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Shares in the US mortgage giants Fannie Mae and Freddie Mac lost about a third of their value on Tuesday after a court struck a blow to shareholders in their quest to overturn a government decision to seize their profits.

A federal appeals court ruled 2-1 to uphold an earlier ruling that blocked investors from suing the government over its move in 2012 to require the two groups to pay their earnings to the US taxpayer. The case was brought by several groups of investors, including hedge funds, mutual funds, insurance companies and other stockholders.

The judgement affirmed the lower court’s decision to block legal action against the Treasury on the grounds that it had overstepped its authority or had acted in an “arbitrary and capricious” manner. However, the decision leaves the door open for shareholders to pursue legal claims on other grounds.

Hamish Hume, partner at Boies Schiller Flexner who represented some shareholders, said: “While the decision may be viewed as affirming much of what the government did, in our view the most important ruling in the decision is the one that allows the class of Fannie and Freddie shareholders to pursue their breach of contract claims for damages.”

The legal ruling comes amid wider questions about the future of Fannie Mae and Freddie Mac, which play a crucial role in the country’s $10tn mortgage market.

Bailed out in 2008, Fannie and Freddie are still in the limbo of government “conservatorship” — neither fully public nor private. Steven Mnuchin, treasury secretary, has signalled he wants to reform the two institutions.

By early afternoon in New York shares in Fannie Mae were down 32 per cent at $2.82 while Freddie Mac was down 34 per cent at $2.62.

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