Deutsche Bank called the charges "unreasonable and unfair," and said it planned to defend against the lawsuit "vigorously."
According to U.S. Attorney Preet Bharara, the bank "ignored every type of red flag and breached every duty of due diligence before underwriting thousands of federally insured mortgages." Bharara also said, "while the homes the defendants issued loans for may have been built on solid ground, the defendants' lending practices were built on quicksand. Ultimately, prudence was trumped by profit, and good faith took a back seat to good fees."
At issue, as the New York Times explains, is Deutsche Bank's relationship with the Federal Housing Authority, an agency of the Department of Housing and Urban Development (HUD) that guarantees mortgages made to borrowers who don't qualify for loans from the major government-sponsored clearinghouses for home loans, Fannie Mae and Freddie Mac.
According to the complaint, MortgageIT, a unit of Deutsche Bank, issued more than 39,000 such loans between 1999 and 2009, worth more than $5 billion. Because the loans had won government backing, the bank was then able to turn around and sell them to investors--in the same fashion that other Wall Street forms were repackaging home loans as investment securities.
But in order to win the crucial cachet of an FHA-guaranteed mortgage, MortgageIT and Deutsche Bank had to file yearly certifications, affirming that the loans met HUD's standards. And federal prosecutors now allege that when the bank filed those documents, it "repeatedly lied to H.U.D. to obtain and maintain MortgageIT's Direct Endorsement Lender status." In part, the federal indictment alleges, the bank did not actually monitor the default rate of the securitized loans, even though it claimed to be doing so.
By this year, around a third of MortgageIT's FHA-backed loans had defaulted, the government claims--and says that the resulting cost to taxpayers will be a around $1 billion.
Note - Deutsche Bank didn't buy MortgageIT until the start of 2007. However, the lawsuit involves activities at MortgageIT that occurred both before and after the DeutshceBank purchase.
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