Fracking and Mortgage Default

55 Pages Posted: 23 Mar 2017

See all articles by Chris Cunningham

Chris Cunningham

Federal Reserve Bank of Atlanta

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Lily Shen

Department of Finance, Clemson University

Date Written: March 23, 2017

Abstract

This paper estimates the effect of increased shale gas drilling on mortgage defaults in Pennsylvania. Utilizing the underlying geologic properties of the land as instrumental variables and the sudden viability of shale gas mining arising from technological innovations in hydraulic fracturing in the mid-to-late 2000s, we are able to isolate plausibly exogenous variation in the timing and location of drilling activity. Controlling for endogeneity we find that mortgages originated before shale gas drilling occurred, were, post-boom, significantly less likely to default in areas with greater drilling activity. Specically, residing in a zip code with any active fracking reduces the probability of severe delinquency by 0.26 percentage points, on average, which corresponds to approximately 110% of the average monthly delinquency rate in our sample of Pennsylvania mortgages (0.24%), and is roughly equivalent to increasing the borrower's FICO score at origination from 580 to 700. Results that do not account for drilling endogeneity are only one-third as large, suggesting that governmental restrictions on drilling at the local level, or the decisions taken by energy companies in choosing where to drill may be biasing down the effect of fracking on land markets shown in the existing literature. These finding suggest that while there may be some real or perceived negative externalities from the immediate proximity to a wellhead for homes that are groundwater dependent as shown in Muehlenbachs et al. (2015) the net effect of the shale gas on land markets at a larger geography (zip code or county) is clearly positive. In addition, while we find that fracking raises house prices in the sub-set of counties where we observe them, the weight of evidence suggests that greatest benefit from fracking came from strengthening the labor market consistent with the double trigger hypothesis of mortgage default.

Keywords: fracking, mortgage, default, real estate, credit risk, oil and gas, debt

Suggested Citation

Cunningham, Chris and Gerardi, Kristopher S. and Shen, Lily, Fracking and Mortgage Default (March 23, 2017). Available at SSRN: https://ssrn.com/abstract=2939403 or http://dx.doi.org/10.2139/ssrn.2939403

Chris Cunningham

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States

Kristopher S. Gerardi

Federal Reserve Bank of Atlanta ( email )

1000 Peachtree Street N.E.
Atlanta, GA 30309-4470
United States
404-498-8561 (Phone)

HOME PAGE: http://sites.google.com/site/kristophergerardishomepage/

Lily Shen (Contact Author)

Department of Finance, Clemson University ( email )

Clemson, SC 29631
United States

HOME PAGE: http://https://sites.google.com/g.clemson.edu/lily-shen

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