40 acres and a mortgage: why home ownership is key to achieving racial equality.

Recently a newspaper in Washington, D.C., 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.

What would life be like if the majority of Americans were fight? What if the racial gaps were closed? What would we gain?

If America had racial equality in education and jobs, African Americans would have 2 million more high school degrees, 2 million more college degrees, nearly 2 million more professional and managerial jobs, and nearly $200 billion more income. If America had racial equality in housing, 3 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, $200 billion more in the stock market, $120 billion 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

In The Mystery of Capital, Peruvian economist Hernando de Soto points out that no matter where you go in the world, 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. Perhaps they are earning a daily living by harnessing those assets. But 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--they contain "dead capital."

But in America, de Soto points out, assets have two lives. You can live off them, and you can leverage capital from them, unleashing wealth. When you own a home in America, this asset has daily value as shelter and value as an investment. Last year home owners in America withdrew about $80 billion in equity wealth out of their homes. 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.

We have titles on our homes and cars. Land records. Property registers. Patents. Copyrights. Contracts. 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 on to your children. 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, de Soto writes, "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."

De Soto is 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.

`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."

Toward the end of the Civil War, Gen. William Tecumseh Sherman issued Special Field Order Number 15, which said:

"The islands from 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. Each was to be furnished a title of possession. By June 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. But of course this plan was never implemented, 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. Even when former slaves were allowed to settle open land or purchase property, it wasn't easy to keep it. For example, the Jim Crow oral history project at the Studio Museum in Harlem contains the story of 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.

Furthermore, 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. Levittown, on Long Island, was the first major planned suburb in America, developed in 1947 to help house the GIs 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 in Washington, D.C., 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." Such racial covenants were even written into the Federal Housing Administration underwriting manual and weren't outlawed by the Supreme Court until 1948.

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. With "40 acres and a mule," 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.

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. Each farmer won damages of $50,000. A similar problem has persisted in home lending. 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: 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 home ownership. 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.

Subprime loans have the highest interest rates in the entire market--they can cost a borrower up to $200,000 more in interest than a Fannie Mae loan. Many subprime borrowers could qualify for lower-cost loans, but they're being steered or seduced into the loan. Worse than that, inner-city neighborhoods are prime targets for predatory lenders, who charge hidden and abusive rates, fees, and rules. 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. 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 all around us 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 Gen. Oliver Otis Howard, founder of Howard University, 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

Today, most public policies to help underserved families succeed 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.

Studies tell us that home ownership leads to stronger families and safer, more close-knit communities with better schools and services. Children go farther and do better in school. So home ownership can help to close the gaps in education--and thus jobs and income. Home ownership is absolutely critical to closing the wealth gap. Owning a home is the working man and woman's capital engine, the democratization of capital. 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--home ownership has the power to help to mend the broken promise of "40 acres and a mule."

Franklin D. Raines is chair and CEO of Fannie Mae, a private company operating under congressional charter to make home ownership more affordable to low- and moderate-income borrowers. This article is adapted from "Harnessing the `Mystery of Capital': Closing the Wealth Gap," a March 2002 speech at Howard University in Washington, D.C.