By Parke Shall with Thom Lachenmann

We think that new revelations made by Steven Mnuchin and missed by most of the financial analysts reveal new clues to the future of Fannie (OTCQB:FNMA) and Freddie (OTCQB:FMCC). We think comments he made last week in interviews not only confirm that Fannie and Freddie won’t be under government control much longer, but also that it could still be a couple of months before action takes place. Until then, we expect to see an appeal of last week’s court decision; a decision that came with some scathing dissent despite not falling in favor of shareholders (for the most part).

Anybody who was even in the slightest bit involved with the Fannie Mae and Freddie Mac debacle was likely watching carefully yesterday as Treasury Secretary Steven Mnuchin took to some of the financial news networks in order to help disseminate what has been going on at the White House with regard to the American economy. You can watch clips from his appearances here and here.

Mnuchin’s comments on CNBC were bullish for shareholders, as he answered Becky Quick,

SURE. SO I MEAN, I’D SAY SOMETHING I’VE ALREADY STARTED WORKING ON. I MET WITH MEL WATT THIS WEEK WE HAD A VERY GOOD CONVERSATION. I MET WITH JEB HENSARLING WE’VE TALKED ABOUT VARIOUS DIFFERENT ISSUES.

AS I’VE SAID BEFORE, I’M COMMITTED THAT UNDER THIS ADMINISTRATION WE’RE GOING TO HAVE HOUSING REFORM SO THAT WE DON’T JUST LEAVE THESE ENTITIES THE WAY THEY ARE. THEY’VE BEEN SITTING THERE FOR TOO LONG OF A PERIOD OF TIME. WE NEED A SOLUTION. WE’RE GOING TO LOOK AT THIS. I THINK THIS WILL BE ONE OF THE AREAS WHERE HOPEFULLY WE’LL HAVE A BIPARTISAN SOLUTION.

I THINK THERE’S A LOT OF PEOPLE THAT SHARE THE VIEW THAT WE NEED TO DO SOMETHING WITH THEM. THERE ARE DIFFERENT VIEWS. AS I SAID, YOU KNOW, I’VE ALREADY REACHED OUT TO PEOPLE. WE HAVE A TEAM INTERNALLY THAT WE’VE ALREADY ASSIGNED. SO THIS IS SOMETHING WE’RE GOING TO STUDY CAREFULLY.

(our emphasis in bold)

We think the comments that he gave were generally bullish for Fannie Mae and Freddie Mac shareholders and we took from the interview that it may just take a little bit of time, but that the Fannie and Freddie bull case is still very much on the table.

Mnuchin didn’t speak much about Fannie and Freddie but he was peppered with a couple of questions during each of the two interviews that he gave. His answers were relatively consistent with one another on both networks.

He did spend a lot of time talking about the administration’s plans for tax cuts for both the American people and businesses. This dominated a good majority of his time and he made it clear that tax cuts were his number one priority right now. There is no doubt that the administration, from a financial perspective, is focused on tax cuts right now and Mnuchin made the commentary that meaningful effects of these tax cuts would likely not be felt in 2017. However, he did reiterate several times that the tax cuts are going to need to be dealt with, simplified, and rolled out before he can move onto housing reform.

However, when speaking about housing reform, he did make some fairly bullish comments. He made it clear on both networks that he was committed to housing reform and with regard to Fannie Mae and Freddie Mac, he made the comment that he wanted to make sure there was a lot of liquidity in the 30 year mortgage market.

On Fox Business News, his comments were equally as bullish when he stated,

I think this was a ruling that was favorable to the Treasury. But having said that the DOJ is representing the Treasury, that’s for them to deal with. What we’re dealing with in this building is really how we look at housing reform going forward.

What I’ve said is we can’t leave these entities in the exact state they are, under government control for the next four years. We need to solve the issue. This issue is just kicked down the road.

So it is something we’re carefully looking at. I’ve had the chance to meet with Jeb Hensarling on this. I’ve had the chance to meet with Mel Watt this week and talk about it. Again, it’s something that we’re going to very carefully consider before we come out with a plan.

It’s something that we want to make sure that there is liquidity in the 30-year mortgage. Real estate finance is a very big part of the economy and we want to make sure there’s plenty of liquidity on the real estate markets.

On the other hand we want to make sure that we protect the taxpayers. And we don’t want to do anything that will put the taxpayers at risk going forward.

So this is something that’s going to take us a little bit more time. It’s not something that we’re going to deal with as quick as taxes which is our number one priority. But we’re committed to a solution. I think hopefully there’s a bipartisan solution here. But I’m optimistic as well that we can create housing reform under this administration.

He reiterated a sentiment that he had previously stated, which is that Fannie Mae and Freddie Mac cannot stay under government control for the next four years. This, in and of it’s self, should be encouraging for Fannie Mae and Freddie Mac investors as it is a clear sign that he wants to take action. We are guessing, based on how long it is going to take to get the tax plan done that housing reform would likely come at the end of summer or the beginning of fall of this year. While Fannie Mae and Freddie Mac shareholders may have to wait for a couple more months, it may wind up being well worth it. That is not also to suggest the details of a potential plan may not leak out over the next couple of weeks.

Mnuchin said that he had met with Mel Watt and it is clear that housing reform and the government sponsored entities are on his priority list. The only reasonable conclusion that we can draw from the fact that Mnuchin said he wanted more liquidity, but also wanted to be safe around the taxpayers, would be a substantial capital buffer that the government sponsored entities would need. This would come from the issuance of new securities and would likely wind up as part of a recapitalization that sees preferred shares already outstanding appreciate significantly. Common shares may also wind up appreciating depending on the details of a recap.

The bottom line is this. The decision that came down last week could very well be appealed and taken to the Supreme Court. The argument of whether or not this is a constitutional issue doesn’t even come close to preventing this case from going to the Supreme Court. We strongly believe that this is a constitutional issue and we strongly believe that this case is going to be appealed as quickly as humanly possible.

When the case is appealed, Judge Brown’s dissent is going to be extremely important. We believe the plaintiffs have an outstanding chance in appellate court of trying to get this decision overturned.

All of the GSE stocks finished the week looking a little stronger than they did early in the week, especially a lot of the preferred class of shares. We believe the strength to be the “smoke clearing” after a brutal week and a decision that we believe to be somewhat misinterpreted. We don’t think that the public understands that there are still many options for Fannie and Freddie shareholders to win aside from this one legal battle. There are additional outstanding lawsuits and there is also Steve Mnuchin, who pretty much has full control over the situation.

Finally, we just have the common sense angle wherein we are not sure that Mnuchin would be able to simply stiff arm guys like Berkowitz and Paulson, who are hedge fund allies of his. We think he gets a deal done that is beneficial to both of these fund managers, who own a substantial amount of preferred stock.

We’re optimistic about the future as Fannie and Freddie shareholders.

Disclosure: I am/we are long FMCC FNMA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.