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Fracking in California and Your Home

UntitledHydraulic fracturing, or “fracking” is a method of oil and gas production.  The process involves drilling into the earth and pumping large amount of water, sand, and chemicals through the pipeline.  The drill pierces the earth and feeds pipeline between 2,000 feet to a mile deep, and then the drill moves out horizontally similar to an underground spider web.  The water mixture gets pumped through the pipelines at high pressure, and breaks open the clay that surrounds most of the oil and natural gas underground, which then escapes and makes its way up to the well.

This method of oil extraction is extremely controversial due to its proximity to homes, potential impact on the environment and human health, and also its ability to stimulate the economy and create jobs throughout the U.S.  More oil in North America means less purchase from the Middle East, and enticingly cheaper oil costs as it currently stands as almost $100 a barrel.  Oil is positioned as one of the most valuable assets in the world.  Fracking is an efficient process as it obtains an immense amount of hydrocarbons previously not obtainable before fracking was used for commercial endeavors in 1949.  Due to recent technological advances, the fracking technique allows for more efficiency and the ability to recover more oil and thus, more profitability.  George King notes, “as of 2012, 2.5 million hydraulic fracturing jobs have been performed on oil and gas wells worldwide, more than one million of them in the United States”[1].

Fracking has been recorded in 10 counties throughout California: Colusa, Kern, Los Angeles, Monterey, Sacramento, Santa Barbara, Sutter, Kings, and Ventura.  Kern County stands as California’s largest oil-producing county.  Oil companies have also participated in fracking offshore, very close to California’s coastline ranging from Seal Beach to the Santa Barbara Channel.  The way that the geology is formed beneath the San Joaquin and Los Angeles basins is estimated to contain 13.7 billion barrels of recoverable shale oil.

If you live in a neighborhood where oil and gas may lie underneath, a landman could come to your door with a lease representing an energy company that wants to drill near your home, which will require a fair amount of equipment both above and below ground.  The lease might not openly mention hydraulic fracturing, but it is likely that it could refer to fracking by including wording such as, “methods and techniques”.    Some of these leases offer a bonus upfront simply for signing the lease.  If the driller ends up finding a reserve of shale gas, you could receive royalties from the energy company as long as the gas continues to flow.

Wherever you side on the topic of hydraulic fracturing, be aware that signing off on a lease could affect your property’s value, your mortgage, or your home insurance. The reason for these three elements being affected is because hydraulic fracturing carries the potential risk of pumping out radioactive chemicals into the earth, crack home foundations, contaminate ground water, and deplete fresh water.  Not to mention, the process of obtaining oil and natural gas pollutes the atmosphere and generates plenty of other types of pollution such as noise pollution and eyesores due to truck traffic, drilling noise, and light.  There have also been increases in seismic activity occurring in areas where fracking takes place as the pipes dispose of any flow back or brine deep into the earth.  Flow back may bring up radon, methane, and other substances.  In the beginning of last month, Forbes released an article entitled, “Pollution Fears Crush Home Values Near Fracking Wells”.

The Forbes Article detailed a study of home values in “fracked areas”, stating, “A loss varied with distance from the nearest shale-gas well.  At 1.5 kilometers, properties with private wells sold for about 10 percent less.  If these two properties are similar in everything but the type of water they are using, we find that the difference equals negative ten percent,’ said Lucija Meuhlenbachs, an assistant professor at the University of Calgary”[2].  The study went on to show, the closer to the fracking activity, the more significant the loss in home value.  Within 1kilometer of the shale gas wells, homes with private drinking water wells exhibited a 22 percent loss in property value.  Still, whether or not shale gas drilling endeavors actually are to blame for change in water quality is aggressively debated.  Regardless of the theory to hold true or not, home values relentlessly plummet in response to hydraulic fracturing.

Homes with natural gas wells are said to have higher levels of methane in them, which creates a fire risk as built up methane can become flammable.  However, research is not certain that the water quality can be directly traced back to the activity of energy companies nearby.

Despite the Forbes article detailing how home values have been affected by the fracking situation, the Real Estate Industry remains neutral on the subject matter.  On MoneyTalksNews.com, and article stated the following: “The National Association of Realtors is in the neutral corner.  ‘Fracking and mineral rights are two issues that are still new to NAR and we have not fully researched their impact on home values or sales at this time…also sitting this one out is National Association of Home Builders.  Spokesman Paul Lopez says, ‘We do not have a position on fracking’”[3].

