ENDICOTT, N.Y.-An expected boon in natural gas leasing here has Visions FCU concerned that gas drilling may lead to large numbers of mortgage loan defaults.
"I'm afraid this could be another subprime mess if these loans are not done right," said Frank Berrish, CEO of the $2.4-billion Visions, about providing mortgages for properties on which gas drilling takes place.
At issue is how the leasing or selling of gas and mineral rights could affect the value of the mortgaged property, and how loans should be constructed to protect the lender. "Right now people are coming in and asking if we will finance mortgages without the mineral rights," Berrish told Credit Union Journal. "Basically, this is a new product. Our attorney is looking at this on a case-by-case basis. There may be some guarantees we may seek from the property owner and the gas company to indemnify us if the property ever went into foreclosure. Each case will be different and negotiated-sort of like a commercial loan."
It Sounds Great, But...
What could eventually lead to defaults are a property's value plummeting due to the presence of a gas drill, or environmental issues caused by the mining that would lead to large-scale devaluation of homes in an area. "In Texas they do a lot of mining for natural gas where they use this new process called cracking, where huge amounts of water, sand, and chemicals are forced into the ground under high pressure. There they've seen huge sinkholes develop and ground water polluted. There are so many factors that could affect the value of the asset. That's why we are thinking this through carefully, as I said, case by case. And we are looking at where we can get some indemnification if something goes wrong."
While at press time Visions had yet to make a loan that would allow gas companies to drill on one of its properties, Berrish said that the CU does plan to make the loans. The main obstacles, according to Berrish, are appraisers properly assessing a property's value given the fact drilling will take place, getting three comps, and title insurance. "Secondary market requirements say you have to have title insurance. But title insurance companies are not 100% willing to give title insurance on properties without mineral rights."
The Marcellus Shale is what energy companies are exploring in upstate New York. It is a subterranean layer of rock stretching from New York to Tennessee, and is believed to be one of the biggest natural gas fields in the world. Berrish said that the need for alternative energy sources and the new cracking drilling process led to the attention on the gas field. It's estimated that leases could run for $5,000 to $6,000 an acre for a term of five years, and royalties of up to 20% on any gas found and exploited.
"People stand to make a lot of money," Berrish said.
But as New York environmental officials draft regulations to allow drilling in the shale as early as next year, there is a "tremendous amount of emotion in our communities," Berrish shared. "I have people sending me e-mails with 200 people in their group telling everyone to call the credit union switchboard and tell us to make these loans and don't ask questions. They say we're impeding economic development if we don't. Then I have another group writing me to say don't make these loans because ethics are bigger than profit, and that the gas companies are going to ruin the environment."
Visions appears to be ahead of many New York credit unions on the matter, according to the Credit Union Association of New York. Spokesperson Bonnie Sklar said that gas drilling in upstate New York is an "emerging topic that has more questions than answers. We are looking into it as a trade association to make sure that our credit unions have the information they need."
NCUA Not Planning New Guidance
Berrish said he contacted NCUA regarding his concern that if the loans are not written correctly, credit unions here could face a second mortgage mess. "NCUA told me that at the present time they are not interested in being involved in this matter," Berrish told Credit Union Journal.
John McKechnie, NCUA director of public and congressional affairs, said in response, "In this or any other type of loan program, NCUA considers it essential that the credit union conduct thorough and effective due-diligence. This includes not only an evaluation of the business model, but also of legal and safety and soundness issues, before loans would be granted. NCUA is not considering issuing additional guidance to cover this specific lending activity..."
