Clemson study shows fracking resulted in lower mortgage defaults

CLEMSON, South Carolina — Despite the negativity many associate with fracking, the controversial technique for extracting oil and natural gas from the earth had a positive impact on mortgage defaults in areas where fracking occurred, according to research by a Clemson University finance professor.

The research, by Lily Shen, assistant professor of finance in the College of Business, examined data from 2004 to 2011 and found that mortgages originated in shale-gas fracking regions of Pennsylvania had a 58 percent lower default rate compared to the state’s average rate of default.

Fracking, or hydraulic fracturing, is an extraction process of drilling into the earth before a high-pressure injection of a water, sand and chemical mixture is used to force natural gas and oil to flow out of the wellhead.

The research, the first to link fracking with mortgage performance, seems to debunk a widely held belief that fracking has devastating impacts on the mortgage market.

“When there’s discovery of a mineral resource, a property becomes more than a place to live. The mineral rights are tied to property ownership. If a person defaults on the mortgage and loses the property, they lose the mineral rights and the potential revenue they could have generated from those rights,” Shen said.

The findings show that borrowers stopped defaulting on mortgages after the nationwide fracking boom, late in 2007, when extracting natural gas became technically feasible and profitable.

Natural gas extraction creates income for property owners in the form of signing bonuses and royalty payments from leases they sign with oil and gas companies, which typically pay between 15 to 25 percent of gas production profits.

“So one can see why it behooves a property owner in these areas to stay current on their mortgage payments,” Shen said.

The fracking process for extracting oil and natural gas from the earth has raised environmental concerns due to the amount of water it requires and the resulting contaminated wastewater. As fracking wells spread across the U.S, financial regulators, banks and real-estate investors also expressed great concern about the possible negative effect of fracking on mortgage performance.

Shen’s study found a much lower rate of mortgage defaults than elsewhere in the state from 2004 to 2011 and borrowers’ credit (FICO) scores showed a 40 percent increase amounting to an average score of 660.

The research examined nearly 372,000 residential mortgages originated in shale-gas fracking areas of Pennsylvania, a state with a history of oil and gas extraction that goes back to the beginning of the 20th century.

It is estimated there are approximately 300,000 fracking wells in the U.S. today. Almost 90 percent of new U.S. onshore oil and natural gas wells are hydraulically fractured and they account for more than half of the U.S. oil output. In the last decade, the fracking process has led to an eightfold increase in U.S. natural gas production.