Sunday, October 23, 2011

Marcellus shale drilling vs. mortgage company restrictions

As natural gas drilling becomes more common in Pennsylvania and elsewhere, lenders are becoming more reluctant to make loans and accept mortgages on properties on which natural gas drilling takes place. Lenders have placed restrictions on natural gas drilling as a condition of approving loans. Lenders do this out of fear of liability for environmental damage or that environmental damage will reduce the value of the mortgaged property.

These new lending policies have taken borrowers and real estate sellers by surprise, according to last week's New York Times:
As natural gas drilling has spread across the country, energy industry representatives have sat down at kitchen tables in states like Texas, Pennsylvania and New York to offer homeowners leases that give companies the right to drill on their land.

. . . .

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?

Some lenders have placed outright prohibitions on drilling on mortgaged properties, while others require the owners to obtain permission from the lender. Other lenders will not approve loans if natural gas drilling already takes place on the property.

The Marcellus Shale development has tremendous potential to increase property values, benefit Pennsylvania's economy and blunt the effect of skyrocketing fuel prices. But property owners especially must be aware that signing a natural gas drilling lease might limit a buyer's ability to obtain a mortgage to purchase the property in the future. The income and resulting increased value from the gas lease should be weighed against potential borrowing problems of future buyers and the resulting decrease in price resulting from a restricted pool of buyers.

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