MANHATTAN U.S. ATTORNEY RECOVERS $202.3 MILLION FROM DEUTSCHE BANK AND MORTGAGEIT IN CIVIL FRAUD CASE ALLEGING RECKLESS MORTGAGE LENDING PRACTICES AND FALSE CERTIFICATIONS TO HUD

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MANHATTAN U.S. ATTORNEY RECOVERS $202.3 MILLION FROM DEUTSCHE BANK AND MORTGAGEIT FOR FRAUD CASE ALLEGING RECKLESS MTG LENDING PRACTICES AND FALSE CERTIFICATIONS TO HUD

MANHATTAN U.S. ATTORNEY RECOVERS $202.3 MILLION FROM DEUTSCHE BANK AND MORTGAGEIT FOR FRAUD CASE ALLEGING RECKLESS MTG LENDING PRACTICES AND FALSE CERTIFICATIONS TO HUD

UNITED STATES ATTORNEY’S OFFICE
Southern District of New York
U.S. ATTORNEY PREET BHARARA

FOR IMMEDIATE RELEASE CONTACT:

U.S. ATTORNEY’S OFFICE
Thursday, May 10, 2012
http://www.justice.gov/usao/nys

Jennifer Queliz, Ellen Davis, Jerika Richardson,
(212) 637-2600

DOJ HUD
Charles Miller Brian Sullivan
(202) 514-2007

HUD-OIG
(202) 402-7527

Kathleen Hatcher
(202) 402-8323

Preet Bharara, the United States Attorney for the Southern District of New York, Stuart F. Delery, the Acting Assistant Attorney General for the Civil Division of the U.S. Department of Justice, Helen Kanovsky, General Counsel of the U.S. Department of Housing and Urban Development (“HUD”), and David A. Montoya, Inspector General of HUD, announced today that the United States has settled a civil fraud lawsuit against DEUTSCHE BANK AG, DB STRUCTURED PRODUCTS, INC., DEUTSCHE BANK  SECURITIES, INC. (collectively “DEUTSCHE BANK” or the “DEUTSCHE BANK defendants”) and MORTGAGEIT, INC. (“MORTGAGEIT”). The Government’s lawsuit, filed May 3, 2011, sought damages and civil penalties under the False Claims Act for repeated false certifications to HUD in connection with the residential mortgage origination practices of MORTGAGEIT, a wholly-owned subsidiary of DEUTSCHE BANK AG since 2007. The suit alleges approximately a decade of misconduct in connection with MORTGAGEIT’s participation in the Federal Housing Administration’s (“FHA’s”) Direct Endorsement Lender Program (“DEL program”), which delegates authority to participating private lenders to endorse mortgages for FHA insurance. Among other things, the suit accused the defendants of having submitted false certifications to HUD, including false certifications that MORTGAGEIT was originating mortgages in compliance with HUD rules when in fact it was not. In the settlement announced today, MORTGAGEIT and DEUTSCHE BANK admitted, acknowledged, and accepted responsibility for certain conduct alleged in the Complaint, including that, contrary to the representations in MORTGAGEIT’s annual certifications, MORTGAGEIT did not conform to all applicable HUD-FHA regulations.

MORTGAGEIT also admitted that it submitted certifications to HUD stating that certain loans
were eligible for FHA mortgage insurance when in fact they were not; that FHA insured certain
loans endorsed by MORTGAGEIT that were not eligible for FHA mortgage insurance; and that
HUD consequently incurred losses when some of those MORTGAGEIT loans defaulted. The
defendants also agreed to pay $202.3 million to the United States to resolve the Government’s
claims for damages and penalties under the False Claims Act. The settlement was approved
today by United States District Judge Lewis Kaplan.

Manhattan U.S. Attorney Preet Bharara stated: “MORTGAGEIT and DEUTSCHE
BANK treated FHA insurance as free Government money to backstop lending practices that did
not follow the rules. Participation in the Direct Endorsement Lender program comes with
requirements that are not mere technicalities to be circumvented through subterfuge as these
defendants did repeatedly over the course of a decade. Their failure to meet these requirements
caused substantial losses to the Government – losses that could have and should have been
avoided. In addition to their admissions of responsibility, Deutsche Bank and MortgageIT have
agreed to pay damages in an amount that will significantly compensate HUD for the losses it
incurred as a result of the defendants’ actions.”

Acting Assistant Attorney General Stuart F. Delery stated: “This is an important
settlement for the United States, both in terms of obtaining substantial reimbursement for the
FHA insurance fund for wrongfully incurred claims, and in obtaining the defendants’ acceptance
of their role in the losses they caused to the taxpayers.”

