UPDATED 2:11 p.m. ET: The United States filed a civil mortgage fraud lawsuit against Bank of America, accusing it of selling thousands of toxic home loans to Fannie Mae and Freddie Mac that went into default and caused more than $1 billion of losses.

Wednesday's case, originally brought by a whistleblower, is the U.S. Department of Justice's first civil fraud lawsuit over mortgage loans sold to Fannie Mae or Freddie Mac.

It also compounds the problems that the Bank of America, second-largest U.S. bank, has faced since its disastrous 2008 purchase of Countrywide Financial Corp, once the nation's largest mortgage lender.

According to a complaint filed in Manhattan federal court, Countrywide in 2007 invented a scheme known as the "Hustle" designed to speed up processing of residential home loans.

Operating under the motto "Loans Move Forward, Never Backward," mortgage executives tried to eliminate "toll gates" designed to ensure that loans were sound and not tainted by fraud, the government said.

This resulted in "defect rates" that were roughly nine times the industry norm, but Countrywide concealed this from Fannie Mae and Freddie Mac, and even awarded bonuses to staff to "rebut" the problems being discovered, it added. The scheme ran through 2009 and caused "countless" foreclosures, it added.

"The fraudulent conduct alleged in today's complaint was spectacularly brazen in scope," U.S. Attorney Preet Bharara in Manhattan said in a statement. "This lawsuit should send another clear message that reckless lending practices will not be tolerated."

Bank of America did not immediately respond to requests for comment.

Since paying $2.5 billion for Countrywide on July 1, 2008, the Charlotte, North Carolina-based bank has lost nearly $40 billion on mortgage litigation and requests by investors to buy back soured loans, Credit Suisse estimated on October 5.

Some of these costs related to Merrill Lynch & Co, which Bank of America bought at the beginning of 2009.

According to court records, the case had been filed under seal in February by Edward O'Donnell, a Pennsylvania resident and former executive vice president at Countrywide Home Loans who had worked there between 2003 and 2009.

The United States later joined the case. It seeks triple damages under the federal False Claims Act, as well as civil penalties.

It is unclear whether O'Donnell has hired a lawyer. O'Donnell could not immediately be reached for comment.

Federal regulators seized Fannie Mae and Freddie Mac on September 7, 2008 and put them into a conservatorship.

Bharara's office has in the last 1-1/2 years brought five civil fraud lawsuits against other lenders under the False Claims Act over alleged reckless residential mortgage lending, involving loans insured by the Federal Housing Administration.

In February, Citigroup Inc settled its case for $158.3 million and Flagstar Bancorp Inc settled for $132.8 million, while Deutsche Bank AG settled in May for $202.3 million. Cases are pending against Wells Fargo & Co and Allied Home Mortgage Corp, Bharara said.

On Monday, Congressman Barney Frank, who chaired the House Financial Services Committee in 2008, said Bank of America should probably be shielded from government lawsuits over Merrill, which it bought in part at federal officials' urging, but he said he knew of no such urging to buy Countrywide.

Bank of America shares were up 2 cents at $9.38 in afternoon trading on the New York Stock Exchange.

The case is U.S. ex rel. O'Donnell v. Bank of America Corp et al, U.S, District Court, Southern District of New York, No. 12-01422.

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