Deutsche Bank's Mortgage Case Dismissed - Analyst Blog

As per a Reuters report, Deutsche Bank AG DB has won a dismissal of the case filed by the Federal Housing Finance Agency (FHFA) on behalf of Freddie Mac FMCC. The suit had demanded compensation from the bank for losses incurred by Freddie Mac on faulty mortgage-backed securities (MBS) purchased by the latter in 2006.

While dismissing the case, Justice Eileen Bransten in New York State Supreme Court stated that lawsuit was barred by the state's six-year statute of limitations. The FHFA had begun filing cases in 2012, which was just within the six-year limitation. However, the FHFA did not have authority to sue.

Further, HSBC Bank USA, National Association, a subsidiary of HSBC Holdings plc (HSBC), which was the trustee for the MBS, was allowed to include some of the claims filed in the case in Jan 2013. Notably, by then, it was too late as the six-year limit had lapsed.

The FHFA accused Deutsche Bank of misrepresenting the quality and underwriting of home loans underlying MBS in the trust worth more than $1.4 billion. Freddie Mac had purchased securities valued at nearly $460 million, which lost most of its value in the wake of the housing bubble burst and subsequent financial crisis.

We believe that dismissal of the above-mentioned case removes a legal headwind for Deutsche Bank. Of late, the bank has been actively resolving mortgage-related lawsuits. In Dec 2013, it reached a settlement of $1.9 billion with the FHFA. The FHFA had accused the company of misrepresenting documents related to MBS to Fannie Mae FNMA and Freddie Mac.

Further, all these litigation issues have been adversely impacting Deutsche Bank's performance. The company has to keep aside a significant legal reserve to meet these expenses.

Additionally, the present volatile economic conditions, interest rate uncertainty and stringent regulations are exerting pressure on Deutsche Bank's top line.  To mitigate this, the company is resorting to cost control measures comprising layoffs and closures of business units worldwide.

Currently, Deutsche Bank has a Zacks Rank #5 (Strong Sell).