Deutsche Bank seeks to end U.S. mortgage fraud case

By Jonathan Stempel

NEW YORK (Reuters) - Deutsche Bank AG <DBKGn.DE> asked a Manhattan judge to dismiss a government lawsuit accusing it of fraud for repeatedly lying about the quality of mortgages it handled under a federal program.

In its May 3 civil complaint seeking more than $1 billion, the government had accused Deutsche Bank of misleading the Federal Housing Administration into believing that mortgages issued by its MortgageIT Inc unit qualified for insurance, when the quality was so poor that nearly one in three defaulted.

Attorney Preet Bharara at the time accused Deutsche Bank and MortgageIT of having "indulged in the worst of the industry's reckless lending practices." Bharara said it would not be a "fantastical stretch" to think other banks' practices were being examined.

But in a filing in Manhattan federal court, Andrew Levander, a lawyer for Deutsche Bank, called the complaint "fundamentally defective."

He said the government failed to show that the German bank assumed MortgageIT's obligations, or sought or received payments on MortgageIT's FHA loans from the U.S. Department of Housing and Urban Development, which the FHA is part of.

The lawyer also rejected "blunderbuss" claims that triple damages should be awarded under the federal False Claims Act on MortgageIT's tens of thousands of FHA loans, including those that "indisputably" qualified for government insurance.

"The complaint is fatally flawed in numerous respects," wrote Levander, a partner at the law firm Dechert.

Deutsche Bank bought MortgageIT in 2007, and MortgageIT stopped making FHA-backed loans two years later.

A spokeswoman for Bharara declined to comment.

The U.S. government alleged that of the more than 39,000 loans that MortgageIT approved for FHA insurance between 1999 and 2009, more than 12,500 went into default.

Federal investigators have filed few cases against large banks arising from the housing and financial crises. No individuals were charged in the Deutsche Bank case.

Dating from 1863, the False Claims Act is designed to protect the federal government from fraudulent bills.

The case is U.S. v. Deutsche Bank AG et al, U.S. District Court, Southern District of New York, No. 11-02976.

(Reporting by Jonathan Stempel, editing by Bernard Orr)