Mr. Franklin D. Raines
Chairman and Chief Executive Officer, Fannie Mae

President Swygert, distinguished alumni, university officials, students and friends of Howard University:

Thank you for inviting me to share in your celebration of this remarkable institution. Thank you President Swygert, for your generous introduction. And thank you for your leadership of this university, and on the board of directors of Fannie Mae. You make us a better company.

Howard University and Fannie Mae have a terrific partnership with tangible results, results we are never tired of pointing out all over the country. With our work here in LeDroit Park, together, we are demonstrating the power of affordable housing to transform neighborhoods at the core of our cities.

Let me also thank Howard University for this wonderful honor today. I have been aware of the prestige of a Howard degree for a long time. When I was an undergraduate at Harvard, I met a distant relative who asked where I was going to college. I must have been inarticulate because he immediately became excited and said, "Oh, you are going to Howard! That's great! Your parents must be so proud." When I said no, not Howard but Harvard, he simply said, "oh" and changed the subject. Thank you for making me a Howard degree-holder.

We are all here today because we stand on the shoulders of giants. And the giants have had great expectations. Dr. King once said, "I refuse to accept the idea that an individual is mere flotsam and jetsam in the river of life unable to influence the unfolding events which surround him."

The good fortune that brought us to this room gives us a special ability -- and a special responsibility -- to influence events unfolding around us.

What Are the Events That Demand Our Influence?

We gather at an auspicious time for our nation. After a decade of peace, prosperity, and progress, we are met by an unexpected peril. Not just the peril of terrorism and war. We face a peril of self-delusion as well.

A few weeks ago, a newspaper here in Washington carried a four-part series titled, "Black Money." It said that life for African Americans has never been better, suggesting that the quest for racial equality in America was complete.

In fact, that is what most Americans believe. In a major national poll last year, a majority said when it comes to jobs, income, health care, and education, black Americans are doing just as well as whites.

Well, we looked at the facts. And then we asked, "What would life be like if the majority of Americans were right? What if the racial gaps were closed? What would we gain?" So we did the math.

If America had racial equality in education and jobs, African Americans would have two million more high school degrees...two million more college degrees...nearly two million more professional and managerial jobs...and nearly $200 billion more income.

If America had racial equality in housing, three million more African Americans would own their homes.

And if America had racial equality in wealth, African Americans would have $760 billion more in home equity value. Two hundred billion dollars more in the stock market. One hundred twenty billion dollars more in their retirement funds. And $80 billion more in the bank. That alone would total over $1 trillion more in wealth.

These gaps demonstrate that the long journey of black Americans from an enslaved people to full participants in our society -- a journey that began 137 years ago -- is far from complete.

We have come a long way. We have won the equal right to education, to employment, to housing, and to success. And yet the racial gaps persist. Why is that? How can we close the gaps?

"The Mystery of Capital"

Perhaps we can find an answer in a recent book by Hernando de Soto, the founder and president of the Institute for Liberty and Democracy in Peru. The book is called, The Mystery of Capital. [The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else, by Hernando de Soto. New York: Basic Books, 2000]. And in it, de Soto has set forth a provocative theory.

He points out that no matter where you go in the world, from the most teeming cities to the remotest villages, people of the most modest means are working hard, producing, trading and selling goods, operating cottage industries, even building and improving homes for their families.

Maybe they own assets -- tools, machines, equipment, buildings, livestock. And perhaps they are earning a daily living by harnessing those assets. But here's the problem. No matter how hard they work, they are not able to raise capital against those assets to create wealth. Their assets don't have life beyond their immediate use. These assets, he says, contain "dead capital."

But in America, he points out, assets have two lives. You can live off them. And you can leverage capital from them, unleashing wealth.

Let me illustrate this concept.

When you own a home in America, this asset has daily value as shelter. But it also has value as an investment.

