy your property,” Linda Hirvonen, a real estate professional in Ithaca, N.Y., wrote in a recent newsletter.

For home owners with mortgages owned or guaranteed by Fannie Mae or Freddie Mac, signing a drilling lease without approval is “generally considered an act of default under the mortgage,” according to a report by the Congressional Research Service. As such, Fannie or Freddie could demand payment in full on a loan, which could push some home owners into foreclosure if they were unable to pay, the report noted. 

But others say they aren’t so worried that these gas leases can potentially jeopardize people’s loans. “The leases have not created any practical conflict or issue with mortgages,” Adam J. Schultz, a lawyer in Syracuse, told The New York Times. He says there are thousands of gas leases on mortgaged properties in New York and Pennsylvania and that state environmental regulations helped protect property values.

Source: “Rush to Drill for Natural Gas Creates Conflicts With Mortgages,” The New York Times (Oct. 20, 2011)

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