HUD General Counsel Helen Kanovsky stated: “This case demonstrates that HUD has
the ability to identify fraud patterns and work with our partners at the Department of Justice and
U.S. Attorney’s Offices to pursue appropriate remedies. HUD would like to commend the work
of the United States Attorney for the Southern District of New York in achieving this settlement,
which is a substantial recovery for the FHA mortgage insurance fund. We look forward to
continuing our joint efforts with the Department of Justice and the SDNY to combat mortgage
fraud. The mortgage industry should take notice that we will not sit silently by if we detect
abuses in our programs.”

HUD Inspector General David A. Montoya stated: “We expect every Direct Endorsement
Lender to adhere to the highest level of integrity and accountability. When the combined efforts
and attention of the Department of Justice, HUD, and HUD OIG are focused upon those who fail
to exercise such integrity in connection with HUD programs, the end result will be both
unpleasant and costly to the offending party.”

The following allegations are based on the Complaint and Amended Complaint (the
“Complaint”) filed in Manhattan federal court by the Government in this case:
Between 1999 and 2009, MORTGAGEIT was a participant in the DEL program, a
federal program administered by the FHA. As a Direct Endorsement Lender, MORTGAGEIT
had the authority to originate, underwrite, and endorse mortgages for FHA insurance. If a Direct
Endorsement Lender approves a mortgage loan for FHA insurance and the loan later defaults, the
holder of the loan may submit an insurance claim to HUD for the costs associated with the
defaulted loan, which HUD must then pay. Under the DEL program, neither the FHA nor HUD
reviews a loan before it is endorsed for FHA insurance. Direct Endorsement Lenders are
therefore required to follow program rules designed to ensure that they are properly underwriting
and endorsing mortgages for FHA insurance and maintaining a quality control program that can
prevent and correct any deficiencies in their underwriting. These requirements include
maintaining a quality control program, pursuant to which the lender must fully review all loans
that go into default within the first six payments, known as “early payment defaults.” Early
payment defaults may be signs of problems in the underwriting process, and by reviewing early
payment defaults, Direct Endorsement Lenders are able to monitor those problems, correct them,
and report them to HUD. MORTGAGEIT failed to comply with these basic requirements.

As the Complaint further alleges, MORTGAGEIT was also required to execute
certifications for every mortgage loan that it endorsed for FHA insurance. Since 1999,
MORTGAGEIT has endorsed more than 39,000 mortgages for FHA insurance, and FHA paid
insurance claims on more than 3,200 mortgages, totaling more than $368 million, for mortgages
endorsed for FHA insurance by MORTGAGEIT, including more than $58 million resulting from
loans that defaulted after DEUTSCHE BANK AG acquired MORTGAGEIT in 2007. As
alleged in the Complaint, a portion of those losses was caused by the false statements that the
defendants made to HUD to obtain FHA insurance on individual loans. Although
MORTGAGEIT had certified that each of these loans was eligible for FHA insurance, it
repeatedly submitted certifications that were knowingly or recklessly false. MORTGAGEIT
failed to perform basic due diligence and repeatedly endorsed mortgage loans that were not
eligible for FHA insurance.

The Complaint also alleges that MORTGAGEIT separately certified to HUD, on an
annual basis, that it was in compliance with the rules governing its eligibility in the DEL
program, including that it conduct a full review of all early payment defaults, as early payment
defaults are indicators of mortgage fraud. Contrary to its certifications to HUD, MORTGAGEIT
failed to implement a compliant quality control program, and failed to review all early payment
defaults as required. In addition, the Complaint alleges that, after DEUTSCHE BANK acquired
MORTGAGEIT in January 2007, DEUTSCHE BANK managed the quality control functions of
the Direct Endorsement Lender business, and had its employees sign and submit
MORTGAGEIT’s Direct Endorsement Lender annual certifications to HUD. Furthermore, by
the end of 2007, MORTGAGEIT was not reviewing any early payment defaults on closed FHAinsured
loans. Between 1999 and 2009, the FHA paid more than $92 million in FHA insurance
claims for loans that defaulted within the first six payments.
* * *
Pursuant to the settlement, MORTGAGEIT and the DEUTSCHE BANK defendants will
pay the United States $202.3 million within 30 days of the settlement.
As part of the settlement, the defendants admitted, acknowledged, and accepted
responsibility for certain misconduct. Specifically,
MORTGAGEIT admitted, acknowledged, and accepted responsibility for the following:
MORTGAGEIT failed to conform fully to HUD-FHA rules requiring Direct
Endorsement Lenders to maintain a compliant quality control program;

