Transcript: Recipe for Disaster?

This is a partial transcript from "Your World with Neil Cavuto," June 30, 2005, that was edited for clarity.

NEIL CAVUTO, HOST: Well, skyrocketing home prices, no-money-down loans and a rate-hiking Fed, could that be a combined recipe for disaster?

Who better to ask than the CEO of home building giant K.B. Home (KBH), Bruce Karatz, and the chief of mortgage giant of Countrywide Financial (CFC), Angelo Mozilo, both of them making some news today.

Angelo, what does it involve?

ANGELO MOZILO, CEO, COUNTRYWIDE FINANCIAL: It's a partnership. Two things. It involves really two steps.

One is, we purchased KB Home mortgage company. And, secondly, we established a 50-50 joint venture, so it's a win-win for both. And we end up processing, hopefully, all of the loans on the homes sold by Bruce.

CAVUTO: So, in other words, a lot of your purchases come. He's the financing vehicle.

BRUCE KARATZ, CEO, KB HOME: Exactly. And we've got the best.

CAVUTO: Yes. He is. He's been around for a long time.

Let me ask you about this situation with the Fed and whether you worry that, with every hike, he's pushing it?

KARATZ: Well, so far, every hike has resulted in lower long-term rates, so for...

(CROSSTALK)

CAVUTO: Eventually, that's not going to happen.

KARATZ: Well, that's what we have been saying. But, in the meantime, rates, 10-year, is at very attractive levels. And so affordability is high. I can't figure out exactly what the Fed is doing.

(CROSSTALK)

CAVUTO: All right. Now, we're showing you the regions of the country where you are big, pretty much in all the key areas of the country, but particularly out West and along the Southeast, that's been seeing double-digit advances. Do you worry that you are in all the too-hot areas?

KARATZ: You know, the reason they're hot is because there is a shortage of product available. It isn't just magic. And it isn't just interest rates.

It's because there is a growing population and more people want to buy than there is product to buy. And so that pushes prices.

CAVUTO: Angelo, I was asking during the break, you've got to be very vigilant about the credit quality, the credit worthiness of your clients. Do you ever worry that some iffy guys are getting through the cracks?

MOZILO: Well, you know, that's right. I worry about everything. I'm paid to worry.

The thing that concerns me would be that the degree of speculation that's going on, particularly in the condo community, particularly South Florida, Vegas and those areas, some areas of the country where they have a lot of condos. So, speculation concerns me.

In terms of the people who are purchasing homes to live in, the credit quality has been holding up quite well, and I think the proof of that is, our delinquencies and foreclosures are at all-time lows.

CAVUTO: But when people are applying to get homes, are they doing — we hear 40 percent or more are doing it with no money down. I mean, are they that heavily leveraged?

MOZILO: Well, that sounds high to me. I don't think in our case it's 40 percent.

You know, I would say probably around the 10 or 15 percent level would be my guess, as to no money down. The issue that I would be concerned about are the people who are taking out loans that could explode on them, you know, as rates rise.

CAVUTO: Does that happen with you?

MOZILO: It has not.

CAVUTO: It has not?

MOZILO: It has not.

As Bruce pointed out, which is true, as they raise the short-term rates, the 10-year, which the mortgage rates are benchmarked off of, have not only remained steady, but have gone down since they started raising rates.

CAVUTO: Yes.

One argument, Bruce, that's been raised with the Fed's constant rate hikes, the ninth now today, is that it does want to prick this housing bubble.

KARATZ: Well, I think the Fed's got other problems than to try to figure out how to regulate housing. And I certainly hope they're not focused on that.

And housing has been one of the real foundation of the growth in our economy. As anemic as it is, housing is one of those areas that is moving it along from an employment standpoint.

CAVUTO: And you have been saying that's what does it, right? I mean, if job growth is what determines the housing rate.

KARATZ: That's right. Very important.

CAVUTO: If you've got that, then you've got everything.

KARATZ: That's right. That's right.

CAVUTO: Right?

KARATZ: So you don't want to kill that golden goose.

So I think, you know, have they done enough? Who knows. For the moment, I don't think it's had any adverse effect on housing. To the contrary, demand still is continuing in a stable, good environment.

CAVUTO: Yes. You say the same thing?

MOZILO: I would say yes.

You know, in fact, I wonder — and the Fed has to ask themselves, if they ever ask themselves anything — why would they want to deter the growth that we have had in the value of housing? Because that's how people build equity.

CAVUTO: I have a crackpot theory on this. You guys are the experts, but I think they're still kicking themselves because they missed the whole Internet boom. And they're damned convinced housing is that boom today. So they're going to do their best to bash you guys.

MOZILO: Yes.

Well, you know, that may be the case. I don't know what the genesis of it is, but I think it is a shame — particularly when you see in middle-class and lower to middle-income areas, where values have gone up, and this is the first time these people have seen the opportunity to gain some wealth, to take that wealth out and to buy a bigger house or do something else with it.

And it would be almost criminal if the Fed tried to pinch that bubble of opportunity.

CAVUTO: I know you can't predict where rates will go, but the consensus had been in August, you know, Bruce, they're done with this. Now that was called into question, given the statement today, as if anyone can understand what these guys say, by the way.

KARATZ: Right.

CAVUTO: But it's going to drag on.

KARATZ: Yes.

CAVUTO: Does that worry you?

KARATZ: You know, I think what we're concerned about is whether or not there is inflation. There doesn't seem to be signs of concern about inflation. I think long-term rates are going to be attractive for quarters to come.

CAVUTO: Yes.

KARATZ: And I think that bodes well for housing.

CAVUTO: Bruce, good seeing you.

Angelo, good seeing you.

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