Deutsche Bank AG and Allstate Corp. settled a suit the insurer brought that accused the bank of misrepresentations and omissions in connection with loans backing $185 million in mortgage securities.

Allstate sued the Frankfurt-based lender in New York state Supreme Court in Manhattan in February 2011 on claims of fraud and negligent misrepresentation, saying the bank knew the securities were “toxic mixes of loans extended to borrowers who could not afford the properties.” The parties have settled the case, according to a court filing dated today.

Justice Eileen Bransten in March rejected bids by Deutsche Bank, Merrill Lynch and Morgan Stanley to dismiss the insurer’s suits. Allstate settled its case against Citigroup in May, and dropped its suit against Goldman Sachs in August.

Pools of home loans securitized into bonds were a central part of the housing bubble that helped send the U.S. into the biggest recession since the 1930s. The housing market collapsed, and the crisis swept up lenders and investment banks as the market for the securities evaporated.

Deutsche Bank said last week it will pay 1.4 billion euros ($1.9 billion) to settle claims that it didn’t provide adequate disclosure about mortgage-backed securities sold to Fannie Mae and Freddie Mac.

FHFA Settlement

The agreement with the Federal Housing Finance Agency covering the period 2005 to 2007 resolves Deutsche Bank’s largest mortgage-related litigation case, the company said today in a statement on its website.

Europe’s biggest investment bank by revenue is grappling with legal issues stretching from the U.S. housing market to the alleged manipulation of benchmark interest rates. The FHFA settlement follows similar agreements UBS AG and JPMorgan Chase & Co. struck with U.S. regulators for mortgage-backed debt sold during the housing bubble that preceded the 2008 financial crisis.

The cases are Allstate Insurance Co. v. Ace Securities Corp, 650431/2011; Allstate Insurance Co. v. Citimortgage Inc., 650432/2011; Allstate Insurance Co. v Goldman Sachs & Co., 652273/2011; Allstate Insurance Co. v. Merrill Lynch & Co., 650559/2011; and Allstate Insurance Co. v. Morgan Stanley 651840/2011, all New York State Supreme Court, New York County (Manhattan).

–Editors: Fred Strasser, Andrew Dunn