The U.S. government sued Deutsche Bank AG for more than $1 billion, accusing the German bank of defrauding it by repeatedly lying to obtain federal insurance guarantees on mortgage debt.
According to the complaint, Deutsche Bank and its MortgageIT Inc unit misled the government into believing their mortgages qualified for federal insurance, knowing they could make "substantial profits" when the loans were later sold.
In fact, the government said, the loan quality was so poor that nearly one in three mortgages defaulted, a percentage elevated by Deutsche Bank's "dysfunctional" quality control.
The complaint, filed in U.S. District Court in Manhattan on Tuesday, marks the latest U.S. government push to hold the mortgage industry responsible for excesses that contributed to a 4-year-old housing slump and millions of foreclosures.
Deutsche Bank and other banks have come under harsh criticism for their mortgage practices. A report on April 13 by a U.S. Senate subcommittee faulted Deutsche Bank, Goldman Sachs Group Inc and others for deceiving purchasers about toxic mortgage debt they sold, quoting a top Deutsche Bank trader who referred to some of the collateral as "pigs."
Last year, Goldman paid $550 million to settle federal fraud claims tied to a mortgage investment it offered.
The Deutsche Bank lawsuit is believed to be among the first targeting a major bank under the federal False Claims Act over alleged wrongdoing tied to mortgages.
"The U.S. is seeking redress for the financial crisis and is trying to find the culprits," said Konrad Becker, a stock analyst at Munich-based bank Merck Finck.
Deutsche Bank shares closed down 2.1 percent at 43.25 euros in Frankfurt, after falling as much as 3.7 percent.
"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."
In its complaint, the government said that from 1999 to 2009 MortgageIT approved more than 39,000 mortgages totaling more than $5 billion for Federal Housing Administration insurance, meaning they were backed by the federal government.
Knowing they would profit from the eventual resale of the loans, the defendants were accused of recklessly choosing mortgages that violated program rules "in blatant disregard" of whether borrowers actually had the ability to make payments.
The government said more than 12,500 -- or nearly one-third -- of the more than 39,000 mortgages had gone into default.
It said it has paid out more than $386 million of FHA insurance claims on 3,100 of these mortgages, and expects to pay out hundreds of millions of dollars more.
"Deutsche Bank and MortgageIT had powerful financial incentives to invest resources into generating as many FHA-insured mortgages as quickly as possible for resale to investors," the complaint said.
"By contrast, Deutsche Bank and MortgageIT had few financial incentives to invest resources into ensuring the quality of its FHA-insured mortgages."
It is unclear whether other banks might be targeted in similar lawsuits. The office of U.S. Attorney Preet Bharara in New York, which brought the lawsuit, had no immediate comment. That office formed a new civil unit to fight mortgage and other fraud in March 2010.
Tuesday's complaint seeks triple damages on the $386 million of claims, as well as punitive damages and fines.
"This could be a risk for Deutsche Bank's earnings outlook," said Joerg Rahn, chief investment officer at Marcard, Stein & Co in Hamburg. "You can see in the share price reaction that the market thinks the same."
Deutsche Bank bought MortgageIT for $430 million in 2007.
Last year, Goldman agreed to pay $550 million to settle a U.S. Securities and Exchange Commission fraud lawsuit over mortgage debt it sold.
The bank was accused of not telling investors in the debt, known as Abacus, that hedge fund Paulson & Co had helped to choose the undelying securities and had bet against them. Goldman did not admit wrongdoing.
Deutsche Bank lost an estimated $4.5 billion tied to the mortgage market collapse, but could have lost more had it not sold a variety of toxic securities, the Senate report said.
Dating from 1863, the False Claims Act is designed to protect the federal government from fraudulent bills.
More than $28 billion has been collected, with the health-care industry in recent years being responsible for a large portion of recoveries.
The case is U.S. v. Deutsche Bank AG et al, U.S. District Court, Southern District of New York, No. 11-02976.
