The federal government is seeking more than $1 billion from Deutsche Bank in a fraud lawsuit that could open a new front in a campaign to punish companies that churned out the low-quality mortgages blamed for sparking the financial crisis.

The lawsuit filed Tuesday in Manhattan federal court says the German financial giant’s New York-based home lender, MortgageIT, recklessly approved 39,000 mortgages for government insurance from 1999 to 2009 “in blatant disregard” of whether borrowers could make the required monthly payments.

The lender repeatedly lied to the government about the quality of the mortgages and about efforts supposedly undertaken to fix the problems, according to the suit.

“Prudence was trumped by profits and good faith was trumped by good fees,” U.S. Atty. Preet Bharara said at news conference announcing the litigation.


The Federal Housing Administration has paid $386 million in insurance claims on bad MortgageIT loans, a figure the agency projects will rise to about $1.3 billion. The government is asking the court to order Deutsche Bank to pay three times the FHA’s eventual losses on the loans. The suit also seeks punitive damages.

Although private investors and government agencies have pressed banks to compensate them for losses on home loans made during the housing boom, Tuesday’s suit could mark a new and aggressive push to crack down on big financial institutions for their central role in the mortgage meltdown.

Rene Febles, an investigator with the Department of Housing and Urban Development who appeared at the U.S. attorney’s news conference, called the case against Deutsche Bank “only the beginning” — a prediction that Bharara didn’t dispute.

“It would not be a fantastical stretch to think we are looking at other lending institutions as well,” the U.S. attorney in Manhattan said.


Such litigation has been a long time coming, said Robert Simpson, president of Investors Mortgage Asset Recovery Co., a Santa Ana firm that audits home loans.

“All of us who have watched this unfold since 2008 have sort of waited and said, ‘Where are these lawsuits? Where is the official action?’ ” Simpson said.

Renee Calabro, a spokeswoman for Frankfurt-based Deutsche Bank, called the lawsuit “unreasonable and unfair” and said the company would defend itself “vigorously.” She noted that much of the activity described in the suit occurred before Deutsche acquired MortgageIT in January 2007.

In addition to originating home loans through MortgageIT, Deutsche Bank also bundled mortgages into securities that were then sold to investors. When the low-quality loans went into default in large numbers, the mortgage-backed bonds plunged in value, setting off the financial crisis.


Deutsche was one of two investment banks — along with Goldman Sachs Group Inc. — that was accused in a Senate report last month of selling investors mortgage-linked bonds that it knew were likely to fail. Deutsche Bank, however, ended up losing billions on mortgage investments when they crashed.

Insured loans were easier to sell to investors. Until Deutsche Bank shuttered MortgageIT in 2009, it was part of a program that allowed the lender, by itself, to approve loans for FHA insurance.

The suit says that before and after Deutsche Bank bought the company in 2007, MortgageIT “knowingly, wantonly, and recklessly permitted egregious underwriting violations to continue unabated.”

In one case cited, the lender approved a mortgage in Dearborn, Mich., even though the borrower had never worked at the company listed as the borrower’s current employer. The loan went into default within four months, costing the FHA $199,119.


When an outside consultant hired to review MortgageIT’s loans in 2004 raised concerns about the company’s lending, employees stuffed the consultant’s reports “unopened and unread, in a closet,” the suit says.

The one MortgageIT employee dedicated to reviewing the quality of insured mortgages was reassigned to help originate more mortgages, according to the government.

One-third of the $5 billion of loans made by MortgageIT ended up going into default, the suit says, and nearly a third of those that defaulted did so in the first six months.

nathaniel.popper@latimes.com