Bloomberg News

Deutsche Bank to Pay $202 Million Over Mortgage Fraud

May 10, 2012

Deutsche Bank AG (DBK) agreed to pay $202.3 million to settle civil claims that its MortgageIT unit lied to qualify thousands of risky mortgages for a federal insurance program in what the U.S. called a “massive fraud.”

The U.S. claimed in a lawsuit filed May 3, 2011, that Frankfurt-based Deutsche Bank and MortgageIT falsely certified that they properly assessed the default risk of borrowers, qualifying loans for insurance by the Housing and Urban Development Department’s Federal Housing Administration.

The bank admitted to some of the conduct alleged in the complaint, according to a statement today by the office of U.S. Attorney Preet Bharara in Manhattan. The U.S. sued under the False Claims Act, which permitted it to seek triple damages and penalties.

“MortgageIT and Deutsche Bank treated FHA insurance as free government money to backstop lending practices that did not follow the rules,” Bharara said in the statement.

U.S. District Judge Lewis Kaplan approved the settlement today, according to the statement.

“We are very pleased to have reached this settlement, for which we have already fully reserved, and to put this issue behind us,” Renee Calabro, a Deutsche Bank spokeswoman, said in an e-mailed statement. “This marks a significant step in resolving our mortgage-related exposures.”

‘Highly Marketable’

MortgageIT endorsed more than 39,000 loans for FHA insurance since 1999, making them “highly marketable for resale,” the U.S. said in its complaint. The FHA paid insurance claims on more than 3,200 of the mortgages, for a total of more than $368 million, according to the government. Another 7,500 mortgages, with unpaid principal balances of $888 million, defaulted without HUD paying any claims yet, according to the complaint.

Deutsche Bank bought MortgageIT in January 2007 for $429 million. The unit was closed in 2009.

After the acquisition, MortgageIT Chief Executive Officer Doug Naidus oversaw mortgage origination in Deutsche Bank’s residential mortgage-backed securities group, the government claimed in its complaint.

In the settlement, Deutsche Bank admitted responsibility for MortgageIT’s failure to maintain an adequate quality control program, its violation of HUD and FHA regulations, its endorsement of loans that weren’t eligible for FHA mortgage insurance, and other violations, according to the U.S. Attorney’s statement.

False Claims Settlements

Deutsche Bank admitted that it was in a position, after acquiring MortgageIT, to know that the unit’s operations didn’t comply with federal regulations, the U.S. said.

The agreement with Deutsche Bank is the largest of three False Claims Act settlements reached by Bharara’s office with banks alleged to have engaged in reckless mortgage lending, for a total recovery of $493.4 million, according to the statement.

The government settled lawsuits in February with CitiMortgage Inc., Citigroup Inc.’s home-loan unit, for $158.3 million and with Flagstar Bancorp Inc. (FBC:US)’s Flagstar Bank FSB unit for $132.8 million. A suit by the U.S. against Allied Home Mortgage Corp. is still pending.

The case is U.S. v. Deutsche Bank AG, 11-cv-2976, U.S. District Court, Southern District of New York (Manhattan).

To contact the reporter on this story: Bob Van Voris in New York at rvanvoris@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net


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