Fracking and Mortgage Default

Chris Cunningham, Kristopher Gerardi, and Yannan Shen

Working Paper 2017-4
March 2017

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This paper finds that increased hydraulic fracturing, or "fracking," along the Marcellus Formation in Pennsylvania had a significant, negative effect on mortgage credit risk. Controlling for potential endogeneity bias by utilizing the underlying geologic properties of the land as instrumental variables for fracking activity, we find that mortgages originated before the 2007 boom in shale gas, were, post-boom, significantly less likely to default in areas with greater drilling activity. The weight of evidence suggests that the greatest benefit from fracking came from strengthening the labor market, consistent with the double trigger hypothesis of mortgage default. The results also suggest that increased fracking activity raised house prices at the county level.

JEL classification: Q51, R11, G21

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


For helpful comments and discussions, the authors thank seminar participants at the 2016 Southern Finance Association Conference, seminar attendees at University Catholique de Louvain IRES Macro Lunch, the London School of Economics/SERC, and Maastricht University Finance. The views expressed here are 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, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, and University Catholique de Louvain, 3 Place Montesquieu, Box L2.06.01, B- 1348 Louvain-la-Neuve, Belgium, chris.cunningham@atl.frb.org; Kris Gerardi, Federal Reserve Bank of Atlanta, Research Department, 1000 Peachtree Street NE, Atlanta, GA 30309-4470, 404-498-8561, kristopher.gerardi@atl.frb.org; or Yannan Shen, Clemson University, College of Business, 170 Sirrine Hall, Clemson, SC 29634, yannan.shen@clemson.edu.
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