Deutsche Bank and its subsidiary MortgageIT are accused of reckless lending in a lawsuit filed today by the federal government.
The suit accuses Deutsche Bank and its mortgage unit of lying to be included in a Federal Housing Administration program to insure mortgages, Reuters reports. The complaint alleges the lenders violated program rules, disregarding whether borrowers could make payments, and then profited from resale of the mortgages.
“While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction,” says the complaint (PDF posted by the Wall Street Journal Law Blog). “The government has paid hundreds of millions of dollars in insurance claims, with hundreds of millions of dollars more expected to be paid in the future.”
The suit alleges that MortgageIT contracted with an outside vendor to conduct quality control reviews of FHA-insured loans, but no one at MortgageIT read any of the findings as they arrived in letters in 2004. “Instead, MortgageIT employees stuffed the letters, unopened and unread, in a closet in MortgageIT”s Manhattan headquarters,” the suit says.
In December 2004 MortgageIT hired a quality control manager, who found the unopened letters, but her preliminary findings produced no responses from branches underwriting mortgages. Upper management did not respond when she complained, the suit says.
The suit claims violations of the False Claims Act, breach of fiduciary duty, and gross negligence, and seeks treble damages.
A Deutsche Bank spokesperson said the bank considers the lawsuit to be unfounded, Dow Jones Newswires reports.
The U.S. Attorney’s Office in Manhattan will announce the civil fraud suit later today, according to the Wall Street Journal (sub. req.), the Wall Street Journal Law Blog and Bloomberg News.
Deutsche Bank was among several financial institutions criticized in a 650-page report released last month. According to the New York Times, the report noted a trader at the bank who took short positions in mortgage securities, helping the bank reduce losses on positive mortgage bets. The report also criticized one of the bank's collateralized debt obligations.