Last month brought the story of a county manager in Oregon who was receiving a home loan along with other good benefits.
This month, its a city manager in California whose home loan has made the news three times this week.
Oakley, California (population 35,432): Oakley Mayor Jim Frazier apologized this week for a lucrative housing benefit the city recently gave its top administrator that sparked a public backlash, promising to rescind the deal. Frazier began Tuesday’s City Council meeting by reading a statement in which he acknowledged that he and the other council members who approved the lucrative home equity share agreement with City Manager Bryan Montgomery had made a mistake.
The deal involved forgiving the balance on the home loan the city had given Montgomery in 2005, which would have allowed him to go from being $196,500 underwater on his mortgage to being guaranteed at least $170,000 in equity, amounting to a $366,500 windfall. Frazier, who recently announced that he is running for a state Assembly seat, called for the council to rescind the agreement at its next meeting. Council members cannot act on matters that do not appear on the agenda. Frazier noted that he and several of his colleagues had offered Montgomery the form of housing assistance as an incentive for him to stay, and pointed out that the city manager has been handling the responsibilities of three department heads whose jobs fell victim to budget cuts.
Councilman Randy Pope cast the dissenting vote in last month’s 4-1 decision to give Montgomery and the city equal ownership in Montgomery’s Brooks Court home. The agreement also guaranteed the city manager at least $170,000 from the sale of the property. At that time, the City Council voided its previous agreement with Montgomery, forgiving the $508,000 remaining on a 30-year, 2.5 percent interest home loan the city had issued him.
News of that action angered a number of residents, who roundly criticized what they considered the council’s largesse at taxpayers’ expense. And some who showed up Tuesday to protest were not appeased by Frazier’s mea culpa. Eve Diamond, one of two residents who addressed the council directly, expressed shock that the council canceled Montgomery’s debt at a time when many other residents have lost their homes to foreclosure. Jon LaBarge echoed her doubts about the sincerity of the council and Montgomery, who had announced earlier in the day that the public backlash had prompted him to withdraw his acceptance of the new agreement.
Montgomery sent a letter to council members before the meeting requesting that they nullify the home equity share agreement they had approved as part of his performance evaluation. He proposed returning to the previous arrangement, which had been offered to entice him to move from Nevada to the Bay Area. Montgomery had said previously that his home’s value has dropped so much that at this point he could not recover what he has already invested in the property. The house he bought for $685,000 is now valued by Contra Costa County at $311,500. In his letter, he emphasized that the home equity share agreement is legal and well-intentioned, and thanked council members for their “significant and courageous action.” But Montgomery also indicated that because the deal had been cast in the “most negative light possible,” it triggered a backlash.
Since the deal was reported, residents have expressed their outrage in online discussions, including a Facebook page.
Oakley loaned Montgomery $620,000 in 2005 when he came to the city, $70,000 of which was immediately repaid as part of a bridge loan. The city also had deferred Montgomery’s mortgage payments since April 1, 2009, and had waived the interest during that period.
Montgomery, who earns an annual base salary of $190,770, indicated in his letter that on Tuesday he paid the past three months of his mortgage and from now on will have the amount automatically deducted from his paycheck. Montgomery declined to respond to an email from this newspaper asking whether he also would be making the other payments that had been deferred since 2009, saying he would no longer discuss the issue.
But the matter isn’t over, according to Frazier, who in his announcement Tuesday said he would be asking the rest of the council to remedy other aspects of the situation. Frazier wants council members to:
- Bring in an independent adviser to work with Montgomery on restructuring the kind of housing assistance he receives.
- Discuss this issue in public from now on.
- Ask Montgomery to apply to a commercial lender for the approximately $508,000 he still owes the city.And, if the city manager can’t get a loan for the full amount, Frazier proposed renegotiating the terms of his original agreement with an outside party. He asked the council in this case to:
- Change the 2.5 percent interest rate to one in keeping with the current market.
- Require Montgomery immediately to pay the city interest on the 27 months of deferred mortgage payments he received.
- Prohibit all future deferrals of mortgage payments.
- Come up with a plan for recovering a loss on the sale of Montgomery’s home if he leaves before 2020.
