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U.S. Hits Deutsche Bank, Mortgage Unit with Lawsuit Over Lending Practices

Source: WSJ - Chad Bray

Posted on 03 May 2011

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In a lawsuit filed on Tuesday in Manhattan federal court, U.S. authorities sued Deutsche Bank AG and a mortgage subsidiary for allegedly lying repeatedly about the quality of mortgages to be included in a government insurance program so that they could profit from the resale of those mortgages.

The suit alleges that Deutsche Bank and its MortgageIT unit "recklessly" selected mortgages that violated the rules of the Federal Housing Administration's mortgage-insurance program "in blatant disregard of whether borrowers could make mortgage payments." According to the lawsuit, those government-insured mortgages were then resold.

The FHA program has paid more than $386 million in insurance claims and costs as of February as a result of Deutsche Bank and MortgageIT allegedly approving mortgages that didn't qualify for the program, the lawsuit said. The U.S. government expects the program will be required to pay "hundreds of millions of dollars in additional claims" in the months and years ahead, according to the lawsuit.

"While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction, and the government has paid hundreds of millions of dollars insurance claims," the lawsuit said.

The complaint is seeking triple damages and penalties under the False Claims Act, as well as compensatory and punitive damages.

Preet Bharara, the U.S. Attorney in Manhattan, and officials from the U.S. Department of Housing and Urban Development are expected to discuss the civil complaint in more detail at a 1 p.m. Eastern time news conference Tuesday.

"We just received the complaint and are reviewing it," a Deutsche Bank spokeswoman said. "We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously."

Between 1999 and 2009, MortgageIT was a so-called direct endorsement lender, allowing it approve FHA insurance for more than 39,000 mortgages totaling more than $5 billion, according to the lawsuit.

The lawsuit alleges that Deutsche Bank and MortgageIT repeatedly lied in order to maintain the unit's status as a direct endorsement lender and failed to implement required quality-control procedures, such as failing to audit MortgageIT's early-payment defaults. MortgageIT allegedly submitted mortgages that weren't eligible for the FHA insurance program and falsely certified that they had conducted due diligence as required by the program's rules.

More than $258 million of the FHA claims and costs paid, so far, arose out of mortgages that defaulted within the first two years, according to the the lawsuit. An additional 7,500 mortgages, totaling more than $888 million in unpaid principal, have defaulted as of February without any claims yet having been paid, according to the lawsuit.

In 2007, the Connecticut Department of Banking reached a settlement with MortgageIT for allegedly failing to register at least 48 mortgage originators in violation of state statutes, paying $48,000 to support a nationwide mortgage licensing system.

Earlier this year, DB Mortgages, a U.K. unit of Deutsche Bank, was fined £840,000, or about $1.4 million, by the U.K. Financial Services Authority and ordered to pay £1.5 million to customers over alleged irresponsible mortgage lending. The FSA claimed that DB Mortgages breached a series of rules between 2006 and 2008, including applying unfair charges to persons who were behind on their mortgage payments.