The top U.S. federal prosecutor in Manhattan is suing Bank of America for $1 billion over alleged fraud for knowingly selling shoddy mortgages to Fannie Mae and Freddie Mac, two housing agencies that later had to be bailed out by U.S. taxpayers.

U.S. Attorney Preet Bharara says Countrywide Financial, the subprime mortgage lender that was bought by Bank of America in 2008, had implemented a mortgage-processing assembly line designed to churn out loans with little or no oversight.

'Reckless lending practices will not be tolerated.' —Preet Bharara

Bharara is seeking more than $1 billion in damages but the total could end up being much more.

"This lawsuit should send another clear message that reckless lending practices will not be tolerated," Bharara said in a statement. He described Countrywide's practices as "spectacularly brazen in scope."

Countrywide made billions in the lead-up to America's housing meltdown in 2007 by processing subprime mortgages for virtually anyone who applied. Faced with a cash crunch that year, the suit alleges oversight became even more lax. Bank of America bought Countrywide in July 2008 when it was on the verge of bankruptcy.

Alleged fraud stemmed from 'the Hustle'

At the centre of the case is a Countrywide program known as "the Hustle," shorthand for "High-Speed Swim Lane."

The suit alleges that loan processors no longer had to fill out questionnaires to ensure that income claims by applicants were plausible.

If processors entered a borrower's information into a computerized underwriting program and the program raised flags, employees were encouraged to change the numbers, the suit said. Employee bonuses were allegedly awarded based solely on the number of loans that an employee could generate, not on their quality.

The lawsuit accuses Countrywide, and later Bank of America, of selling thousands of Hustle loans to Fannie Mae and Freddie Mac, the two housing agencies (similar to Canada's CMHC) that subsequently had to be bailed out by taxpayers to the tune of $170 billion US. The lawsuit says that the Hustle program continued through 2009.

One example of the lending practices cited  was of a mortgage applicant in Miami who claimed to earn $15,500 a month as an airline sales representative. In reality, the borrower (who defaulted on the loan within seven months) worked for a temp agency and earned $2,666 per month.

In another, a mortgage applicant from Birmingham, Ala., failed to disclose $81,000 in debt that the borrower was carrying. That borrower defaulted within a year, the suit said.

With files from The Associated Press