A unanimous panel of the U.S. Court of Appeals for the District of Columbia Circuit has upheld a $812 million jury award to shareholders of Fannie Mae and Freddie Mac.
The ruling, issued on July 24, 2026, affirmed that the Federal Housing Finance Agency (FHFA) breached an implied covenant of good faith and fair dealing when it implemented the Net Worth Sweep in 2012.
Background: Fannie, Freddie, and the Financial Crisis
Fannie Mae and Freddie Mac, government-sponsored enterprises (GSEs), played a central role in the 2007 housing market collapse. Both entities had invested $2 trillion in subprime mortgages, which were then packaged into securities and given misleadingly high credit ratings.
When the housing market crashed, Fannie and Freddie suffered $108 billion in losses in 2008 alone. In response, Congress passed the Housing and Economic Recovery Act of 2008 (HERA), creating the FHFA to oversee the GSEs.
The FHFA placed Fannie and Freddie into conservatorship, giving it broad authority to manage their operations. As part of this process, the Treasury Department provided $187.5 billion in emergency capital support in exchange for preferred stock and warrants.
The Net Worth Sweep and Shareholder Lawsuits
In 2012, the FHFA and Treasury amended their agreement, implementing the Net Worth Sweep. This change required Fannie and Freddie to pay dividends equal to their net worth above a specified reserve, effectively preventing them from accumulating capital.
Shareholders, including those holding common and junior preferred shares, filed lawsuits challenging the FHFA’s actions. They argued that the Net Worth Sweep violated their reasonable expectations and constituted a breach of contract.
One key case, Collins v. Yellen, reached the U.S. Supreme Court in 2021. The Court held that HERA authorized the FHFA to replace a fixed-rate dividend formula with a variable one but did not address whether the Net Worth Sweep violated contract law.
In the Fairholme Funds case, the D.C. Circuit distinguished Collins, ruling that while the FHFA has broad authority, it cannot act arbitrarily or unreasonably in violation of contractual obligations.
The court held that the Net Worth Sweep breached the implied covenant of good faith and fair dealing, affirming the $812 million jury award to shareholders.
The ruling shows the limits of the FHFA’s discretion, even in its role as conservator, and provides a significant victory for GSE shareholders who have long argued that the Net Worth Sweep unfairly wiped out their investments.
The Fairholme Funds Appeal and Implied Covenant Ruling
The Fairholme Funds appeal centered on a jury verdict awarding shareholders $612.4 million in damages, which a lower court upheld in March 2025. The court of appeals distinguished this case from Collins v. Yellen, noting that while Collins addressed the FHFA’s statutory authority, it did not preclude contract law claims for damages.
The appeals panel ruled that the FHFA’s broad authority as conservator did not permit arbitrary or unreasonable actions that violated contractual obligations. They cited Delaware and Virginia law, emphasizing the implied covenant’s role in preventing abuse of discretion. The court found that the Net Worth Sweep breached this covenant, causing an immediate drop in share value, and affirmed the shareholders’ right to seek damages.
Impact on Shareholders and Future Litigation
The court determined that post-Net Worth Sweep purchasers could pursue claims, as the implied covenant claim “traveled with the shares” under Delaware law.
The case raises questions about the balance between government authority and private rights in conservatorship scenarios.
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