Deutsche Bank agreed on Thursday to pay the federal government more than $200 million to settle accusations that it knowingly misled the Department of Housing and Urban Developmentabout the quality of mortgages that later defaulted.
The defaults ultimately cost taxpayers about $368 million. The settlement resolves a lawsuit filed against Deutsche in May 2011 by the United States attorney for the Southern District of New York, Preet Bharara, along with HUD and the Department of Justice.
The home loans were issued by MortgageIT, a mortgage provider that Deutsche Bank bought in 2007. Under the terms of the settlement, Deutsche Bank admitted it should have known that MortgageIT’s practices did not conform to HUD rules after it made the acquisition. The $202 million settlement is a significant victory for the federal Financial Fraud Enforcement Task Force, which was established to investigate the abuses that culminated in the financial crisis of 2008 and early 2009.
MortgageIT insured the loans under a Federal Housing Administration program called Direct Endorsement Lender despite the fact that they did not qualify under the rules of the program and were not eligible for the insurance, according to the suit. When the loans later soured, the government was obligated to cover the losses.
As a Direct Endorsement Lender, MortgageIT had the authority to provide the F.H.A. insurance on the loans it made, without having to seek prior approval from the housing administration. Because of that extra authority, government officials said, the mortgage provider is supposed to do everything it can to assure the mortgages are being given to creditworthy borrowers who can pay back the money.
“MortgageIT and Deutsche Bank treated F.H.A. insurance as free government money to backstop lending practices that did not follow the rules,” Mr. Bharara said in a statement. “Their failure to meet these requirements caused substantial losses to the government — losses that could have and should have been avoided.”
The HUD inspector general, David A. Montoya, said in a statement that every Direct Endorsement Lender participant was expected “to adhere to the highest level of integrity and accountability.” When lenders fall short, he said, “the end result will be both unpleasant and costly to the offending party.”
In a statement, Deutsche Bank said: “We are very pleased to have reached this settlement, for which we have already fully reserved, and to put this issue behind us. This marks a significant step in resolving our mortgage-related exposures.”
The company has said previously that the 90 percent of the mortgages that later defaulted were made before Deutsche Bank acquired MortgageIT in 2007. That purchase was part of a larger effort by many Wall Street banks to plunge into the mortgage market, which was then booming, a move that has cost Wall Street billions of dollars since then, both from market losses and legal settlements.
Many of the worst-performing mortgages were so-called subprime loans, but MortgageIT was a specialist in Alt-A mortgages, which were supposed to be slightly safer and thus less likely to default. In fact, the Alt-A category also performed very poorly in the wake of the housing market collapse.
An earlier settlement with Citigroup’s Citimortgage unit over similar claims in February totaled $158 million, while a Bank of America settlement for its Countrywide unit the same month equaled $1 billion. Still, given the huge losses racked up by the banking industry and the deep recession that followed the crisis, there have been comparatively few prosecutions of wrongdoing connected to the housing bubble and subsequent bust.