May 3, 2011

Department Of Justice Files FHA Fraud Suit Against Deutsche Bank

As a plugged-in reader notes, the United States has filed a civil mortgage fraud lawsuit against Deutsche Bank and its wholly owned subsidiary MortgageIT for falsely certifying loans were eligible for FHA guarantees without conducting the required due diligence.

Between 1999 and 2009, MORTGAGEIT was an approved direct endorsement lender, and endorsed more than 39,000 mortgages for FHA insurance, totaling more than $5 billion in underlying principal obligations. These mortgages were highly marketable for resale to investors because they were insured by the full faith and credit of the United States. MORTGAGEIT and DEUTSCHE BANK, which acquired MORTGAGEIT in January 2007, made substantial profits through the resale of these endorsed FHA-insured mortgages.
According to the Complaint, MORTGAGEIT repeatedly made false certifications to HUD to obtain approval of mortgages that MORTGAGEIT underwriters wrongfully endorsed for FHA insurance. These mortgages were not eligible for FHA insurance under HUD rules. Notwithstanding the mortgages' ineligibility, underwriters at MORTGAGEIT endorsed the mortgages by falsely certifying that they had conducted the due diligence required by HUD rules when, in fact, they had not. By endorsing ineligible mortgages and falsely certifying compliance with HUD rules, MORTGAGEIT wrongfully obtained approval of these ineligible mortgages for FHA insurance, thereby putting millions of FHA dollars at risk.

To date, FHA has paid insurance claims on more than 3,100 mortgages, totaling $386 million, for mortgages endorsed by MortgageIT.

As plugged-in people know, at the begining of 2008 FHA insured mortgages accounted for less than 0.5 percent of all Bay Area home sales, jumping to 20 percent by the end of that year. This March, the percentage was 22.4.

DOJ Sues Deutsche Bank for Reckless Lending Practices [justice.gov]
FHA To Tighten Its Belt, But With Its Fly Wide Open? [SocketSite]
San Francisco Recorded Sales Activity Down 1.0% In March [SocketSite]

First Published: May 3, 2011 2:50 PM

Comments from "Plugged In" Readers

Apparently, the way to ensure that your FHA risk manager doesn't go to jail for something like this is to avoid having one!

"By the end of 2007, the lawsuit says, not a single person was employed at Deutsche or MortgageIT to conduct quality controls of closed FHA-insured mortgages. No one was home."

The cutting edge technique of stuffing unopened letters in a closet will probably also take a reputational hit because of this suit.

"In or about 2004, MortgageIT contracted with an outside vendor, Tena Companies, Inc. (“Tena”) , to conduct quality control reviews of closed FHA-insured loans. As noted above, those reviews did not include early payment defaults because MortgageIT failed to identify early payment defaults to Tena.

Throughout 2004, Tena prepared findings letters detailing underwriting violations it found in FHA0insured mortgages underwritten by MortgageIT. The findings letters included the identification of serious underwriting violations… No one at MortgageIT read any of the Tena findings letters as they arrived in 2004. Instead, MortgageIT employees stuffed the letters, unopened and unread, in a closet in MortgageIT’s Manhattan headquarters."

http://ftalphaville.ft.com/blog/2011/05/03/557696/the-skeletons-or-mortgage-audits-in-deutsche-banks-closet/

Posted by: tc_sf at May 3, 2011 4:29 PM

This is a pricing game, right? I'm gonna guess "under $1 Billion" for the fine/settlement.

Posted by: EH at May 3, 2011 4:59 PM

All banks were in the same game, "self-regulating" themselves while the authorities were asleep. Why singling out DB?

Anything they will do now is an exercise in futility. The banker will call someone at the Govt to claim the world is coming to an end because of over-regulation and convert the punishment into a pure slap on the wrist.

Posted by: lol at May 3, 2011 6:46 PM

the only true significance of this case that I see is that it further proves how foolish lending got back in the mid 00's. (not that we need more proof). And it is cases like this which exemplifies why going back to the rah-rah 2000's RE market is impossible. The banks TORPEDOED trust in the MBS market due to the awe-inspiring amount of fraud. MBS = a four letter word to any prospective buyer.

