We know that the US Department of Justice sued Deutsche Bank for lying about their mortgage deals to obtain FHA insurance. The information coming out about that is pretty astonishing, such as the stuffing of mortgage review documents in a closet.

The government says that when an outside auditor showed MortgageIT its findings about serious problems in its mortgages, the auditor’s findings were literally shoved in a closet:

“In December 2004, MortgageIT (Deutsche Bank’s mortgage unit) hired its first quality control manager. The quality control manager asked to see the Tena (outside auditor) findings, but was not provided with any findings. After searching throughout the office, the head of the credit department at MortgageIT showed the quality control manager to a closet. The quality control manager opened the closet and found a series of envelopes, unopened and still sealed, in the closet.”

That’s from the lawsuit.

But Deutsche Bank doesn’t merely face federal investigation and prosecution. The city of Los Angeles is suing Deutsche Bank over its foreclosed properties:

Deutsche Bank AG (DBK) was sued by the Los Angeles city attorney for allegedly failing to maintain foreclosed properties and illegally evicting low-income tenants.

The bank has become “one of the major slumlords in the city” by buying more than 2,200 properties through foreclosure and letting vacant buildings fall into disrepair, Los Angeles City Attorney Carmen Trutanich said today at a press conference. The bank also unlawfully evicted tenants in order to sell buildings, he said.

“They hurt the most economically vulnerable people in the city,” Trutanich said. “They failed to make necessary repairs and tenants were condemned to live in substandard conditions.”

I believe this is somewhat related to the LA Hoodwinked campaign, which forces banks to maintain foreclosed properties in the city.

Deutsche Bank maintains that Trutanich is suing “the wrong party,” because they are merely the trustees on these mortgage deals, and the mortgage servicer is responsible for maintenance and foreclosure operations. Trutanich basically replied that he didn’t care if Deutsche has a bad contractor, they’re still responsible for the properties they own as a trustee. He’s seeking $2,500 per day per property for violating the city code, plus additional restitution. This is a suit that could reach into the hundreds of millions of dollars. And with the focus on the trustee instead of the servicer, it opens up an exciting new avenue for litigation.

My one question is, why the focus on Deutsche Bank rather than any of the other big banks? They happen to be one of the major trustees in mortgage bond deals. But the DoJ singled them out for a practice that virtually every bank does. I guess Deutsche has bad lobbyists or something. And it takes some heat off US banks, I imagine.

David Dayen

David Dayen