ENDICOTT, N.Y.-Making a loan on property that is leasing gas or mineral rights is a "very complicated situation," explained the CEO of Visions FCU here, which has been carefully assessing the matter for a few years.
CEO Frank Berrish still holds that opinion today after first speaking with Credit Union Journal more than a year ago (
Berrish said the credit union believes it is positioned well on those loans. "We worked with a local attorney and put together an attornment agreement to protect Visions in case the property goes into default."
At issue is how the leasing or selling of gas or mineral rights could affect the value of the mortgaged property, the CEO explained.
Edward Butler, VP of lending for Visions, said the credit union determined that in cases where the home owner leases gas rights, the credit union has to be in the first lien position. "So a subordination non-disturbance attornment agreement is what we use when working with the oil and gas companies, and it basically puts our lien position first."
Butler explained that via the agreement the credit union states to the gas company that it will not in any way stop the drilling if the property goes into foreclosure or goes delinquent.
However, if the property goes delinquent or is foreclosed on, the CU will give the gas company proper notification and then the royalties and any other payments go directly to Visions. The gas company also agrees to indemnify the home owner and the credit union against any future environmental impact.
Protecting The Credit Union
The agreement to indemnify the credit union protects the value of the home in the event that the drilling activity affects the price of the property. Butler explained that the gas company agrees to correct any issues that as a result of its drilling causes the price of the home to drop, such as cleanup of a contaminated property.
"There is some other language in there that we have worked up with our attorney," said Butler. "These types of agreements were quite common in Texas a few years ago when the gas companies were drilling into the Barnett Shale, and they worked out well."
But that does not protect the credit union against the value of the home falling due to the fact a big, hulking, drilling rig is on the land or nearby. "But we have appraisers who are well schooled on this matter and as part of their appraisal process they comment on whether there is something about the property, either now or in the future, that could have an impact on the value."
Butler added that Visions underwrites to secondary market guidelines and requires title insurance on the property. "That is protection in an of itself."
