U.S. Sues Bank For Mortgage Fraud

The plaintiff is the U.S. Government. The defendant is Deutsche Bank AG and its wholly owned subsidiary, MortgageIT Inc.

The complaint alleges that the bank made repeated false certifications made to the U.S. Department of Housing and Urban Development (HUD) in connection with the residential mortgage origination and sponsorship practices of MortgageIT. To date, the Federal Housing Administration (FHA) has paid insurance claims on more than 3,100 mortgages, totaling $386 million, for mortgages endorsed by MortgageIT.

Between 1999 and 2009, MortgageIT 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. These mortgages were highly marketable for resale to investors because they were insured by the full faith and credit of the United States.

Substantial profits

MortgageIT and Deutsche Bank, which acquired MortgageIT in January 2007, made substantial profits through the resale of these endorsed FHA-insured mortgages.

But taxpayers lost money. According to the complaint, MortgageIT repeatedly made false certifications 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, the government says.

Despite that, underwriters at MortgageIT allegedly endorsed the mortgages by falsely certifying that they had conducted the due diligence required by HUD rules when, in fact, they had not. By endorsing ineligible mortgages and falsely certifying compliance with HUD rules, the complaint states, MortgageIT wrongfully obtained approval of these ineligible mortgages for FHA insurance, thereby putting millions of FHA dollars at risk.

No quality control

The complaint also says MortgageIT and Deutsche Bank never implemented the quality control procedures required of direct endorsement lenders. Instead, the government says, they falsely certified to HUD that MortgageIT had the required procedures in place. On occasions when HUD discovered evidence that MortgageIT was violating the quality control requirement, the government says MortgageIT falsely stated the failures had been corrected.

The government’s complaint seeks triple damages and penalties under the False Claims Act for the insurance claims already paid by HUD for mortgages wrongfully endorsed by MortgageIT through the false statements of Deutsche Bank and MortgageIT.

In addition, the government seeks compensatory and punitive damages under the common law theories of breach of fiduciary duty, gross negligence, negligence and indemnification for the insurance claims that HUD expects to pay in the future for mortgages wrongfully endorsed by MortgageIT as a result of Deutsche Bank’s and MortgageIT’s false statements.

“Many working families count on FHA’s mortgage insurance program to help them achieve the dream of home ownership,” said Assistant Attorney General West.  “According to our complaint, these lenders put millions of dollars of taxpayer funds at risk and violated the integrity of this important program by making false certifications to HUD.”

FHA mortgage insurance protects lenders against defaults on mortgages. It's one way the government can encourage banks to make loans to borrowers who might not be able to meet conventional underwriting requirements.