Double Trigger for Mortgage Default: The Fracking Boom

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.