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A study from Clemson University and the Federal Reserve Bank of Atlanta shows fracking lowers mortgage defaults, raises home values and improves FICO scores.

It was a little less than six years ago when Ian Urbina, as part of his “Drilling Down” series in the New York Times, wrote a piece entitled “Rush to Drill for Natural Gas Creates Conflicts With Mortgages.” Urbina who was always looking for opportunities to slam fracking, quoted an official of Wells Fargo bank as telling a mortgage broker from Northeastern Pennsylvania it would be “very difficult to obtain financing due to the potential hazard” as well as “unknowns.” Urbina, of course, long ago moved onto other things, and history has moved beyond the baseless speculation at the root of so much policy discussion to the hard facts, which are very friendly, as it turns out, to fracking.

Screen Shot 2017 03 25 at 6.24.20 AM 512x322
New home under construction next to well pad in 2011, Susquehanna County

A newly published study, simply entitled “Fracking and Mortgage Defaults,” provides the facts that have rendered most of what Urbina had to say in 2011 as irrelevant in retrospect. It’s authored by Chris Cunningham and Kristopher Gerardi of the Federal Reserve Bank of Atlanta and Lily Shen of Clemson University. The thing is dry and heavy in the way most truly comprehensive studies and the title warns the reader it’s about no more than simple facts. There’s no invite to speculate, no clickbait for fractivists.

The findings of this study address much more than default rates, though. Here are the five most important conclusions:

  1.  Mortgages originated before shale gas drilling occurred, are, post-boom, significantly less likely to default in areas with greater drilling activity.
  2.  Allowing fracking reduces the probability of default by about as much as replacing a borrower with a subprime credit score of 580 with a prime credit borrower with a score of 700.
  3. The net effect of the shale gas on land markets is clearly positive.
  4. Fracking raises house prices.
  5.  The greatest benefit from fracking comes from strengthening the labor market.

Here, from the report conclusion, is a summing up of what was found (emphasis added):

    This paper shows that the net effect of the shale gas boom in Pennsylvania was to lower mortgage credit risk. This finding is remarkably robust to the measure of drilling activity and to the location or fragility of mortgages exposed to the boom. Since the sample of mortgages considered originates from before the first fracking production well was drilled we believe that it is largely free of the types of selection biases that may plague other studies of environmental hazards and energy shocks. Indeed, the effect of drilling on default appears to be greater in zip codes that were not previously exposed to more traditional types of oil or gas drilling. The shale boom also reduced default for the riskiest mortgages based on underwriting criteria like FICO scores. While we are unable to measure the impact on default risk from being in the immediate vicinity of a shale well, using our zip-code aggregate measures we find little evidence in support of … prohibition on insuring mortgages on properties near oil and gas wells.

    While the shale boom could have positively impacted housing markets in a number of ways, such as by raising the expected mineral rents from a parcel of land, or by providing much needed liquidity to underwater homeowners in the form of signing bonuses and royalties, the weight of the evidence points to improvements in the labor market associated with the shale boom as the most consequential.

So, there it is. Notwithstanding Ian Urbina’s speculation, others’ fear-mongering and that Wells Fargo letter, fracking has reduced mortgage default rates and made it safer to lend in shale country, not riskier. Who’d have thunk it? Well, just about anybody with common sense and ability to see with their own eyes. This study simply confirms the obvious; economic development creates wealth and improves lives.

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