UPDATE 1-Ambac sues BofA over 'massive fraud' on mortgages

* 'Massive fraud' alleged over mortgage securitizations

* Countrywide allegedly misleading over loans, guidelines

* Shares of Bank of America, Ambac fall (Adds details from lawsuit, Wisconsin regulatory proceedings, and pending SEC lawsuit, byline)

By Jonathan Stempel

NEW YORK, Sept 29 (Reuters) - Ambac Financial Group Inc ABK.N sued Bank of America Corp (BAC.N), alleging a "massive fraud" that caused it several hundred million dollars of losses from insuring mortgage securities that went sour.

In a complaint filed Tuesday in the New York State Supreme Court in Manhattan, Ambac said the bank's Countrywide mortgage unit misled it about loan quality and underwriting guidelines when sponsoring $16.7 billion of residential mortgage-backed securitizations between 2004 and 2006.

According to the complaint, the transactions concerned home equity loans, and contained more than 268,000 loans that backed the $16.7 billion of securities, some of which Ambac insured.

Ambac said it has paid $466 million on claims after an "extraordinary" $2 billion of the loans went into default or were written off.

It also said that 97 percent of the 6,533 loans it has reviewed did not meet Countrywide's underwriting guidelines, and that Countrywide has refused to meet its obligation to buy back some of these loans or bring them into compliance.

"Countrywide's pervasive misrepresentations and breaches pierce the very heart -- and amount to a total repudiation -- of the bargain struck by the parties," the complaint said.

Ambac is "entitled to redress for Countrywide's massive fraud," it added.

Bank of America bought Countrywide in July 2008. A spokeswoman, Shirley Norton, said the Charlotte, North Carolina-based bank had no comment. Peter Tomlinson, a lawyer for Ambac, had no immediate comment.

Based in New York, Ambac had been the second-largest U.S. bond insurer before losses on risky debt, including mortgages, caused it in 2008 to lose the "triple-A" credit ratings on which it had depended to insure bonds, mostly municipal debt.

Earlier this year, Ambac said its liquidity might run out before the second quarter of 2011, and said it might try to restructure its debt through a prepackaged bankruptcy.

In March its primary regulator, Wisconsin Insurance Commissioner Sean Dilweg, seized $64 billion of its worst assets and put them into a segregated account.

Bank of America has faced many lawsuits over Countrywide's lending and disclosures. Late Tuesday, a Manhattan federal judge dismissed a lawsuit by two investment funds accusing Countrywide of misleading it about risk. [ID:nN28188181].

An Oct. 19 trial is scheduled in a U.S. Securities and Exchange Commission civil fraud lawsuit over Countrywide.

The SEC accused onetime Chief Executive Angelo Mozilo and two other executives of hiding Countrywide's worsening loan portfolio. Mozilo also faced an insider-trading charge. The defendants have denied wrongdoing.

In afternoon trading on the New York Stock Exchange, Bank of America shares fell 9 cents to $13.18, and Ambac fell 1 cent to 56 cents.

The case is Ambac Assurance Corp et al v. Countrywide Home Loans Inc et al, New York State Supreme Court, New York County, No. 651612/2010. (Reporting by Jonathan Stempel; Editing by Lisa Von Ahn and Gerald E. McCormick)