In theory, any fees or royalty payments collected by property owners are intended to help offset any adverse effects that arise from mineral extraction. Despite this intention, the complicated web of landownership and mineral rights often means that this isn’t the case.
Some homebuilders in America hold onto the mineral rights under their developments without disclosing this to the homebuyers. D.R. Horton, for example, is one of the largest homebuilders in America. They buy large stretches of land, develop it into subdivisions, and then sell the houses they’ve built. A special report by Reuters found that D.R. Horton has “separated the mineral rights from tens of thousands of homes in the states where shale plays are either well under way or possible” (Conlin). In most states, the sellers, like D.R. Horton, “aren’t legally required to disclose to home buyers whether they are severing the mineral rights to a property” (Conlin). Oftentimes, property owners can be unaware that they don’t own the mineral rights underneath their homes.
This can have disastrous implications for the homeowners, as it can impact many aspects of property and home ownership. Some of the largest mortgage lenders in the country, such as Wells Fargo, “sometimes den[y] mortgages to homes encumbered by gas leases” (Conlin). Other mortgage lenders across the country have added a clause to their mortgages, allowing them to “declare borrowers in default in any part of the subsurface property has been ‘leased, assigned or otherwise transferred for use to extract minerals, oil or gas’” (Conlin). Some mortgage lenders, such as Sovereign Bank, won’t “move forward with financing a property…if mineral rights are severed” (Conlin).
The Attorney General’s office in the state of North Carolina issued a report in 2012 entitled, “North Carolina Oil and Gas Study under Session Law 2011-276: Impacts on Landowners and Consumer Protection Issues.” While this report came to many conclusions, it found that homebuyers in North Carolina might assume that when they buy their property, they buy access to all the resources on, above, or below it as well. While a homebuyer’s lender “will require a title search which should disclose any defects or limitations to the title, including a mineral rights deed…the title search information may not be provided to the buyer until closing.” This information may be revealed so late in the process that the homebuyer is unable to back out of buying the property.
If the mineral rights under the property are leased, it could affect the property owner’s ability to obtain a mortgage, refinance an existing mortgage, or obtain new credit. The property owners may be in violation of some clauses within their mortgage, which may put them at risk of foreclosure. As per the due-on-sale clause, if the mineral rights under a property are leased without the permission of the mortgage lender, it “could be considered an act of default under the mortgage” (“North Carolina Oil and Gas Study under Session Law 2001-276: Impacts on Landowners and Consumer Protection Issues”).
Another common mortgage clause is the hazardous substances clause, which “prohibit[s] the borrower from allowing…the use or storage of hazardous substances beyond those used in normal residential activities” (“North Carolina Oil and Gas Study under Session Law 2001-276: Impacts on Landowners and Consumer Protection Issues”). Often, the presence of the chemical substances involved in fracking on a property can violate this clause and put the property owner at risk of defaulting their mortgage. Once again, when property owners don’t own the mineral rights, their mortgage could be at risk due to someone else’s decision.
Mortgage lenders don’t want to lend to owners of severed estates for several reasons. One reason is because oftentimes the fear of pollution associated with fracking can crash local property values, and they don’t want to be responsible for a potentially contaminated property that would be difficult to sell. A study published by Resources for the Future, an “independent, nonpartisan organization that conducts rigorous economic research and analysis” (“About RFF”), found that housing properties generally lose value when they are located close to fracking wells. While the loss can be partially made up by royalties paid to the mineral right owner, it doesn’t include the costs associated with installing water filtration systems for homes that use well water. When all is accounted for, the study found that within 1.5 kilometers of a fracking well, a property that relies on well water loses 10 percent in property value. Within one kilometer of a well, homeowners who use well water lose 22 percent in property value. Properties who get their water from public water don’t see any losses in property value, although their property doesn’t gain value either (Muehlenbachs). The study found, that across the board, any positive values associated with fracking, such as royalties made, are quickly wiped out by the negative externalities, such as noise and light pollution or increased truck traffic, associated with having a fracking wellhead nearby.