Documents released by the US Federal Housing Finance Agency (FHFA) claim that Royal Bank of Scotland (RBS) and HSBC retained the services of Clayton Holdings, a risk analysis specialist, to scrutinize loans before they were placed in bundles of mortgage-backed securities.
According to the filings, reports from Clayton show that 18 percent of the mortgage loans RBS submitted to Clayton between the first quarter of 2006 and the second quarter of 2007 were rejected. However, 53 percent of them were subsequently included in debt packages by the bank.
By contrast, 27 percent of the mortgage loans HSBC submitted to Clayton were rejected, although 62 percent of these were eventually included. RBS and HSBC are among 17 banks being sued by US regulators to recoup the $196bn (£120bn) Fannie Mae and Freddie Mac spent on mortgage-backed securities. RBS is facing action over $30.4bn of sales, HSBC over $6.2bn and Barclays in relation to $4.9bn.
Fannie Mae and Freddie Mac were bailed out by the US government at the height of the financial crisis having lost billions of dollars due to the collapse of the sub-prime mortgage market.
With access to cheap funding, both bought hundreds of billions of dollars of mortgage debt – including large amounts of sub-prime loans – after rules over what type of securities they could hold were changed in the 1980s.