fracking boom could lead to housing bust

7/29/2019 Fracking Boom Could Lead to Housing Bust

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Fracking boom could lead to housing bustByRoger Drouin

thinkpanamaWhen it comes to the real estate market in Bradford County, Pa., where 62,600 residents live

above the Marcellus Shale, nothing is black and white, says Bob Benjamin, a local brokerand certified appraiser. There arent exactly fifty shades of grey, he says, but residentialmortgage lending here is an especially murky situation.

When Benjamin fills out an appraisal for a lender, he has to note if there is a fracked well oranimpoundment lakeon or near the property. Im having to explain a lot of things when Igive the appraisal to the lender, he says. They are asking questions about the well quite

often.And national lenders are becoming more cautious about underwriting mortgages forproperties near fracking, even ones they would have routinely financed in the past, Benjaminsays.

Thats a real problem in Bradford County, where 93 percent of the acreage is now under

lease to a gas company.

Local banks are still lending because they have to if they want the business in the county,according to Benjamin, who has been involved in the areas real estate market since 1980.But, he says, The big boys, Wells Fargo and the other banks are probably pretty similar,

they are going to protect their butt.Lawyers, realtors, public officials, and environmental advocates from Pennsylvania toArkansas to Colorado are noticing that banks and federal agencies are revisiting their lendingpolicies to account for the potential impact of drilling on property values, and in some casesare refusing to finance property with or even just near drilling activity.

Real estate experts say another problematic trend is that many homeowners insurancepolicies do not cover residential properties with a gas lease or gas well, yet all mortgagecompanies require homeowners insurance from their borrowers.

Well, that is a conflict, says Greg May, vice president of residential mortgage lending at

Ithaca, N.Y.-based Tompkins Trust Company.
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Last month, a landowner in Madison, N.Y., was surprised when their insurancecompanyrefused to renewtheir homeowners policy because there is a conventional gas wellon their property.While the media and environmental groups have focused on shale drillings potential topoison the soil, water, and air, theyve largely overlooked its potential to poison the realestate market.

I think we are on the tip of this, says Steve Hvozdovich, Marcellus Shale coordinator forClean Water Action in Pennsylvania. Whether you are the homeowner trying to gethomeowners insurance or the neighbor [to a fracking site] who is trying to refinance, thereare just so many tentacles to this. I dont think people are grasping all the impacts ofnaturalgas drilling.

Benjamin doesnt often hear property owners talk about the issue. I dont think most areconcerned about it, he says. But I think they may have to be in the future.

The first denial

Brian and Amy Smith live across the street from a new gas well in Daisytown in WashingtonCounty, Pa., an hour south of Pittsburgh. Last year, when they applied for a new mortgage ontheir $230,000 home and hobby farm, they were denied.

According to ABC affiliate WTAE, this appears to be the first example in westernPennsylvania of a homeowner being denied a mortgage because of gas drilling on aneighbors property:In an email, Quicken Loans told the Smiths, Unfortunately, we are unable to move forwardwith this loan. It is located across the street from a gas drilling site. Two other national

lenders also turned down Brian Smiths application.I think a lot of folks nationally are watching this case, says Rep. Jared Polis (D-Colo.), acongressman who represents areas north and west of Denver. He noted that in his homedistrict fracking leads to a haircut on a propertys values.

I think it is something that the banks would frankly be smart to look at, Polis says.

Elisabeth N. Radow, a lawyer and chair of the League of Women Voters of New York States

Committee on Energy, Agriculture and the Environment, says the Smiths story shows thatproperty owners are clearly vulnerable to what happens on their neighbors land in fracking

territory. A [fracking] gas well brings commercial activity, can pollute drinking water and

devalue the property.

Radow says its logical that high-volume horizontal fracturingan operation in whichmillions of gallons of water mixed with hundreds of chemicals are pumped horizontally intolayers of shalehas lenders worried. They are trying to protect themselves, she says.

The Obama administration has so far taken a hands-off approach to regulating fracking, ashave many states, so the banks are trying to figure out how to proceed in uncertain territory.
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What is the federal government doing to protect the Smiths of the world? asks John R.

