Mortgage company requires bonus payment be used to retire loan.

The good news is that very soon we will have clear title to our farm here in western PA.

We were fortunate to be signed by a major at the end of last year to a good contract containing the addendums we wanted, and at the dollars and percentage we consider fair. 

We were recently given a date certain for the bonus payment to be deposited in our account and were obviously happy knowing this actually may just happen.

Then we were informed our mortgage company (a farm focused lending company) is demanding the bonus payment be sent to them so that our loan be satisfied first with the remaining amount then sent to us.

There is a clause in the mortgage papers concerning this (which we didn't realize).

We have had the loan for over 12 years and according to them, have an excellent record of payment.

However, my credit rating has been in decline since I lost my job over a year ago. I am 60 years old and have found it impossible to find similar employment due in large part to the economic slowdown. The mortgage company used my credit rating as the reason for their demand.

I realize there is probably nothing I can do regarding this last minute turn of events, and as I said at the top, we will end up with a clear title to our 90 acreas. However, in the short term and given our existing economic condition, the remaining bonus dollars will just cover the federal and property taxes owed.

In other words, nothing left over to bridge the gap from the present to potential future income.

My purpose for posting this is two-fold:

1) Alert anyone in a similar position to get prepared. Our shock would have been mitigated had we known earlier, before we started making arrangements to satisfy mounting financial issues. 

2) Seek insight from the Shale Nation as to how the value of our paid up property can be unlocked so that as we become retired burger flippers, we can still meet our financial obligations. 

Don't get me wrong, we are happy to be in a position to even be discussing this issue. However, the lesson learned is to never count on anything until it is firmly under your control, and even then there could be (and probably will be) unwanted surprises.  

 

 

 

 

         

                

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Permalink Reply by Samuel J. Orr on February 21, 2013 at 5:53am

I do not know how old your mortgage is. Please read  the terms of your specific mortgage. See if there is a written clause that requires you to do this. Before you agree to anything have an attorney review it. Its a few dollars very well spent. If there is no contractual obligation in the mortgage obligating you to pay off your mortgage with the proceeds, then tell the bank to go pound salt!

Permalink Reply by Markus on February 21, 2013 at 6:09am

I am with Sam on this one for sure...

Permalink Reply by Markus on February 21, 2013 at 6:07am

Wow - thanks for this post.  

I presume a well has yet to be drilled?  Is drilling actually occurring in your area?  Just thinking that future royalties might help out a bit...do you know if your acreage is even in a unit?  

Permalink Reply by Kathleen on February 21, 2013 at 6:42am
I'm going to find a positive. I think you do have a bridge which is the money you keep each month instead of paying the mortgage :0). If you are in good standing than this will be your bonus.
I do hope you can get around this though if that's what you want.
Permalink Reply by M.A.B. on February 21, 2013 at 8:18am

did your terms say gross or net? do they want you to pay them off so you can get a loan to pay the taxes? sounds fishy

Permalink Reply by Jack Straw on February 21, 2013 at 8:49am

Gulp!

I agree with Samuel in that you would be advised to consult a Real Estate Attorney.

Prior to doing that, you might first wish to contact the O&G Company to determine to whom the check will be made out.

It is quite possible that they intend to make the check jointly out to you and the Mortgage holder.

 

Good luck in getting this handled in a manner which is to your best benefit,

 

JS

Permalink Reply by ray schmidt on February 21, 2013 at 9:19am

I am with Kathleen,at least you wont have a mortgage payment anymore so you can use that money for other things! I think its a blessing in disguise since you stated its in your contract anyway,thats 18 years with no monthly payment. Assuming a 30 year loan.IMHO

Permalink Reply by Oliver Perry on February 21, 2013 at 9:30am

I agree with Ray, look at the interest you will be saving. Many people use their bonus money to pay off their mortgage, thats the first thing they think of to spend it on. I realize you would prefer to use it in the best way you see fit, but you have to look on the bright side.

