- Apr 12, 2008
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- real world
Mortgages for Drilling Properties May Face Hurdle
By IAN URBINA
The Department of Agriculture is considering requiring an extensive environmental review before issuing mortgages to people who have leased their land for oil and gas drilling.
Last year more than 140,000 families, many of them with low incomes and living in rural areas, received roughly $18 billion in loans or loan guarantees from the department under the Rural Housing Service program. Much of the money went to residents in states that have seen the biggest growth in drilling in recent years, including Pennsylvania, Texas and Louisiana.
The program is popular because it generally requires no down payment. As its financing has grown and credit markets have tightened in recent years, the program’s loans have roughly quadrupled since 2004.
The decision, agriculture officials say, would also affect the department’s Rural Business and Cooperative program, which issued more than $1 billion in loans and grants last year to about 15,000 rural businesses.
Home mortgages and rural business loans from the agency have been allowed to avoid such reviews, except under unusual circumstances.
The proposal by the Agriculture Department, which has signaled its intention in e-mails to Congress and landowners, reflects a growing concern that lending to owners of properties with drilling leases might violate the National Environmental Policy Act, known as NEPA, which requires environmental reviews before federal money is spent. Because that law covers all federal agencies, the department’s move raises questions about litigation risks for other agencies, legal experts said.
Drilling for gas has become more common using a technique known as hydraulic fracturing, which breaks up rock deep underground using water and chemicals under high pressure. The drilling has been an economic boon — creating jobs and reducing dependence on foreign energy. But it has raised concerns about contamination of water wells, air pollution and above-ground spills.
Over the last year, some banks and federal agencies have started revisiting their lending policies to account for the potential impact of drilling on property values.
“We will no longer be financing homes with gas leases,” Jennifer Jackson, program director for rural loans in the Agriculture Department’s New York office, wrote in an internal e-mail this month, citing several factors, including the costs of conducting such reviews.
In e-mails sent to landowners and Congress, agriculture officials said that environmental specialists at the agency believed that the reviews were legally necessary and that leased properties should not be given special exemptions. But when asked about the notice, the Agriculture Department said its secretary, Tom Vilsack, is still reviewing it.
Legal experts said that the agency’s notice would have broad repercussions.
The environmental reviews being proposed by the Agriculture Department would give the public a fuller accounting of the potential environmental risks of drilling, the experts said. Such reviews would also help protect the agency from litigation from environmental groups — a cost that would ultimately be borne by taxpayers.
But the Agriculture Department’s notice would also mean that landowners who had already signed leases to allow drilling on their land would face hurdles if they applied for federally backed mortgages.
Full environmental reviews from the Agriculture Department or other agencies would also add new wrinkles to President Obama’s plans to expand domestic drilling, the experts said.
Asked for comment, department officials declined to answer specific questions about the notice or about the e-mails, which were sent in February and March by officials from the Agriculture Department’s regional offices and its headquarters.
Other Agriculture Department officials, who asked not to be identified because they were not authorized to speak to reporters, said that the notice was technically not a policy change but a clarification of existing rules. The notice was being issued partly in response to growing questions from state offices about whether agency loans for properties with drilling leases complied with federal environmental law, they said.
Officials in some offices, especially in the West, where drilling has been occurring for decades, said they had historically given categorical exclusions to properties with drilling leases. But officials in state offices in the East, where drilling has expanded rapidly in recent years, said they wanted more guidance on whether bypassing environmental reviews was legal. Next month’s clarification from agricultural officials in Washington is meant to settle that dispute.
Edward Lloyd, an environmental law professor at Columbia, noted that billions of dollars worth of home loans are made directly or underwritten each year by Fannie Mae, Freddie Mac, the Federal Housing Administration and the Veterans Administration. He said those lenders might feel compelled by the Agriculture Department’s decision to study their own policies.
Professor Lloyd and two other legal experts predicted that rather than assessing the impact from each oil and gas lease separately, the Agriculture Department and other federal agencies may instead prepare a blanket environmental review of drilling that applies to all of their lending programs.
Kevin T. K. Bailey, a Congressional liaison with the Agriculture Department, said in e-mails sent to Representatives Maurice D. Hinchey and Carolyn B. Maloney, both Democrats from New York, that the agency was willing to conduct such a review, but there was no money in the budget for it, so lending would need to stop until the matter was resolved.
Agriculture officials said the notice was in response to an article in The Times in October that described how leases often allowed certain activities, like storing hazardous waste on a property, that were expressly forbidden by mortgages because they could harm resale values.
“There is substantial controversy over the extent, range, and issues associated with hydraulic fracturing (fracking) for gas,” Mr. Bailey wrote in a March 8 e-mail to members of Congress, adding that “for a number of years” the loan program typically had considered its mortgages exempt from environmental review. But the agency notice will clarify that this is not the case for properties with drilling leases.
Requiring environmental reviews for such properties will be slow but will allow the public to have more say in the matter, he added.
“Approval of such leases would allow for a number of potential impacts to possibly occur which would need to be analyzed in a NEPA document that would be reviewed by the public for sufficiency,” he wrote.
“The overall environmental effects of such development have not been addressed in any NEPA document by any federal agency,” he said, adding that allowing people with drilling leases on their properties to qualify automatically for mortgages from the Agriculture Department “places the Agency at risk of NEPA related litigation.”