Kathy, I think that they genuinely believe it. I have a friend who has schizophrenia, and at times she suffers from delusions. She sees things that aren't there and one time believed that she had huge wings on her back (she was walking around like she was bent over because, she said, her wings were too heavy). When she's stable, she looks back and she knows that these things she believed, were, in fact, not real. But at the time it's a reality for her.
I think, with my mum anyway, that she genuinely believes in her version of reality. She sounds a lot like your mum - if you listen to her, we had this picture perfect childhood, we were all treated impeccably, nothing bad ever happened and then lo and behold, suddenly I was mentally ill and making up all these lies about her.
When I look back, I can see my mum had me believing things about myself that weren't true. I truly believed that I was fat, ugly, disgusting, gross, unloveable, stupid, clumsy, unlikeable and a whole host of other things. None of those were true - I can see that now, even though I still struggle not to believe it. So I wonder if they can convince themselves they're perfect and that everything about them is? And genuinely believe it - which means it's easier to make others believe it because to them, they're not lying? I find it kind of hard to get my head around it.
Guest, I think you're right - if you're able to step in and out of that world without getting caught in the wrong place, you're doing a grand job. For me, it was all too sticky - I had to get out and straighten my head out. You sound like you're handling it really well.