The paydays during the boom
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By DAVID STREITFELD and GRETCHEN MORGENSON New York Times News - Published: October 19, 2008
After a sex scandal destroyed his promising political career and he left Washington, he eventually reinvented himself as a well-regarded advocate and builder of urban, working-class homes. He has financed the construction of more than 7,000 houses.
For the three years he was a director at KB Home, Cisneros received at least $70,000 in pay and more than $100,000 worth of stock. He also received $1.14 million in directors' fees and stock grants during the six years he was a director at Countrywide. He made more than $5 million from Countrywide stock options, money he says he plowed into his company.
He says his development work provides an annual income of "several hundred thousand" dollars. All told, his paydays are modest relative to the windfalls some executives netted in the boom. Indeed, Cisneros says his mistake was not the greed that afflicted many of his counterparts in banking housing; it was unwavering belief.
It was, he argues, impossible to know in the beginning that the federal push to increase homeownership 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."
From people dizzily drawing home equity loans out of increasingly valuable houses to banks racking up huge fees, few wanted the party to end.
"I'm not sure you can regulate when we're talking about an entire nation of 300 million people and this behavior becomes viral," Cisneros said.
Homeownership has deep roots in the American soul. But until recently getting a mortgage was a challenge for low-income families. Many of these families were minorities, which naturally made the subject of special interest to Cisneros, who, in 1993, became the first Hispanic head of the Department of Housing and Urban Development.
He had President Clinton's ear, an easy charisma, and a determination to increase a homeownership rate that had been stagnant for nearly three decades.
Thus was born the National Homeownership Strategy, which promoted ownership as patriotic and an easy win for all. "We were trying to be creative," Cisneros recalls.
Under Cisneros, there were small and big changes at HUD, an agency that greased the mortgage wheel for first-time buyers by insuring billions of dollars in loans. Families no longer had to prove that their incomes would remain stable for five years; three years sufficed.
And in another change championed by the mortgage industry, lenders were allowed to hire their own appraisers rather than rely on a government-selected panel. This saved borrowers money but opened the door for inflated appraisals. (A later HUD inquiry uncovered appraisal fraud that imperiled the federal mortgage insurance fund.)
"Henry did everything he could for home builders while he was at HUD," said Janet Ahmad, president of Homeowners for Better Building, an advocacy group in San Antonio, who has known Cisneros since he was a city councilor. "That laid the groundwork for where we are now."
Cisneros, who says he has no recollection of appraisal rules' being relaxed when he ran HUD, disputes that notion. "I look back at HUD and feel my hands were clean," he says.
Lenders applauded two more changes HUD made on Cisneros' watch: They no longer had to interview most government-insured borrowers face-to-face or maintain physical branch offices. The industry changed, too. Lenders sprang up to serve those whose poor credit history made them ineligible for lower-interest "prime" loans. Countrywide, which Angelo R. Mozilo co-founded in 1969, set up a subprime unit in 1996.
Cisneros met Mozilo while he was HUD secretary, when Countrywide signed a government pledge to use "proactive creative efforts" to extend homeownership to minorities and low-income Americans.
He met Bruce E. Karatz, the chief executive of KB Home, when both were helping Los Angeles rebuild after the devastating Northridge earthquake in 1994.
There were real gains during the Clinton years, as homeownership rose to 67.4 percent in 2000 from 64 percent in 1994. Hispanics and African-Americans were the biggest beneficiaries. But as the boom later gathered steam, and as the Bush administration continued the Clinton administration's push to amplify homeownership, some of those gains turned out to be built on sand.
Cisneros left government in 1997 after revelations that he lied to federal investigators about payments to a former mistress. In the following years, HUD continued to draw attention in the news media and among consumer advocates for an overly lenient posture toward the housing industry.
Cisneros says he was never aware of improprieties at KB or Countrywide, and worked with them because he was impressed by Karatz and Mozilo. Mozilo could not be reached for comment.
Still, Countrywide expanded subprime lending aggressively while Cisneros served on its board. In September 2004, according to documents provided by a former employee, lending audits in six of Countrywide's largest regions showed about one in eight loans was "severely unsatisfactory" because of shoddy underwriting.
HUD required such audits, and lenders were expected to address problems. Cisneros was a member of the Countrywide committee that oversaw compliance with legal and regulatory requirements. But he says he did not recall seeing or receiving the reports.
Nor, he says, was there ever a board vote about the wisdom of subprime lending.
"The irresistible temptation to engage in subprime was Countrywide's fatal error," he says. "I fault myself for not having seen it and, since it was not something I could change, having left." Cisneros left Countrywide's board last year. At the time, he expressed "enormous confidence in the leadership." In 2003, Cisneros ended his partnership with KB because, he says, he felt constrained working with just one builder. He formed a new company with the same mission, CityView, that has raised $725 million.
Karatz has a different recollection of why the partnership ended.
"It didn't become an important part of KB's business," he says. "It was profitable but I don't think as profitable in those initial years as Henry's group wanted it to be."
TROUBLES IN LAGO VISTA
Today in Lago Vista, many homeowners are just trying to get by. With association dues unpaid, residents cannot hire private security guards, and they say crime has increased. Salvador Gutierrez, a truck driver, woke up recently to see four men stealing the tires off his pickup. Seventeen houses are for sale, but there are few buyers.
Hugo Martinez, who got a pair of Countrywide loans to buy a two-bedroom house with no down payment, recently lost his job with a car dealership. He has a lower-paying job as a mechanic and can't refinance or sell his house.
"They make it easy when you buy," Martinez says. "But after a while, the interest rate goes up. KB Home says they cannot help us at all."
Five years ago, Carlo Lee and Patricia Reyes bought their first home, a three-bedroom house in Lago Vista.
After Patricia Reyes became ill last year and lost her job, they fell behind on their payments. Last month, Carlo Reyes was laid off from one of his jobs, assembling cabinets. He still works part-time at a hospital, but unless the couple come up with missed payments and fees, they will lose their home.
"Everyone isn't happy here in Lago Vista," Carlo Reyes says.
Countrywide was bought recently at a fire-sale price by Bank of America. Cisneros describes Mozilo as "sick with stress — the final chapter of his life is the infamy that's been brought on him, or that he brought on himself."
Karatz was forced out of KB two years ago amid a compensation scandal. Last month, without admitting or denying the allegations, he settled government charges that he illegally backdated stock options worth $6 million.
For his part, Cisneros says he is proud of Lago Vista. "It is inaccurate to say that we put people into homes that they couldn't afford," he says. "No one was forcing people into homes."
He also remains bullish on home building, despite the current carnage.
"We're not selling cigarettes," he says. "We're not drawing people into casino gambling. We're building the homes they're going to raise their families in."
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