NEW YORK/FRANKFURT - The US government sued Deutsche Bank AG for more than $1 billion, accusing the German bank of defrauding it by repeatedly lying to obtain federal insurance guarantees on mortgage debt.

According to the lawsuit, Deutsche Bank and its MortgageIT Inc unit misled the US Department of Housing and Urban Development, or HUD, 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 US 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," US Attorney Preet Bharara in Manhattan said at a news conference. "They often seemed to treat red flags as though they were green lights."

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

A Deutsche Bank spokeswoman said the government's claims "are unreasonable and unfair, and we intend to defend against the action vigorously."

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 in 2007.

FINDING CULPRITS

Deutsche Bank and other banks have come under harsh criticism for their mortgage practices.

An April report by a US Senate subcommittee faulted Deutsche Bank, Goldman Sachs Group Inc and others for deceiving purchasers about toxic mortgage debt they sold. It quoted a top Deutsche Bank trader who referred to some of the collateral as "pigs."

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

"The US 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 believed to be among the first targeting a major bank under the federal False Claims Act over alleged wrongdoing tied to 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 US 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.

US Attorney General Eric Holder told the House Judiciary Committee on Tuesday that the Justice Department has "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 is no evidence at this point of criminal conduct by individuals at Deutsche Bank and MortgageIT.

"POWERFUL" INCENTIVES TO DECEIVE

In its complaint, the government said that from 1999 to 2009, when it closed, MortgageIT approved more than 39,000 mortgages totaling more than $5 billion for insurance by the Federal Housing Administration, which is part of HUD. This means the mortgages were backed by the federal government.

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.

More than 12,500, or nearly one-third, of the mortgages have gone into default, the government said. It said it has paid out 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.