As the real estate market was starting to crumble, more banks were using the Federal Housing Authority’s guarantees to continue offering mortgage loans, when Fannie Mae and Freddie Mac were tightening the reins on their guarantees. This was common practice among banks. With loans fully backed by the FHA and therefore the United States government, they were able to sell these mortgages. This effectively passed the risk onto the buyers, most of whom thought they were still light on risk thanks to the FHA.
Well, the United States government now believes that some of these banks lied to the government about the loans in order to receive coverage by the FHA. The government is suing Deutsche Bank for this reason.
Back in 2006, Deutsche Bank acquired MortgageIT, the unit that is the focus of the suit. According to the government, the bank should have seen warning signs that the unit was not properly reporting information to the FHA as early as 2003. Here are some examples of the problems:
In New York in 2002, for instance, MortgageIT loaned money to a borrower who was able to close on the deal using funds that were a gift. MortgageIT did not properly document those funds, and within two months of the closing on the property, the borrower was in default.
In Colorado a couple of years later, MortgageIT endorsed an application by a borrower who had no credit history, a violation of federal rules. Six months later the mortgage went into default, costing the federal government $190,977 in insurance claims. Around the same time in Oklahoma, MortgageIT did not verify that a borrower was closing on the deal using his own money, rather than someone else’s.
The government is seeing “at least hundreds of millions of dollars” from the bank as restitution, and estimates the problems with MortgageIT cost the government up to $1 billion.