Wednesday, May 4, 2011
New York (FT.COM) -- The U.S. justice department has sued Deutsche Bank for more than $1 billion, accusing the German lender and a subsidiary of lying their way into a government mortgage scheme and "recklessly" endorsing risky loans for federal insurance.
"These companies repeatedly and brazenly breached the public trust," Preet Bharara, U.S. Attorney in New York, said Tuesday during a press conference.
The suit marks the latest effort by U.S. officials to hold lenders accountable for the financial crisis, and retrains the spotlight on an embarrassing episode for Deutsche and other Wall Street banks that ventured deeper into a U.S. mortgage market just before its historic descent.
U.S. officials allege that Deutsche and its MortgageIT arm profited from the resale of mortgages that would eventually leave thousands of Americans facing default or eviction while sticking the government with hundreds of millions in insurance claims.
According to the complaint, the U.S. government paid more than $386 million in claims and costs stemming from insurance approvals largely based on MortgageIT's false statements.
Federal officials are seeking treble damages and penalties. Costs stemming from MortgageIT loans are expected to increase, adding hundreds of millions of dollars in additional claims, the complaint said.
The complaint is another setback for Deutsche in the U.S. The bank was a prominent target in a recent Senate subcommittee report, which criticized its mortgage-linked trading practices during the crisis.
People familiar with the case say that Deutsche had sought a settlement for some time before Tuesday's announcement, but was unable to agree terms. Mr Bharara declined to comment on a potential settlement.
"We just received the complaint and are reviewing it," a Deutsche spokesman said. "We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously."
According to the suit, MortgageIT took advantage of a program that insured mortgages against possible defaults as a means to encourage banks to extend credit to borrowers who would fall short of normal underwriting standards. MortgageIT had been an approved lender in the program from 1999-2009.
The bank noted MortgageIT was a small player in the FHA scheme, and that about 90% of the loans now under scrutiny were written before Deutsche acquired the business.
Deutsche acquired MortgageIT for about $429 million in January 2007. By the end of 2008, the bank would begin to shut it down.
