April 18, 2024

U.S. Sues Deutsche Bank Over Mortgage Practices

In a complaint filed in Federal District Court in New York, the government accused a Deutsche Bank unit, known as MortgageIT, of “knowingly, wantonly and recklessly” failing to adequately scrutinize borrowers, and then lying to federal officials who pointed out shortcomings.

As a result, the federal government has made insurance payments of $386 million on bad loans, and expects to make payments of hundreds of millions more, the lawsuit said. The government is seeking triple damages as well as punitive damages.

The suit involves Deutsche Bank’s involvement with the Federal Housing Administration, an arm of the government that guarantees mortgages made to borrowers who are less qualified than those who have loans backed by the mortgage finance giants Fannie Mae or Freddie Mac.

MortgageIT was qualified to issue F.H.A.-backed loans, and from 1999 to 2009 the bank sponsored more than 39,000 F.H.A. loans, worth more than $5 billion, according to the complaint. The bank knowingly used the government guarantee on unqualified, risky loans, the complaint says, because it was able to then quickly sell the loans to investors.

The bank had “powerful financial incentives to invest resources into generating as many F.H.A.-insured mortgages as quickly as possible,” the complaint says.

Deutsche Bank acquired MortgageIT, a real estate investment trust, in the summer of 2006, as the bank sought to expand its presence in the American mortgage market. The complaint involves actions at MortgageIT before and after the Deutsche acquisition.

The F.H.A. was long a sleepy arm of the government, backing only a small portion of home loans made. But as trouble hit the mortgage market, the F.H.A. began guaranteeing far more loans. By 2009, officials had grown concerned that the agency had backed many loans that would fail, possibly costing taxpayers billions of dollars.

One way the F.H.A. tried to make sure the loans remained sound was to require banks to qualify as so-called “direct endorsement lenders.” The housing agency, which is part of the Department of Housing and Urban Development, made such lenders report their standards on a regular basis.

The complaint says that Deutsche “regularly lied to HUD to obtain and maintain MortgageIT’s Direct Endorsement Lender status.” In particular, the complaint said Deutsche did not monitor how often homeowners were defaulting on their mortgages immediately after receiving the loans.

In one case, for example, MortgageIT endorsed an application by a Colorado borrower who had no credit history, a violation of federal rules. Six months later the mortgage went into default, costing the federal government $191,000 in insurance claims.

As of this year, HUD has paid more than $386 million to cover losses on Deutsche’s F.H.A.-backed loans. Many of the losses, the complaint says, were caused by false statements the bank made to HUD to obtain the government guarantee.

The government has filed relatively few cases against big banks related to the financial crisis.

The Justice Department’s case on Tuesday was a civil case, not a criminal case, and it did not name any individual executives or workers. Deutsche Bank was one of the largest players in the American mortgage market, bundling up billions of dollars of mortgages into bonds it sold to investors.

The United States attorney for the Southern District of New York, Preet Bharara, will hold a news conference to discuss the case on Tuesday afternoon.

Jack Ewing reported from Frankfurt and Louise Story from New York.

Article source: http://www.nytimes.com/2011/05/04/business/04mortgage.html?partner=rss&emc=rss

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