Nolon, a land-use and property professor at Pace Law School. Banks are out there on thefrontier of this regulatory chaos saying, We cant assure ourselves this is a safe technology

because there is this fragmented regulatory process.

A very clear stance

Radow advises people looking to purchase a home anywhere with drilling to do theirhomework before buying.

She predicts that homeowners will start seeing mortgage provisions prohibiting gas drilling.She saw one earlier this month from New Jersey, where the gas industry is lobbying Gov.Chris Christie (R) to open the Delaware River basin to fracking. TheMineral, Oil and GasRights Rider[PDF] on loan paperwork from Sovereign Bank says the mortgage will beautomatically recalled if the property owner transfers any oil or gas rights or allows anysurface drilling activity. It also specifies that owners must take affirmative steps to prevent

the renewal or expansion of a current gas lease.A spokesperson for Sovereign Bank said the company would not comment for this story.

May, the lending firm vice president from Ithaca, says he is neither pro- nor anti-fracking, buthe thinks property owners and prospective buyers need to be aware of these kinds ofmortgage issues.

That is one of the top lenders that has taken a very clear stance, May says of the SovereignBank document. We need to pay attention to this.

Another big unknown is how homeowners might be affected by horizontal drilling happening

underneath their property, May said. Horizontal drill bores radiate out from the vertical boreup to one mile in each direction, which could potentially impact other owners fee-simplereal estate ownership, May says.

The problems are here

Twelve hundred miles southwest of Bradford County, Connee Robertson and her husbandrun an animal rescue center on 1.6 acres overlooking Little Red River in Heber Springs, Ark..

Robertson moved to the area in 1993 because she fell in love with this part of the Ozarksknown for its pristine rivers and lakes. That was before gas companies such as Chesapeake

Energy discovered the Fayetteville shale formation in the early 2000s.

Once that happened, the majority of property owners in Heber Springs leased their gas rights.Everyone saw dollar signs, Robertson says. Everyone ends up regretting it. The problemsare here now.
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Over the past few years, those problems have included earthquakes and drilling crews pullingwater out of the Little Red River. One of Robertsons horses died for unknown reasons, andher neighbors wells have been polluted.

More recently, Robertson has heard about buyers unable to purchase homes in the area

because they cant secure financing.

In the Laurel Highlands area of Pennsylvanias Allegheny Mountains, traditionally known fortourism and recreation, drilling is scaring off prospective second-home buyers before theyeven start thinking about mortgages, says Melissa Troutman of the Mountain WatershedAssociation. She knows of one buyer who left the market after they learned that there wasdrilling three and a half miles from a home they were looking at.

In technical default

Many of the largest mortgage institutions have already enacted policies that bar lending to

certain properties near gas drilling and gas lines.

The Federal Housing Administrations lending guidelines prohibit financing for homeswithin 300 feet of a property with an active or planned drilling site. In an email response toa question from Grist, FHA spokesman Lemar Wooley explained the reasoning behind theguidelines:

FHA is primarily concerned with the health and safety of the occupants of the dwelling. If theproperty is subject to smoke, fumes, offensive noise and odors, etc. to the extent they wouldendanger the health of the occupants then the property is ineligible. FHA is also concernedwith the risk to the insurance fund. So if the property is subject to those same items and the

health of the occupants is not endangered, but the marketability of the property iscompromised, the property may not be eligible for FHA insurance.Fannie Mae and Freddie Mac also prohibit property owners from signing a gas lease.

May said many owners are now in technical default under the terms of their mortgage if

they signed a gas lease without first getting consent from their lender.

Another clause in Fannie Mae and Freddie Mac mortgages prohibits hazardous materials on aresidential property. It comes as a surprise to a lot of people. They werent aware that their

mortgage came with those restrictions, May said.

Back in Bradford County, Benjamin, who plans to retire in 10 or so years, hasnt decidedwhether he wants to keep his family in the area, where there are good and bad points to thedrilling boom. But he knows one thing for sure: Fracking changed everything in theregions real estate market.

Roger Drouin is a freelance journalist who covers environmental issues. When hes not reporting or

writing, he is out getting almost lost in the woods. He blogs at rogersoutdoorblog.com.
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fracking boom could lead to housing bust

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