As for the impact that fracking has on home insurance, a few home insurance companies have come out and flat out said that they will not cover any damage related to a drilling process that utilizes hydraulic fracturing.  Nationwide Insurance Company was the first to come out and say this, releasing a statement that “we are not designed to cover (risk from fracking)”[4].  Nationwide also stated that the risks involved in fracking operations are “too great to ignore” and apply to policies of commercial contractors and landowners who lease property to gas companies.  Earthquakes as a result of fracking (or other reasons) are simply not insurable.  Insurance companies recommend that if some sort of negative situation arises in your home due to fracking, get a lawyer and sue the driller because insurance is simply not going to cover it.  In that case, homeowners should have a rainy day fund to cover all of the legal fees associated.  If a home is not insurable, a mortgage will not be easily obtainable either.

Due to the magnitude of how controversial the subject of hydraulic fracturing has become between politicians who seek to stimulate the economy, Big Oil giants who seek alternatives to cleaner forms of energy in natural gas, and environmentalists who believe that the impact of drilling for oil and fracking is far more negative than the consequential output, the issue of fracking has become one that varies on a local basis versus a national basis.  Different parts of the nation feel incredibly differently on the subject.  Therefore, opinions and regulations vary county by county.  For example, on Tuesday May 7th, 2014, City Council leaders in Beverly Hills voted to completely ban fracking.  An article in Reuters covered that due to these votes, Beverly Hills has become “the first municipality in California to prohibit the controversial technique for extracting from underground rock deposits”[5].

Recently, the Wall Street Journal accounted for well locations and census data in over 700 counties located in America’s biggest energy-producing states.  The data reveals that at least 15.3 million Americans lived within a mile of a well that has been drilled since 2000[6].

Depending on the terms of your mortgage loan, fracking does have the potential to affect a mortgage.  Federal lenders such as Fannie Mae, Freddie Mac, or FHA have specific regulations that have to due with hydraulic fracturing.  Even if you did not have your loan serviced by one of these lenders, it is possible that the loan was sold to them after you closed your loan and moved into your new home.  Double check who your lender is before even thinking of getting tied up in a lease with an energy company.   There are regulations placed on issues such as environmentally hazardous material on your property (gas in particular), an active well or a plan to drill within 300 feet of the property, or transferring the mineral rights on your property without the written consent of the lender.  The hazardous materials section details the lender’s stance on how hazardous materials may affect the value of the property, and it is detailed in the mortgage agreement.

Mineral rights are situated as another obstacle in this process.  Something that many homebuyers fail to look into during a home sale transaction is determining who owns the mineral rights on the property. It is possible that homebuilders and developers can hold on to the mineral rights.  In order to determine who owns the title to the mineral rights on your property, do a title search.  Talk to your lender about finding this information out.  Signing a lease with an energy company is giving up your mineral rights, and in most leases it provides the driller with the right to transfer its interest to another company, which would then be out of your hands.  Drillers are typically allowed to keep the lease going as long as the driller shows progress on the property.  No mineral rights equals no royalties to be received, meaning that neighbors can be making money off of the project while you sit back and soak up the noise pollution.

Should the mineral rights be yours to give away, or should your lender agree to let drilling take place on or near your property, the monetary reward, or royalties, are usually steady depending on how much oil flows out of the rig.  One ‘beneficiary’ to the energy industry said, “when they handed me the check, I said I would pay my taxes and some bills and put away some money for rainy weather.  I am grateful6”.  Typically, those who receive royalties are a lot more willing and financially able to accommodate the oil rig as their new neighbor.

 

[1] King, George E., “Hydraulic Fracturing 101”.  Apache Corporation. 2012.

[2] McMahon, Jeff. “Pollution Fears Crush Home Prices Near Fracking Wells.” Forbes. Forbes Magazine, 10 Apr. 2014.

[3] “Homeowners: How Mineral Rights and Fracking Affect You.” Money Talks News. N.p., 24 Apr. 2014.

[4] Gerken, James. “Nationwide Insurance: Fracking Damage Won’t Be Covered.” The Huffington Post. TheHuffingtonPost.com, 13 July 2012.

[5] Feldman, Dana. “Beverly Hills Becomes First in California to Ban Fracking.”Reuters. Thomson Reuters, 07 May 2014.

[6] Gold, Russell, and Tom McGinty. “Energy Boom Puts Wells in America’s Backyard.” The Wall Street Journal. Dow Jones & Company, 25 Oct. 2013.

If you have any questions about the information herein, feel free to reach out to the Author, Brittany Williams, at Brittany.williams@broadviewmortgage.com.  If you would like a quick preapproval Click Here, and for assistance with down payment or buyer assistance Click Here.  You are also always free to give us a call Toll Free (855) 692-7623.

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