SAN JOSE -- San Jose has quietly granted extended repayment terms to two former city officials on home loans offered as a recruitment perk that are now underwater.
The extension of terms for officials who would have had to pay the city back within six months of leaving their jobs hasn't cost taxpayers, who otherwise could be stuck with a loss if foreclosing and selling the property would not cover all the debt.
But the city's term extension, done administratively in 2011 without City Council approval, highlights the ongoing risks to taxpayers of a recruitment perk that has come under growing scrutiny. San Jose and the Santa Clara County Office of Education have recently been saddled with underwater loans on former officials' homes.
"If it avoids the possibility of the city taking a loss, then I'm OK with the action," said Councilman Pete Constant, a critic of the perk who added he was "a bit surprised" the move was made without notifying the council. "However, I have serious concerns about the city providing executive home loans to people who make such significant salaries. The risk to taxpayers is far too high in this economic environment."
San Jose began offering executive home loans in 2000 at the peak of the dot-com boom. Officials in San Jose and other cities said it was critical to drawing executive talent to pricey Silicon Valley. San Jose at one point held seven low-cost
But the loans came into question in 2008 after the council declined to reappoint Barbara Attard, the former independent police auditor, who had clashed with the police chief. Attard had taken a city loan -- limited to $250,000 -- to buy a $353,000 downtown condominium with no money down and a $100,000 first mortgage from a private lender. Under the deal, she paid 2.86 percent interest to the city, a rate pegged to what San Jose would expect to earn on its investments.
But when the council effectively fired Attard, her condo's value had dived with the collapsing real estate market to as little as $250,000, about what she would owe the city within six months.
Under state law, the city would be forced to take a loss if selling the unit would not pay off all the loans. So the council ultimately forgave Attard's loan, took the deed to her condo instead of foreclosing, and paid off the $94,000 outstanding on her first mortgage. The city is now renting the condo through a property management firm for $1,150 a month.
More recently, the Santa Clara County Board of Education sued former Superintendent Charles Weis last month after he walked away from the luxury San Jose condo he had bought with a loan from the board. Weis had sought to hand title to the condo over to the school board after he retired in June, arguing it was worth less than the $890,000 he had paid in 2008 when he was hired.
The board also has sought to renegotiate loan terms for Weis' successor, Xavier De La Torre, who bought his house in San Jose's Cambrian neighborhood in May with board loans of $500,000 at 2 percent interest and $460,000 at 3 percent interest.
Some San Jose loan holders have since repaid the city. Harry Mavrogenes, the former redevelopment chief who retired in June 2011, and John Stufflebean, the former environmental services director who left to work for Sunnyvale two months later, have both returned the money.
But two others are now on an extended payback plan due to underwater mortgages: Mark Danaj, the former human resources director who left in January 2011 to work for Fremont, and Stephen Ferguson, the former information technology director who left in March 2011 to attend to his wife's illness.
Danaj used the $250,000 city loan plus a $337,000 first mortgage to buy a $660,000 home in 2003. Ferguson used the $250,000 city loan plus a $25,000 first mortgage to buy a $290,000 condominium. City spokesman David Vossbrink said both properties are now underwater. The city manager extended Danaj's repayment three years and Ferguson's five years due to "adverse market conditions," he said.
"The city manager has the delegated authority to modify the notes to protect the city's interests," Vossbrink said, adding that the rates -- 4.91 percent for Danaj and 4.52 percent for Ferguson -- "are now higher than market."
"So we're doing OK in that regard," Vossbrink said.
Contact John Woolfolk at 408-975-9346. Follow him at Twitter.com/johnwoolfolk1.