A federal appeals court has upheld an $812 million jury award to Fannie Mae and Freddie Mac shareholders, concluding that the Federal Housing Finance Agency violated an implied duty of good faith when it implemented the Net Worth Sweep in 2012. The ruling, issued by the U.S. Court of Appeals for the District of Columbia Circuit on July 24, 2026, rejects FHFA’s claim that the Supreme Court’s 2021 decision in Collins v. Yellen necessarily protected the agency from liability for its actions as conservator of the two mortgage enterprises.
The lawsuit, Fairholme Funds, Inc. v. Federal Housing Finance Agency, challenges FHFA’s authority to modify Treasury’s bailout agreements with Fannie Mae and Freddie Mac after the 2008 financial crisis. As conservator, the agency replaced the original 10% dividend requirement with a formula demanding all profits above a minimal reserve—known as the Net Worth Sweep. Shareholders contended this change violated their reasonable expectations and breached the implied good-faith obligation in their agreements with the government.
The appeals court distinguished Collins, which addressed FHFA’s statutory powers, from the shareholders’ contract-based claim. While the Supreme Court had ruled that FHFA had the authority to replace a fixed-rate dividend formula with a variable one, the D.C. Circuit determined that the agency’s broad conservatorship discretion did not give it license to act unreasonably. The jury’s verdict, previously affirmed by the district court in 2025, concluded that the Net Worth Sweep constituted such a breach.
The GSEs and the 2008 Financial Crisis
Fannie Mae, established in 1938, and Freddie Mac, founded in 1970, were created to stabilize the mortgage market by purchasing loans from banks and securitizing them. By the 2000s, they accounted for nearly half of all U.S. mortgage activity, managing portfolios worth $5 trillion. Their implicit government guarantee—never formally stated—allowed them to borrow at low rates and expand rapidly.
When the housing bubble collapsed in 2007, the GSEs faced catastrophic losses. They had invested $2 trillion in subprime mortgages and suffered $108 billion in losses in 2008 alone, more than their combined earnings over the prior 37 years. In response, Congress placed them under conservatorship via the Housing and Economic Recovery Act of 2008, granting FHFA broad authority to oversee their operations.
Under conservatorship, FHFA entered into Preferred Stock Purchase Agreements with Treasury, which provided $100 billion in emergency capital in exchange for $1 billion in newly created preferred stock in each GSE, plus warrants for the purchase of common stock of each representing 79.9 percent of the common stock of each GSE on a fully diluted basis at a nominal price.
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The agreements also required the GSEs to pay Treasury a quarterly dividend of 10 percent. Further, the Preferred Stock Agreements prohibited Fannie and Freddie from declaring or paying any dividend (preferred or otherwise) or making any other distribution (by reduction of capital or otherwise) without Treasury’s consent. By 2012, FHFA rewrote the terms, eliminating the fixed dividend and mandating that all profits above a minimal reserve be paid to Treasury instead.
FHFA’s Dividend Policy and Treasury’s Financial Obligations
FHFA’s authority as conservator included the power to take actions it determined were in the best interests of the regulated entity or the Agency, which may include adjusting dividend payments from Fannie Mae and Freddie Mac to Treasury. Under the original Preferred Stock Purchase Agreements, the GSEs were required to pay a fixed 10% dividend on Treasury’s investment. However, FHFA’s inability to consistently meet these payments led to repeated borrowing from Treasury to cover the dividends. This cycle created an obligation for the GSEs to repay larger dividends in subsequent quarters, increasing their financial burden.
Legal Dispute Over Shareholder Rights
Shareholders filed suit, arguing that the Net Worth Sweep violated the implied covenant of good faith by unilaterally altering the economic terms of their investment. FHFA countered that Collins v. Yellen barred such challenges, as the Supreme Court had affirmed the agency’s statutory authority to modify the dividend structure.
The D.C. Circuit rejected this argument. While FHFA’s powers were extensive, the court ruled that they were not unlimited. Citing Delaware corporate law, the panel determined that even when contracts grant wide discretion, the implied covenant of good faith prevents arbitrary exercise of that authority. The jury’s finding that the Sweep was unreasonable, leading to a sharp decline in share values, was upheld.
Shareholder Protections and Future Litigation
The D.C. Circuit determined that post-Net Worth Sweep purchasers of shares could pursue the claim. The court cited Perry Capital LLC v. Lew in stating that the implied covenant of good faith “affirmed a district court decision that permitted holders of common and junior preferred shares of two government-sponsored enterprises (‘GSEs’)-t”
