AN ANALYSIS OF THE EFFECTS OF THE REMOVAL OF THE YIELD CEILING ON FEDERALLY INSURED MORTGAGES IN CANADA.

The Canadian experience in removing the ceiling on federally insured mortgage loans provides a good illustration of the structural implications of the ceiling. After the ceiling was removed, the ratio of the conventional mortgage rate to the NHA rate fell from 112.8 percent to 103.0 percent, indicating that the ceiling provided a benefit of approximately 10 percent of the conventional mortgage rate for NHA borrowers. On the other hand, the ceiling substantially reduced the availability of this credit since the proportion of financial institution mortgage lending for new residential construction that was federally insured almost doubled after the ceiling was removed. Moreover, this reduction in availability fell primarily on low income borrowers since the proportion of NHA loans going to the bottom third of the income distribution rose from approximately 13 percent to 30 percent after the ceiling was removed. Thus, the removal of the rate ceiling on federally insured mortgage loans increased the cost of this credit by approximately 10 percent of the conventional mortgage rate, but substantially increased the availability of this credit, especially for low income borrowers. [ABSTRACT FROM AUTHOR]