Feds Sue Deutsche Bank Over Mortgages

by Paul Springer

If you Googled “Deutsche Bank” this morning, only one item came up above the “Welcome to Deutsche Bank – Passion to Perform” link: a notice that the federal government is suing the bank for mortgage fraud.

The Manhattan U.S. Attorney’s Office blasted the bank in a complaint filed Tuesday:

DeutscheBank and [subsidiary] MortgageIT repeatedly lied to be included in a government program to select mortgages for insurance by the Government. Once in that program, they recklessly selected mortgages that violated program rules in blatant disregard of whether mortgage borrowers could make mortgage payments.

In other words, Deutsche Bank allegedly behaved like any number of other banks that trafficked in liar loans in the build up to the subprime collapse.

The bank called the allegations “unreasonable and unfair,” according to Bloomberg. Deutsche Bank has not yet filed a reply to the civil  suit.

The suit alleges that the bank lied in order to issue Federal Housing Administration mortgages underwritten by Department of Housing and Urban Development guidelines, and that it did so in a way that left the government on the hook to guarantee loans that borrowers were unable to pay back.

HUD has had to pay off over $350 million in loans, the lawsuit says, and reliance on the False Claims Act allows the government to claim treble damages – making this a potential $1 billion liability for the bank.

According to the U.S. Attorney’s account, the bank underwent astonishing gyrations to spurn underwriting guidelines and also ignored warnings from an outside auditor.

In the bigger picture, The Wall Street Journal suggests, the purported fraud was part of an industry-wide plan to issue smelly liar loans and repackage them in sweet-smelling derivatives:

During the housing boom, the German bank and other Wall Street firms bought lenders in order to feed their mortgage operations. Loans were pooled into mortgage bonds and sold to investors, a lucrative business at the time, but one that helped fuel the financial crisis and has come back to haunt the firms.

“MortgateIT took the only staff member dedicated to auditing FHA-insured mortgages, and reassigned him to increase productions instead,” the lawsuit claims.

Warnings from an external auditor were also tossed in the circular file:

And when an outside auditor provided findings to MortgageIT revealing serious problems, those findings were literally stuffed in a closet and left unread and unopened.

MortgageIT did not verify borrower’s employment or source of funds, according to the complaint.

By the end of 2007, the lawsuit claims, the one employee who was supposed to audit FHA mortgages was fully employed in loan production.

In the case of one particular underwriter, the U.S. Attorney alleges, the bank had information as early as 2004 that systematic underwriting of ineligible and fraudulent mortgages was taking place. But there was no system in place for oversight or management of defaults.

The U.S. Attorney claims that quality-control procedures would have prevented this one underwriter from submitting about 100 mortgages that cost the FHA millions of dollars.

And now, as the real estate market wallows in a sea of foreclosed properties, it is nearly impossible for even the most well-qualified borrower to obtain a walk-on-water loan to purchase a home.

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