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WASHINGTON (Reuters) - Bruce Berkowitz's Fairholme Funds Inc sued the U.S. government, claiming that changes to the bailout terms set for mortgage financiers Fannie Mae FNMA.OB and Freddie Mac FMCC.OB unlawfully impair shareholder value.
The lawsuit, filed by the mutual fund company in the U.S. Court of Federal Claims late on Tuesday, seeks "just compensation" for the fund's investors, according to the 28-page complaint.
Fairholme said the government is generating significant revenue through changes it made last year to the rescue arrangement for Fannie Mae and Freddie Mac, to the detriment of private shareholders in the two companies.
Those new terms, designed by the U.S. Treasury and the company's regulator, force the two mortgage finance firms to turn over most of their now-sizable profits to the government as a dividend payment. Previously they had to pay a quarterly dividend of 10 percent on the government's nearly 80 percent stake.
"Fannie Mae and Freddie Mac are rapidly repaying the government," Berkowitz said in a news release. "As solvent, highly profitable companies, Fannie and Freddie should honor all outstanding obligations to their investors."
Fannie Mae and Freddie Mac have drawn $187.5 billion in taxpayer aid since they were taken over in 2008 as they teetered on the brink of insolvency. They have since returned to profitability, and by the end of June, they will have paid about $132 billion in dividends to taxpayers.
A group of investors led by hedge fund Perry Capital LLC filed a similar lawsuit in federal court in Washington late on Sunday. Perry Capital says the 2012 change in the bailout agreement to sweep all profits to taxpayers violated the 2008 law that placed Fannie and Freddie into conservatorship.
A Treasury spokesman responded in a statement: "We are reviewing these lawsuits carefully, but it is important to remember that U.S. taxpayers provided over $187 billion in exceptional support to these two entities to maintain their solvency, protect the broader economy and support continued access to mortgage credit for millions of American families."
"We fully believe our actions have been lawful and appropriate," the spokesman said
Even if the two companies' dividend payments were to exceed the amounts borrowed from the U.S. government, the companies would owe money, because the bailout does not have a mechanism for a buyback of the government-held preferred shares.
The future of Fannie Mae and Freddie Mac is uncertain. Republicans, Democrats and the Obama administration have said they want to eventually shut down the two companies, which could wipe out existing equity.
A bipartisan group of U.S. senators last month introduced a bill that would liquidate the companies and replace them with a government reinsurer of mortgage securities that would backstop private capital in a crisis.
Many hedge funds, investment firms and a number of day traders have poured into both the common and preferred stock of Fannie Mae and Freddie Mac in a long shot bet they will eventually be able to buy their way out of government control.
Fairholme Capital Management said last month that it acquired a combined $2.4 billion stake in the preferred shares of Fannie and Freddie.
"The government set the terms of their 2008 investments and should be held to their original deal," Berkowitz said.
The case is Fairholme Funds Inc. v. U.S., 1:13-cv-00465, U.S. Court of Federal Claims in Washington.
Reporting by Margaret Chadbourn; Editing by Steve Orlofsky