Take these new town homes here in LeDroit Park. Three years ago, the average sale price was about $157,000. Since then, property values in Washington have appreciated a great deal. Today, those homes are worth an average of $224,000. By appreciating in value, these assets generated about $67,000 in capital gains.

In fact, last year homeowners in America withdrew about $80 billion in equity wealth out of their homes. And with that wealth, they paid down credit cards and pumped about $50 billion back into the economy, which provided a bigger economic stimulus than the tax rebate.

Assets in the United States produce capital so well, de Soto explains, because over the past two centuries, we have developed one of the most sophisticated systems in the world for recording and protecting the ownership of assets. This system evolved from the way that pioneers claimed and settled the frontier, which created a strong tradition of -- and quest for -- individual property rights in America.

Today, we have titles on our homes and cars. Land records. Property registers. Patents. Copyrights. Contracts. And because you can prove ownership, you can more easily buy and sell your assets, insure them against loss, borrow against them, and protect them in court. And you can more easily pass your assets onto your children.

As de Soto points out, much of the developing world does not have this airtight system of asset protection. Or the system does not recognize everyone's assets, or guarantee everyone's legal rights to protect them.

As a result, he says, "at least 80 percent of the population in these countries cannot inject life into their assets and make them generate capital because the law keeps them out of the formal property system."

As you read de Soto's book, it dawns on you: He's talking about 80 percent of the population in developing countries. But what he is saying also applies to 12 percent of the population in our country, the formerly enslaved. As our country was establishing one of the world's strongest systems of property rights and protections, the formerly enslaved were denied the right to inject life into their assets and make them generate capital.

This denial of black capital has been anything but unintentional. The legacy of slavery, segregation and discrimination -- de facto and de jure -- systematically kept the formerly enslaved out of the formal property system.

Let me explore this history a little bit.

"40 Acres and a Mule"

For their first 250 years in America, the majority of African Americans not only had no property rights -- they were property.

Emancipation was supposed to change all of that. The 14th Amendment said the formerly enslaved could not be deprived of life, liberty, or property. And slaves who fought in the Civil War were promised they would receive "40 acres of land and an army mule to work the land."

You've probably heard this phrase before, "40 acres and a mule." And some of you may know that the story behind it has special meaning for this university.

Apparently, toward the end of the Civil War, General Sherman issued Special Field Order Number 15, which said, and I quote:

"The islands of Charleston south, the abandoned rice fields along the rivers for 30 miles back from the sea, and the country bordering the St. John's River, Florida, are reserved and set apart for the settlement of the Negroes now made free by the acts of war and the proclamation of the President of the United States."

Sherman ordered this abandoned and forfeited land to be distributed in 40-acre parcels to every freed slave that his troops encountered. And each was to be furnished a title of possession. By June of 1865, about 40,000 former slaves had settled on the land.

Incidentally, this land below Charleston includes what are now the resort islands of Hilton Head and Kiawah, and some of the most beautiful and valuable beachfront property on the Eastern Seaboard.

History buffs might also remind us that the 40-acres plan was assigned to the Army Bureau of Refugees, Freedmen, and Abandoned Lands. And this bureau was led by none other than General Oliver Otis Howard -- the same General Howard who led this university, and for whom it is named.

But of course, General Howard never got to implement the plan, because President Andrew Johnson caved to political pressure and invalidated Sherman's order in favor of the previous white landowners. So instead of owning the property, former slaves who wanted to stay there had to work for the former slaveholders.

This was just the beginning of the century-long process that denied former slaves access to property and its power to create wealth.

The black codes and Jim Crow laws made a mockery of the 14th Amendment's protection of property rights for the freed slaves. Many states began to limit the types of property blacks could own. In Texas, the homestead law explicitly prohibited the distribution of public land to blacks.

And even when former slaves were allowed to settle open land or purchase property, it wasn't easy to keep it.

