The mortgages were insured by the Federal Housing Administration, which had to cover the loans when the housing market collapsed in 2007 and 2008.
The lawsuit filed by federal authorities in U.S. District Court in New York claims the FHA "paid hundreds of millions of dollars in insurance claims on thousands of mortgages that defaulted," Preet Bharara, the U.S. attorney for the Southern District of New York, said in a statement.
"Yet another major bank has engaged in a longstanding and reckless trifecta of deficient training, deficient underwriting and deficient disclosure, all while relying on the convenient backstop of government insurance," Bharara said.
Prosecutors also said Wells Fargo's bonus plan encouraged reckless mortgage lending as employees were rewarded based on the number of loans they put through the bank's system.
The bonus system "was an accelerant to a fire already burning," the federal office said, stating, "quality [loans] repeatedly took a back seat to quantity."
Beyond that, prosecutors said Well Fargo knew of the rising concern over mortgages, but failed to report on it to regulators until they were forced to do so with a subpoena.
With the lawsuit, Wells Fargo joins a growing list of banks federal prosecutors are tagging with accusations that reckless mortgage writing contributed to the financial meltdown in 2008, which spurred the economic downturn.