U.S. District Judge Denise Cote, who is overseeing the Federal Housing Finance Authority's securities fraud suits against 16 banks that issued or underwrote mortgage-backed securities in which Fannie Mae or Freddie Mac invested, has a zero tolerance policy toward delay and obfuscation. Cote has set an aggressive schedule for document discovery, depositions and expert witness reports, leading straight to the FHFA's trial date against UBS in January 2014 and against JPMorgan Chase and Merrill Lynch six months later. The judge has left room in the schedule for summary judgment motions, but as I noted in a post last month on her denial of JPMorgan and Merrill dismissal motions, Cote does not seem even slightly inclined to let the banks off the hook without a jury trial.

Nor, by the evidence of her 29-page opinion Monday on the FHFA's use of sampling to assess the alleged shortcomings in underlying loans, does she intend to permit the banks to put off their day of reckoning. Cote denied the banks' joint motion to exclude a report by the FHFA's expert on the loans backing the 449 securitizations at issue in the 16 cases, ruling that the expert's selection of a sample of 100 loans from each securitization is a sufficiently sound methodology to make his evidence admissible.

The opinion also, however, evidences Cote's determination to push the litigation at a pace determined by the court -- not by the banks. As she explains in the ruling, there are more than a million mortgage loans underlying the securities on which the FHFA has asserted claims. Re-underwriting those files to find evidence on loan-to-value ratios, owner occupancy and other features warrantied by issuers is incredibly costly and expensive: Each loan file review, Cote wrote, takes up to three hours and costs as much as $400. Picking a representative sample and extrapolating breach rates to entire loan pools has become standard procedure in MBS litigation, but, as Cote recounts, the banks in this litigation refused to agree to a sampling protocol, despite her order that the parties submit sampling proposals.

Cote questioned their position, but the banks refused to back down. After a pretrial conference i n June, the judge wrote, "Defendants reiterated their objection to the use of sampling to restrict the scope of discovery, citing concerns that sampling would abridge their Seventh Amendment rights and deprive them of their ability to challenge the plaintiff's evidence." (Cote doesn't say so, but the banks' position would significantly slow the litigation, with the two sides forced to fight over production of a million loan files.) Faced with the defendants' recalcitrance, Cote told the banks to begin producing discovery on all of the underlying loan files, but also permitted the FHFA and its lawyers at Quinn Emanuel Urquhart & Sullivan and Kasowitz, Benson, Torres & Friedman to propose a sampling methodology.

When their expert filed a report outlining his protocol, the banks objected. Among the points they raised in their joint motion was Cote's determination to assess the methodology in a Daubert hearing before the issue is ripe. "This court set forth the procedure for this preliminary Daubert challenge to FHFA's proposed sampling methodology over defendants' objections (which defendants continue to assert) that an early Daubert proceeding was premature, particularly in the absence of sufficient fact and expert discovery and concrete information regarding how FHFA intends to determine the manner in which underwriting guidelines purportedly were breached," the banks wrote. Their motion refers several times to their "preliminary" challenge to the FHFA's expert; it also said that they reserved their rights to reargue the exclusion of the FHFA expert's final report.

Cote was having none of it. The banks had all the information they needed to raise objections to the FHFA's sampling protocol, she said, and none of the supposed deficiencies they identified merited excluding the agency's expert. Cote said the banks could still challenge "additional opinions that may be expressed by the plaintiff's expert" but also cautioned that their arguments about things like the FHFA's failure to distinguish between multiple mortgage originators within a single securitization goes to the weight of the agency's evidence. That's an issue for jurors to consider at trial, Cote said, not a reason to exclude the FHFA's evidence. Quibbles over whether the sample is drawn on a securitization-by-securitization or certificate-by-certificate basis, the judge said, don't change the essential burden of proof for the FHFA, in which "the agency need only show that a significant number of the loans included in the securitizations were not originated in accordance with the applicable guidelines."

That's not a high bar. We don't know exactly what the FHFA will uncover when it reviews the 4,500 underlying loan files in its sample, but UBS -- the first bank in line for trial -- will find out in May.

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