Bair abridged

FDIC chairman Sheila Bair -- who was the first member of the Bush administration to push for a rate freeze, back in October -- didn't get much mic time at today's Treasury Department press conference announcing an agreement with lenders to do just that.

But Bair did have her say during a House Financial Services Committee hearing on the topic. Here's an abridged version of her responses to some of the criticism that's been leveled at the plan (which she prefers to characterize as "misconceptions"):

Critics: Freezing rates on up to 1.2 million subprime ARM loans for five years will create a windfall for subprime borrowers. 

Bair (paraphrased and abridged): Not likely. Those who are eligible for a rate freeze are likely to be paying 7 percent to 9 percent starter rates. The average starter rate of subprime hybrid mortgages originated in 2006 was 8.29 percent.

Critics: Restructuring will cheat investors in the securities that funded these loans out of expected returns (and discourages future investment in mortgage securitizations, making the credit crunch even worse).

Bair (paraphrased): Nobody actually expected borrowers would stay in these loans and pay the higher reset rate. It was assumed they would refinance. Only 1 in 30 hybrid loans (those with 2- to 3-year introductory rates) made in 2003 is still current and paying the full rate after reset. Almost half of the subprime hybrid loans made in 2006 had LTVs over 90 percent, and debt-to-income of above 40 percent. With the fully indexed rate five percentage points above the starter rate, they were obviously not designed for the long run.

Critics: Freezing rates just puts off the inevitable foreclosure.

Bair (paraphrased): Only people who are current on their loans will be eligible for a rate freeze. That some of these borrowers have been making payments for two years at the starter rate bodes well for their ability to repay at that rate over the long run. The reason people are getting into trouble with hybrid ARMs is not because their financial circumstances have changed, but because of the loan's features. Now that house prices are no longer skyrocketing or are headed down, it's impossible for them to refinance before their rates reset, as both borrowers and lenders had intended.

Critics: Restructuring can't be done on a widescale basis.

Bair (paraphrased): Some servicers say they are obligated to maximize return to investors by establishing a new payment rate for each loan depending on its unique circumstances. But a loan-by-loan approach would mean hundreds of thousands of foreclosures and greater losses to borrowers and investors. A systematic approach to loan modifications involves creating categories of borrowers -- those who can't afford their current subprime ARM loans, those who have remained current and will be able to refinance before a reset, and those who can afford their current ARM loans but won't be able to refinance or continue to make payments after a reset. Freeze the rates on the last group, and everyone comes out ahead. Some servicers are already using this approach to loan modifications, and they say it reduces the cost and complexity of restructuring.

Read testimony of Bair and other witnesses here.

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