Among the damaging charges in the government's civil lawsuit against Deutsche Bank over its role in allegedly defrauding a government mortgage-insurance program, this charge is a standout.

According to the lawsuit, Deutsche Bank's MortgageIT unit repeatedly lied to HUD about the quality of its mortgages. And of the more than 39,000 mortgages that Mortgage IT endorsed for HUD's mortgage-insurance program, FHA, about one third of them defaulted. The government says that when an outside auditor showed MortgageIT its findings...