Fracking Boom Gives Banks Mortgage Headaches by Andy Peters, November 12, 2013, American Banker
At least three institutions — Tompkins Financial (TMP) in Ithaca, N.Y., Spain’s Santander Bank and State Employees’ Credit Union in Raleigh, N.C. — are refusing to make mortgages on land where oil or gas rights have been sold to an energy company. … The uniform New York state mortgage agreement, used by Fannie Mae and Freddie Mac, states that “you cannot cause or permit any hazardous materials to be on your property and it specifically references oil and gas,” says Greg May, vice president of residential mortgage lending at Tompkins. “That alone would make it a problem.” The mortgage agreement says homeowners can sell an oil or gas lease to an energy firm with prior consent from a lender, but May says, “I don’t know any lenders who are granting that right now.”
If Fannie Mae owns the mortgage, it’s unlikely it would approve such a transfer. Fannie Mae generally does not “allow surface instruments,” such as an oil rig, on property it owns, says spokeswoman Callie Dosberg. A landowner could apply for prior approval, and there “may be a work-around, but generally the agency does not approve such requests,” she says. A greater concern for homeowners is that Fannie Mae or Freddie Mac could force the entire outstanding loan balance to become due immediately. Freddie Mac is within its legal authority to exercise a mortgage’s “due on sale” clause if a borrower enters into a mineral-rights agreement, says spokesman Brad German. He says no “public information” is available to show if that has ever happened.
An ability to exercise the “due on sale” clause is triggered if a landowner transfers a right attached to the property; or through language that bars “hazardous conditions” on the site, German says. A clause in Freddie Mac’s standard security instrument bars “the borrower from taking any action that could cause the deterioration, damage or decrease in value of the subject property.” So “the borrower cannot enter into a mineral lease without express approval,” German says. Banks are in a bind, too, May says. On one hand, they must follow Fannie Mae and Freddie Mac policies, but they don’t want to add dozens of foreclosed homes to their books. “Lenders are trying really hard to play a neutral role in this,” May says. “We’re not in the market to own real estate. We want to make loans.” … Oil rigs on a piece of land would affect the values of neighboring properties, says Jim Blaine, the $27 billion-asset credit union’s president. “You could end up where someone puts a drilling platform on that property,” Blaine says. “We’d have to tell their neighbors, ‘We’re sorry, your property value just went down.'”
The credit union was one of several financial institutions that pushed North Carolina lawmakers to pass a law requiring it to be “very clearly stated” in a sales contract whether a property’s mineral rights have been severed, Blaine says. The $76 billion-asset Santander Bank, formerly Sovereign Bank, added a clause in September 2012 to mortgage agreements stating that it will not make loans where a property owner has severed the mineral rights. “We include this clause as a means of reducing the bank’s risk and protecting its financial strength, which benefits all of our customers,” says Santander spokeswoman Siobhan O’Shea.
Santander has branches in the Marcellus Shale region of Pennsylvania, where oil and gas fracking is centered. Santander, “to the best of our knowledge,” has not recalled a mortgage for any property financed before the new clause was added to legal agreements, O’Shea says. The $4.9 billion-asset Tompkins has not changed its policy on mortgage loans, but is “just following the policy that’s always been there,” which says that an oil or gas lease is in “direct conflict” with the terms of a uniform mortgage loan, May says. “I’m not pro- or con-drilling,” May says. “My charge at Tompkins is to control the risk to the best of my ability.”
Fracking could have a negative influence on property values, so it is an issue all mortgage lenders should review, says Steve Hvozdovich, Marcellus Campaign Coordinator for Clean Water Action. A potential problem is oil leaks, which can cause water pollution, he says. “A lot of people in rural Pennsylvania rely on well water for their homes,” Hvozdovich says. “If you have contaminated well water, you don’t have a reliable drinking water source, which is going to make it almost impossible to resell the home.”
The ultimate warning sign for banks may be insurance, May says. A borrower can’t get a mortgage without homeowners’ insurance. “We’re actually seeing insurance companies cancel [insurance] renewals when they find a [gas or oil] lease on the property,” May says. [Emphasis added]
Rabobank is against shale gas extraction by Kees de Peace, July 1, 2013, Trouw
Rabobank refuse to lend to businesses that deal with the extraction of shale gas money.Even farmers who lease their land to energy companies with the intention of shale gas out of the ground, do not get loans from the bank. … Here and there by negligence and badly beaten wells question of pollution of soil and water. Thereby colliding gas interests and agricultural interests increasingly with each other. Rabobank is the largest agricultural lender. The bank considers the production of what it calls “unconventional fuels” such as oil from tar sands and shale gas from deep bedrock, as polluting and do not contribute to it. A spokeswoman for the office of Rabobank in Utrecht confirms this arrangement. Which is based on the ‘Position paper on oil and gas activities’ that the bank has recently issued. … The position of Rabobank applies worldwide, says the spokesperson, but is mainly used in practice in the U.S..
NETHERLANDS:‘Rabobank turns against shale gas’ by Presseurop, July 1, 2013, Trouw
The country’s largest bank is refusing to lend to companies that wish to invest in shale gas. The Amsterdam daily reports that Rabobank “does not want to contribute to energy which it believes to be polluting,” and has said as much in a recent position paper on its business and sustainable development. For the moment, this decision will mainly have an impact on the bank’s operations in the US, where Rabobank is the leading lender to farmers, and where the drive to develop shale gas is such that it has been called “a second gold rush”. [Emphasis added]