Yesterday we looked at the clear evidence that fracking in a community causes property to lose significant value. Today we turn our attention to documenting how the mortgage industry, recognizing how drilling adds risk and reduces value, is beginning to tighten policies on lending on properties that have wells on or near them, or that are subject to leasing.

As more and more Americans live closer to oil and gas wells, what lending institutions are most worried about are the additional risks brought by drilling:

• Uninsurable property damage for oil and gas activities outside of a landowner’s control.
• Lending institutions refusing to provide mortgage loans on homes with gas leases because they don’t meet secondary mortgage market guidelines.
• The possibility of default because a borrower signed a mineral lease
• Prohibitively expensive appraisals and title searches made complicated by the long paper trail associated with mineral rights and attached liabilities.
• Difficulty of getting construction loans, which require a risk-free property.

Photo: Spencer Platt, Getty Images

While some lending institutions continue to make loans in oilfields, the number of banks that are applying stringent conditions or refusing to make loans to properties associated with oil and gas drilling is increasing. Here are some examples:

• In North Carolina the State Employees’ Credit Union (NCSECU) has announced that it will no longer approve mortgage financing for split estates. The credit union, which manages almost $12 billion in residential mortgages, said it considers loans on such land to be riskier than those where the mineral rights remain with the land. “You could end up where someone puts a drilling platform on a property,” says NCSECU President Jim Blaine, “We’d have to tell their neighbors, ‘we’re sorry, your property value just went down.'”
• According to American Banker, at least two mortgage lending institutions in addition to NCSECU — Tompkins Financial in Ithaca, NY and Spain’s Santander Bank — will no longer write mortgages on land where oil or gas rights have been sold to an energy company.
• Language in the Federal Home Loan Mortgage Corporation’s (Freddie Mac) standard mortgage contract prohibits a “borrower from taking any action that could cause the deterioration, damage or decrease in value of the subject property.” If a landowner breaks that clause by signing a drilling lease or entering into a mineral rights agreement, Freddie Mac has the legal authority to exercise a call on the full amount of a mortgage, according to an agency spokesman.
• According to a white paper prepared for the New York State Bar Association, Wells Fargo, one of the largest home mortgage lenders in the United States, is approaching home loans for properties that have gas drilling leases attached to them with a high degree of caution.
• The Tompkins Trust Company has prepared a white paper that details how several companies, including Provident Funding, GMAC, FNCB, Fidelity and First Liberty, First Place Bank, Solvay Bank, and CFCU Community Credit Union, are putting hard-to-meet conditions on mortgages or denying loans altogether on properties with oil and gas leases.
• Fracking and associated injection wells can lead to earthquakes that can damage property, a concern for a number of lenders.
• A Pennsylvania couple was recently denied a new mortgage on their farm by Quicken Loans because of a drilling site across the street. According to the lender, “gas wells and other structures in nearby lots…can significantly degrade a property’s value” and do not meet underwriting guidelines. Two other lenders also denied the family mortgages.
• Federal lending and mortgage institutions (FHA, Fannie Mae, Freddie Mac) all have prohibitions against lending on properties where drilling is taking place or where hazardous materials are stored. A drilling lease on a property financed through one of these agencies would result in a ”technical default.” FHA’s guidelines also don’t allow it to finance mortgages where homes are within 300 feet of an active or planned drilling site.

As we’ve seen over and over, increased oil and gas drilling causes irreparable damage to a community. Lending institutions are reacting because it’s their money that’s on the line. Their increasing unwillingness to lend will further hurt property values and drive up mortgage rates.

Another industry that will shy away from increased risk is insurance. Tomorrow we’ll look at how major insurers are writing fewer policies in areas impacted by drilling.