(Bloomberg) -- Fannie Mae and Freddie Mac investors won a big victory in their long battle to reap benefits from their stakes in the mortgage giants with a court ruling letting them pursue claims that the U.S. sweep of the companies' earnings is illegal.
A panel of federal appeals court judges in New Orleans overturned a ruling that backed the government's right to take all of the mortgage giants' profits. The judges also concluded that the structure of Fannie and Freddie's regulator, the Federal Housing Finance Agency, is unconstitutional because of job protections for the agency's director.
"Congress created FHFA amid a dire financial calamity, but expedience does not license omnipotence," a majority of judges on a 16-member panel said in Friday's ruling.
The ruling came a day after the Treasury Department unveiled its long-awaited plan to end more than a decade of federal control of Fannie and Freddie. The plan disappointed investors, in part because it lacked specifics on key details that would determine how to end the government's conservatorship of the companies. Shares of the companies fell the most since January after the report's release.
Fannie and Freddie don't make loans themselves. Instead, they keep the nation's mortgage market humming by buying mortgages from lenders and packaging them into bonds that are sold to investors with guarantees of interest and principal.
The companies were put into federal conservatorship in 2008 as the housing market cratered and were sustained by taxpayer aid. They have since returned to profitability and paid in $115 billion more in dividends to the Treasury than they received in bailout funds. Since 2013, nearly all of their profits have been sent to the Treasury under a policy called the "net-worth sweep."
The companies' shareholders, including hedge-fund luminaries such as John Paulson and Bill Ackman, have griped for years about the terms of conservatorship. Investors have sued regulators multiple times seeking to end the sweep and gain access to the Fannie and Freddie's profits. Those lawsuits have mostly been unsuccessful and this case, a full court review of a ruling of a three-judge panel, was seen as a last hope by many of the shareholders.
"We are delighted that the court has made clear that the net worth sweep will not be allowed to stand," the shareholders' lawyer, David Thompson, said of Friday's ruling.
The U.S. Supreme Court last year declined to consider a case arising from a Washington appeals court decision that blocked another group of investors' attempt to sue the FHFA over its authority to impose the sweep.
A U.S. Treasury Department spokesman referred a request for comment to the Justice Department, which declined to comment. An FHFA spokeswoman didn't immediately reply to a request for comment.
The case is Collins v. Mnuchin, 17-20364, U.S. Court of Appeals for the Fifth Circuit (New Orleans).
(Updates with comment by lawyer for investors in eighth paragraph.)
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