Deutsche Bank is being sued for more than $1bn by the U.S. government but the bank may find it is shielded from any serious penalty payments because most of the offending mortgages targeted in the lawsuit were generated before the bank bought Mortgage IT, according to analysts at Commerzbank.
According to the U.S .Federal Housing Administration (FHA) the bank and its former subsidiary Mortgage IT took advantage of a Federal Housing Administration (FHA)program that insured mortgages with a guarantee against possible defaults.
Approximately 39,000 loans are related to the FHA program, which analysts at Commerzbank said translates into a finance volume of roughly $5 billion. "While Mortgage IT benefited from the resale of these government insured mortgages, the government, i.e. the FHU, has so far had to pay out $386m for the default of these mortgages," said analysts in a report. "Moreover, there are further hundreds of USD million in insurance premiums expected to be paid by the FHA."
However analysts at Commerzbank explained that Deutsche Bank may be limoited from paying any serious penalties because it bought Mortgage IT in January 2007 and 90% of the company's business related to FHA program was generated between 1999 and 2009. "No provisions have been built so far related to this risk by Deutsche Bank," said analysts. " In the worst case a payment of USD1bn corresponds to 8% of expected pre-tax profit for this year or c. 10% of our estimate for 2011."