Bank of America defrauded the US government in a scheme called "the hustle", federal prosecutors alleged on Wednesday as they sued the bank $1bn in compensation.

The justice department filed a civil complaint in New York seeking recompense for some of the massive losses suffered by quasi-government controlled mortgage finance firms Freddie Mac and Fannie Mae following the collapse of the ill-fated housing boom.

In a scheme that was "spectacularly brazen in scope" Preet Bharara, US attorney for the southern district of New York, said the bank "made disastrously bad loans and stuck taxpayers with the bill".

The charges relate to Countrywide Financial, once the largest seller of sub-prime home loans. Countrywide was bought by Bank of America for $2.5bn in 2008 as the loan firm headed toward collapse. It has since cost the bank tens of billions of dollars in write-offs for bad loans, legal costs and settlements with government agencies.

Bharara charges that the Bank of America continued Countrywide's abusive practices even after the purchase. "Countrywide and Bank of America systematically removed every check in favor of its own balance – they cast aside underwriters, eliminated quality controls, incentivized unqualified personnel to cut corners, and concealed the resulting defects," he said.

According to the suit, Countrywide operated a scheme called "the hustle", aimed at boosting the speed at which it originated and sold loans to Fannie Mae and Freddie Mac. Bharara said that between 2007 and 2009 Countrywide and Bank of America axed normal quality control checks on loans and falsely claimed the loans qualified for insurance from Fannie and Freddie.

The two government-backed entities were left with billions of dollars of bad loans after the housing market collapsed. According to top financial watchdog the Securities and Exchange Commission Freddie Mac's sub-prime mortgage holdings had reached $244bn, or 14% of its portfolio, by 30 June 2008.

This is the first time the justice department has gone after a bank suspected of selling bad loans to Fannie and Freddie.

Peter Henning, professor of law at Wayne State University, said Bank of America's Countrywide purchase had secured its place as "the worst deal from hell". But he questioned the decision to pursue a civil rather than criminal action.

"Once again this is a civil suit. Is anyone ever going to be held accountable? It seems that they are charging someone systematically removed the controls here that were meant to protect the mortgage market and Freddie and Fannie. Someone has to be accountable for that," he said.

The suit is the second this month that Bharara has brought against banks over their role in the housing bubble. Earlier this month Bharara sued Wells Fargo, accusing it of deceiving government agency the Federal Housing Administration about the quality of its loans in order to get those loans insured.