Gas leases affect mortgages elsewhere [The Dominion Post, Morgantown, W.Va.]

Nov. 27--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.

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