Lily Shen, assistant professor of finance, Clemson University College of Business Clemson University
Could an oil and natural gas extraction technique that has revolutionized America's energy industry also have a positive impact on mortgage defaults?
The answer is "yes," according to a new study from Clemson University.
Lily Shen, assistant professor of finance at Clemson University's College of Business, analyzed data from 2004 to 2011. Her research found that mortgages which originated in the regions of Pennsylvania in which hydraulic fracturing (also known as "fracking") occurs, had a mortgage default rate 58 percent lower than the state average.
Fracking is a technique in which fluids consisting of more than 99% water and sand, along with about .5% other chemicals, are injected under high pressure into shale rock formations. This process creates "fissures" that free up natural gas, which is then extracted for use as an energy source.
“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.
According to Shen's research, borrowers ceased defaulting on mortgages after the nationwide fracking boom, which began in 2007. Property owners who own land on which fracking occurs generate income through signing bonuses and royalty payments from leases signed with oil and gas companies. Those bonuses and payments "typically pay between 15 to 25 percent of gas production profits," according to a University of Clemson press release.
Further, Shen’s study also found that the borrowers' credit (FICO) scores showed a 40 percent increase.
While some environmental activist groups have loudly opposed fracking, one South Carolina veteran leader said the Clemson study shows that fracking's economic benefits complement its national security ramifications.
“People don’t realize that without this new energy revolution, America would be hurting,” says William Schachte, a retired U.S. Navy rear admiral and volunteer chairman of South Carolina’s Vets4Energy. “Beyond providing an abundance of North American energy, lowering gasoline and electricity costs and improving the environment; it has saved millions of American jobs. Jobs that have kept families in their homes, paying taxes, and supporting themselves."
Vets4Energy is a national volunteer group of American military veterans who advocate for policies that increase the country's energy independence.
"Our country would be in a different place had this energy stayed in the ground," added Schachte. "Our national, energy and economic security would definitely be much weaker.”
Clemson University is touting Shen's research as the very first to link fracking with mortgage performance. In a press release, Clemson also said the research "seems to debunk a widely held belief that fracking has devastating impacts on the mortgage market."
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