Greg May, vice president for residential mortgage lending at Tompkins Trust Company in Ithaca, said that he was not taking a political stand on shale gas drilling at at recent forum on compulsory integration. However, the local lender minced no words about gas leasing and home mortgages: They are not compatible.
National secondary lending markets like Fannie Mae and Freddie Mac that back up the typical home mortgage do now allow industrial use of residential property. May said, "We are having more and more difficult conservations with our borrowers."
Mortgage problems have been one of the hidden fault lines in the rush for Marcellus Shale natural gas (see last week's Tompkins Weekly article by Sue Smith-Heavenrich), but a recent forum on compulsory integration and gas drilling shed some light.
The public forum on Nov. 14, at the Dryden Fire Hall, featured political analysis from the local Assemblywoman Barbara Lifton and from former State Senator Nancy Larriane Hoffman, now a farmer and spokesperson fro Land Stewards of New York.
Kenneth Holden, an attorney with extensive experience in natural gas leasing, described the nitty-gritty of the process of compulsory integration. Tompkins County Legislator Carol Chock presented details of task force work on land values and assessments in gas drilling areas.
At issue is the fact that energy companies may be able to remove natural gas from your property even if you haven't signed a drilling lease because of the compulsory integration provisions of the New York State Oil, Gas and Solution Mining Law.
Lifton described a public hearing on the compulsory integration in Elmira that took place in November 2004. A legislative newcomer at the time, she thought it would be an education experience. The Trenton Black River formation was being vertically drilled for natural gas in the Southern Tier then, and many folks were exciting about getting rich. Lifton said the room was packed and the atmosphere was electric, noting, "The was gold fever in that room, I can tell you."
Hoffman, who farms, in southern Onondaga County and who decries herself as a "recovering politician," supported Lifton's account of the compulsory integration bill being passed in the wee hours of the morning. Legislative leaders rush everything on the last of the session and give no time for reading, let alone evaluating, bills that pass unanimously. Hoffman demands that the compulsory integration law be repealed, saying, "The compulsory integration law that we have in this state is probably the worst one in the nation. It means that people who never been contacted and have no interest in leasing their land find out they have these three awful options [see below] thrown at them."
Landsmen representing drillers have been pursuing property owners in Hoffman's neighborhood to sign gas leases, but the landsmen have avoided Hoffman and her closest neighbor. That's probably because Hoffman is a former state senator who served on the Environmental Conservation Committee and her neighbor is a former DEC official.
The gas companies can just ignore you and wait until your neighbors have signed. "Where are your landowner rights? What if you have decided that you will save that resource for your grandchildren?" Hoffman asks.
When gas companies lease 60 percent of a "spacing unit" (a drilling area that the company itself maps), they can force the landowners in the remaining 40 percent to be compulsorily integrated.
Attorney Kenneth Holden listed the three options for "drafted" landowners: an integrated royalty owner gets the lowest royalty in the spacing unit with limited liability; an integrated participating owner invests a small fortune in hopes of reaching a large fortune; and an integrated nonparticipating owner shares risk but lets the energy company pay up front his or her share of an investment to be paid out of future profits.
Chock, Tompkins County legislator from Distinct 3, finds herself immersed in gas drilling issues; she chairs the Tompkins County Council of Governments' Task Force on Gas Drilling, Assessments and Land Evaluations Subcommittee. Tompkins is one of only two counties in the state that assess property on a countywide basis, and Chock said that our county assessors "set the standard here."
"Everyone involved in real estate needs information to make fair appraisals of property value, but the current reporting system makes it impossible to get gas lease information," Chock said. Noting that lenders must look decades ahead to evaluate mortgage lending, she added, "I gained more appreciation for the time horizon that lenders look at."
Tompkins Trust's May was the principal author of the drilling task force's "Gas and Oil Leases as They Relate to Residential Lending" report. May told the crowd in Dryden that secondary markets Fannie Mae and Freddie Mac were very clear. Reading aloud from a standard residential mortgage form, he quoted from section 19, "…prohibits transfer or sale of any portion of rights of mortgage property without the prior written consent of the lender."
"The people who have gone out, got a mortgage and then signed a gas lease are in technical violation; they are in default under terms of their mortgage," says May. "Whether it's compulsory integration or someone signing a lease, it's a conflict. Gas leasing and residential areas have a built-in conflict."
The forum was presented by Cornell Cooperative Extension of Tompkins County (Sharon Anderson, 272-2292) and advocacy organization Fleased (Ellen Harrison, 539-7133).