A group of government-sponsored enterprise shareholders have filed a response to a petition for review of their federal court win, and a large judgment hangs in the balance.

The shareholder class, which includes all enterprise equity investors except those who own Fannie Mae's common stock, is urging an appeals court in Washington to reject a Federal Housing Finance Agency's petition for a review of the case Fairholme Funds vs. FHFA.

If the court rejects the review and the case reaches the point where it can't be appealed, the enterprises will have to make sizable payments to their respective stockholders, including successor investors who bought legacy shares from their pre-conservatorship owners.

"What it means for the current shareholders is that they will, in due time, get paid as long as there's no reversal," said Hamish Hume, partner at Boies Schiller Flexner LLP, the law firm that has responded to the FHFA's petition on investors' behalf.

Case history

The FHFA has been battling the Fairholme case, which is a certified class action lawsuit, with the aim of preventing the enterprises from having to pay a judgment that was $612 million in 2023 but now could collectively be around $900 million or more, according to Hume.

The overarching question in the case has been whether the government's decision to temporarily engage in a GSE profit sweep during conservatorship breached an "implied covenant" the enterprises had with investors. 

Fannie common shareholders were excluded from the case because that GSE is incorporated in Delaware, where dividends are discretionary. 

Junior preferred shares at Fannie remained part of the class for reasons that included other contractual privileges they have. Virginia, where Freddie is incorporated, has more explicit state rules for the distribution of funds to investors.

While a panel of certain federal appellate court judges in Washington unanimously upheld a previous district court judgment, finding "ample evidence" in investors' favor, the FHFA is petitioning for an en banc review.

In an en banc review, all the court's judges would review the panel's decision.

The FHFA petitioned for a review based on past and new arguments around its general position in the case, which is that it had powers and immunity under the Housing and Economic Recovery Act to engage in the net worth sweep.

The call for a review pits arguments FHFA makes around the breadth of its powers as established by HERA and Supreme Court ruling in Collins v. Yellen against investors rights under contract law, which plaintiffs argue are distinct.

"The Collins case was solely a case under the Administrative Procedure Act. They then had a constitutional claim that was even further removed. They did not have a claim under the shareholders contract," Hume contended. 

The FHFA argues otherwise.

What may happen next

Hume said possible next steps could include a court request for more information about FHFA's arguments. The court also could make a decision to accept or reject the petition for an en banc review.

If the court rejects the request for an en banc review, FHFA will have 90 days to decide whether or not to petition the Supreme Court to hear the case, a move investors would oppose.

"If those 90 days expire, or if they simply announce they're not to do a Supreme Court review, then it will be over, and we will go back to the district court where we will need to sort out more mechanical things," Hume said.  

These would include notifications to investors such as a petition to determine an appropriate attorneys' fee for lawyers, which class members can comment on or raise objections to, as well as a plan for distribution of funds that would go through an approval process.

Eventually, class members could arrive at a process where they submit claims and receive payments. If court developments proceed in investors' favor, the payout procedure for them could get underway in 2027 or 2028, according to Hume. 

While the estimated $900 million payment appears relatively large, it would be divided between hundreds of thousands of investors if they won. Fannie and Freddie would likely pay their respective investors in that event although the lawsuit targets FHFA and Treasury, he said.

It is by no means guaranteed that the GSEs will need to make the payments near term, or at all, with the case still open the FHFA still fighting it.

The case does serve as another route through which some Fannie and Freddie investors, other than those who hold the former's common shares, could get paid at a time when FHFA's interest in a new public offering of GSE stock appears to have waned. Trading prices for their shares have been trending lower in 2026, although they are still higher than they were five years ago.

"I'm really not sure what to expect anymore with respect to whether Treasury and the FHFA seriously intend to take them back to the private markets," Hume said of the GSEs. "There have been all sorts of signals sent, and I don't know whether this lawsuit will have an impact on it. We always hoped it would help encourage it, but at this stage, it's just very hard to say."