The Oakley City Council had given its city manager what amounts to a $366,500 bonus as part of a sweetheart deal to rescue him from an underwater mortgage. The generous taxpayer-funded payoff far exceeds loan restructuring terms banks would offer borrowers who owe more than their homes are worth. Under the council’s agreement with Bryan Montgomery, manager of the community of 35,000 people, the city forgave a home loan it had issued him and received in exchange a far-less-valuable partial ownership of his property. It was the third time Montgomery received mortgage assistance from the city. When he took the job in 2005, the city issued the loan at an exceptionally favorable interest rate. Then, for the past 2 1/2 years, the City Council had allowed Montgomery to defer monthly payments without accruing additional interest.
The City Council agreed to the latest deal without consulting an outside adviser and after negotiating directly with Montgomery in closed session. That private gathering violated the state open-meeting law because a council majority cannot legally negotiate compensation in private with an employee. Michael Martello, a government attorney for 30 years and an expert on California conflict-of-interest law, says Montgomery’s dual role negotiating with the council a major change to his home loan, benefitting him at the expense of the taxpayers he was supposed to be protecting, raises concerns of ethical and legal conflicts of interest. Finally, the huge magnitude of the bonus, equal to nearly two years of Montgomery’s salary, appears to make it an illegal gift of public funds, Martello says. Oakley City Attorney Derek Cole, who was present during the closed-door discussions, denies laws were broken.
The public notice of the accord included a misleading report from Mayor Jim Frazier that was ghost-written by Montgomery. The report was prepared for the Sept. 27 public approval of the deal, which had already been bargained behind closed doors. The analysis contains no disclosure of the taxpayer cost. Instead, the Frazier/Montgomery memo claims “the fiscal impact of the equity share arrangement is unknown and subject to the market at the time the property is sold.” The important accounting question in evaluating the cost of the deal is not what the house will sell for sometime in the future; the issue is what the house is worth today — and that can be easily determined through an appraisal.
It’s been six years since Montgomery, 42, was recruited from Nevada and received the mortgage to help him ease into the pricier California real estate market. He bought his 3,361-square-foot Brooks Court abode for $685,000 with aid of a $550,000 mortgage from the city. The loan, at 2.5 percent annual interest, was to be paid off in 30 years. Montgomery last month owed the city $508,000 on the loan. Meanwhile, according to his county records, the sagging real estate market had depressed the home’s value to $311,500. In other words, he was underwater by $196,500.
Under the new deal, the council forgave the loan balance. In exchange, the city took 50 percent ownership of the house. But Montgomery is guaranteed at least $170,000 from a future sale, even if his half of the house is worth less. Thus, Montgomery instantly went from $196,500 underwater to owning $170,000 of equity, a net gain of $366,500 — all at taxpayer expense.
Once reached, the deal was placed on the council’s public consent calendar, the section of the agenda for routine items. The item piqued the curiosity of reporter Rowena Coetsee, whose story appeared Oct. 1.
Councilman Randy Pope objected to the Montgomery deal. Pope’s four council colleagues disagreed. Frazier insists “it is not costing the city” because the property has not been sold. By that logic, retirement accounts haven’t really lost money if we haven’t cashed them out. And homeowners with loans greater than the value of their houses aren’t underwater until they actually sell their properties.
Frazier claims the council acted because it didn’t want to lose Montgomery. But the deal contains no incentive for him to stay. For example, the council could have phased in a loan reduction, rewarding Montgomery each year he remained. Instead, this deal guarantees him cash if he sells the house and, hence, makes it easier for him to move.
Frazier also says the deal protects the city because Montgomery could have walked away as many underwater homeowners have done. But if Montgomery had defaulted, the city would have owned the entire house rather than the half it now owns. Second, under the city manager’s contract, defaulting would have been grounds for termination. Third, city managers who want to preserve their careers don’t want defaults or foreclosures on their records.
Loan modifications are usually for people struggling to make payments. On his salary, Montgomery should have had no problem covering his $2,173-a-month obligation. Nevertheless, the city had let him skip payments since April 2009, more than offsetting for him the furlough pay cut that other city employees had to absorb. Even with the pay cut, Montgomery earns about $200,000 a year in salary, deferred compensation and vehicle allowance. On top of that, the city is paying about $34,000 a year toward his pension plan. Read more at the Contra Costa Times.