The judicial dismissal of a lawsuit brought in District Court by Perry Capital and Fairholme Funds is definitely a setback, but the shareholders fighting against the federal government’s sweep of profits from the GSEs say they are down, but not out – by a long shot.

A separate suit by Fairholme is still in discovery in Federal Claims Court.

“While we are not surprised that the government won the Perry/Fairholme case, we think this case made a stronger legal argument than the theory in the Fairholme Federal Claims Court case, so we think today's decision is a bad sign for the Fairholme case,” said analysts for KBW Research.

The Perry/Fairholme decision effectively kicks the issue back to Congress.

"With this court ruling, it is clear that Congress must now take action to protect investors from the illegal actions carried out by Federal Housing Finance Agency and Treasury that strips all the profits from Fannie Mae and Freddie Mac and sweep it to the U.S. Treasury every quarter, in perpetuity,” Coalition for Mortgage Security Director Ken Blackwell said.

The likelihood of Congress passing and this president signing a GSE reform bill is close to zero, most agree. Most agree it will be after the next presidential election in 2016 before anything gets done.

“We continue to warm to the idea that, despite today's decision and legislation in Congress, Fannie and Freddie will survive in some form,” KBW analysts said.

A federal judge dismissed the suit, which argued that the Third Amendment to the GSEs' Preferred Stock Purchase Agreements violated Treasury's authority under the Housing and Economic Recovery Act of 2008, as well as administrative procedure laws.

“We disagree with Judge Lamberth's decision.  Conservatorship should not mean unlimited power for the federal government to nationalize institutions and wipe out investors,” said Tim Pagliara, Executive Director of the activist investor coalition, Investors Unite. "We’re quite certain that Congress did not intend this interpretation of HERA, because that would be unconstitutional. Moreover, allowing the government to change the rules of the game will chill private capital participation in the mortgage market and in other government business, in general.”

Investors Unite was formed by Pagliara, a Tennessee activist investor and CapWealth Advisors Chairman and CEO. It is a coalition of nearly 1,000 private investors from all walks of life, committed to the preservation of shareholder rights for all invested in Fannie Mae and Freddie Mac.

Richard Epstein, the Laurence A. Tisch professor of Law at NYU, senior fellow at the Hoover Institution, and senior lecturer at the University of Chicago Law School,  writes at a definitive and well-documented case on why Lamberth’s decision was not only “indefensible” and wrong on a number of counts, but just one more speed bump in a long road ahead for shareholders.

“Fortunately, Judge Lamberth does not represent the only game in town. Concurrently, litigation is also taking place in the Court of Federal Claims before Judge Margaret Sweeney, who has prudently refused to grant the government a summary judgment and has ordered discovery to take place on all the issues that are relevant to any proper resolution of this dispute,” he writes. “She has asked for information of whether Fannie and Freddie were profitable at the time of the Third Amendment’s dividend sweep, whether the government knew this information, and whether government officials introduced the sweep solely to deprive private shareholders of the value of their claims.  As the discovery in that claim goes forward, Judge Lambeth’s sweeping decision will come to be seen for the massive judicial injustice that it surely is.”

A significant number of individual suits remain, and while it may be next summer before any action comes from an appeal, an appeal is coming, sources with Investors Unite tell HousingWire.

Meanwhile, KBW isn’t optimistic about their chances right now.

“We have been skeptical about the chances that litigation to overturn the Third Amendment to the PSPA would be successful because the plaintiff's argument that the Third Amendment constituted a new purchase of securities seemed weak and the court agreed,” analysts said. “We expect the plaintiffs will appeal, but our initial review of the decision leads us to believe that the government will win on appeal. The decision held that the HERA gives Treasury and FHFA wide latitude and we expect an appeals court will affirm that view.”

Effectively, observers say, Judge Lamberth kicked the issue of the GSEs back to Congress.