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Government accuses Deutsche Bank of mortgage fraud

May 3, 2011 |  9:38 am

Deutsche

U.S. prosecutors are suing Deutsche Bank and accusing it of fraudulently approving mortgages over a number of years in ways that have ended up costing the government hundreds of millions of dollars.

The lawsuit filed Tuesday morning in Manhattan federal court says that Deutsche Bank and its subsidiary, MortgageIT, lied to the government and "recklessly" approved mortgages for federal mortgage insurance without fully vetting the quality of the mortgages.

From 1999 to 2009, MortgageIT was part of a government program that allowed it to approve home loans for Federal Housing Administration mortgage insurance, and it ended up doing this with 39,000 mortgages worth $5 billion, according to the complaint. After Deutsche Bank acquired MortgageIT in January 2007, it marketed and sold these mortgages to investors.

The complaint says that Deutsche Bank and MortgageIT pushed out the mortgages at a rapid pace, without worrying about the quality of the mortgages or problems with the approval process.

"When an outside auditor provided findings to MortgageIT revealing serious problems, those findings were literally stuffed in a closet and left unread and unopened," the complaint says.

The rapid production of low-quality home loans, spurred on by fee-hungry investment banks, has taken much of the blame for the financial crisis, but so far few banks have faced government lawsuits over their activities leading up to the crisis.

According to the suit, the government has already paid $386 million in insurance claims related to bad MortgageIT loans and expects to pay "hundreds of millions of dollars" more.

The government is seeking to recover in damages and penalties triple what it has paid out, which would be at least $1 billion.

The bank did not immediately respond to a request for comment.

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Photo: U.S. attorney Preet Bharara announces a lawsuit against Deutsche Bank AG, which accuses the bank of lying "repeatedly" to qualify thousands of risky mortgages for a government insurance program.   Credit: Louis Lanzano/Bloomberg

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