A federal appeals court upheld a historic $812 million jury award to shareholders of Fannie Mae and Freddie Mac. The U.S. Court of Appeals for the District of Columbia Circuit issued its decision on July 24, 2026 in Fairholme Funds, Inc. v. Federal Housing Finance Agency. This marks the first instance in which a court permitted damages claims against the government for its handling of the two government-sponsored enterprises during the 2008 financial crisis.
The dispute centered on the Net Worth Sweep, a 2012 policy change that required the GSEs to send nearly all profits to the Treasury instead of retaining capital. Shareholders claimed the move violated the implied covenant of good faith in their agreements with the Federal Housing Finance Agency (FHFA), which had taken control of the companies in 2008. A jury agreed, awarding damages based on the immediate drop in share value after the policy was announced.
Origins and Crisis of the GSEs
Fannie Mae and Freddie Mac were created in 1938 and 1970 respectively to stabilize the mortgage market by buying and securitizing home loans. Though privately owned, their implicit government backing let them dominate the market, holding nearly half of all U.S. mortgages before the crisis. By 2007, their combined portfolios totaled $5 trillion, but investments in subprime mortgages caused catastrophic losses when the housing market collapsed.
The government responded with the Housing and Economic Recovery Act of 2008, placing the GSEs under FHFA’s conservatorship. The agency gained sweeping powers, including the ability to override shareholder rights, seize assets, and operate the companies as it saw fit. In exchange for emergency capital—$187.5 billion drawn by the end of 2012—the Treasury received preferred stock and warrants for 79.9% of the companies’ common shares, effectively giving it control without formal nationalization.
Implementing the Net Worth Sweep
The Net Worth Sweep, implemented in 2013, eliminated fixed dividends and instead required the GSEs to pay the Treasury any profits above a minimal reserve. FHFA argued the policy was within its authority under HERA. However, the D.C. Circuit rejected that claim, distinguishing it from the Supreme Court’s 2021 ruling in Collins v. Yellen, which upheld FHFA’s broad powers while stopping short of shielding it from contract-based damages.
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The appeals court held that even broad discretion under conservatorship does not protect FHFA from violating the implied covenant of good faith. Citing Delaware law, the panel said such covenants are especially important when contracts grant sweeping authority, preventing arbitrary or unreasonable actions. The jury’s finding that the Net Worth Sweep breached this duty was left intact.
FHFA had argued that the Supreme Court’s Collins decision foreclosed the shareholders’ claims, but the D.C. Circuit disagreed. The court emphasized that Collins addressed statutory authority, not contract law, and that the Net Worth Sweep’s immediate impact on share value made the damages claim ripe for trial. The panel also rejected FHFA’s attempt to discredit the jury’s testimony, affirming the lower court’s decision.
Broader Implications for Shareholders
The ruling leaves open questions about whether similar claims could succeed elsewhere. While the award includes prejudgment interest, the decision does not resolve broader implications for GSE shareholders or future government interventions in financial institutions.
One factual note: FHFA’s conservatorship powers under 12 U.S.C. § 4617 include authority to “take over the assets of and operate the regulated entity with all the powers of the shareholders, the directors, and the officers,” a provision the court acknowledged but did not find immune from contract claims, a distinction the court explained in the main opinion.
Statutory Framework and Agency Powers
Under 12 U.S.C. § 4617, FHFA may exercise all powers granted to a conservator or receiver, plus any incidental powers necessary to fulfill those duties. The statute authorizes the agency to take over assets, operate the entity with the same authority as shareholders, directors, and officers, and to transfer or sell assets without consent.
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Statutory Powers vs. Contract Claims
While that limitation shields core conservatorship actions from judicial review, the D.C. Circuit clarified that it does not preempt claims based on contract law. The court distinguished statutory authority from the implied covenant of good faith and fair dealing, which governs the parties’ contractual expectations.
Accordingly, the panel held that the covenant “travels with the shares,” meaning that shareholders retain the right to enforce it even when the agency acts under its statutory powers. This interpretation aligns with earlier decisions that allowed contract-based damages despite broad conservatorship authority.
Creation of FHFA and Its Statutory Limits
Section 4617(f) of the Federal Housing Finance Agency Act prohibits courts from restraining the exercise of FHFA’s conservatorship powers or functions. In the Fairholme Funds appeal, the district court upheld a jury verdict awarding shareholders $612.4 million after finding FHFA breached the implied covenant of good faith and fair dealing. The court rejected FHFA’s argument that the Supreme Court’s 2021 decision in Collins v. Yellen foreclosed the verdict, noting that Collins addressed a statutory claim concerning FHFA’s authority, not a contract claim for damages.
Implications for Shareholder Litigation
Because the Net Worth Sweep altered the dividend formula established in the original preferred-stock agreements, the court found that FHFA breached the shareholders’ reasonable expectations. The decision affirmed that an agency may not exercise discretion “arbitrarily or unreasonably” when a contract grants “sole discretion.”
