Feds sue Deutsche Bank over bad mortgage lending

The government sued banking giant Deutsche Bank and a mortgage subsidiary Tuesday for an alleged pattern of lies to federal agencies and reckless lending that could cost the United States more than $1 billion.

The civil lawsuit in federal court in Manhattan alleges that the bank and its MortgageIT subsidiary approved loans for Federal Housing Administration-insured mortgages "in blatant disregard of whether borrowers could make mortgage payments," and profited by reselling the loans before they defaulted.

"The defendants simply ignored every type of red flag and breached every duty of due diligence before endorsing mortgages for federal insurance," said Manhattan U.S. Attorney Preet Bharara, whose office filed the suit. "In fact, they seemed to treat red flags as if they were green lights. Ultimately, prudence was trumped by profit, and good faith took a backseat to good fees."

Deutsche Bank said most of the bad loans were made before MortgageIT was acquired. "We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously," the bank said in a statement.

The lawsuit marked the latest government effort to attack the lending practices that contributed to a real-estate bubble and recession, and Bharara said it would not be a "fantastic stretch" to anticipate that additional cases may be brought against other lenders.

Bharara said no criminal charges were filed because there was insufficient evidence of "criminal intent."

Deutsche Bank, Germany's largest bank, acquired MortgageIT in January 2007. The allegations in the lawsuit cover business practices from 1999 until 2009, a period during which the company certified 39,000 mortgages worth $5 billion for FHA insurance, the lawsuit said.

Over 12,500 of those mortgages have defaulted, costing the government $386 million; an additional 7,500 mortgages worth $888 million were in default as of February without insurance claims yet, the suit said. Those numbers include payments from or claims faced by the FHA of $357 million for 2,300 mortgages that defaulted within six months.

The lawsuit seeks triple damages for claims paid, and punitive damages.