U.S. Attorney Preet Bharara has filed a mortgage fraud suit in U.S. District Court in Manhattan against Deutsche Bank and its subsidiary, MortgageIT. The suit claims that MortgageIT lied about the quality of its lending practices in order to take advantage of the U.S. Department of Housing & Urban Development's (HUD) and the Federal Housing Administration's (FHA) mortgage insurance program. The government’s complaint seeks damages and civil penalties under the False Claims Act for repeated false certifications made to HUD in connection with the residential mortgage origination and sponsorship practices of MortgageIT. To date, the FHA has paid insurance claims on more than 3,100 mortgages, totaling $386 million, for mortgages endorsed by MortgageIT.
According to the complaint filed in Manhattan federal court: In a 10-year span between 1999-2009, MortgageIT was an approved direct endorsement lender, having 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 re-sale 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.
In addition, MortgageIT and Deutsche Bank never implemented the quality control (QC) procedures required of direct endorsement lenders, but falsely certified to HUD that MortgageIT had the required procedures in place. On various occasions when HUD discovered evidence that MortgageIT was violating the QC requirement, MortgageIT falsely stated the failures had been corrected.
“As alleged, MortgageIT and Deutsche Bank ignored every type of red flag and breached every duty of due diligence before underwriting thousands of federally insured mortgages,” said U.S. Attorney Bharara. “While the homes the defendants issued loans for may have been built on solid ground, the defendants’ lending practices were built on quicksand. Ultimately, prudence was trumped by profit, and good faith took a back seat to good fees. This is exactly the kind of misconduct that our Civil Frauds Unit was created to combat.”
According to the complaint, in 2004, MortgageIT contracted Tena Companies Inc. to conduct QC reviews of closed FHA-insured loans. Tena prepared its findings in letters detailing rampant underwriting violations found in FHA-insured loans underwritten by MortgageIT's branch location in Chicago. No one at MortgageIT read the Tena reports when they arrived in 2004, as the finding letters were forwarded to MortgageIT's Manhattan base of operations and stored in a closet.
"I personally believe there is no way that all 39,000 loans are bad," said Tommy A. Duncan, CMT of Quality Mortgage Services LLC. "A test of 10 percent is what is needed to prove what percentage of loans are good, and Deutsche Bank then could have cause to dismiss the action."
Shortly after, MortgageIT hired its first QC manager in December of 2004, who requested to review the Tena findings only to be shown a closet containing the unopened letters. MortgageIT's neglect of the Tena findings prevented the company from taking action towards amending these fraudulent underwriting practices.
The government’s complaint seeks treble damages and penalties under the False Claims Act for the insurance claims already paid by HUD for mortgages wrongfully endorsed by MortgageIT through the false statements of Deutsche Bank and MortgageIT. In addition, the United States seeks compensatory and punitive damages under the common law theories of breach of fiduciary duty, gross negligence, negligence and indemnification for the insurance claims that HUD expects to pay in the future for mortgages wrongfully endorsed by MortgageIT as a result of Deutsche Bank’s and MortgageIT’s false statements.
“The Department of Housing and Urban Development Office of Inspector General is committed to aggressively pursuing, in cooperation with our law enforcement partners, those who would seek to damage our nation’s important housing programs,” said HUD Acting Inspector General Michael P. Stephens. “In today's trying economic times, it is all the more important to protect those programs, such as the FHA’s, which are so critical to our fragile recovery and to our country’s citizenry.”