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United States Sues Deutsche Bank for $1B over Defaulted Mortgages

The United States government has filed a lawsuit against ""Deutsche Bank"":http://www.db.com and its MortgageIT subsidiary, claiming that Germany's largest bank ""repeatedly lied"" to get into a federal program that allowed the company to select mortgages to be insured by the ""Federal Housing Administration"":http://www.fha.gov (FHA) against default.

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Once part of the program, U.S. authorities say Deutsche Bank ""recklessly"" selected mortgages that violated the program rules ""in blatant disregard"" of whether borrowers could make their mortgage payments.

According to the lawsuit filed Tuesday in a federal court in Manhattan, the German bank and its mortgage unit reaped profits from reselling these government-backed mortgages to investors even as thousands of borrowers faced default and eviction.

The U.S. government says it has already paid out hundreds of millions of dollars in insurance claims as a result of Deutsche Bank's actions and expects to be out hundreds of millions more on future defaults.

The United States is seeking triple damages and penalties to the tune of $1 billion on the grounds that Deutsche Bank violated the federal False Claims Act and common law.

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The federal program referred to in the suit is FHA's Direct Endorsement Lender program, which gives private lenders the authority to endorse mortgages that qualify for FHA insurance. In reviewing mortgages for eligibility, the complaint says participating lenders are required to review each mortgage to ensure compliance with HUD rules and implement a mandatory quality control plan, which includes an audit of mortgages that default soon after closing.

According to the complaint, between 1999 and 2009, MortgageIT was an approved Direct Endorsement Lender and endorsed more than 39,000 mortgages for FHA insurance, totaling more than $5 billion in underlying principal.

Deutsche Bank acquired MortgageIT in 2007. The suit states that the two entities ""had powerful financial incentives to invest resources into generating as many FHA-insured mortgages as quickly as possible for resale to investors,"" as these loans were highly marketable since they were insured by the ""full faith and credit of the United States.""

According to the complaint, Deutsche Bank and is subsidiary consistently lied to HUD to maintain MortgageIT's status as a Direct Endorsement Lender, failed to implement the quality controls required by HUD, did not audit early payment defaults, and neglected to address deficiencies in its quality control system even though these deficiencies were reported to upper management.

As of February 2011, HUD has paid more than $386 million in FHA default claims resulting from Deutsche Bank and MortgageIT's approval of mortgages for FHA insurance and the ""false statements"" made by the two entities to obtain U.S.-backing on thousands of individual loans, according to the lawsuit.

Deutsche Bank's New York office did not immediately return requests for comment.

About Author: Carrie Bay

Carrie Bay is a freelance writer for DS News and its sister publication MReport. She served as online editor for DSNews.com from 2008 through 2011. Prior to joining DS News and the Five Star organization, she managed public relations, marketing, and media relations initiatives for several B2B companies in the financial services, technology, and telecommunications industries. She also wrote for retail and nonprofit organizations upon graduating from Texas A&M University with degrees in journalism and English.
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