Investigators keep finding skeletons in the closets of companies that participated in the mortgage boom. In a case the government filed against Deutsche Bank AG on Tuesday, the "closet" part is literally true.
The civil fraud suit alleges the German bank and its U.S. home lending arm, MortgageIT, failed to implement basic quality-control principles that were mandated for direct-endorsement Federal Housing Administration lenders. As an example, the suit says that in 2004 MortgageIT hired an outside vendor, Tena Cos. Inc., to conduct quality-control reviews of closed FHA loans. When the audit found serious underwriting violations, MortgageIT allegedly ignored these red flags by "stuffing the letters, unopened and unread, in a closet in MortgageIT's Manhattan headquarters for months."
From 1999 to 2009, MortgageIT originated more than 39,000 loans with FHA insurance, totaling more than $5 billion. The suit says the Deutsche unit "recklessly selected mortgages that violated program rules in blatant disregard of whether borrowers could make mortgage payments."
More than 14,000 of these loans have defaulted, and the FHA has paid insurance claims on nearly 3,100 of them, totaling $386 million.
"Borrower after borrower defaulted, often within months of closing, because those loans were doomed to fail because the defendants ignored every type of red flag and breached every duty of due diligence before endorsing mortgages for federal insurance," said Preet Bharara, the U.S. attorney for the Southern District of New York. "In fact, they often seemed to treat red flags as if they were green lights."
The suit claims that from 1999 to 2009, the defendants repeatedly lied to the Department of Housing and Urban Development, which oversees the FHA, to maintain MortgageIT's direct endorsement lender status. By the end of 2007, no one at Deutsche Bank or MortgageIT was doing post-closing quality control reviews of FHA-insured loans, as required by HUD, the suit said.
Deutsche Bank called the allegations "unreasonable and unfair" and said it would fight the case. "Close to 90% of the activity covered by the U.S. Department's of Justice's allegations happened prior to Deutsche Bank's acquisition of MortgageIT," the company said. "When Deutsche Bank acquired MortgageIT in 2007, it was an FHA lender that had been operating within the oversight of the Department of Housing and Urban Development for nearly a decade."
The government is seeking maximum civil damages, and penalties under the False Claims Act for the claims paid by HUD for mortgages wrongfully endorsed by MortgageIT. It also seeks compensation for certain future and punitive damages.
