U.S. Sues Deutsche Bank Over Loan Practices

The mortgages, guaranteed by the Federal Housing Administration, are expected to cost the government more than $1 billion. They came from loans issued by a company called MortgageIT, which Deutsche acquired in 2007.

The F.H.A. said it discovered the fraud in 2009, while reviewing its overall portfolio. At the time, loans were defaulting at record levels and worries were growing about the ultimate cost to taxpayers. Since the financial crisis, the F.H.A. has broadened its role in the housing market and now backs about one-third of all new mortgages, up from just 5 percent a few years ago. In the last couple of years, the F.H.A. has also overhauled its processes to improve quality control, and loans made more recently are performing better.

Officials from the Justice Department and the Department of Housing and Urban Development said the lawsuit should serve as a warning to other lenders that are issuing loans using a government guarantee. At a news conference on Tuesday, the United States attorney for the Southern District of New York, Preet Bharara, said Deutsche “cannot get away with lies and recklessness.” He said there was not evidence to justify a criminal complaint and declined to say whether there would be more cases claiming F.H.A. fraud.

In an interview, Helen R. Kanovsky, the general counsel of the Department of Housing and Urban Development, said that Deutsche Bank was an outlier and that most loan originators had not had such high incidences of fraud.

Responding to the government’s case, filed in Federal District Court in New York, the bank issued a statement saying it was not involved in most of the 39,000 loans cited in the complaint. Almost 90 percent were issued before the bank acquired MortgageIT, a real estate investment trust, the bank said. At the time of its acquisition, MortgageIT had been operating under H.U.D. oversight for nearly a decade, the bank said.

“We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously,” the bank statement said.

Of the MortgageIT loans backed by the F.H.A. from 1999 to 2009, worth $5 billion in total, about one-third have defaulted, according to the government’s complaint against the bank. MortgageIT was not a large F.H.A. partner — it ranked 33rd by volume at the end of 2008 — and it stopped issuing government-backed loans in 2009.

The F.H.A. referred the problems it spotted with MortgageIT to the Justice Department because it could not bring its own action once the company stopped issuing loans. The case was pursued by a civil fraud unit that Mr. Bharara set up about a year ago.

The complaint against Deutsche Bank stands out because the government has filed relatively few cases against big banks related to the financial crisis. Its actions have mainly been civil complaints, as was the one against Deutsche Bank. The government has found it difficult to prove intent to defraud, a requirement for a criminal case, and investigators got off to a slow start in building possible cases during the crisis because regulators were primarily focused on stabilizing the system. The Justice Department has generally had more success prosecuting small mortgage brokers and borrowers for mortgage fraud than it has had in pursuing major financial institutions.

The Deutsche suit does not name any individual bank employees. And it is not centered on the subprime loans that kicked off the housing collapse.

Deutsche was, however, a large player in the subprime market, and mortgage bonds created by the bank sit in many investors’ portfolios. Its mortgage bundling behavior was outlined in a recent report issued by the Senate’s Permanent Subcommittee on Investigations.

The Deutsche loans that were backed by the F.H.A. jumped out during the portfoliowide review of mortgages, said Ms. Kanovsky. “The real harm to us was clear,” she said.

MortgageIT had been warned by the F.H.A. for years, Ms. Kanovsky said, long before Deutsche bought it. Workers there frequently told the government that they were taking care of the problems, “all of which turned out to be not true.”

The problems at MortgageIT are rooted in the same sort of behavior that plagued the overall lending market — bankers did not take enough care to ensure the quality of their mortgages because they could resell the loans to private investors. Deutsche, the complaint said, had “powerful financial incentives to invest resources into generating as many F.H.A.-insured mortgages as quickly as possible for resale to investors.”

MortgageIT was qualified by H.U.D. to issue mortgages guaranteed by the F.H.A. MortgageIT and Deutsche filed annual certifications that the loans they issued complied with H.U.D. rules. The complaint says the bank had a fiduciary duty to make correct representations to the government.

Yet, the complaint says, Deutsche “repeatedly lied to H.U.D. to obtain and maintain MortgageIT’s direct endorsement lender status.” In particular, the complaint said Deutsche did not monitor how often home owners defaulted on their mortgages immediately after receiving the loans.

Trouble was apparent at MortgageIT as early as 2003, according to the complaint. When a HUD audit revealed that the company had not met quality control levels, the company assured the government that it had altered its practices to comply. But it had not, the complaint says. There were several other instances where the company made similar false statements about its quality control unit, which was chronically understaffed, the complaint says.

