Double Trigger for Mortgage Default: The Fracking Boom

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Chris Cunningham

Federal Reserve Bank of Atlanta

Kristopher Gerardi

Federal Reserve Bank of Atlanta

Lily Shen

Clemson University

Date Written: June 11, 2020

Abstract

This paper exploits a natural experiment afforded by the fracking boom in Pennsylvania to shed light on the determinants of mortgage default. Looking only at mortgages originated before fracking became viable, and using the underlying geology as a supply shifter, we find that mortgages on homes exposed to shale drilling experience a significant reduction in default risk. This effect is more than four times greater for borrowers who are underwater on their loans. Additional evidence shows that fracking activity does not raise house prices but significantly increases household income through higher royalty payments, wages and salaries. Furthermore, we find that fracking directly leads to employment increases in the drilling/mining and construction sectors at the county level, and reduces income from unemployment benefits at the ZIP code level. Finally, in addition to reducing mortgage default risk, we show that fracking lowers credit card delinquencies. These results are most consistent with the "double-trigger" theory of mortgage default, where underwater borrowers subject to an adverse income shock are much more likely to lose their homes to foreclosure.

Keywords: credit risk ,household finance •,mortgage default , fracking ,financial crisis

Suggested Citation

Cunningham, Chris and Gerardi, Kristopher S. and Shen, Lily, Double Trigger for Mortgage Default: The Fracking Boom (June 11, 2020). Available at SSRN: https://ssrn.com/abstract=

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)

Clemson University ( email )

Clemson, SC 29631
United States

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