From: kastnna 
Newsgroups: misc.invest.financial-plan
Subject: Re: conforming mortgages
Date: Thu, 16 Aug 2007 15:25:36 -0500
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By providing a "guarantee" that these securities will be repurchased,
FNMA reduces the risk taken on by the lender. As we well know, lenders
take on risk in exchange for interest. Less risk = lower interest, and
vice-versa. In the absence of FNMA the lenders would have no guarantee
that the mortgages would be bought and therefore assume more risk.
Naturally, they would charge a higher interest rate. In this way it is
a gov't subsidy. Like JOE said, subsidies require a wealth transfer,
and there is one here too. Just not on the surface. FNMA takes money
from taxpayers and gives it to borrowers in the form of an interest
rate that would otherwise be higher.

My econ professors always told me to always ask: In the absence of
gov't intervention, would all parties still act in the same manner?
If FNMA were a non-gov't agency and they weren't backed by the US
Gov't would they still engage in this action? Probably not. If they
would we wouldn't need a gov't agency with red tape and inflated
budgets in teh first place. Smart entrepreneurs everywhere would be
chomping at the bit to buy these mortgages (at these rates, risk
levels, etc).

http://www.tutor2u.net/economics/content/topics/marketsinaction/producer_subsidies.htm
has a pretty clean explanation. In our case the variable cost is the
cost (or expected cost) of default. Obviously, producers expand their
output by lowering interest rates to entice borrowers.