Unsealed Gas Drilling Settlement Underscores Need For CU Vigilence

March 22, 2013 at 8:38 am Leave a comment

imagesCAZ2XNH1As readers of this blog will know, I have consistently urged credit unions in areas where members are being asked to lease property to hydro-fracking companies to take steps to protect the value of their mortgage collateral.  Recently, documents unsealed by a Pennsylvania court involving drilling on the Pennsylvania side of the Marcellus Shale demonstrates precisely why this is so important.

Earlier this week, a judge unsealed a settlement between a Pennsylvania family and Marcellus Shale development companies.  The $750,000 settlement, which the companies wanted to keep confidential, stemmed from allegations that the family’s property was made worthless and they suffered health problems as a result of drilling, which took place on adjacent property.  According to the Wall Street Journal, a lawsuit technically was never filed and as part of the settlement the family also agreed that any future health claims would be settled through arbitration.

Now, I have no idea about the underlying merits of the claims, but I do know that for those of you who don’t think drilling could have consequences for your lending practice, the settlement underscores yet again why this type of thinking is just plain wrong.  As the months turn into years, it’s possible that Governor Cuomo will never lift New York’s moratorium on high-powered hydro-fracking, but if he does, it will be too late to do anything about the leases that your members have already granted.

With that backdrop in mind, the case demonstrates the need for appraisers who are skilled in assessing the impact that gas drilling may have on property values in a given area.  Remember, the people who settled in this case didn’t even have gas drilling taking place on their own property, but their property value was impacted by the activity nonetheless.

Also, as the holder of the mortgage, the credit union has to give itself a seat at the table in any lease negotiations.  At the very least, members should be put on notice that any agreement to enter into a gas drilling lease requires the approval of the credit union.  If you do find yourself reviewing a lease agreement, there are further stipulations you can try to negotiate including making sure that the mortgage is one of the first things paid off with any gas drilling royalties.

Finally, the big question remains:  will Fannie and Freddie be willing to accept mortgages that are subject to gas leases as an acceptable exception to title?  Remember that hydro-fracking has been taking place across the country and I haven’t been able to find a single recorded case of Fannie or Freddie refusing to take a mortgage.  In addition, my brethren in Pennsylvania haven’t had any issues with the GSE’s yet.  But, when you start hearing about out-of-court settlements involving several hundred thousand dollars, it is hard to believe that this won’t at least raise some eyebrows in the secondary market community.  Remember that even if a mortgage is sold to Fannie and Freddie, they are typically going to have the right to make a lender repurchase property that is subject to environmental hazards.

NYS Budget Close to Done

If press reports are accurate, legislators could be voting on budget bills to enact the 2013-2014 State Budget by Sunday or early Monday.  The unofficial deadline is Passover.  The budget deal calls for a little more than $135 billion in spending.  If all goes according to plan, the Legislature will be taking three weeks off, meaning that everyone will be good and refreshed for our upcoming Government Affairs Conference.

Entry filed under: Advocacy, Legal Watch, New York State, Political, Regulatory. Tags: , , , , , .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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