Over the past several years, the fossil-fuel industry has been highly adept at publicizing the economic upshots of fracking: royalty checks, decreased prices for oil and gas, profits for investors.
But the industry is far less eager to discuss the hidden costs of the current drilling boom — the longterm price of air and water pollution, the consequences of undermining a nascent renewable energy industry, the harms from accidents when moving and storing all the hazardous waste fracking produces.
Add to that list of hidden costs one that is starting to grab more attention from bankers and the real estate industry: property values and mortgage problems. New research, for example, demonstrates that the vast majority of prospective buyers say they would decline to buy a home near oil and gas drilling.
As millions of Americans sign oil and gas leases granting the right to companies to extract fossil fuels from their land, they are realizing that these documents often conflict with their mortgages, which is leading to all manner of legal and financial headaches, and making it harder to sell homes on land whose oil and gas rights are leased.
Concern about these impacts is spreading in southern states like Texas, Alabama and Florida, according to a survey due for release in the next several weeks from the University of Denver. In northeastern states like Pennsylvania,fracking worries have prompted lenders to begin rejecting mortgage applications due to gas drilling – on neighboring property. In Colorado, real estate brokers describe keeping a long list of sellers in heavily fracked areas, but a paucity of buyers.
Under the terms mortgage buyers like Fannie Mae and Freddie Mac require, “you cannot cause or permit any hazardous materials to be on your property and it specifically references oil and gas,” Greg May, vice president of residential mortgage lending at Tompkins Bank, told American Banker in an interview published Nov. 12. “That alone would make it a problem.”
The repercussions for the American real estate market could be enormous. More than 15.3 million Americans – roughly one out of every 20 people living in the U.S. — now live within a mile of an oil or gas well that was drilled since 2000, the Wall St. Journal recently reported.
And that may be just the tip of the iceberg since shale gas and oil wells require ongoing drilling for them to stay productive. In 2010, for example, Pennsylvania regulators predicted a more than 10-fold increase in shale wells in their state over the next couple decades.
But the biggest players in the mortgage markets, Fannie Mae, Freddie Mac and Farmer Mac, have so far largely turned a blind eye to the issue despite early warnings. In 2011, after the New York Times expose first highlighted the extent of the conflicts between typical mortgages and drilling leases, several members of Congress pushed the Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, for more information about how wide-spread drilling could impact the real estate market.
“These potential conflicts also pose major risks for the fragile housing market,” Representative John Sarbanes, Democrat of Maryland, wrote in an Oct. 26 letter to FHFA. “Investors could attempt to walk away from any security backed violated mortgages.”
At the time, the Federal Housing Finance Agency refused to proactively investigate the possible conflicts, telling lawmakers that it would await results from the EPA’s national study of fracking’s impact on drinking water.
But evidence has been mounting that – with or without harm to a particular residence’s drinking water supplies – the heavy industrial activity associated with gas drilling can damage property values and drive down real estate prices.
A new study from the University of Denver highlights the financial drawbacks to siting industrial processes in residential neighborhoods. The vast majority of 550 people surveyed would decline to buy a home if it was near natural gas drilling, according to the study, whose results will be reported in the next Journal of Real Estate Literature.
Roughly three out of four Texans told researchers they would not be interested in purchasing a house just like their current home, in an identical neighborhood, if the new home depended on well water and was located a quarter mile from a drilling rig. Two out of three Floridians and Alabamans surveyed also said they would lose interest in buying.
Those who would buy a home near a gas rig would only be interested if the house was at a discount. The top quarter of the bids submitted by Texans came in at around six percent below the value of their own homes, while Florida-Alabama homeowners offered a steeper discount—their highest bids were about 15 percent lower. If the term “fracking” was used, average bids seemed to sink further, researchers noted.
“Our surveys show a five-to-15 percent reduction in bid value for homes located proximate to fracking scenarios,” said Ron Throupe, a professor in the Daniels College of Business at the University of Denver and lead author of the study, which is entitled “A Review of Hydro-Fracking and its Potential Impacts on Real Estate.”
The survey’s results are largely consistent with research conducted by economists from Duke University last year, who found that properties in one heavily-drilled Pennsylvania county lost up to 25 percent of their value if drilling rigs went up within 1.25 miles and the home relied on groundwater.
But the new research is striking in part because oil and gas industry has long argued that those who know its record best are its strongest supporters. They’ve argued that landowners in states like Pennsylvania, New York and Ohio are simply afraid of something new, but that once the industry has proven itself, fears will fade away, and have played up stereotypes of nervous northeasterners versus hardy Texans.
“Interestingly, in areas where development is actually taking place, realtors’ views on these issues are quite a bit different than they are in Ithaca,” Energy in Depth wrote in response to the New York Times article that highlighted New York lenders’ concerns about conflicted between oil and gas leases and mortgages.
But the data suggests that even Texans prefer to keep the gas industry at arms’ length.
The study’s findings could have implications for home appraisals atop natural gas reserves.
For a home to have value, you need to be able to find someone who wants to buy it, and appraisers know this. They build “marketability” right into their formulas. This study shows that buyers say they’d be reluctant to purchase these properties.
Real estate professionals say they’re well aware of buyers’ reluctance. “Because of drilling and fracking, we are seeing a high inventory of homes in communities where it is prevalent,” Adam Cox, a broker managing 40 Colorado realtors, wrote in a Colorado Statesman column earlier this year. “There are a high number of sellers and a lack of interested buyers, leading to long turnaround times on homes in the area.”
If properties can’t be sold if borrowers default on their loans, banks may shy away from lending. And if buyers can’t get mortgages easily, home values can be further affected.
“[T]he banking industry is starting to take note of the lending conflict,” Dr. Throupe told DeSmog. “The questions about lending capability create a question of whether financing will be readily available for buyers of property with oil and gas leases.”
The impacts would need to be worked into appraisal calculations, reducing property valuations. “This would mean that marketability is reduced to only all cash buyers, limiting the buyer pool, reducing demand,” Dr. Throupe explained, “resulting in discounting of prices in the future for the land.”
These appraisals are used for many purposes. Under standard mortgage terms, borrowers ask their banks permission before they sign an oil and gas lease. As part of that process, they’re required to describe how the value of their property will be affected. But in 2011 the New York Times reported that few borrowers have actually notified their banks when they sign oil and gas leases, and the number of undisclosed leases on mortgaged properties nationwide remains unknown. Fannie Mae and Freddie Mac have rebuffed requests from member of Congress to audit their portfolios to assess how much of their collateral is at risk.
In some cases, home buyers might not even know the oil and gas rights have already been sold from beneath their feet. Big developers like D.R. Horton are increasingly selling properties in suburban housing developments without the oil and gas rights, a Reuters investigation revealed, meaning that buyers may have no idea that their new mini-mansion could one day find itself in the shadow of a fracking rig, with the home-builder pocketing the royalties.
Other people whose property values are at stake never even leased their land, but just live near someone who did. These folks often feel powerless to respond to the problems drilling has caused them, but lawyers are increasingly turning to “nuisance” lawsuits to help them recover damages from oil and gas companies (or even prevent drilling from starting). The use of nuisance law is a new frontier in fracking litigation – and peer-reviewed research, like the study from the University of Denver demonstrating direct harm to property values simply because prospective buyers know about drilling could strengthen plaintiff’s cases, and could even help to quantify damages.