Like oil and water: fracking, residential mortgages and insurance

Fracking is the colloquial term for the hydrofracturing and subsequent extraction of oil and gas-bearing shales. The "fracturing" part of the process breaks up shale rock deep underground through the application of water and chemicals under extremely high pressure. While fracking has created jobs and delivered energy resources, it does not come without a host of negative consequences.

The negative effects of fracking most often reported in the media and by environmental groups relate primarily its potential to damage and pollute the soil, water, and air. Yet along with these known risks, writes Roger Drouin in a Grist article titled Fracking boom could lead to housing bust, another set of risks looms large:  its doleful effects on the residential property market.

In his article, Drouin cites the Mineral, Oil and Gas Rights rider in loan paperwork from Sovereign Bank says the mortgage will be automatically recalled if the property owner transfers any oil or gas rights or allows any surface drilling activity. It also specifies that owners must “take affirmative steps to prevent the renewal or expansion” of a current gas lease.

None of this should be surprising, really. It was reported in a 2012 article in the New York Times that the Department of Agriculture was considering requiring an extensive environmental review before issuing mortgages under its Rural Housing Service program to people who have leased their land for oil and gas drilling. The Federal Housing Administration’s lending guidelines prohibit financing for homes within 300 feet of a property with “an active or planned drilling site.” Fannie Mae and Freddie Mac also prohibit property owners from signing a gas lease.  The result of all this is that 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.

Insurance is another issue. Drouin notes that real estate experts see a trend in homeowners insurance policies not covering residential properties with a gas lease or gas well. This directly impacts any property transactions, as mortgage companies require homeowners insurance from their borrowers.

It is easy to see why fracking does not mix with homeowners insurance. As reported in the Catskill Mountainkeeper, gas companies can sell a gas lease to anyone they choose without telling the homeowner. Subsequently, the homeowner has lost control over who comes onto their property to drill and the quality of work they perform. In addition, neither homeowner’s insurance nor the gas lease covers risks from accidents, such as methane leaks, chemical spills, and blowouts that can come with gas drilling, and it is hard to envision a carrier being enthusiastic about underwriting coverage for those perils.

Title insurance may also be adversely affected, as a gas lease may void title insurance should the policy not cover commercial ventures. The Catskill Mountainkeeper notes that "[t]he fine print in most title insurance policies in New York State contains specific exclusions that have the potential to void title insurance coverage for any commercial venture, including any of the common activities of commercial drilling, storage, or transmission of gas that occur on a residential property" and that "it’s likely that even if someone were able to buy a property with a gas lease, they would be unable to get title insurance."

To learn more, read Elizabeth N. Radow's article, Homeowners and Gas Drilling Leases: Boom or Bust? from the November/December 2011 issue of the NYSBA Journal.