Drilling casts shadow on home mortgages

The presence of oil and gas leases on residential properties could cause problems for homeowners looking to mortgage their property, especially if the lender wants to sell the mortgage on the secondary market.

Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy mortgages from banks, are not allowed to purchase mortgages on properties where transport or sale of certain “hazardous substances” is occurring.

Residential properties in Colorado increasingly are being eyed for oil and gas development because many either lie near oil and gas fields or have oil and gas deposits beneath them. Thanks to Colorado’s oil and gas boom and the rebound in the residential real estate market, the impact of energy development in residential areas is being scrutinized closely. Financing and insuring mortgages are among the issues that have arisen as potential problems.

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The Freddie Mac Deed of Trust for Colorado defines hazardous substances as “gasoline, kerosene, other flammable or toxic petroleum products, toxic pesticides and herbicides, volatile solvents, materials containing asbestos or formaldehyde, and radioactive materials.”

“Borrower shall not cause or permit the presence, use, disposal, storage or release of any hazardous substances, or threaten to release any hazardous substances, on or in the property,” the deed states.

The restriction was put in place to protect investors in the government-sponsored enterprises from risk, said Greg May, senior vice president and residential mortgage lending and operations manager for Ithaca, N.Y.-based Tompkins Trust Co.

These restrictions are making it difficult for borrowers to find financing at a competitive rate as oil and gas leases become more prevalent, he said.

“These borrowers can still get a loan,” May said, “but may have to pay a premium or get an adjustable-rate loan instead of fixed.”

Banks sell mortgages to the secondary market to maintain a steady stream of capital that can be used to make more loans. More than 65 percent of mortgages made in the country are purchased or guaranteed through Fannie and Freddie.

However, some mortgages are held on a bank’s books rather than being sold, so the rules of Fannie and Freddie do not apply. These loans still can run into problems, though, said Elisabeth Radow, an attorney based in New York.

Most insurance policies do not cover homes with hydraulic fracturing on the property, Radow said, and lenders usually require that a home is insured in order to issue a mortgage.

Large insurance companies such as Nationwide have publicly acknowledged that they reserve the right not to renew a homeowner’s insurance policy if fracking is occurring on the land, Radow said.

“From an underwriting standpoint, we do not have a comfort level with the unique risks associated with the fracking process to provide coverage at a reasonable price. Insurance is a contract and it is designed to cover certain risks,” Nationwide said in a statement. “Risks like natural gas and oil drilling are not part of our contracts, and this is common across the industry. Our longstanding underwriting guideline is that we do not insure the oil and gas business.”

The statement reiterated that its homeowners insurance plans did not cover “earth movement,” which is typically thought of as an earthquake or similar phenomenon, but also applies to fracking, said Michael Barry, spokesman for the Insurance Information Institute.

“Earth movement is a standard exclusion,” Barry said.

Situations where fracking has damaged the foundation of a home are not common but have occurred, Barry said.

Typically, homeowners who live in earthquake-prone areas take out earthquake insurance to protect themselves from earth movement, in addition to their homeowners insurance, Barry said. Anyone who is concerned about home damage from earth movement can seek an earthquake policy, he said.

Banks are dealing with the issue on a case-by-case basis.

“We have made loans on properties where leases exist, though these loans often require additional research and documentation before an approval can be given,´ said Cristie Drumm, Colorado spokeswoman for Wells Fargo Bank National Association.

Each of Wells Fargo’s decisions is based on a set of factors that must be independently analyzed, Drumm said.

Factors that can cause a loan on a property with a gas lease to be denied include:

• The agreement adversely impacts the use of the surface of the property, including dwellings.

• The property does not qualify for hazard insurance.

• The insurance premiums cause the monthly payment to exceed an acceptable debt-to-income ratio.

• Investor guidelines prohibit mineral leases.

Nationally, Wells Fargo reportedly has restricted its lending on these types of properties and cautiously has been refusing loans on them since 2012.

The bank, one of the largest mortgage lenders in the nation, has not set policy regarding lending decisions on properties where gas or other drilling and mining operations exist, Drumm said.

May’s bank, Tompkins Trust Co., also deals with the issue one loan at a time, but has put in place stringent requirements for getting a mortgage on a property with a gas lease.

“We want to try to help, but we’re restricted by regulations on the secondary market,” he said “We try to talk to the consumer at the outset so that they’re aware of the difficulties.”

Molly Armbrister can be reached at 970-232-3139 or marmbrister@ncbr.com. Follow her on Twitter at @MArmbristerNCBR.