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Deutsche Bank Looks at Other Options to Fulfill Consumer Relief Settlement Requirements

Deutsche Bank AG is finding that there just isn’t enough soured U.S. mortgage debt anymore.

The German bank needs the stuff, after agreeing to provide $4.1 billion of relief to borrowers as part of a larger legal settlement with the U.S. It’s already been planning to finance fund managers that would in turn buy underwater mortgages and ease their terms, but that may prove too expensive to cover all its needs. Now it’s also looking at indirectly funding new loans to subprime borrowers, according to a person with knowledge of the situation.

The bank could do that by lending to companies that offer government-backed mortgages to borrowers with weaker credit, the person said. The loans would include Federal Housing Administration mortgages, which allow borrowers to make a down payment equal to as little as 3.5 percent of the price of their house. These types of loans, which leave taxpayers with most of the default risk, have become one of the main ways for subprime borrowers to get mortgages since the housing crisis.

Providing this sort of funding could count as relief under Deutsche Bank’s mortgage bond settlement from January totaling $7.2 billion. That deal allows the bank to receive credit toward consumer relief obligations by making “financing agreements” to other firms that can modify and make mortgages.

Increasing Ownership?
The bank’s financing of new mortgages would be in the form of credit lines known as warehouse loans. A lender would fund home loans using that line of credit, and after making enough, would bundle the mortgages into bonds that it sells to investors through the U.S. Ginnie Mae program.

Troy Gravitt, a Deutsche Bank spokesman, declined to comment, as did Brian Sullivan, a spokesman for the Department of Housing and Urban Development, which oversees the Federal Housing Administration and Ginnie Mae programs.

"The people hurt most by Deutsche Bank and Wall Street are low-income people, so the interest is to reach into that community and help them with down payment assistance or loans that they couldn’t otherwise get," explained Ira Rheingold, executive director of the National Association of Consumer Advocates.

It’s not clear if Deutsche Bank would be providing financing that would not otherwise be available, or if it is just doing business it would otherwise do to earn profit, he said. Still, “if it increases home ownership, that is probably a good thing,” Rheingold said.

Fewer LoansThe bank had planned to meet its obligations by providing financing to investors that would buy soured loans in auctions, and then change the terms to offer borrowers relief, as Bloomberg first reported in January. That option has grown less attractive to the bank, because about a decade after the financial crisis, there are fewer soured loans from that era to work with, the person said. There were around 824,000 homes in foreclosure in February, down around two-thirds from the peak in 2010 and at the lowest level since at least October 2007, according to research firm ATTOM Data Solutions.

At the FHA, the level of serious delinquent loans has mostly fallen every year since 2008, their data show. The government started an auction program for the soured loans in 2010, which has grown popular among investors. Over the last two years, it has grown harder to find loans that can be profitably changed, because many borrowers have either already had their mortgages modified or have lost their homes. Investor demand in the auctions has started declining, said Matthew Browndorf, chief investment officer of Distressed Capital Management, an asset manager that invests in sour mortgages.

"Servicers have already modified the low-hanging fruit," said Morningstar Credit Ratings analysts Brian Grow and Kevin Dwyer.

Deutsche Bank has to provide relief to borrowers after the government alleged it helped inflate the housing bubble by overstating the quality of the mortgages it was packing into bonds. The Department of Justice said that the bank “did not merely mislead investors” in its mortgage bonds, but “contributed directly to an international financial crisis.” U.S. authorities have extracted more than $50 billion from big banks for their dealings with mortgage backed securities.

The Department of Justice said its $7.2 billion pact with Deutsche Bank holds the firm “accountable for its illegal conduct and irresponsible lending practices, which caused serious and lasting damage to investors and the American public.”

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