SECU Pulls Back From Financing Fracking Property
The State Employees' Credit Union said it now is one of a growing number of financial institutions in some parts of the country that have stopped financing purchases of property whose owners have sold the mineral rights.
The mineral rights have most often been sold to facilitate exploration and drilling for oil and natural gas, often through a procedure known as hydraulic fracturing or fracking, which extracts oil and natural gas from primarily shale deposits with a mixture of water and chemicals forced underground at pressure.
“The issue is not fracking per se,” explained Jim Blaine, CEO of the 1.86-million member, $26.9 billion credit union in Raleigh, N.C. “We take no position on that. The issues are whether buyers are aware that the mineral rights have been sold and what that might do to the value of the property.”
Blaine explained North Carolina is not at the center of the main exploration area with the technique, but that the central part of the state has been found to have some oil and natural gas deposits, often in areas where coal was also mined during the 19th century, he said.
SECU began encountering the issue in its lending about two years ago when some of its members found that property whose purchase they were trying to finance had had its mineral rights sold, or severed, Blaine explained.
A developer had been selling homes in the area and retaining the mineral rights with an eye toward potential future profits from their sale. SECU supported the passage of a state law which now requires every housing purchase contract say up front whether or not the land still has its mineral rights and the developer has since returned the mineral rights he had purchased back to the home owners who had not realized they had been retained, Blaine said. But issues around mineral rights, fracking and housing finance remain largely unresolved.
SECU has stopped financing homes where the mineral rights have been severed because it considers those loans to be riskier than those where the mineral rights remain with the land, Blaine explained.
Not only are there risks to ground water and from potential spills, a house which was purchased as a single family home could suddenly become a residence very close to a potential industrial site if a fracking operation moves in to start drilling, he added.
“We would consider homes in those circumstances at a higher risk of strategic default,” Blaine said, indicating the strategy where home owners simply walk away from properties where the value has fallen too far beneath mortgage amount.
Other potential risks include what might happen to your property's value if you don't sell your mineral rights, but your neighbor does. “You still have to deal with a drilling operation and all that means where you didn't have to before,” Blaine said.