That's the Frack, Jack: How Drilling Can Affect Your Mortgage

Hydraulic fracturing, more commonly known as fracking, is a divisive issue. Whether you are on the side of the energy producers or the environmentalists, there is one thing you should know about how fracking can affect you personally - it might cause your mortgage to be invalidated, and prevent you from getting a mortgage in the future.

How Fracking Affects Property

Fracking pumps liquid into the earth at high pressure to force oil and natural gas out of rock formations and other underground areas where these energy resources were previously inaccessible. The rise of fracking activity has led to an economic boom some areas, while helping to reduce America's dependence on foreign oil. On the other hand, it has also led to concerns about contaminated groundwater and earthquakes caused by destabilizing the structure of the earth just below the surface.

It's Complicated....

Where mortgages -- and potentially your mortgage- - come into it is that because it can squeeze energy out of tight spots, fracking has led to oil and gas drilling in residential areas. This is often contrary to mortgage terms on the properties in those areas.

Publications as diverse as MSN Money, The New York Times, and American Banker have reported that mortgage lenders are being increasingly cautious about lending in areas where fracking may be involved, and are also concerned about existing mortgages in areas where fracking has begun.

In many cases, fracking may violate the terms of a mortgage. Loans purchased by Fannie Mae and Freddie Mac do not allow mortgaged properties to store hazardous materials or have their gas rights leased. FHA home loans are not allowed to be made on any property within 300 feet of a drilling site. That's right - even if you don't allow fracking on your property, your neighbor's activity can invalidate your mortgage.

Because Fannie Mae, Freddie Mac, and FHA home loans are so influential in the mortgage market, individual lenders are increasingly shying away from allowing oil and gas drilling on mortgaged properties. This growing rift between fracking and lenders can affect homeowners in a number of ways:

  1. It may violate the terms of your current mortgage. If this happens, your mortgage would be considered in technical default, meaning you'd have to pay the mortgage off immediately or risk foreclosure.
  2. It may complicate the future sale of your home. Even if you own your home free and clear and have no plans to ever get another mortgage, fracking could impede the future sale of your home. Many buyers are dependent on FHA home loans, and as other lenders crack down on allowing loans to properties in areas where there is fracking, your pool of potential buyers could shrink considerably.
  3. It may prevent you from refinancing. Even if your current loan doesn't prohibit fracking, the increased use of such loan provisions could limit your options should you ever want to refinance a mortgage.
  4. It may keep you from getting a home equity loan. Home equity loans are mortgages too, so the provisions banning oil and gas drilling could stop you from ever getting a home equity loan if there is fracking in your area. Also, there are concerns that environmental damage could hurt property values in areas where there has been widespread fracking, especially once all the energy resources have been drained from ground underneath. If property values go down, the amount of home equity you have available to borrow against could be reduced or wiped out altogether.

The bottom line is, before you sell or lease any oil or gas rights to your property, make sure you have researched and considered the impact on your current mortgage and possible future loans. Also, if there is talk of fracking activity in your region, make sure you local zoning board or other rulemakers have thoroughly considered the impact this could have on the ability of all properties in the area to be eligible for mortgages.

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