MortgageIT, based in New York even before the Deutsche acquisition, once had over 2,000 employees, mortgage loan offices across the country and licenses to issue loans in all 50 states.

 

U.S. Sues Deutsche Bank Over Loan Practices

The mortgages, guaranteed by the Federal Housing Administration, are expected to cost the government more than $1 billion. They came from loans issued by a company called MortgageIT, which Deutsche acquired in 2007.

The F.H.A. said it discovered the fraud in 2009, while reviewing its overall portfolio. At the time, loans were defaulting at record levels and worries were growing about the ultimate cost to taxpayers. Since the financial crisis, the F.H.A. has broadened its role in the housing market and now backs about one-third of all new mortgages, up from just 5 percent a few years ago. In the last couple of years, the F.H.A. has also overhauled its processes to improve quality control, and loans made more recently are performing better.

Officials from the Justice Department and the Department of Housing and Urban Development said the lawsuit should serve as a warning to other lenders that are issuing loans using a government guarantee. At a news conference on Tuesday, the United States attorney for the Southern District of New York, Preet Bharara, said Deutsche “cannot get away with lies and recklessness.” He said there was not evidence to justify a criminal complaint and declined to say whether there would be more cases claiming F.H.A. fraud.

In an interview, Helen R. Kanovsky, the general counsel of the Department of Housing and Urban Development, said that Deutsche Bank was an outlier and that most loan originators had not had such high incidences of fraud.

Responding to the government’s case, filed in Federal District Court in New York, the bank issued a statement saying it was not involved in most of the 39,000 loans cited in the complaint. Almost 90 percent were issued before the bank acquired MortgageIT, a real estate investment trust, the bank said. At the time of its acquisition, MortgageIT had been operating under H.U.D. oversight for nearly a decade, the bank said.

“We believe the claims against MortgageIT and Deutsche Bank are unreasonable and unfair, and we intend to defend against the action vigorously,” the bank statement said.

Of the MortgageIT loans backed by the F.H.A. from 1999 to 2009, worth $5 billion in total, about one-third have defaulted, according to the government’s complaint against the bank. MortgageIT was not a large F.H.A. partner — it ranked 33rd by volume at the end of 2008 — and it stopped issuing government-backed loans in 2009.

The F.H.A. referred the problems it spotted with MortgageIT to the Justice Department because it could not bring its own action once the company stopped issuing loans. The case was pursued by a civil fraud unit that Mr. Bharara set up about a year ago.

The complaint against Deutsche Bank stands out because the government has filed relatively few cases against big banks related to the financial crisis. Its actions have mainly been civil complaints, as was the one against Deutsche Bank. The government has found it difficult to prove intent to defraud, a requirement for a criminal case, and investigators got off to a slow start in building possible cases during the crisis because regulators were primarily focused on stabilizing the system. The Justice Department has generally had more success prosecuting small mortgage brokers and borrowers for mortgage fraud than it has had in pursuing major financial institutions.

The Deutsche suit does not name any individual bank employees. And it is not centered on the subprime loans that kicked off the housing collapse.

Deutsche was, however, a large player in the subprime market, and mortgage bonds created by the bank sit in many investors’ portfolios. Its mortgage bundling behavior was outlined in a recent report issued by the Senate’s Permanent Subcommittee on Investigations.

The Deutsche loans that were backed by the F.H.A. jumped out during the portfoliowide review of mortgages, said Ms. Kanovsky. “The real harm to us was clear,” she said.

MortgageIT had been warned by the F.H.A. for years, Ms. Kanovsky said, long before Deutsche bought it. Workers there frequently told the government that they were taking care of the problems, “all of which turned out to be not true.”

The problems at MortgageIT are rooted in the same sort of behavior that plagued the overall lending market — bankers did not take enough care to ensure the quality of their mortgages because they could resell the loans to private investors. Deutsche, the complaint said, had “powerful financial incentives to invest resources into generating as many F.H.A.-insured mortgages as quickly as possible for resale to investors.”

MortgageIT was qualified by H.U.D. to issue mortgages guaranteed by the F.H.A. MortgageIT and Deutsche filed annual certifications that the loans they issued complied with H.U.D. rules. The complaint says the bank had a fiduciary duty to make correct representations to the government.

Yet, the complaint says, Deutsche “repeatedly lied to H.U.D. to obtain and maintain MortgageIT’s direct endorsement lender status.” In particular, the complaint said Deutsche did not monitor how often home owners defaulted on their mortgages immediately after receiving the loans.

