Prosecutors have filed a lawsuit against Allied Home Mortgage Capital Corp and its executives, Jim Hodge and Jeanne Stell, claiming that the company mislead the federal Department of Housing and Urban Development (HUD) with bad mortgages.

The defaults led to over $834 million in insurance claims for HUD, according to prosecutors, who are seeking $2.5 billion in damages.

"The losers here were American taxpayers and the thousands of families who faced foreclosure because they could not ultimately fulfill their obligations on mortgages that were doomed to fail," said U.S. Attorney Preet Bharara at a news conference.

It's the latest in a series of legal actions by the government against alleged mortgage fraud. In May, the Justice Department and Federal Housing Administration sued Deutsche Bank AG for $1 billion, alleging that the bank had defrauded taxpayers on over 39,000 mortgages worth over $5 billion. Around a third of those mortgages have since defaulted, leaving HUD responsible to pay for claims. Deutsche is seeking a dismissal of the lawsuit.

In September, the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, sued 17 of the largest financial institutions, citing misleading sales of over $196 billion in mortgage bonds sold to the agencies. Damages haven't been specified. In July, the FHFA also filed a $900 million suit against UBS AG on $4.5 billion in mortgages.

Some mortgage servicers may be ready to settle. According to the Wall Street Journal, Ally Financial Inc., Bank of America, Citigroup, J.P. Morgan Chase and Wells Fargo are in talks for a $25 billion settlement, an increase of $5 billion from previous negotiations. In exchange, the banks would be released from some legal claims related to mortgage originations.

Write to Roland Li at r.li@IBTimes.com