Karatz is back

The former CEO of KB Home had disappeared from public view after being forced out of the company in an accounting scandal. But after settling government charges of illegally backdating stock options worth $6 million, Karatz has surfaced. He's quoted a couple of times in Sunday's NYT story about his ties to Henry Cisneros, who was on the board of both KB and Countrywide. The two companies worked closely in coordinating sales and lending, a connection that generated huge revenues at the height of the boom. Actually, Cisneros, Karatz and Countrywide CEO Angelo Mozilo might be described as a sort of unholy trinity.

In 2000, Mr. Cisneros returned to San Antonio, where he formed American CityVista, a developer, in partnership with KB, and became a KB director. KB’s board also included James A. Johnson, a prominent Democrat and the former chief executive of Fannie Mae, the mortgage giant now being run by the government. Mr. Johnson did not return a phone call seeking comment. It made for a cozy network. Fannie bought or backed many mortgages received by home buyers in the KB Home/American CityVista partnership. And Fannie’s biggest mortgage client was Countrywide, whose board Mr. Cisneros had joined in 2001.

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To get things rolling in Lago Vista, traditional bars to homeownership were lowered to the ground. Fannie Mae, CityVista and KB promoted a program allowing police officers, firefighters, teachers and others to get loans with nothing down and no closing costs. KB marketed its developments in videos. In one from 2003, Mr. Karatz declared: “One of the greatest misconceptions today is people who sit back and think, ‘I can’t afford to buy.’ ” Mr. Cisneros appeared — identified as a former HUD director — saying the time was ripe to buy a home. Many agreed.

"It started off fabulously," Karatz says in the Times piece. "It was probably, looking back, a little too ambitious to think that there would be sufficient local demand." Might we begin seeing his name pop up again? There had been speculation about what Karatz would do after his legal troubles were resolved – he is after all, still very wealthy and quite connected to the L.A. biz scene. But having played such a central role in the housing bubble, it’ll be hard for him start showing his face around town. Besides, he’s still embroiled in a bunch of shareholder litigation. Meanwhile, Cisneros, who was responsible for helping push homeownership during his time in the Clinton administration, says it was impossible to know that things would end so badly.

Once the housing boom got going, he suggests, laws and regulations barely had a chance. “You think you have a finely tuned instrument that you can use to say: ‘Stop! We’re at 69 percent homeownership. We should not go further. There are people who should remain renters,’ ” he says. “But you really are just given a sledgehammer and an ax. They are blunt tools.”