Lenders in upstate New York are increasingly concerned about oil and natural gas leases on mortgaged properties and are refusing to finance properties with those leases.
New York state law conflicts with long-standing requirements of secondary market investors, said Greg May, vice president of residential mortgage lending at Tompkins Trust Company in Ithaca, NY.
Fannie Mae and Freddie Mac require gas lines as well as any other mining-related activities be set back at least 200 feet from residential properties. The Federal Housing Authority requires setbacks of at least 300 feet from the property line. “Typically, gas leases do not respect those setbacks,” May said.
New York state law requires that pipelines and oil and gas buildings be set back 100 feet from residential buildings. State laws are silent on subsurface lines.
Homeowners with gas lines within those secondary market setback limits are in violation of their mortgage terms and in technical default, May said. If they stop paying their mortgages, the investor could try to force the lender to buy back the loan, although the lender could argue that they met the terms when the mortgage was recorded.
Secondary market rules prohibit any mining-related activity – including roads and pump stations and other structures – with the setback limits.
“They’re looking to preserve the integrity of the residential property,” May said. “Those activities appear to be more commercial. If it suddenly turns into a quasi-commercial property, it could have a negative impact on the property.”
More lenders are becoming concerned and are refusing to finance properties with gas leases, according to May. “Each one I talk to says, ‘You’re right, Greg. That’s a problem.’ Before, lenders didn’t understand there’s a conflict. More and more lenders are coming to understand that.”
How many homeowners have mortgages violating setback requirements is unknown, but it’s probably large. Tens of thousands of property owners have gas leases. Homeowners are supposed to obtain their lender’s approval before signing a gas lease, he said, but Tompkins Trust Company has yet to receive a request to approve one, a situation that’s probably typical among lenders.
The state must put into place larger setback requirements that do not conflict with mortgage investor rules, May said, noting that other states don’t have that conflict. “It’s a simple fix,” he said.
Terms of leases might not be recorded; there might be only a memorandum of the lease. “Without the terms of the lease, appraisers don’t know if the lease is for $1 or something much larger,” he said. “It’s important them to effectively compare apples to apples.”
And because the FHA’s setback requirements are based on property lines, a neighbor’s gas line can create a problem, he said, saying a centralized database would help.