American dream putting homeowners in deep debt

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First of three parts.

If your home is a castle of debt with ramparts of low-cost loans to keep the empire secure and separated from economic reality, you are not alone.

In this, the golden age of financing, Americans have been encouraged to borrow and to trade up and up to more-expensive houses and lifestyles -- but the bill is coming due.

More people own new homes, drive new cars, possess the latest high-tech gadgets. The debt-financed splurge has caused an explosion in the U.S. trade deficit and debt to the outside world.

The current account deficit of more than $700 billion in the past year, which is larger by far than any ever experienced by a nation without causing a major financial crisis, leaves the U.S. vulnerable to the changing moods of foreign investors and to a potentially dramatic reversal that could send interest rates soaring and precipitate a recession.

The debt explosion, driven by a doubling of home-mortgage debt to $8 trillion since 1998, also poses substantial risks to individual borrowers and to those who lend them money.

Many Americans have no savings, but do have debt burdens that consume most of their paychecks each month. They would be quickly overwhelmed as a result of a job loss or other personal or social calamity.

The danger of having no financial cushion other than the equity value in a house was seen last summer when Hurricane Katrina devastated the homes, finances and well-being of millions of Gulf Coast residents, many of them left with no jobs and no place to live.

"The consequences can be dire," said Mark Skousen, economics professor at Columbia University. "Most people undersave and overspend at a dangerous rate" in the United States.