Unexpected Wealth Change and Mortgage Default: Evidence from the Shale Gas Boom

Abstract

In this study, I apply spatial and temporal analysis in an effort to understand how mortgage borrowers respond to a wealth shock with unknown consequences and how their reactions translate into default decisions on residential mortgages. I examine whether extracting shale gas changed default probabilities of mortgages in the shale gas region after a nationwide fracking boom. Utilizing a sample of 371,946 residential mortgages that was originated in Pennsylvania between 2004 and 2011, the analysis provides compelling evidence that mortgages originated in the shale gas region after the shale gas boom are associated with a 58% decrease in default probability compared to the state average default rate. Findings of my temporal analysis suggest that: (1) borrowers stopped defaulting on mortgages as soon as extracting shale gas became profitable nationwide; and (2) local permitting activities do not have additional impact on borrowers’ default decision. An analysis of mortgages located on a buffer between fracking region and non-fracking region shows that the effect of fracking on lowering mortgage default rate persists even within a 7mile buffer zone. In a fracking region, GSE-secured mortgages, which are farther away from fracking wells than non-GSE loans, are more likely to default than the latter. The contribution of my study is twofold: in regard to its direct application to the fracking boom, I find no empirical evidence that fracking triggers mortgage default.