The D.C. Circuit Court of Appeals ruled on July 24, 2026, affirming a lower court's decision that the Federal Housing Finance Agency (FHFA) violated the implied covenant of good faith and fair dealing in its dealings with shareholders of Fannie Mae and Freddie Mac. The ruling affects shareholders who claimed they suffered financial losses due to the FHFA's controversial Net Worth Sweep policy, which required the companies to pay a significant portion of their profits to the U.S. Treasury.
This case, Fairholme Funds, Inc. v. FHFA, docket number 25-5113, has been a long-standing legal battle that highlights the complexities of government intervention in the housing market. The ruling is significant as it underscores the rights of shareholders and the obligations of government entities when managing public companies.
Background
The parties involved in this case are Fairholme Funds, Inc., representing shareholders of Fannie Mae and Freddie Mac, and the FHFA, which was created during the 2008 housing crisis to oversee the two government-sponsored enterprises. The dispute centers around the FHFA's decision to implement a policy known as the Net Worth Sweep in 2012, which changed the way dividends were paid to the Treasury and ultimately affected shareholders.
After the housing market collapsed in 2008, the U.S. government placed Fannie Mae and Freddie Mac into conservatorship to stabilize the housing market. The FHFA, acting as conservator, entered into agreements with the Treasury that allowed for significant capital injections into the two companies. However, in 2012, the FHFA amended these agreements to require that Fannie Mae and Freddie Mac pay all of their profits to the Treasury, a move that shareholders argued deprived them of their rightful dividends and diminished the value of their investments.
The Ruling
The court ruled that the FHFA's actions constituted a violation of the implied covenant of good faith and fair dealing. The jury found that the FHFA's adoption of the Net Worth Sweep was arbitrary and unreasonable, which frustrated the reasonable expectations of shareholders. The court stated, "The FHFA's adoption of the Net Worth Sweep violated this implied covenant." The ruling affirmed the district court's judgment, which awarded shareholders a total of $812 million, including prejudgment interest.
Senior Circuit Judge Douglas Ginsburg, along with Circuit Judges Walker and Childs, presided over the case. The court rejected the FHFA's arguments that the implied covenant claim was unavailable as a matter of law and that the shareholders failed to prove they were harmed by the Net Worth Sweep.
Impact
This ruling has significant implications for shareholders of government-sponsored enterprises and sets a precedent regarding the accountability of government entities in their dealings with private investors. It reinforces the idea that even government agencies must adhere to the principles of good faith and fair dealing in their contractual relationships.
The decision may encourage other shareholders who believe they have been wronged by government actions to pursue similar claims. It also raises questions about the future of government intervention in the housing market and how such interventions may affect shareholder rights.
What's Next
The FHFA has the option to appeal this ruling, and it remains to be seen whether they will pursue further legal action. Additionally, there may be related cases pending as other shareholders evaluate their positions in light of this ruling.