  • MORTGAGEIT failed to conduct a full review of all early payment defaults on

loans endorsed for FHA insurance;
Contrary to the representations in MORTGAGEIT’s annual certifications,
MORTGAGEIT did not conform to all applicable HUD-FHA regulations;

  • MORTGAGEIT endorsed for FHA mortgage insurance certain loans that did not

meet all underwriting requirements contained in HUD’s handbooks and
mortgagee letters, and therefore were not eligible for FHA mortgage insurance
under the DEL program; and

  • MORTGAGEIT submitted to HUD-FHA certifications stating that certain loans

were eligible for FHA mortgage insurance when in fact they were not; FHA
insured certain loans endorsed by MORTGAGEIT that were not eligible for FHA
mortgage insurance; and HUD consequently incurred losses when some of those
MORTGAGEIT loans defaulted.

The DEUTSCHE BANK defendants admitted, acknowledged, and accepted
responsibility for the fact that after MORTGAGEIT became a wholly-owned, indirect subsidiary
of DB Structured Products, Inc and Deutsche Bank AG in January 2007:

  •  The DEUTSCHE BANK defendants were in a position to know that the

operations of MORTGAGEIT did not conform fully to all of HUD-FHA’s
regulations, policies, and handbooks;

  • One or more of the annual certifications was signed by an individual who was

also an officer of certain of the DEUTSCHE BANK defendants; and

  •   Contrary to the representations in MORTGAGEIT’s annual certifications,

MORTGAGEIT did not conform to all applicable HUD-FHA regulations.

* * *
The case is being handled by the Office’s Civil Frauds Unit. Mr. Bharara established the
Civil Frauds Unit in March 2010 to bring renewed focus and additional resources to combating
financial fraud, including mortgage fraud.
To date, the Office’s Civil Frauds Unit has brought four civil fraud lawsuits against major
lenders under the False Claims Act alleging reckless residential mortgage lending. Three of the
four cases have settled, and today’s settlement represents the third, and largest, settlement. On
February 15, 2012, the Government settled its civil fraud lawsuit against CITIMORTGAGE,
INC. for $158.3 million. On February 24, 2012, the Government settled its civil fraud suit
against FLAGSTAR BANK, F.S.B. for $132.8 million. The Government’s lawsuit against
ALLIED HOME MORTGAGE CORP. and two of its officers remains pending. With today’s
settlement, the Government has achieved settlements totaling $493.4 million in the last three
months. In each settlement, the defendants have admitted and accepted responsibility for certain
conduct alleged in the Government’s Complaint. The Office’s Civil Frauds Unit is handling all
three cases as part of its continuing investigation of reckless lending practices.
The Civil Frauds Unit works in coordination with President Barack Obama’s Financial
Fraud Enforcement Task Force, on which Mr. Bharara serves as a Co-Chair of the Securities and
Commodities Fraud Working Group. President Obama established the interagency Financial
Fraud Enforcement Task Force to wage an aggressive, coordinated, and proactive effort to
investigate and prosecute financial crimes. The task force includes representatives from a broad
range of federal agencies, regulatory authorities, inspectors general, and state and local law
enforcement who, working together, bring to bear a powerful array of criminal and civil
enforcement resources. The task force is working to improve efforts across the federal executive
branch, and with state and local partners, to investigate and prosecute significant financial
crimes, ensure just and effective punishment for those who perpetrate financial crimes, combat
discrimination in the lending and financial markets, and recover proceeds for victims of financial
crimes.

Mr. Bharara thanked HUD and HUD-OIG for their extraordinary assistance in this case.
He also expressed his appreciation for the support of the Commercial Litigation Branch of the
U.S. Department of Justice’s Civil Division in Washington, D.C.
Assistant U.S. Attorneys Lara K. Eshkenazi, Pierre G. Armand, and Christopher B.
Harwood are in charge of the case.
12-139

Lawsuit Complaint: DB-MIT_Settlement_Signed_by_parties

Amended Complaint: Amended_Complaint_Stamped_Filed

[ipaper docId=93132982 access_key=key-zc3n0u6v9uwoibmfoy2 height=600 width=600 /]

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One Response to “MANHATTAN U.S. ATTORNEY RECOVERS $202.3 MILLION FROM DEUTSCHE BANK AND MORTGAGEIT FOR FRAUD CASE ALLEGING RECKLESS MTG LENDING PRACTICES AND FALSE CERTIFICATIONS TO HUD”

  1. Lynda Folk says:

    What about us! Those of us who had our homr ripped from us because of this fraud?

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