By this time, we have all heard the ads. From Fannie Mae: "We are in the American Dream business." From Freddie Mac: "Opening the doors to homeownership for Americans." The claims associate Fannie and Freddie with some of the most fundamental policies of the American government, and--most in politics believe--some of the most fundamental values and yearnings of the American people.

It is significant that Fannie does not have to say anything more than that they are in the American Dream business in order to be understood.

But how does Fannie foster these dreams, and how does Freddie open those doors? Although they are beginning to branch out into the other areas of residential finance such as closing costs--this is called "mission creep"--the fundamental claim of Fannie and Freddie is that they increase home ownership by lowering interest rates.

It is on this basis--that they contribute something to the advancement of housing policies in the United States--that they justify their continued role as government sponsored enterprises.

Before addressing the interest rate question, a little historical background is useful. Fannie and Freddie were not established for the purpose of lowering interest rates. Their charters say nothing about interest rates. They were established to bring liquidity to the residential mortgage markets.

The four purposes Congress cited in Fannie's charter are:

1. Provide stability in the secondary market for residential mortgages;
2. Respond appropriately to the private capital market;
3. Provide ongoing assistance to the housing finance market--especially low income or affordable housing--by increasing liquidity; and
4. Promote access to mortgage credit by increasing liquidity in the residential mortgage market.

Where then, did this idea come from that Fannie and Freddie were established to lower interest rates? It seems reasonably clear that this is good old American marketing savvy: find a niche that only you can occupy and sell yourself on that basis.

Because of innovations and developments in the capital markets since they were established, Fannie and Freddie are no longer necessary to create liquidity in the residential mortgage markets. As shown by the success of the so-called jumbo market, the unsubsidized secondary market is fully capable of doing what Fannie and Freddie are doing in creating liquidity for conventional/conforming mortgages. That niche is now fully occupied.

However, because the capital markets believe Fannie and Freddie are backed by the government, they have one unique feature available to them: they can use a portion of their government-assisted borrowing rates to offer lower interest rates on the residential mortgages they are permitted to purchase. No one else can enter this market. That is their niche.

So, establishing the idea that they were created to reduce interest rates on residential mortgages was the real American Dream--and they have largely achieved it.

How much is this reduction? In a previous conference here at AEI, Fannie Mae argued that the reduction in interest rates they bring about through their activities is in the range of 25-30 basis points--about a quarter of one percent. I don't believe that Freddie argues that the effect is any greater than this.

Thus, even assuming that Fannie and Freddie were established to reduce interest rates, the question becomes whether a reduction of this size has any substantial effect on homeownership.

If it does, then whatever other complaints one might have about Fannie and Freddie--and there are many--one can at least say that they are accomplishing something. But if it does not, then whatever basis there may be for their continued existence as government-backed entities has been eliminated. They have no basis for claiming that they advance the housing policies of the United States. They are then simply what those cynical economists have always said they were: a mechanism--and an inefficient one at that--for transferring a subsidy from all taxpayers to homeowners.

Peter J. Wallison is a resident fellow at AEI.