September 7, 2007

Mortgage Company Agreements Hold Up Mineral Drilling Royalties for Some: Fort Worth: Agreements With Mortgage Lenders Required for Payments

By Marice Richter, The Dallas Morning News

Sep. 7--Thousands of area residents who leased their mineral rights for natural gas drilling could find there's red tape between signing a lease and cashing a royalty check.

Some residents of the Oakhurst neighborhood in Fort Worth are among the first to experience a problem with collecting royalty payments because the drilling company that holds the leases in Oakhurst is insisting that subordination agreements be signed between homeowners and their mortgage lenders before royalty checks are issued.

A subordination agreement allows homeowners with pre-existing mortgages to collect royalties ahead of the mortgage company that holds the lien, said Tim Malone, an oil and gas attorney who recently met with some Oakhurst residents.

The agreement also protects drilling companies in the event of a foreclosure on a property that carries a mineral rights lease.

The problem for some homeowners is that their mortgage companies are balking or insisting on high fees to approve a subordination agreement.

"It's been inconsistent," said Libby Willis, president of the Oakhurst Neighborhood Association. "My lender was great and took care of the matter quickly and without a hassle or fee.

"But some mortgage companies are trying to charge upwards of $500 and want a survey done, too," she said. "This has taken us completely by surprise."

In some cases, the fees may be more than months or even years worth of royalty payments, homeowners said.

Oakhurst, a neighborhood northeast of downtown Fort Worth with homes dating to the 1920s, was one of the first urban neighborhoods to be targeted for drilling above the expansive Barnett Shale gas field.

Dale Resources began approaching Oakhurst residents to lease their mineral rights nearly two years ago. Many signed, figuring they had little to lose, Ms. Willis said.

Dale recently sold out to Chesapeake Energy Corp., which is one of the biggest drilling firms in the Barnett Shale. Chesapeake and other drilling companies are continuing efforts to lease mineral rights across Tarrant County -- as well as other North Texas counties, including Dallas -- to expand drilling in the gas-rich underground field.

Oakhurst may be a model for what could happen in other North Texas neighborhoods, where hundreds of wells are being drilled or set for drilling, some residents said.

"Everyone is talking about what is going on Oakhurst," said Don Young, a critic of urban gas drilling. "We knew sooner or later there would be problems and opponents of urban drilling are using it as another argument for the obvious."

Oakhurst resident JannMiles said she has tried -- so far unsuccessfully -- to negotiate down the fee of $300 and a new property survey her mortgage company wants for a signing a subordination agreement. A survey would cost about $400, she said.

"If I had known about this two years ago, when I was approached to lease my mineral rights, I could have switched mortgage companies," Ms. Miles said. "But in this economic climate that is much more difficult to do.

"I haven't had any luck, and I'm tired and exhausted of dealing with it," she said.

Ms. Miles said she expects a monthly royalty check of about $25 so it would take a long time to recoup fees of about $700.

Chesapeake officials said they are trying to intervene on behalf of their leased homeowners who are having trouble with mortgage lenders.

"We have drilled in 19 states and have never encountered an issue like this before working in the Barnett Shale," said Henry Hood, general counsel for Chesapeake. "A subordination agreement should be a simple, routine function."

The firm could have withheld signing bonuses until subordination agreements were in place but chose to hand them out, usually from $200 to $500 for residential neighborhood property, Mr. Hood said.

"We want to pay the royalties, we don't want to suspend them, but we have to protect our interests," Mr. Hood said.

If a property without a subordination agreement goes into foreclosure, the lease would be voided and a drilling company could end up paying tens of thousands of dollars to a new owner, Mr. Hood said.

"There is give and take in this whole process," Mr. Hood said. "We think everyone who is trying to change policies for the Barnett Shale should step up and play fair."

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