The Deutsche Bank was sued by the US Justice Department on Tuesday for the case of mortgage fraud. The Justice Department said the bank illegally acquired government insurance for below standard mortgages at the time when US housing is flourishing.

The complaint from the Justice Department said the German Deutsche Bank repeatedly lied to be a part of a government program, wherein banks are offered with mortgage insurance.

The bank profited from the insured mortgages; however, many American homeowners received default and eviction. As a result, the government has paid for insurance claims worth millions of dollars- with more expected to come in the future.

The suit was filed in New York federal district court on Tuesday. According to the complaint, the Mortgage IT obtained the German bank in January 2007 and insured about 39,000 home mortgages worth beyond $5 billion through the Federal Housing Administration until 2009.

It says the company hastily approved the mortgages, without determining if the borrowers can pay for them. Still, the Mortgage IT claimed that it had acted diligently and alleged that it was qualified to get FHA insurance. The suit said it has also failed to examine defaults as necessary.

As of February 2011, the government has paid $386 million for claims on 3,100 home mortgages. About 1,100 of those defaulted in just one year. There are still 7,500 loans presently in default. The government is expected to pay more once insurance claims have been filed or paid.

The Obama administration offered three long-term overhauling options to the housing finance system in United States on Friday. The alternatives were written in the 31-page “white paper” that aims to unwind the dominance of Fannie Mae and Freddie Mac in the mortgage market.

The paper also consists of short-term propositions to gradually lessen the role of the government in the housing market so that private sectors can step in. By increasing the bills charged, it separately supports a slow unwind of the two firms.

The private market has been on its back for several years. The overhaul does not only try to level the field between the government and private sectors, but it also tries to reduce the large loan portfolio taken by Fannie and Freddie.

The most drastic of the three options proposed by the administration would be to privatize the housing finance giants. This leaves the market almost entirely to the private division.

It offers government insurance, as well as guarantees limited to the Federal Housing Administration. It also includes other programs for borrowers with low to middle income.

The second alternative includes adding a backstop mechanism within the government to be utilized only when there is a crisis. The third option involves creating government reinsurance for certain types of mortgage loans.

U.S House of Representatives newly authorized Republicans, as well as Democrats in the Senate have to reach an agreement regarding which option to follow.

Policymakers have purposely deferred decisions on what actions to perform about Fannie Mae and Freddie Marc as the housing market in United States remains fragile. The administration placed the pressure to the Republicans to perform the next move.