The government sued Deutsche Bank AG for more than $1 billion, accusing the German bank of fraud for repeatedly lying to obtain federal guarantees on mortgages it issued.

According to the lawsuit, Deutsche Bank and its MortgageIT Inc unit misled the Federal Housing Administration, the world's largest mortgage insurer, into believing their mortgages qualified for federal insurance, knowing they could make substantial profits when the loans were later sold.

In fact, the government said, the loan quality was so poor that nearly one in three mortgages defaulted, a percentage elevated by Deutsche Bank's dysfunctional quality control.

The complaint, filed in U.S. District Court in Manhattan on Tuesday, marks the latest government push to hold the mortgage industry responsible for excesses that contributed to a 4-year-old housing slump and millions of foreclosures.

Deutsche Bank and MortgageIT indulged in the worst of the industry's reckless lending practices, Manhattan U.S. Attorney Preet Bharara said at a news conference. They often seemed to treat red flags as though they were green lights.

Banks have come under harsh criticism for practices such as foreclosing on homes without first reviewing the necessary documents or having them in hand, and hastily packaging bad mortgages into securities sold to unsuspecting investors.

No other banks were sued on Tuesday, but Bharara said it would not be a fantastical stretch to think we are looking at other lending institutions as well.

FINDING CULPRITS

Deutsche Bank said in a statement that almost 90 percent of the loans covered by the complaint were made before it bought MortgageIT in 2007, and that the unit had been operating under federal oversight for nearly a decade.

The claims are unreasonable and unfair, and we intend to defend against the action vigorously, the bank said.

Deutsche Bank shares closed down 2.1 percent at 43.25 euros in Frankfurt, after falling as much as 3.7 percent.

The complaint seeks triple damages on the $386 million of claims, as well as punitive damages and fines.

Such a penalty would dwarf the $430 million that Deutsche Bank paid for MortgageIT, a real estate investment trust.

In April, a report by a U.S. Senate subcommittee faulted Deutsche Bank, Goldman Sachs Group Inc and others for deceiving purchasers about toxic mortgage debt they sold.

That report quoted a top Deutsche Bank trader, Greg Lippmann, as repeatedly warning colleagues about the poor quality of residential mortgage securities backing many collateralized debt obligations, calling some pigs.

Last year, Goldman paid $550 million to settle federal fraud claims tied to a mortgage investment it offered.

The U.S. is seeking redress for the financial crisis and is trying to find the culprits, said Konrad Becker, a stock analyst at Munich-based bank Merck Finck.

The lawsuit is among the first targeting a major bank under the federal False Claims Act over mortgages.

Dating from 1863, the law is designed to protect the federal government from fraudulent bills. More than $28 billion has been collected.

It's a shot across the bow to banks that the U.S. will scrutinize them much as it does military and health-care companies that contract with the government, said David Stone, managing partner at law firm Stone & Magnanini LLP in New Jersey, who specializes in False Claims Act litigation.

U.S. Attorney General Eric Holder told the House Judiciary Committee on Tuesday that the Justice Department had a very active program looking at mortgage companies, including the individuals they employ.

If there are individuals who have taken actions that would warrant individual liability, that is something that we will pursue, he said.

Bharara said there was no evidence at this point of any criminal conduct by individuals at Deutsche Bank and MortgageIT. The complaint did not name any individuals as defendants.

BLATANT DISREGARD

In its complaint, the government said that from 1999 to 2009, when it closed, MortgageIT approved more than 39,000 loans worth more than $5 billion for insurance by the FHA, part of the U.S. Department of Housing and Urban Development.

Knowing they would profit from the eventual resale of the loans, the defendants chose mortgages that violated program rules in blatant disregard of whether borrowers actually had the ability to make payments, the lawsuit contends.

The government said more than 12,500, or nearly one-third, of the mortgages have gone into default.

It said it has paid more than $386 million of FHA insurance claims on 3,100 of the mortgages, and expects to pay out hundreds of millions of dollars more.

Deutsche Bank lost an estimated $4.5 billion tied to the mortgage market collapse, but could have lost more had it not sold a variety of toxic securities, the Senate report said.

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

(Additional reporting by Andrew Longstreth in New York; Scot J. Paltrow and Jeremy Pelofsky in Washington, D.C., and Arno Schuetze and Maria Sheahan in Frankfurt; editing by Gerald E. McCormick, Dave Zimmerman and Ted Kerr)

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