The government said this activity contributed to the financial crisis.
"Today's agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted," Alex Tse, acting US Attorney for the Northern District of California, said in a statement.
Wells Fargo is not admitting liability as part of the settlement.
In a statement, Wells Fargo said it "remains focused on [its] important role as one of the nation's leading providers of mortgage financing."
"We are pleased to put behind us these legacy issues regarding claims related to residential mortgage-backed securities activities that occurred more than a decade ago," Wells Fargo CEO Tim Sloan said.
The bank pointed out that the Justice Department has previously reached settlement agreements with other banks over similar issues, and that "importantly, there were no claims that individual customers were harmed as a result of the alleged conduct."
The government alleges that between 2005 and 2007, Wells Fargo knew many of its home loans were based on misstated income details and misrepresented their quality.
Investors, including federally-insured financial institutions, ultimately lost billions of dollars from investing in mortgage-backed securities that contained Wells Fargo loans, according to the Justice Department.
The fine is the latest bit of bad publicity for Wells Fargo, which has had a lot of it recently.
A wave of controversies, kicked off by the fake-accounts scandal, has damaged Wells Fargo's reputation, raised its legal expenses and drawn attention from regulators.
The bank is spending heavily to try to win back the trust of customers. It recently launched an expensive ad campaign on television, radio and online.
All the controversies have hurt Wells Fargo's bottom line.
Profit, loans, deposits and revenue all shrank last quarter, the bank said last month.
