The US Justice Department sued German giant Deutsche Bank Tuesday for more than $1 billion for mortgage fraud, saying the bank illegally obtained government insurance for substandard mortgages during the US housing boom.
Deutsche Bank and its subsidiary MortgageIT “repeatedly lied to be included in a government program to select mortgages for insurance by the government,” the Justice Department complaint said.
“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 in insurance claims, with hundreds of millions of dollars more expected in the future,” it said. The government asked the court to award it triple the amount it has already paid out on mortgages that should not have been insured, an amount that could run over $1 billion, as well as other compensation and punitive damages.
“MortgageIT and Deutsche Bank ignored every type of red flag and breached every duty of due diligence before underwriting thousands of federally insured mortgages,” said US attorney Preet Bhahara.
“While the homes the defendants issued loans for may have been built on solid ground, the defendants’ lending practices were built on quicksand.”
The suit, filed Tuesday in New York federal district court, said that MortgageIT, acquired by Deutsche Bank in January 2007, insured 39,000 home loans worth more than $5 billion with the Federal Housing Administration (FHA) in the decade to 2009.
The mortgages were “recklessly” approved by the company in “blatant disregard” of whether the borrowers would be able to make payments on them. Both the bank and MortgageIT “made substantial profits through (the) resale of these FHA-insured mortgages,” many of which later ended up in default, the complaint said.
Despite the mortgages’ low quality, MortgageIT falsely claimed it had performed due diligence and asserted them as eligible for FHA insurance. It also failed to monitor defaults as required, the suit alleged.
“MortgageIT took the only staff member dedicated to auditing FHA-insured mortgages and reassigned him to production instead,” it said.
The company also “literally stuffed” into a closet unopened, unread outside auditor reports on the problem, it said.
Deutsche Bank’s and MortgageIT’s mortgage operations were in “egregious violations” of FHA requirements. The result was that, not long after being sold on to investors by Deutsche Bank and its subsidiary, thousands of the loans went into default, costing the insurer while the bank profited.
The government said it had paid out $386 million as of February this year for claims on 3,100 home loans, 1,100 of which defaulted within one year.
It expected to pay “hundreds of millions of dollars more” in the future on another 7,500 more loans currently in default but insurance claims have yet to be filed or paid.
Germany’s biggest bank rejected the charges and pledged to mount a vigorous defense.
“The suit is unfounded and we intend to defend ourselves vigorously against this action,” a Deutsche Bank spokesman told AFP, declining to comment further.
In late trading on the Frankfurt stock exchange, shares in Deutsche Bank were down 2.21 percent at 43.22 euros.
New York, May 3, 2011 (AFP)
