Lately some residents have asked questions about subordination agreements. What do they mean? What kind of paperwork is involved?
Here’s the simple answer. Unless you own your home outright, a mortgage company holds a lien against the home and you pay them a monthly mortgage fee toward ownership. If you default on your mortgage the mortgage company can then lay claim to the property and in some cases, income from mineral leases on the property. However, this cannot happen if a resident has a subordination agreement with their mortgage company.
Subordination agreements allow the resident’s claim to the mineral lease royalty income to hold precedence over the mortgage company claim. Therefore filing this subordination agreement allows residents to continue to be paid mineral royalty income even if they default on their home loan and no longer own their home.
In the past mineral ownership has not been a large issue for mortgage companies or residents, but that is changing. Some mortgage companies are looking for ways to shore up loses that they suffered in the Fannie Mae shake out and the Wall Street Credit crunch. To help recover mortgage loses going forward they are adding language to their latest contracts specifying that they have first claim on mineral income from the property.
Most mortgage companies are charging a fee to sign subordination agreements. If your existing mortgage documents require a lease review fee or a subordination agreement, Cherokee Horn will cover that cost for you up to a reasonable amount. If you’re shopping for a new loan, you may want to clarify your lender’s position on mineral leasing and choose a lender that does not restrict your royalties or charge for a lease review. If you have other questions, please feel free to call us. We are happy to assist.
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Other residents have asked about home values holding up if drilling occurs. The answer here is that drilling has had no obvious negative trend effect on values. In fact, drilling and the economic stimulus of drilling on the area economy have helped home values here remain relatively stable, while other areas of the country have seen home values drop dramatically by double digits.
One of the chief driving factors for home values is demand. With the economy still comparatively strong here, home values in the DFW area have taken only a small 5% drop due to general credit tightening and some job loss.
So, next time you hear someone complain that natural gas drilling has a negative effect on his or her home value, you are simply not getting the whole story. Mineral rights have become important bargaining chips in the sale of homes. Some people look specifically to purchase homes with mineral rights, knowing that it is just a matter of time before those mineral rights will become a source of income.
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