Chris Cunningham, Kristopher Gerardi, and Lily Shen
Working Paper 2017-4a
March 2017 (revised October 2020)

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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 it 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.

JEL classification: Q51, R11, G21

Key words: mortgage default, hydraulic fracking, house prices, shale gas link

For helpful comments and discussions, the authors thank seminar participants at the 2016 Energy and Commodity Finance Conference, 2016 Southern Finance Association Conference, 2016 Financial Management Association Conference, seminar attendees at Clemson University/Finance, University Catholique de Louvain/IRES Macro Lunch, the London School of Economics/SERC, and Maastricht University/Finance. The authors are especially grateful for comments and suggestions from Brent Ambrose, Henry Overman, Christian Hilber, and Piet Eichholtz. The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Chris Cunningham, Federal Reserve Bank of Atlanta, 1000 Peachtree St. NE, Atlanta, GA, 30309; Kris Gerardi, Federal Reserve Bank of Atlanta, 1000 Peachtree St. NE, Atlanta, GA 30309; or Lily Shen.

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