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.
Published or updated May 3, 2011. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @flexo on Twitter and visit our Facebook page for more updates.
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Luke Landes founded Consumerism Commentary in 2003 and has been building online communities since 1990. Luke, also known as Flexo, has contributed to PC World Magazine, US News, Forbes, and other publications. 
{ 6 comments… read them below or add one }
It’s about time the thieves are going to pay for the lies. The epolpe who bought these houses were unscrupulous as well. For every action there should be an equal opposite reaction.
This is rare, but I wish the government all the luck in the world in getting a judgment against Deutsche and MortgageIT, and actually collecting any of the money. Getting a judgment is one thing, collecting payment is another thing entirely.
I’m always amazed at how corporate executives think they can get away with this stuff…
I wonder if this is the tip of the iceberg. There was so much going on with mortgages back then. It’s hard to imagine that it was only this one institution. I wish them luck.
Hopefully the government will recover the $1b or more. MortgageIT sounds like it was outright crooked based on what they’re saying. But $3b in total loans isn’t a lot relative to the total housing market.
Countrywide was considerably worse in the extent of their bad loans.
wow, this one shocked me a little. i did not expect to see this. i, for one, am glad. it would seem to me there could be many more cases like this in the future, although i doubt many will ever get even this far.
i doubt much will change, but at the very least, if the fear of actions like this keeps things on the up and up, i am all for it.
Interesting…The City of Los Angeles announced yesterday they’re suing the same bank for not maintaining REO homes and creating slums.
http://online.wsj.com/article/SB10001424052748704322804576303320892386698.html