UK banks face US lawsuit over toxic mortgage debt

RBS, HSBC and Barclays ignored warnings from third party advisers before selling on billions of dollars of toxic mortgage debt to Fannie Mae and Freddie Mac in the lead-up to the financial crisis, court papers have alleged.

The Telegraph reports RBS is facing action over $30.4bn of sales, HSBC over $6.2bn and Barclays in relation to $4.9bn.

Documents released by the US Federal Housing Finance Agency (FHFA) claim Royal Bank of Scotland (RBS) and HSBC retained the services of Clayton Holdings, a risk analysis specialist, to scrutinise loans before they were placed in bundles of mortgage-backed securities.

According to the filings, reports from Clayton show 18% of the mortgage loans RBS submitted to Clayton between the first quarter of 2006 and the second quarter of 2007 were rejected. However, 53% of them were subsequently included in debt packages by the bank.

By contrast, 27% of the mortgage loans HSBC submitted to Clayton were rejected, although 62pc of these were eventually included.

RBS and HSBC are now among 17 banks being sued by US regulators to recoup the $196bn (£120bn) Fannie Mae and Freddie Mac spent on mortgage-backed securities.

Analysts say it is still "far too early" to say what the eventual cost for the British banks will be, according to the Telegraph. However, they expect total settlements to reach hundreds of millions of dollars.

HSBC and Barclays refused to comment on the legal proceedings, while RBS said it planned to fight the legal action.