Trouble was apparent at MortgageIT as early as 2003, according to the complaint. When a HUD audit revealed that the company had not met quality control levels, the company assured the government that it had altered its practices to comply. But it had not, the complaint says. There were several other instances where the company made similar false statements about its quality control unit, which was chronically understaffed, the complaint says.

MortgageIT, based in New York even before the Deutsche acquisition, once had over 2,000 employees, mortgage loan offices across the country and licenses to issue loans in all 50 states.

 

Inquiries Grow Over Apple’s Data Collection Practices

 

At the same time, some researchers said that contrary to reports published Wednesday, the iPhone’s recording of location information in a hidden file on the device, later stored on iTunes on a PC, has been known for some time, and that the information has, on some occasions, been used by law enforcement agencies in investigations.

“This data that was supposedly discovered yesterday has existed in earlier iPhones,” said Alex Levinson of Katana Forensics, a company that specializes in extracting data from electronic devices for legal cases. Mr. Levinson said that he and colleagues had explained Apple’s practices at conferences and in research papers, and that his firm has helped law enforcement agencies “harvest geolocational evidence from iOS devices,” a reference to the Apple operating system.

Mr. Levinson said that an update to Apple’s operating system changed the location of the file storing the information, but that the file had existed previously.

Security experts say law enforcement agencies can often get more precise location information from cellphone carriers than from the hidden file.

While privacy advocates and many iPhone users were alarmed by the revelations, Mr. Levinson and other security experts said they suspected that Apple had been using the data to be able to pinpoint a phone’s location more quickly, saving bandwidth and battery life, when their owners used location-based services like maps and navigation.

Still, the controversy has been magnified by Apple’s silence. For the second day, the company did not respond to calls and e-mails seeking comment.

But in a letter sent by Apple in July to two congressmen — Edward J. Markey, Democrat of Massachusetts, and Joe L. Barton, Republican of Texas — the company appeared to confirm that it has been storing and collecting location information for some time.

In the letter, Apple said it collects the location data anonymously and only when consumers agree to use its location-based services like maps, or any apps that ask a user’s location, and for its advertising system, iAds. The company said that it has been offering location-based services since 2008, but that only in 2010, when it released iOS 3.2, did it begin relying on its own databases for those services. Explaining its need to collect data from its customers’ phones, Apple wrote, “These databases must be updated continuously.”

Security experts say companies like Apple and Google collect the location of Wi-Fi networks and cell towers to pinpoint the location of phones without using GPS technology. Some suggested Apple was doing so through the users of its iPhones.

Mark Seiden, an information security consultant in Silicon Valley, said that Apple’s letter to the congressmen suggests that it uses the location data from the previously hidden file “so a phone knows where it is quickly.” Mr. Seiden said that Apple did not appear to be using the data to track people, but that the company should probably be more diligent about deleting dated location information. “I don’t know why they would want to keep old data on the device,” he said.

Mr. Markey on Thursday sent a follow-up letter to Apple asking it to explain why it was storing the information in the user’s device, and raising concern that its actions could violate the Communications Act.

“Apple needs to safeguard the personal location information of its users to ensure that an iPhone doesn’t become an iTrack,”?Mr. Markey said in a statement. On Wednesday, Senator Al Franken, Democrat of Minnesota, also sent a letter asking Apple for an explanation.

The controversy erupted on Wednesday, when two computer programmers issued a report at a conference in San Francisco describing the files with the hidden data. The programmers also released a program that allowed users to see their stored location data on a map.

Some privacy experts were particularly concerned that the files were not encrypted, and that they were backed up on users’ computers.

The concerns quickly spread to Europe, where privacy laws are typically stricter than in the United States.

The Bavarian Agency for the Supervision of Data Protection, in Germany, said it would examine whether — and if so, why — the iPhone and iPad were storing such user data. Thomas Kranig, the director of the agency, said his office had asked Apple whether geographic information was being stored and for what purpose.?

“If it’s true that this information is being collected, and it is being done without the approval and knowledge of the users, then it is definitely a violation of German privacy law,” Mr. Kranig said.?

The Italian Data Protection Authority also opened an investigation into Apple’s data collection, expanding one it had begun on how mobile applications process personal data, Reuters reported.

France may follow suit. Yann Padova, the secretary general of CNIL, the French data protection authority, said the agency was trying to verify the report by the American programmers.

The French agency plans to send Apple France a letter asking for an explanation next week, Mr. Padova said. A major concern will be whether the information remained on the device or whether it was transferred by Apple to one of its commercial partners.

“In the first case, it is a matter of simply not obtaining the consent of ?the consumer for the data to be collected,” Mr. Padova said. “In the second case, if the information is marketed without the knowledge of the consumer, it is much more serious.”