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Mortgage

State of New York bans fracking

Cuomo officially bans oil and gas extraction process for entire state

Gas companies and homeowners hoping to strike it rich by mining the oil and gas reserves buried deep beneath the ground of the state of New York are officially out of luck, because New York’s governor, Andrew Cuomo, has just banned the oil and gas extraction process known as fracking throughout New York.

Fracking was already unofficially banned in New York, despite the presence of massive oil and gas reserves that could be extracted from the Marcellus Shale, which stretches for much of the Western and Southern portions of New York State.

But now, according to a report from the New York Times, the Cuomo administration has officially banned fracking in the state, citing the potential for air and water contamination and “inestimable public-health risks.”

From the New York Times report:

“I cannot support high volume hydraulic fracturing in the great state of New York,” said Howard Zucker, the acting commissioner of health.

That conclusion was delivered publicly during a year-end cabinet meeting called by Gov. Andrew M. Cuomo in Albany. It came amid increased calls by environmentalists to ban fracking, which uses water and chemicals to release natural gas trapped in deeply buried shale deposits.

The risks and benefits of fracking have come under increased scrutiny in recent years, especially in the last few months, when the rise of domestic oil production due to fracking has contributed to the decline of worldwide oil prices as the OPEC nations flood the market with cheap oil in an effort to drive down the economic viability of domestic fracking.

Proponents of fracking say that the process is safe and cite the nation’s skyrocketing oil production as benefits. The September issue of HousingWire Magazine profiled fracking and its impact on the U.S. economy.

Hydraulic fracturing, or fracking, is the practice of injecting a mixture of water and chemicals into underground rock formations to release previously inaccessible oil and gas reserves that were trapped within the rock.

In many cases, the shale formations are located underneath developed areas, including neighborhoods. But unconventional gas drilling, or horizontal fracking, allows the wells to be built hundreds or thousands of feet away from the developed land while still allowing access to the valuable minerals.

The development of horizontal fracking has enabled homeowners to lease their mineral, or subsurface, rights to oil and gas companies for mountains of cash. With all of that money to be made, gas wells have become a more common occurrence in Texas, Pennsylvania, West Virginia and North Dakota.

But despite the potential for big oil and gas business in New York, the Cuomo administration is stating that the potential health risks are too great to ignore.

Fracking’s impact on housing is significant. In addition to the fact that much of the oil and gas reserves rest beneath people’s homes, the price of oil could affect interest rates in 2015, according to analysts at Bank of America Merrill Lynch.

“The possibility of further declines in oil prices increases the chances that mortgage rates drop to the 3.25%-3.5% range that we believe is necessary to get housing back to affordable levels for many,” said Chris Flannigan, ABS and MBS strategist at BofAML.

“We have maintained the view that 4% mortgage rates are too high to allow for sustainable recovery in housing. In our view, a drop to the 3.25%-3.5% mortgage rate range would eliminate the current benign technical conditions prevailing in the agency MBS market, increasing supply from both refinancing and purchase mortgage channels. Such a rate drop would also create significant upside risk to our forecast of roughly $1 trillion of mortgage production in 2015.”

Plus there is the potential for reduced property values from fracking. On the other hand, if a homeowner leases their subsurface rights to a gas company, their economic profile could change in a hurry.

If done correctly, subsurface drilling could be a win-win for banks, borrowers and gas companies, but naturally there are critics. “There is some hysteria because it’s being done in places that it’s never been done before," Ballard Spahr attorney Harry Weiss told HousingWire in May.

Unlike some claims that fracking could reduce property value, Weiss believes this isn't the case at all.

“The value of the mortgage where the borrower owns the drilling rights could be higher," he said. “There’s more security in the mortgage, but where the borrower just controls the surface, the concerns are heightened for mortgage bankers.”

Weiss notes that even though, when done correctly, energy needs can marry well with the preservation of mortgage investments, he warns that bankers need to be aware of the impact of the energy sector on personal property debt.

For example, if a homeowner wishes to sell or lease the drilling rights to their mortgaged property, the bank generally has to be notified and provide their consent.

“I know anecdotally that the borrowers aren’t always doing that,” Weiss warned.

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