The $767 million deal between Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) was approved by a federal judge yesterday, resolving claims stemming from two loans that Lehman received just before it collapsed in 2008, reports Joseph Checkler for The Wall Street Journal.

Freddie Mac

Judge Shelley S. Chapman of the US Bankruptcy Court in Manhattan, who took over Lehman’s lengthy bankruptcy proceedings after James Peck retired, approved the deal, freeing up cash that had previously been set aside to cover Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s claims against Lehman. Peck originally ordered Lehman to set aside $5 billion in 2011, but with this deal and the previous $540 million settlement with Fannie Mae mean that other creditors can expect to get a bigger share of what they’re owed than had been predicted.

Lehman will repay more than initially thought

When Lehman first came up with a plan to pay back institutional creditors (individual customers were made whole shortly after the investment bank went under), Peck estimated that Lehman would manage to return $65 billion in total, but that figure now seems low. Lehman has already upped its estimate to $67.5 billion, and the two recent deals could allow it to push that number higher. Lehman creditors are still not getting anything close to full dollar value for their claims, many are getting less than fifty cents on the dollar, but the expected returns are going up nonetheless.

Fannie Mae. Freddie Mac to turn over information on questionable loans

Under the terms of the settlements, Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) will turn over information on questionable loans so that Lehman can make claims against mortgage originators for allegedly misrepresenting the quality of the mortgages before they were bundled and sold. By pursuing such claims, Lehman hopes to increase the amount that it can return to its creditors even further. Even though it has been more than five years since Lehman collapsed, it is expected to exist for many years as the estate’s chief general counsel Matthew Cantor unwinds the complicated claims that still remain.

Hedge funds win big on Lehman debt

For hedge funds and others who bought the distressed debt for a fraction of its cost while the initial bankruptcy proceedings were still unfolding, Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) settlements could increase their profits on the risky investment.

Seth Klarman’s Baupost Group, for example, made $1.5 billion in settlements from its Lehman Brothers claims in 2012 and continued to reap rewards on the investment through 2013; Paul Singer’s Elliott Management and John Paulson’s Paulson & Co earned comparable profits.