By Dawn Kopecki, Hugh Son and David Voreacos

Bloomberg Businessweek | May 4, 2011

May 4 (Bloomberg) -- The U.S. Department of Justice may pursue claims against other lenders after suing Deutsche Bank AG for more than $1 billion, alleging the firm lied while arranging federal insurance on faulty mortgages.

The Housing and Urban Development Department is examining loans insured through the Federal Housing Administration and may refer additional cases to the Justice Department, HUD’s general counsel, Helen Kanovsky, said yesterday in an interview.

“We go where the evidence takes us, and if it takes us to the larger players on Wall Street, so be it,” Kanovsky said. U.S. Attorney Preet Bharara said it wouldn’t be a “fantastical stretch” for prosecutors to scrutinize other lenders.

Deutsche Bank’s MortgageIT unit falsely certified that it was examining default risks while qualifying loans for FHA insurance, according to the government’s complaint. HUD has already borne $386 million in claims and costs, and has yet to make payments on defaulted loans with principal balances of $888 million. Some mortgages stem from the housing boom, when the industry eased lending standards, fueling more than $2 trillion in credit losses and writedowns.

“Nobody was doing any mortgage due diligence whatsoever,” said Christopher Thornberg, principal at Beacon Economics LLC in Los Angeles. He said the government may have brought the claim against Deutsche Bank as a “test case” before targeting other banks or seeking to force settlements.

‘Big Negative’

“We could see another potential big negative for the industry out of this,” said Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia and an analyst with FBR Capital Markets in Arlington, Virginia. “It’s going to be a continued earnings drag on the industry.”

Deutsche Bank said it will “vigorously” fight the government’s allegations.

“We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair” Renee Calabro, a spokeswoman for the Frankfurt-based company, said by e-mail. “Close to 90 percent of the activity covered by the DOJ allegations happened prior to Deutsche Bank’s acquisition of MortgageIT.”

Countrywide Financial Corp. was the biggest originator of FHA-insured loans during the agency’s fiscal year ending Sept. 30, 2008, as housing-market losses prompted the collapse of financial firms including Bear Stearns Cos. and Lehman Brothers Holdings Inc. The lender had $10.8 billion in endorsed mortgages, according to FHA data.

Mortgage Lenders

Wells Fargo & Co. was the second-largest, with $9.8 billion in loans, and National City Corp. was third with $3.6 billion. Bank of America Corp., which acquired Countrywide in 2008, was No. 4 with $3.2 billion.

Jerry Dubrowski of Bank of America, Veronica Clemons of Wells Fargo and Fred Solomon of PNC Financial Services Group Inc., which acquired National City in 2009, declined to comment.

Deutsche Bank and MortgageIT concealed problem loans through “egregious” violations of HUD rules for analyzing the income and creditworthiness of borrowers, according to the Justice Department’s complaint filed yesterday in Manhattan federal court. MortgageIT endorsed more than 39,000 loans for FHA insurance after 1999, making them “highly marketable for resale,” the U.S. said. Of those, 12,500 defaulted.

Deutsche Bank paid $429 million in January 2007 to buy MortgageIT. Bharara said it was closed in 2009.

Default, Eviction

“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 in insurance claims, with hundreds of millions of dollars more expected to be paid in the future,” according to the complaint.

Deutsche Bank fell as much as 3.7 percent in Frankfurt trading yesterday. The shares for the day declined 2.1 percent to 43.25 euros.

As of February, HUD had insurance claims and related costs arising from 3,100 loans, according to the complaint. Another 7,500 mortgages defaulted without HUD making any payments yet, according to the complaint.

The FHA paid $15.3 billion in claims in the 12 months ended March 31, according to payout records.

Triple Damages

The U.S. sued under the False Claims Act, which means it can seek triple damages and penalties of more than $1 billion. It also claims breach of fiduciary duty, negligence, gross negligence and indemnification. It seeks compensatory damages for past and future payments, as well as punitive damages.

“It’s good to have people cracking down,” David H. Stevens, president of the Mortgage Bankers Association, said in an interview. Stevens, who headed the FHA from mid-2009 until March and fined “hundreds” of lenders for violations during his term, said he had no personal knowledge about the case.

The case is U.S. v. Deutsche Bank AG, 11-cv-2976, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Patricia Hurtado, Jody Shenn and David Glovin in New York. Editors: Dan Reichl, Michael Hytha.

To contact the reporters on this story: Dawn Kopecki in New York at; Hugh Son in New York at; David Voreacos in Newark, New Jersey, at