RealEstateEconomyWatch.com

Yesterday the Justice Department sued Deutsche Bank AG, one of the world’s 10 biggest banks by assets,  for at least $1 billion for defrauding taxpayers by “repeatedly” lying to a federal agency when securing taxpayer-backed insurance for thousands of mortgages.

Between 1999 and 2009, Deutsche Bank’s MortgageIT subsidiary was an approved direct endorsement lender, and endorsed more than 39,000 mortgages for FHA insurance, totaling more than $5 billion in underlying principal obligations.  

 The government charged that MortgageIT repeatedly lied to HUD to obtain approval of mortgages that MortgageIT underwriters wrongfully endorsed for FHA insurance.  These mortgages were not eligible for FHA insurance under HUD rules and subsequently a third of those mortgages, or about 12,500, have since defaulted, leaving the government on the hook. By contrast, about 15 percent of all mortgage holders received a foreclosure filing in the first quarter of 2011 according to RealtyTrac.

On more than 3,100 of its FHA-guaranteed mortgages that have defaulted, HUD has paid more than $386 million in claims to the owners of the mortgage debt, according to the lawsuit. More than two-thirds of those mortgages defaulted within two years of origination. 

As of February, more than 7,500 additional mortgages, with more than $888 million in unpaid principal balances, also had defaulted without HUD paying any claims. About half of those defaulted within the first two years.

The agency expects to pay “at least hundreds of millions of dollars” in additional claims as more risky mortgages default in the months and years ahead, according to the lawsuit.

Meanwhile, Deutsche Bank made “substantial profits” by selling these loans to investors, the suit claims. Federal authorities identified some of the MortgageIT practices that now form the basis of its suit as far back as 2003. Despite warnings, the problems continued.

“As alleged, MortgageIT and Deutsche Bank ignored every type of red flag and breached every duty of due diligence before underwriting thousands of federally insured mortgages,” said U.S. Attorney Preet Bharara.  “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. This is exactly the kind of misconduct that our Civil Frauds Unit was created to combat.”

Yesterday, a Deutsche spokeswoman, Renee Calabro, said that “close to 90 percent of the activity” alleged in the lawsuit occurred prior to the bank’s purchase of the lending unit.

 ”We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously,” Calabro said in a statement.

 On March 328, USA Today found that the FHA approved 15,000 mortgages since late 2008 from companies that had violated agency standards for a full year or more by having an excessive number of their mortgages go into default. At least six instances in the past three years, lenders that the FHA flagged as potentially fraudulent were subsequently accused by state or federal authorities of mortgage fraud.

 Since 2005, at least 13 mortgage companies continued to write FHA-insured loans after federal or state authorities brought criminal or civil mortgage-fraud cases against them.

 In data released to USA Today, the FHA took six years (2000-2006) to announce it was going to monitor underwriters’ defaults. Approximately, three to five years later, the agency began to enforce accountability to the underwriters. David Stevens, FHA commissioner admitted there was a lack of enforcement. “There hadn’t been a whole lot of institutional enforcement,” he told USA Today.

 A total of 821 violations of FHA standards have gone unpunished since late 2007, while the agency has taken action in 222 instances of violations. According to the FHA, the number of lenders violating agency standards is a small portion of the 11,600 companies now with FHA approval.