Thus, if the govt wants mortgage rates low, it will basically need to continue fully supporting (90% +) of the market. No market based system can have mortgage rates at levels seen around 2005. Private lenders might step in... at a MUCH higher interest rate. But our "recovered" economy can barely handle 5% rates, much less 10 or 15% rates.

in other words: RE will remain on govt life support for a long time, and thus RE all over (including SF) is at the whim of Washington DC politics. I've said as much for years now.

===
All banks were in the same game, "self-regulating" themselves while the authorities were asleep. Why singling out DB?

because it is German.

It's all political theater.
Can't accuse an American bank of this because then it weakens the American Banking Sector, and our entire government has already decided that the biggest banks must grow no matter how destructive they are to our society as a whole. The banks come first.

Why have the Govt sue Citibank and win a large settlement that then has to be paid by taxpayers through a new bailout anyway? In theory DB has non-American money that they can pay fines with! (ok, ok, they got over $12B of American taxpayer money, so I guess we're really still just fining ourselves, but it will be more covert so the American public won't understand... the desired outcome).

if the govt were serious (it is not) then it would sue all responsible banks based on FANNIE and FREDDIE'S losses as well as FHA. And they would make a criminal charge instead of simply bringing a civil suit. and most importantly they would start suing the executives of these companies.

even better, they would simply pull the banking licenses of these behemoths and wind them down.
(I hear the pleasurable screams of the so-called capitalists as they wail "AAAHHHHH SOCIALISIM!!!!! AAAAHHHHH NATIONALIZING THE BANKS!!!!!!" music to my ears).

but the so-called capitalists need not worry. Not a single thing I listed will ever come to pass. This is all just simple window dressing to fool Americans into thinking that our govt cares one wit about any of us or the rule of law. they care only for their corporate "citizens" with the biggest checkbooks, enshrined into law by our beloved Supreme Court with its Citizens United decision.

let's do a thought experiment: let's say that DB loses this case and gets fined $1B. How many billions did they make during the run up? it's a SMALL cost of doing business.

Put another way: what would you do if you could illegally make $100B and then later MAYBE be accused of wrongdoing and MAYBE lose a suit for $1B, but you still get to keep your job and you still get to have and keep 7 years of record bonuses? or if the heat is REALLY turned up you still get to keep hundreds of millions of ill-gotten dollars in your PERSONAL bank account while being let go with no prejudice, and you still keep your lifetime pension of millions of dollars???

Posted by: ex SF-er at May 4, 2011 6:25 AM

because it is German.

I think most people over the age of thirty-five have probably worked at an organization where, when intense pressure to meet some pre-determined "goal" comes down from upper management, certain individuals start cutting corners. The more I read about how Deutsche Bank and how they conducted their various businesses during the "financial crisis", the more I think they were just running fast and loose trying to keep up with Citi and all the rest.

After the fallout in 2008, they've joined the ranks of accidental landlords, and aren't managing that too well. From today's Los Angeles Times, L.A. says Deutsche Bank among city’s largest slumlords, files suit seeking hundreds of millions of dollars:

The Los Angeles city attorney's office accused officials at Deutsche Bank, a German financial institution, of being among "the largest slumlords in Los Angeles" and filed an unusual lawsuit Wednesday asking a judge to fine the company hundreds of millions of dollars and issue an injunction forcing it to clean up the foreclosed properties it owns in Los Angeles, which have numbered 2,000 over the last four years.
…city officials claimed in court papers that Deutsche Bank has illegally evicted tenants, shut off their water and power and then let hundreds of properties turn into graffiti-scarred dens for squatters, gang members and other criminals, destroying quality of life and driving up crime in the process.
They say the bank, which invested heavily in mortgage-backed securities, found itself "transformed…from detached investment brokers…to large-scale residential property owners, a role whose responsibilities …they have completely eschewed."
The article doesn't say, but I'd guess what happened was that a lot of the loans they made into MBS went bad, the loans were "put back" to DB by investors, and they wound up managing a lot of properties that they didn't know what to do with and weren't making enough money on to hire a competent property management firm.

And of course they can't sell them because they'd have to mark to market. Can't have that.

Posted by: Brahma (incensed renter) at May 4, 2011 10:22 AM

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