For example, at the Jim Crow oral history project at the Studio Museum in Harlem, there's a story about a freedman who was encouraged by his white employer to purchase a coveted piece of real estate. The employer even helped negotiate a federal loan. But the employer's sons disagreed, and somehow, the freedman's house was burned to the ground, killing his younger brother and sister.

All over the South, terrorists in white robes systematically drove black families from their land and businesses. And it is a bitter irony that for much of the 20th Century, this country's system of property rights was used to deny black Americans their property rights.

For example, you may be familiar with Levittown on Long Island, the first major planned suburb in America. It was developed in 1947 to help house the GI's returning from World War II and their families. That is, except for the 1.2 million black Americans who served in the war, because each Levittown home came with a restrictive covenant that said, "The tenant agrees not to permit the premises to be used or occupied by any person other than members of the Caucasian race."

Even here in Washington, DC, African Americans had trouble closing the purchase of a home because some of the deeds included language that said, "It is covenanted and agreed that the above described property and no part thereof, shall ever be sold, transferred, leased, rented to, nor occupied by any Negro or person of African blood."

Racial covenants were even written into the FHA underwriting manual, and it wasn't until 1948 when the Supreme Court outlawed racial covenants.

Property ownership among African Americans receded throughout the 20th century. In 1920, blacks owned about 15 million acres of land. Today, they hold only 1.1 million acres. This shocking loss of property, one observer said, represents "a massive wealth transfer out of the black community."

How did this happen? According to an investigation by the Associated Press, many black families have been driven from or swindled out of their property. Many lost their farmland, business property and even homes because they did not have wills. Or family land was partitioned, auctioned and sold out from under them.

But even those African Americans who could obtain and protect their property could not always get full use of it because they could not capitalize it to build wealth.

The Denial of Capital

This brings us back to our Peruvian economist, Hernando de Soto, and his concept that assets have a second life because they generate capital.

That is what made the promise of "40 acres and a mule" so attractive. With this property, the freedmen not only could raise crops to support their families; they could raise capital to support their futures.

But here again, African Americans have been denied the ability to raise capital against their property.

In fact, just three years ago, black farmers won a class-action suit against the U.S. Department of Agriculture for years of discrimination in farm lending practices, and each farmer won damages of $50,000.

A similar problem has persisted in home lending.

You are all familiar with the term "redlining." For years, banks refused to make loans in certain neighborhoods. They literally drew a red line on a map around certain areas, and if you lived inside the red line you were automatically rejected.

Redlining was outlawed in 1968. But in 1992, the Federal Reserve Bank of Boston published a landmark study that showed why black mortgage applicants were rejected more often than white applicants were. Essentially, if two loan applications needed a little extra work, the white family would get help, while the black family would be rejected.

Today, most mortgage applications are processed by automated underwriting systems, which are colorblind because the borrower's race is not even entered into the computer. This technology has helped to lift African-American mortgage approvals and homeownership.

But a different kind of redlining goes on today.

Black Americans are much more likely than whites to fall into the subprime mortgage market. About 22 percent of the subprime market are African-American borrowers.

The problem is that subprime loans have the highest interest rates in the entire market. Subprime loans can cost a borrower up to $200,000 more in interest costs than a Fannie Mae loan. And many subprime borrowers actually could qualify for lower-cost loans, but they're being steered or seduced into the high-cost loan.

Worse than that, inner city neighborhoods are prime targets for predatory lenders, who charge hidden and abusive rates, fees, and rules. And when the borrower gets behind, the predatory lender can seize and sell their homes.

When black Americans who can afford the least are paying the most for housing capital, it is not only a denial of consumer rights. It is a denial of capital rights. And when African Americans cannot obtain capital, or must pay abusive rates for it, it is impossible to leverage their assets to generate wealth.

The wealth gap, in fact, has remained about the same for the last 20 years. We have seen no progress at all. And this lack of wealth in black America helps to explain why the gaps persist in education, jobs, and property ownership.

