• 4 days Nuclear Bomb = Nuclear War: Saudi Arabia Will Develop Nuclear Bomb If Iran Does
  • 3 days Statoil Changes Name
  • 4 days Tillerson just sacked ... how will market react?
  • 3 days Russian hackers targeted American energy grid
  • 3 days Is $71 As Good As It Gets For Oil Bulls This Year?
  • 4 days Petrobras Narrows 2017 Loss, Net Debt Falls Below $85bn
  • 4 days Proton battery-alternative for lithium?
  • 4 days Ford Recalls 1.38 Million Vehicles (North America) For Loose Steering Wheel Bolt
  • 3 days Oil Boom Will Help Ghana To Be One Of The Fastest Growing¨Economies By 2018!
  • 3 days Country With Biggest Oil Reserves Biggest Threat to World Economy
  • 4 days I vote for Exxon
  • 3 days HAPPY RIG COUNT DAY!!
  • 4 days UK vs. Russia - Britain Expels 23 Russian Diplomats Over Chemical Attack On Ex-Spy.
  • 4 days Why is gold soooo boring?
  • 4 days South Korea Would Suspend Five Coal - Fire Power Plants.
  • 3 days Spotify to file $1 billion IPO
Alt Text

Solving Renewable Energy’s Biggest Problem

While renewable energy appears to…

Alt Text

China Plans Record Natural Gas, Coal Production In 2018

China expects to produce record…

Kurt Cobb

Kurt Cobb

Kurt Cobb is a freelance writer and communications consultant who writes frequently about energy and environment. His work has also appeared in The Christian Science…

More Info

Trending Discussions

How Fracking Threatens the Health of the Mortgage Industry

One fact ought to tell you all you need to know about the risks faced by homeowners signing leases for natural gas drilling on their property: Wells Fargo & Company, both the largest home mortgage lender in the United States and a major lender to the country's second largest producer of natural gas, Chesapeake Energy Corp., refuses to make home loans for properties encumbered with natural gas drilling leases.

This salient fact comes from an article (PDF) written for the New York State Bar Association Journal by attorney Elisabeth N. Radow. Written in the form of an even-tempered legal brief, Radow relates one astounding finding after another. Perhaps most relevant to homeowners who either have signed drilling leases or who may be asked to sign them in the future is this: "Signing a gas lease without lender consent is likely to constitute a mortgage default." You read that right. Default.

Her conclusion stems from something which most homeowners probably don't even realize:

Standard residential mortgages prohibit:
the use, disposal, storage, or release of any hazardous substances on, under or about the mortgaged property. In mortgages, hazardous substances include gasoline, kerosene, other flammable or toxic petroleum products, volatile solvents, toxic pesticides and herbicides, materials containing asbestos or formaldehyde and radioactive materials.

Of course, homeowners often have and use some of the above-mentioned materials. But the lenders may invoke their rights should industrial-sized activities such as hydraulic fracturing or fracking occur. Fracking, a process often associated with natural gas drilling, utilizes a cocktail of hazardous chemicals mixed with water. Millions of gallons of the mixture are pumped under high pressure into each well to fracture deep shale formations and thereby release the embedded natural gas found there. Beyond this, homeowners with mortgages are prohibited from violating any environmental laws, federal, state or local. Can they always count on drillers to observe those laws?

Now, here's how the fracking mess intersects with the on-going mortgage mess. Most mortgages are sold into the secondary market to federal lenders such as Fannie Mae and Freddie Mac, and some are packaged in groups as mortgaged-back securities and sold to investors. The mortgage lenders make representations to buyers in the secondary market that the mortgages they are selling conform to widely accepted standards that prohibit the kinds of activities listed above. In Radow's opinion it is likely that many residential mortgages with natural gas leases on the underlying properties have already made their way onto the books of Fannie Mae and Freddie Mac or into investor portfolios. And, with shale gas found across many states, there are likely to be many more compromised mortgages sold into the secondary market in the future.

None of this might matter if the drilling and production did not affect the value of the underlying property. Some of those who signed leases for drilling so-called coal-bed methane in Colorado and then experienced problems ended up with losses on their homes that reached 85 percent. In some instances, property owners merely situated near drilling and production have suffered. A Pennsylvania couple was recently denied a new mortgage on their home and hobby farm because according to the lender "gas wells and other structures in nearby lots...can significantly degrade a property's value." The owners came to the logical conclusion that if they cannot refinance their own home, no potential buyer would likely be able to get a mortgage to purchase it should the couple ever want to sell.

Others who've had their water supply contaminated but could not prove it was due to nearby natural gas drilling are facing a wipeout since their homes are now worth far less than the mortgages on them. Some of those people will simply end up walking away in order to protect the health of their families.

But why not turn to one's insurance company to pay for damage to one's property? It turns out that homeowners insurance almost always excludes damage from industrial operations on one's residential property, Radow writes. And, that's what natural gas drilling is, an industrial operation. Even for those who escape the problems of water contamination and human and animal health effects, there remains the ever present possibility of damaging explosions and fires from drilling and production operations. Homeowners insurance won't pay for that either.

Surely, the drilling companies are responsible for explosions and fires linked to their operations. Unlike water contamination which is usually an underground phenomenon and often difficult to prove, it should be obvious that the companies are responsible for damage from explosions and fires caused by their actions. Don't count on it, Radow seems to say. In such circumstances, homeowners may have to sue for damages and even if they win, they may not get paid for all damages since the natural gas drillers admit in their regulatory filings that they may not carry enough insurance to pay for damage due to such mishaps.

One more twist has been the sale by a major homebuilder of entire subdivisions of new homes stripped of their mineral rights. Obviously, the homebuilder hopes to make a second fortune by leasing those rights should they become valuable. Naturally, the newly aware homeowners worry about the possible loss of value in their homes should that come to pass. It's no wonder. Homebuilder D.R. Horton's energy subsidiary has been given “the perpetual right to drill, mine, explore … and remove any of the subsurface resources on or from the property by any means whatsoever."

Now, we come to who will ultimately pay for any clean up on abandoned, underinsured properties contaminated and otherwise made uninhabitable or at least, undesirable. Perhaps you've already figured out that it will be in almost all cases U.S. taxpayers who now own the two largest mortgage companies in the country, Fannie Mae and Freddie Mac. When these mortgage giants finally take possession of all the contaminated and impaired properties, they will be obliged to clean them up and simultaneously bear the losses in the value of the mortgages issued on those properties.

In this way, the average citizen will be subsidizing the natural gas industry by bearing the costs associated with devalued property and hazardous waste clean up. When all of this starts happening in a big way, you can count on those in charge saying that nobody saw it coming.

By. Kurt Cobb

Kurt Cobb is the author of the peak-oil-themed thriller, Prelude, and a columnist for the Paris-based science news site Scitizen. His work has also been featured on Energy Bulletin, The Oil Drum, 321energy, Common Dreams, Le Monde Diplomatique, EV World, and many other sites. He maintains a blog called Resource Insights.

Back to homepage

Trending Discussions

Leave a comment
  • Erik on May 26 2012 said:
    We live in San Juan County, New Mexico - Permian Basin area. When looking at homes - anytime we saw a well pad or any gas equipment nearby we immediately said no way, and there are a lot of homes with well pads or condensate tanks nearby if not within a 100 ft or so. I remember one real estate agent at a open house asked what we thought and we said not really interested with the well pad across the street, she said welcome to New Mexico and we said nope. That house still hasn't sold and it's dropped over 100,000.00 since initial listing.

Leave a comment

Oilprice - The No. 1 Source for Oil & Energy News