AP News

Pa. banks, homeowners examine oil and gas leases


PITTSBURGH (AP) — When Donald Yost tried to refinance his home about 30 miles north of Pittsburgh in January, he met a roadblock. It wasn't his credit score — he had a solid rating — or the appraisal he'd paid almost $500 for — that was good, too.

Instead, it was the lease he has that allows a company to drill for gas about a mile underneath his property, similar to leases that many of his neighbors have.

Yost said that in the middle of the application process ESB Bank told him the gas lease was too prohibitive. So he went to the drilling company, Rex Energy, which agreed to subordinate their claims to the property — in other words, to put the bank's interest first.

"They were actually very good," Yost said of Rex.

But Yost said a bank representative then told him that no loans would be given to anyone with a gas drilling lease. And that's what upsets Yost the most, he said: that the bank didn't tell him upfront that homes with leases didn't qualify. He said it also declined to refund what he'd paid for his appraisal.

Eventually, Yost did get his home refinanced with another bank — after he paid for a second appraisal. ESB spokesman Daniel Schwartz said the bank has no comment.

Financial experts say situations like Yost's are rare, and that properties with leases are routinely financed. But banks are taking a new look at how to assess both the positive and negative impacts of the Marcellus Shale boom, which has brought drilling rigs to some communities that never had them before.

The Marcellus Shale is a gas-rich formation of rock thousands of feet below large parts of Pennsylvania, New York, West Virginia and other states. Advances in drilling technology made the shale accessible, which led to a boom in production, jobs and profits, and a drop in natural gas prices for consumers. But there are also concerns about pollution and impacts to roads and other public services.

But oil and gas exploration has been going on for 160 years in Pennsylvania, notes Sean Moran, co-chair of the Energy Section at Buchanan Ingersoll & Rooney, a major law firm in Pittsburgh that has recently been hiring specialists in the oil and gas industry.

"Most banks are trying to court landowners who have oil and gas rights," Moran said, adding that there are a lot of rumors about problems with mortgages and gas leases, but little hard data to suggest it's a significant problem.

The Department of Environmental Protection estimates that more than 350,000 oil and gas wells have been drilled since 1859. Pennsylvania led the nation in oil production in the late 1800s, but had faded to a minor role until the Marcellus boom.

Charles Updegraff is chairman of Citizens & Northern Bank, which is based in a western Pennsylvania region with a long history of drilling.

"We're taking a little bit harder look at it than we did in the past, simply because of the increased activity," he said of both the number and value of gas drilling leases. But Updegraff said his bank doesn't exclude people with Marcellus leases, simply because they wouldn't write many mortgage loans if they did.

The biggest questions now tie into appraisals, Updegraff said. A property that actually has a drilling rig or pipeline on it is quite different than one that doesn't, but even there blanket judgments don't apply, he said, since one owner might be getting larger amounts of money from a lease than another. Many people with leases are also using their money to improve the properties.

Updegraff said that in the past it was probably common that people seeking loans or mortgages didn't even ask about mineral leases, since many involved tiny amounts of money.

"I would find it hard to believe that nobody's asking now," he said, since gas leases can now involve hundreds of thousands of dollars.


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