Thursday, October 20, 2011

Natural Gas Leases May Conflict With Mortgages

NYT, via nc links:
But bankers and real estate executives, especially in New York, are starting to pay closer attention to the fine print and are raising provocative questions, such as: What happens if they lend money for a piece of land that ends up storing the equivalent of an Olympic-size swimming pool filled with toxic wastewater from drilling?
Fearful of just such a possibility, some banks have become reluctant to grant mortgages on properties leased for gas drilling. At least eight local or national banks do not typically issue mortgages on such properties, lenders say.
A credit union in upstate New York has started requiring gas companies to promise to pay for any damage caused by drilling that may lead to devaluation of its mortgaged properties. Another will make home loans only to people who expressly agree not to sign a gas lease as long as they hold the mortgage.
More generally, bankers are concerned because many leases allow drillers to operate in ways that violate rules in landowners’ mortgages. These rules also require homeowners to get permission from their mortgage banker before they sign a lease — a fact that most landowners do not know.
Hopefully, the bonus and royalty payments will help pay off such loans, and not get blown on shiny new John Deere tractors purchased as a tax dodge.  For some reason, I'm not very confident that people won't blow the money, then have trouble with the banks. 

If this is a "technical default" according to the banks, could the banks demand payment on the loans, and if the owner isn't able to pay up, can the banks forclose?  This would prove very interesting if there was a large natural gas find on the property.

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