Deutsche Bank AG and a mortgage subsidiary

US Sues Deutsche Bank, Mortgage Unit US authorities sued Deutsche Bank AG and a mortgage subsidiary, alleging that they repeatedly lied about the quality of mortgages to be included in a government insurance program, so that they could profit from the resale of those ...

authorities sued Deutsche Bank AG and a mortgage subsidiary, alleging that they repeatedly lied about the quality of mortgages to be included in a government insurance program, so that they could profit from the resale of those mortgages.

The U.S. government expects the FHA program, which is overseen by the Department of Housing and Urban Development, will be required to pay "hundreds of millions of dollars in additional claims" in the months and years ahead, according to the lawsuit. The FHA program has paid more than $386 million in insurance claims and costs as of February as a result of Deutsche Bank and MortgageIT allegedly approving mortgages that didn't qualify for the program, the lawsuit said.

"While Deutsche Bank and MortgageIT profited from the resale of these government-insured mortgages, thousands of American homeowners have faced default and eviction, and the government has paid hundreds of millions of dollars insurance claims," the lawsuit said.

The complaint is seeking triple damages and penalties under the False Claims Act, as well as compensatory and punitive damages.

More than $258 million of the FHA claims and costs paid, so far, arose out of mortgages that defaulted within the first two years, according to the lawsuit. The lawsuit, filed Tuesday in Manhattan federal court, alleges that Deutsche Bank and its MortgageIT unit "recklessly" selected mortgages that violated the rules of the Federal Housing Administration's mortgage-insurance program "in blatant disregard of whether borrowers could make mortgage payments." Those government-insured mortgages were then resold, according to the lawsuit. An additional 7,500 mortgages, totaling more than $888 million in unpaid principal, have defaulted as of February without any claims yet having been paid, according to the lawsuit.

Preet Bharara, the U.S. Attorney in Manhattan, and officials from the HUD are expected to discuss the civil complaint in more detail at a news conference at 1 p.m. Eastern time Tuesday.

Between 1999 and 2009, MortgageIT was a so-called direct-endorsement lender, allowing it to approve FHA insurance for more than 39,000 mortgages totaling more than $5 billion, according to the lawsuit. "We just received the complaint and are reviewing it," a Deutsche Bank spokeswoman said. "We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously." About a third of those mortgages—more than 12,500—have defaulted, the lawsuit said.

The lawsuit alleges that Deutsche Bank and MortgageIT repeatedly lied in order to maintain the unit's status as a direct-endorsement lender and failed to implement required quality-control procedures, such as failing to audit MortgageIT's early-payment defaults.

MortgageIT allegedly submitted mortgages that weren't eligible for the FHA insurance program and falsely certified that they had conducted due diligence as required by the program's rules.

Those letters remained unread until MortgageIT hired its first quality-control manager in December 2004, according to the lawsuit.

Deutsche Bank completed its acquisition of MortgageIT in January 2007, in a deal valued at $429 million. Company officials, at the time, said the acquisition in part would provide Deutsche Bank "a steady source of product for distribution into the mortgage-capital markets."

The bank began winding down the unit in 2008. About 90% of the loans at issue were originated before Deutsche Bank owned MortgageIT, which lost its status as a FHA-approved mortgage company in October 2009.

Earlier this year, DB Mortgages, a U.K. unit of Deutsche Bank, was fined £840,000, or about $1.4 million, by the U.K. Financial Services Authority and ordered to pay £1.5 million to customers over alleged irresponsible mortgage lending. The FSA claimed that DB Mortgages breached a series of rules between 2006 and 2008, including applying unfair charges to persons who were behind on their mortgage payments. At one point in 2004, MortgageIT literally stuffed letters from an outside vendor outlining underwriting violations in its FHA-insured mortgages in a closet at its Manhattan headquarters, the lawsuit alleges.In 2007, the Connecticut Department of Banking reached a settlement with MortgageIT for allegedly failing to register at least 48 mortgage originators in violation of state statutes, paying $48,000 to support a nationwide mortgage licensing system.