Wednesday, May 4, 2011

Federal Government Sues Deutsche Bank for $1 Billion

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Lies, scandal and fraud envelops Deutsche Bank AG, Germany’s biggest lender, after the U.S. federal government filed a civil mortgage lawsuit worth $1 billion. NY1 News explains the situation...

“The lawsuit filed in Manhattan claims the bank repeatedly lied to be included in the federal program that insured mortgages. Lawyers say once in the program, Deutsche Bank “recklessly” selected mortgages without checking to see if borrowers could make their payments, then resold their mortgages at a higher price to investors.”  

The Real Deal, which posted the full complaint on its blog, says the real problems started with Deutsche’s acquisition of Mortgage IT back in 2007.

“According to the complaint, MortgageIT issued more than $5 billion in Federal Housing Administration-backed loans [...]. It alleges that MortgageIT, which repeatedly lied in order to obtain approval as an FHA lender, turned a blind eye to the wrongful endorsements because they were making substantial profits off of resales on those FHA-insured loans.”

The New York Times reports that since MortgageIT was part
of the exclusive Federal Housing Administration, it was still allowed to lend because its home loans were backed by the F.H.A. The combination of the F.H.A. granting more loans and MortgageIT’s elusiveness caused friction for borrowers.

“[...] as trouble hit the mortgage market, the F.H.A. began guaranteeing far more loans to fill the void. [...] MortgageIT was one of the private lenders that was qualified ... to issue mortgages guaranteed by the F.H.A."

But CNBC says the bank isn’t going down without a fight. Deutsche says they shouldn’t be accountable for things that happened before they purchased the company.

“The bank tells us 90% of the allegations happened before it acquired the business, it calls the suit ‘unreasonable and unfair.’  But the U.S. attorney for the southern district of New York says that the defendants ignored all warning signs and indulged in the worst of the industry’s lending practices.”

MarketWatch tallies how many mortgages are affected
, and how much the tab will be for the federal government to pick up.

“Between 1999 and 2009, MortgageIT was an approved Direct Endorsement Lender, and it endorsed more than 39,000 mortgages [...]. As of February, the U.S. government has paid more than $386 million in FHA insurance claims and related costs on defaulted mortgages underwritten by MortgageIT.”

So how is this going to affect other mortgage lenders on the block? A writer for Fortune on CNN Money says its a good step for the federal government to try and clean up a mess, but it’s a little too late.

“The case against Deutsche is another major step. But the sad moral of the past decade is that the mere threat of paying out shareholder money is not punishment enough to make Wall Street clean up its act. So even a billion-dollar lawsuit, as good a thing as that might be, ends up feeling a day late and a dollar short.”

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