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December 10, 2016
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Wrongful takings, the sequel

In calculating the impact of natural gas drilling on local economies, one of the areas that has remained the vaguest is the question of its impact on property values. On the one hand, we have reports that, for instance, rental housing becomes extremely scarce and rents skyrocket in areas with intensive gas drilling activity, which certainly sounds like a plus for landlords. On the other hand, we have reports that real estate sales and values, especially for second homes or retirement homes, have suffered in response to the uncertainties regarding the possible advent of gas drilling in our area, as have renovation and architectural design-related businesses. And obviously, property values in places like Dimock, PA, where homeowners have lost access to potable water, have effectively fallen to zero.

But until very recently, the evidence on this subject has been largely anecdotal. Now, a story in last week’s New York Times, as well as a study done by Tompkins County Council of Governments’ Task Force on Gas Drilling, have helped pin down some of the potential impacts of gas drilling on property values and the real estate market. They focus on problems related to the policies of mortgage lenders regarding natural gas drilling on the land that serves as collateral on their loans.

The article and report find that many lenders are unwilling to extend mortgages on properties on which there are natural gas leases. Others are unwilling to extend such mortgages except under certain conditions, such as a 200- or 300-foot setback from the residence. Such setbacks compare to New York State requirements of only 50 to 150 feet (depending on the targeted formation), creating an obvious problem: even those who have not leased can be forced into technical default on their mortgage by a neighbor who does lease, through no fault of their own.

There are two other factors that could increase the frequency with which such situations occur. The first is New York State’s policy of compulsory integration, according to which any gas driller who can certify that it has leased 60% of a drilling unit (a square mile) can co-opt the remaining 40%. The second is the fact that for many mortgage lenders, the setback requirements apply not only to surface activity, but to subsurface activities, increasing the affected area in the case of horizontal drilling far out beyond the setbacks from the vertical well bores to the extreme length of the horizontal bores.

The combination of these two factors could obviously have the effect of forcing numerous property owners who have no wish to lease into non-compliance with the terms of their mortgages. Properties in technical default on their current mortgages, and/or properties on which it is difficult or impossible to get a new mortgage, could become virtually unsaleable.

So, it looks like the action of the state, in collusion with drilling companies, could result in a significant number of properties becoming unmarketable and therefore worthless.

Sound familiar? It should. It’s called a “wrongful taking.” It certainly satisfies two major criteria: the property would be left with at most “a bare residue” of its worth, and the problem would not be self-created.

A third criterion—whether those who suffer are being unfairly singled out to pay for the supposed good of the whole—is perhaps not so black and white. It’s true that the Marcellus Shale covers a fairly large swath of New York State, so if a lot of properties are integrated it could be argued that too many people are affected in order to count as “singled out.” But let’s face it: if so many people were affected that they couldn’t be perceived as unfairly singled out, that would mean that a vast portion of New York real estate had become worthless—a pretty steep price to pay for any perceived public benefits of chasing after an obsolescent energy source like natural gas.

The bankers—and the investors to whom they wish to be able to sell mortgage-backed securities—have not created this situation because they are sentimentalists or tree huggers. They are businessmen, and many of them have apparently made the decision that land upon which natural gas leases have been signed is in such danger of becoming worthless that they don’t want to take a risk on it.

Think about it.

Communities in Jeapordy

We need to have a continuing study of the financial impacts gas drilling has on communities. I'm sure it will look like an exaggerated bell curve, peaking during drilling and initial production stages, then falling drastically a year or so after that period. This could help impress that the long-term effects of gas drilling on communities is disastrous.

On target.

Your editorial is on target, every point.

As I mentioned in another comment, my mortgagee, the "investor", must give consent to such gas extraction leasing, according to a representative of Coastal States.

God forbid that you are in New York State, which has a compulsory integration law, and that would negatively impact you in this way, if you are against such shale gas extraction.

None of these economic issues have been considered, in New York State.

It is frightening, and it should be thoroughly unacceptable.

unacceptable is hardly the word

This is indeed very frightening. Did the New York Times mention by name which lenders would not mortgage leased land? Does anyone have a link to the article. If a well goes in near my home, I will be foreclosed on for sure and my credit ruined.


I could not copy the link, perhaps the NYT's doesn't allow a computer to do that, but if you go to the Times website, there is a search box up left. Type in "drilling down", without the quotation marks. That is the title of the series of articles on gas extraction by Ian Urbina. When you click on search, it takes you to a page where the Urbina article on mortgages is the second listing. You can read the article from there.

When you wrote that you will be foreclosed on for sure, and your credit ruined, I suggest you not jump to that conclusion. We all have a lot to learn as to how this will play out, so don't take anything for granted.

The issues are real though, and they need to be explored. It took me over six weeks to get that phone message from the representative at my mortgage company. I think the companies themselves are scrambling on this issue, and they probably don't want to put anything in writing.