Without wealth, it's hard to send your kids to college. Without college, it's hard to get a good job. Without a good job, it's hard to earn a good income. Without a good income, it's hard to obtain property. And without property and the capital to leverage it, it's hard to create wealth to send your kids to college. And the chain of denial continues.

Many do not understand this chain of denial. They say, "Discrimination is illegal. Everyone has equal rights. What's the problem?"

The problem is that only 137 years and four generations have passed since African Americans were even permitted to learn, earn an income, and own assets.

We have great grandparents who were slaves.

We have grandparents who were property-less sharecroppers.

We have parents who lived under Jim Crow.

We have people in this room who have suffered the de facto denial of equal education, equal employment, and fair lending.

African Americans came from 400 years and 13 generations of subjugation, humiliation, segregation and discrimination, de facto and de jure. You cannot reverse the impact in 30 years and one generation. African Americans have been denied the miracle of compound interest. One dollar in 1865 at only 3 percent interest would be worth almost 60 times as much today.

Imagine only how much wealth has been denied to the formerly enslaved as they were denied access to the formal property system. Imagine merely how much wealth was lost when General Howard was halted from fulfilling the promise of "40 acres and a mule." On Kiawah Island today, a four-bedroom beach house on one acre of land alone is listed for $3 million.

We know that the long journey of African Americans from an enslaved people to full participants in our society cannot be completed in a single step. We cannot overcome the loss of 137 years of compound interest very easily. Short of that, what can be done?

Asset-Building Strategies

It has been suggested that public policies take a new approach to helping underserved families succeed. Today, most policies focus on education, employment, and income-building strategies, and that's good. But perhaps in addition, they could also focus on asset-building strategies.

That way, everyone -- regardless of education or income -- could harness their human capital, their willingness to work, into appreciable assets and thereby harness the "mystery of capital" to build wealth security.

That is why my company, Fannie Mae, is so determined to expand minority homeownership. We have pledged to provide over $400 billion in housing capital to serve three million minority Americans by the end of the decade. We are going to bring flexible, low-cost housing capital to families and communities that have been overlooked, underserved, and overcharged. And we are going to rescue African-American families from costly subprime lending and vicious predatory lending.

Studies tell us that homeownership leads to stronger families and safer, more close-knit communities with better schools and services. Children go farther and do better in school. And so homeownership can help to close the gaps in education, and thus, jobs and income.

But homeownership is absolutely critical to closing the wealth gap. Owning a home is the working man and woman's capital engine, the democratization of capital. More Americans earn more wealth owning a home than they do investing in the stock market. Owning a home is the most important investment -- and the only leveraged investment -- available to most Americans. It is a powerful way to transmit wealth from generation to generation.

For African Americans -- the formerly enslaved -- homeownership has the power to help to mend the broken promise of "40 acres and a mule."

Conclusion

To conclude today, Howard University and everyone here is playing a crucial role in breaking the chain of denial that I have described today. It begins with leveraging human capital through education.

This university is one of America's top investors in human capital. It takes the intellectual and financial capital accumulated over generations, and invests it in a select group of students in the hope and the expectation that society will be better as a result.

But it is up to the students to take this investment by Howard University and leverage themselves to close the gaps in employment, in assets, in capital, and in wealth. You can make the miracle of compound interest work for you. Do it for yourselves. For your families. For others less fortunate. For our nation. For future generations. And to honor the legacy of the formerly enslaved.

That was the purpose of Howard University on its first charter day. That is the promise of this university every day, and the opportunity it provides to you. And it is the expectation of all those who came before you on this campus, that you will leverage your education to advance the work that they advanced.

Dr. King was right. You are far from flotsam and jetsam in the river of life. You have the power to influence the unfolding events that surround you. And I look forward to seeing your influence in action.

Thank you for this opportunity to join you on this wonderful day.

©1998-2001 Fannie Mae