New York mortgage bankers denying mortgage applications with oil and gas leases

My colleague Kate Sinding and I have both blogged in the past about how potential homebuyers have been denied mortgages for properties with natural gas leases in Pennsylvania, how FHA will not insure mortgages when a home is less than 300 feet from the boundary of a wellpad, and the steep (75%) drop in property values for some homeowners with nearby natural gas operations.

Now there is recent news from New York State that mortgage lenders are denying applications where the property has a natural gas lease, including major lenders like GMAC, Wells Fargo, and Bank of America, and may even reject an application if a neighbor has a lease. I learned about this from the firm Toxics Targeting, which has a lot of documentation on this issue on its website, including a recent radio interview with NYS Assemblywoman Barbara Lifton.

Assemblywoman Lifton has met with mortgage bankers in her district and discusses their difficulty in selling locally originated mortgages into the secondary mortgage market. They've told her they are each turning down 6-10 mortgage applications per week. According to a presentation by Tompkins Trust Company, a New York State bank, the secondary mortgage market requires that nothing "interfere with the use and enjoyment of any present or proposed improvements or the balance of the mortgaged premises," or the property's marketability or value. The lender goes on to say that a mortgage may be possible if the property is sufficiently large to ensure that any natural gas activity could be 5 acres away from the homesite for conventional financing, or 10 acres for FHA. That leaves out of a lot of homebuyers and sellers, since there is a substantial risk that natural gas production on one's property could interfere with the use, enjoyment, value or marketability of a home. We've seen this around the country, especially when there is serious drinking water contamination or toxic air pollution.

Assemblywoman Lifton explains that, in the past, a homeseller could be released from a lease in order to sell their house but now, since homeowners can be forced to allow oil or gas drilling beneath their land due to forced pooling and unitization,* companies will not let homeowners out of their leases.

She also reports that homeowners may lose their title insurance. According to the Tompkins Trust Company presentation, most New York State title insurance policies do not cover properties where there are structures more than 35 feet tall, storage of machinery, equipment or industrial supplies, or any commercial activity. So even if someone has cash to buy a house and doesn't need a mortgage, very few people would likely buy it without title insurance.

*For an explanation of forced pooling, I recommend a recent ProPublica article on the topic.