Feds sue Deutsche Bank, alleging mortgage fraud

The federal government sued Deutsche Bank on Tuesday, saying the bank committed fraud and padded its pockets with undeserved income as it repeatedly lied in order to join a government programme that insured mortgages.

The lawsuit in US District Court in Manhattan seeks to recover hundreds of millions of dollars in insurance claims that the government has had to pay when homeowners defaulted on their mortgages.

The lawsuit also asked for punitive damages.

The government said the bank profited from the resale of the risky mortgages, leaving the government to foot the bill. Mortgage insurance is issued by the Federal Housing Administration (FHA).

The lawsuit said the bank carried out the fraud through its subsidiary, MortgageIT, which employed more than 2,000 people at branches in all 50 US states.

In a statement, Deutsche spokeswoman Reneé Calabro said the bank had received the complaint and was reviewing it.

"We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously," she said.

The lawsuit against Deutsche Bank seeks to recover more than US$386 million that the Department of Housing and Urban Development has paid out in FHA insurance claims and related costs arising out of MortgageIT's approval of more than 3,100 mortgages.

The suit alleges that Deutsche Bank and MortgageIT failed to comply with HUD rules and regulations regarding required quality control procedures, and then lied about their purported compliance.

The government said the quality control violations were egregious, including the failure to review all early payment defaults and to implement minimal quality control processes.

The lawsuit noted that MortgageIT hired an outside vendor, Tena Companies Inc, to conduct quality control reviews of closed FHA-insured loans in 2004, but then never read letters that Tena wrote identifying serious underwriting violations.

"Instead, MortgageIT employees stuffed the letters, unopened and unread, in a closet in MortgageIT's Manhattan headquarters," the lawsuit said.

- AP