The Nebraska Bankers Association is warning bankers in drought-stricken areas of the state to take a close look at their loan documents to make sure they know who owns the water rights on land used as collateral.
Typically, bankers do not factor in water rights when lending to farmers, but with parts of Nebraska now in their fifth year of drought conditions, lenders are concerned farmers will begin selling off the water rights. Doing so would drastically reduce the value of farmland used as collateral.
“You could have a loan on an irrigated piece of ground and feel secured on that, and then find out the water rights have been transferred and you are lending on a piece of dry land which has considerably less value,” said Matt Williams, the president and chairman of the $86 million-asset Gothenburg State Bank and Trust Co.
Mr. Williams said he knows of no instances yet where banks have foreclosed on a loan only to find out the water rights have been sold.
But he said banks should not take any chances. A former chairman and still an active member of the trade group, he has been leading seminars in which he has urged bankers to factor water rights into loan agreements. He has also contacted companies that produce standard loan documents to ask them to include water-rights language.
The trade group also has been raising awareness of water issues in its monthly newsletter, and it is encouraging bankers to get involved in state water-policy debates. (It formed a water-policy task force in 2004.)
Water rights refer primarily to who has control of the water once it is pumped out of a well. With only so much to go around, water is becoming more valuable, and bankers fear farmers might sell their water — to developers or other farmers — because it is more valuable than anything they can grow.
Much of the Great Plains region has been classified as “abnormally dry” or having moderate drought conditions by the National Drought Mitigation Center at the University of Nebraska-Lincoln. On Jan. 28, Dallas and Waco, Tex., received more than 1.5 inches of rain — more than they had gotten in the previous 88 days combined.
Nebraska bankers appear to be out front on the water-rights issue, but Mark K. Scanlan, the director of agricultural finance for the Independent Community Bankers of America, said bankers throughout the West — particularly those in high-growth areas — need to pay attention to water rights as demand for water rises. He said farmers could come under pressure to sell their rights to residential and commercial developers.
“Some groups try to get all the farmers in one geographic area to sell their water rights for some business use,” Mr. Scanlan said.
Koger Propst, the president of the $850 million-asset FirstBank of Colorado in Lakewood, said it figures water rights into all of its real estate lending. It has an internal water committee that monitors the water-rights risk on its loans, and if the bank is not sure that water will be available, it will reject a loan, Mr. Propst said.
Even for home loans in municipalities that seem rich enough to go out and buy more water, the bank will reduce the amount it is willing to lend, he said.
“If it’s an area where they might be able to solve the problem, we might deduct 5% from what we would lend,” Mr. Propst said.
