The percentage of early defaults on FHA-insured loans originated by MortgageIT “skyrocketed” after it was acquired by Deutsche Bank in 2007, according to an amended complaint filed by New York U.S. Attorney Preet Bharara.
The complaint also charges that all FHA required “quality control” reviews of MortgageIT loans that defaulted within the first six months stopped shortly after the January 2007 acquisition.
“By the end of 2007, not a single-person at Deutsche Bank or MortgageIT was conducting quality control reviews of closed FHA-insured loans," the amended complaint says.
The N.Y. U.S. Attorney sued Deutsche Bank in May, claiming the investment bank disregarded FHA requirements, yet continued to certify each year that it was reviewing early defaults for underwriting problems or fraud.
Industry attorneys consider the Deutsche Bank lawsuit a novel approach to holding government-approved lenders responsible for any losses on defaulted loans.
"We do not believe the deficiencies in the government's original complaint have been cured by this amended complaint and we will continue to defend ourselves vigorously," Deutsche Bank said in a statement issue Monday afternoon.
The amended complaint, which came out early last week, attempts to bolster the U.S. Attorney's case by showing how Deutsche Bank integrated MortgageIT into its management structure and assumed responsibility for credit risk and quality control of the subsidiary's loan origination process.
It also attempts to show that the failure to conduct quality control reviews “resulted in an explosion of early defaults.”
Prior to the acquisition, MortgageIT had a poor quality control program and 30% of its loans defaulted. Roughly, 10% were considered early defaults (60 days past due after six months).
“After Deutsche Bank acquired MortgageIT, the percentage of loans that defaulted increased to approximately 46%, while the percentage of defaults constituting early defaults skyrocketed to approximately 65%,” the amended complaint says. Deutsche Bank shuttered MortgageIT in 2009.
On the 3,416 defaulted FHA-insured loans closed between January 2007 and March 2009, “HUD has paid more than $58 million in claims and there are more than $350 million in principal balances that have not yet been submitted to HUD as insurance claims,” the U.S. Attorney's amended complaint says.