Permalink Reply by ralph monico on February 21, 2013 at 1:26pm

I have handled this issue for a number of clients.  A mortgage secured by real estate will always involve a security interest in surface and sub-surface rights. 

 

Under certain conditions, a bank may agree to a partial release of mortgage as to subsurface mineral rights only.  This process requires the bank to execute and file of record such a release.  This will allow the subsurface rights to be leased.  (in the absence of a release the gas/oil company will either decline to exercise the option and pay on the lease or require the release before exercising the option). In my experience, banks are willing to do this only when monies paid under the lease are used for a specific, pre-defined purpose approved by the bank (which almost always involve reduction of the debt or enhancing the landowner's ability to pay the mortgage. 

While the situation occurs frequently in a variety of contexts, it can be complicated. 

 

Permalink Reply by ralph monico on February 21, 2013 at 1:57pm

My paranthetical should read (in the absence of a release the gas/oil company will either decline to exercise the option and not pay on the lease or require to release to be filed of record before exercising the option). 

Sorry for any confusion!

Permalink Reply by Farmhouse on February 21, 2013 at 2:37pm

The same thing happened to me.  But it was the O&G co. that wanted this done, demanded actually.

Sometimes called 'Subordination" and most banks will not agree to it.

Basically what the O&G wants the bank to do is take a subordinate or second position BEHIND the O&G company in the event of a default on the loan.

If the property were to go into foreclosure and/or be repossessed, the Gas co needs to be sure that they can retain ownership of their investment ( the wells, etc.) So they write this clause into the lease and usually wont' make the deal without it.

The bank says "no way" to that deal.

The bank needs to be sure they can retain their asset (the farm). So basically this creates an impasse. Neither side will agree to it. 

The solution? Use the signing bonus to pay off the mortgage and pay the net proceeds to the landowner.

Both sides get what they want.

What is curious to me is that it was the bank that initiated this. Usually it is the Gas co. that demands that any liens be satisfied. 

Furthermore, that your bank is using your credit score as the criteria for this is very strange. The bank assessed your risk and likelihood of paying back the loan when they originated the loan. It's not an on-going assessment. Once your loan is approved, if your paying as agreed, your credit score doesn't determine whether or not you can keep it. 

Also, your bank is not in the position to demand that the ENTIRE amount be sent to them and then they will pay the proceeds to you. MAJOR RED FLAG. Tell your bank that you need a "Pay off statement" that is good until the date that your gas co. wants to make payment. Give your gas co. this amount and have them pay the bank direct in the amount of the payoff.

Have the gas co. write you a separate check for the difference.

Do you by chance have other lines of credit issued by this bank? (i.e. credit cards or car loans that maybe have fallen behind in payments) Other than your mortgage, that they may want to get paid at the same time? That would be the only reason I can think of for them to demand the full bonus be paid to them and then have them issue payment on the difference. 

If you haven't already done so, make sure that your lease states that you have the right to mortgage the property in the future, if you so desire. The same terms of subordination will likely have to be met, but there are a few small neighborhood banks that realize the potential of gas and oil development and will accept subordination. In my case we refinanced and our bank accepted the subordination clause but had us sign an agreement that allocates any royalty income to the bank, only if we fall behind in our payments and only until we are caught up. So I thought that was acceptable.

To answer your question, this could be a way to monetize your land to "bridge the gap" until you begin getting royalty. Perhaps you could refinance or take out a home equity line of credit to provide some income or pay some bills or debt, presumably with much lower payments than your current mortgage payment which you are already making on time. Food for thought.

Finally, please put that bonus money aside for taxes and don't touch it. You WILL have to pay income taxes on that money. As I have stated on this forum before- I found out the hard way, the IRS doesn't play. 

Good Luck to you.

Permalink Reply by Samuel J. Orr on February 22, 2013 at 3:11pm

The head honchos at these banks need to be put in jail. They are crooks IMHO!

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