D.R. Horton faces inquiry over mineral rights

Wed Apr 18, 2012 4:41pm EDT

* Retains mineral right under many homes it sells

* North Carolina looks at disclosure to buyers

* Homebuilder says it has responded to the inquiry

* Reports earnings Monday

By Michelle Conlin

April 18 (Reuters) - Homebuilder D.R. Horton Inc is hanging on to the rights to drill for oil and natural gas underneath many of the houses it sells, a practice that state prosecutors are watching closely.

The drilling rights could give a lift to the largest U.S. homebuilder, whose shares plunged when the housing market crumbled. As energy companies find vast new gas deposits using a controversial technique known as "hydraulic fracturing," mineral rights are becoming increasingly valuable.

But the North Carolina Department of Justice is looking into whether D.R. Horton's customers knew they were giving up their rights to the oil, natural gas, groundwater and other minerals underneath their properties, in perpetuity. The state Department of Justice sent a letter to the Fort Worth, Texas-based homebuilder last week requesting information.

D.R. Horton says it has responded to the request and "provided them with our current disclosure practices."

The company said its practice is "to disclose the mineral reservation to potential homebuyers before a sales contract is executed. The reservation is also reflected to all homebuyers in the owner's title insurance commitment, which is delivered to homebuyers prior to closing, and in the deed delivered to the homebuyer at closing."

The issue of who should own mineral rights is particularly acute in North Carolina, where legislators have been debating whether to open up the state to hydraulic fracturing, known as "fracking."

In 2010, when the state legislature began looking at allowing fracking in the state, D.R. Horton began including language in its standard sales contracts reserving mineral rights. It also retains the right to drill and dig tunnels, shafts and wells, with no limitation, underneath the homes it has sold.

D.R. Horton sells homes that cater to first-time buyers. The company is set to report earnings on Monday.

"I'm sure they will be getting a lot of questions about mineral rights on the earnings conference call," said Stifel Nicolaus analyst Michael Widner.

MORTGAGE TROUBLE

For D.R. Horton homeowners, fracking raises real concerns. Financial institutions, for example, have been loath to grant mortgages on homes within three miles of gas wells. Entire neighborhoods could see their home values plummet.

The State Employees' Credit Union is one North Carolina lender that will not grant mortgages to homes without mineral rights, says Spencer Scarboro, senior vice president of loan originations.

Scarboro says that one D.R. Horton sales contract got past a credit union loan officer and an underwriter before a closing attorney discovered the language in the sales contract about the mineral rights. The credit union rejected the mortgage application.

"We're concerned with the potential future damage to the property, the future marketability, and the concerns with the resell if the home doesn't come with the mineral rights," says Scarboro.

Fracking involves blasting a watery cocktail of sand and chemicals deep underground to fracture rock and free otherwise unavailable gas and oil.

As fracking has proliferated in states like Texas and Pennsylvania, so has the controversy surrounding its use.

Critics of the technique warn that it can poison drinking water, contaminate air, and pollute soil. Some scientists have even argued that fracking has contributed to earthquakes. The U.S. Environmental Protection Agency is currently studying the public health and safety aspects of fracking.

Supporters of the process say that if it is done properly it poses no environmental threat.

For many, fracking has turned the dirt underneath their land into gold and has become big business.

In the past two decades, land men working for oil and gas companies have fanned out across resource-rich states like Texas, North Dakota and Pennsylvania. They have banged on doors and persuaded homeowners to sign leases for their mineral rights.

Those who hold out can sometimes garner thousands of dollars an acre, plus royalties, according to homeowners in Pennsylvania.

D.R. Horton says it reserves mineral rights in the majority of the areas where it operates. It then transfers those rights to a subsidiary called DRH Energy, which is also based in Ft. Worth, Texas.

The two companies share a chairman, Donald R. Horton, and a chief executive officer, Donald Tomnitz.

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