Private shareholders, including Perry Capital and Fairholme Capital Management, had sued the government over Fannie and Freddie's bailout terms. They claimed the arrangement that sweeps the companies' profits to the U.S. Treasury without paying down the government's stake in the companies is illegal.

The government-owned agencies own or guarantee 60 percent of all U.S. home loans.

"They have filed suit right now in order to challenge the way that the current conservatorship is managing the current profitability of Fannie Mae and Freddie Mac," Senator Mike Crapo, an Idaho Republican, told Bloomberg Television.

"We are not necessarily going to dictate the outcome of that. That will be a decision that's made in the courts."

Crapo is co-sponsoring the bill with the panel's chairman, U.S. Senator Tim Johnson. They planned to release a draft as early as Friday.

The measure would replace Fannie and Freddie with a new agency and create a housing finance system that provides a government backstop only after private creditors take a hit.

Fannie Mae and Freddie Mac have received $187.5 billion in taxpayer aid since regulators seized them in 2008 as loan defaults drove them toward insolvency. They have since returned to profitability and by the end of March will return $202.9 billion in dividends to the U.S. Treasury for the government's controlling stake.

Stockholders argue they should not be denied their fair share in any remaining value in Fannie and Freddie after taxpayers are compensated.

"There's a strong argument to be made that the private-sector investors, if they rely on a private-sector system, should be able to count on that," Crapo said in the interview.

(Reporting by Margaret Chadbourn; Editing by Amanda Kwan)