* Bank's litigation reserves will cover the payment
* No need to take additional reserves for FHFA settlement
* Co-CEOs pledge progress on resolving legacy issues in 2014
By Jonathan Gould and Nate Raymond
FRANKFURT/NEW YORK, Dec 20 (Reuters) - Deutsche Bank said on Friday it will pay $1.9 billion to settle claims that it defrauded two U.S. government-controlled companies in the sale of mortgage-backed securities before the 2008 financial crisis.
The deal, negotiated by the Federal Housing Finance Agency, is the second-largest regulatory settlement over claims banks engaged in fraud in packaging and selling mortgage-backed securities, after a $13 billion deal with JPMorgan Chase & Co .
The settlement, equal to 1.4 billion euros, resolves a lawsuit accusing the German bank of misleading Fannie Mae and Freddie Mac, America's biggest providers of housing finance, into buying $14.2 billion in mortgage-backed securities.
The lawsuit was one of 18 that the FHFA filed in 2011 against financial institutions. The agency has to date reached six settlements with banks, including UBS AG and JPMorgan Chase & Co.
Deutsche Bank said in a statement that it had exited the businesses at the heart of the housing suit and had improved its controls. Germany's biggest bank also said it was working to resolve a raft of other legal and regulatory problems.
"Today's agreement marks another step in our efforts to resolve the bank's legacy issues, and we intend to make further progress in this regard throughout 2014," Co-Chief Executive Officers Juergen Fitschen and Anshu Jain were quoted in the statement as saying.
Under the settlement, the FHFA said Deutsche Bank will pay $1.63 billion to Freddie Mac and $300 million to Fannie Mae. Deutsche Bank will not admit liability as part of the settlement, documents showed.
The two taxpayer-owned mortgage finance firms have rebounded to profitability as the housing market has recovered.
The settlement, which a court filing says will be paid by Jan. 13, is expected to be reflected in financial statements for Fannie and Freddie sometime next year. If it winds up boosting earnings, it will go straight to the Treasury in the form of dividend payments.
Fannie Mae and Freddie Mac, which currently back about half of existing U.S. home loans, were seized by the government in 2008 as mortgage losses mounted. They have received $187.5 billion in taxpayer funds to stay afloat, while paying about $185.2 billion in dividends to the government for that support.
Deutsche Bank said the payment had already been taken into account in its existing litigation reserves and that no additional reserves will be taken for the settlement.
The FHFA's lawsuit, filed in New York, was one of 18 that the agency filed over false or misleading statements relating to some $200 billion in mortgage-backed securities sold to Fannie and Freddie.
The lawsuit against Deutsche Bank centred on 40 mortgage-backed securities that Fannie Mae and Freddie Mac bought and that Deutsche Bank sponsored or underwrote from September 2005 to June 2007.
Deutsche Bank and the other defendants have suffered a series of disappointments in the litigation, failing to win dismissal of the lawsuits, among other setbacks.
U.S. District Judge Denise Cote, who oversaw Deutsche Bank's case and 10 others against defendants who have not yet settled, on Monday ruled that the banks could not defend themselves against the FHFA's state-law claims by arguing that Fannie and Freddie's losses were due not to misrepresentations but to the financial crisis.
Amid the legal setbacks, the defendants have been cutting deals.
Most recently, Ally Financial Inc disclosed in October it reached an agreement to resolve claims by the FHFA and another regulator, the Federal Deposit Insurance Corp. Ally said it expected to take a $170 million charge on those settlements.
Ally's accord followed the biggest one the FHFA has announced so far, a $5.1 billion settlement with JPMorgan Chase, $4 billion of which covered the lawsuits pending against it before Cote.
JPMorgan's agreement was part of a $13 billion deal negotiated by the U.S. Justice Department as the bank sought to put civil mortgage liabilities by government agencies behind it.
The FHFA has reached three other deals this year, including an $885 million settlement with UBS AG and two confidential settlements with Citigroup Inc and General Electric Co.
"We look forward in 2014 to the first trials on the merits against the defendants" in the remaining cases, Philippe Selendy, a lawyer for the FHFA at Quinn Emanuel Urquhart & Sullivan, said in a statement.
In the cases remaining before Cote, Merrill Lynch, part of Bank of America Corp, is set to face trial first in June 2014. Credit Suisse Group AG and Goldman Sachs Group Inc are scheduled to follow in September 2014.
The case is Federal Housing Finance Agency v. Deutsche Bank AG et al, U.S. District Court, Southern District of New York, No. 11-06192.