A train wreck is an other-worldly event.

At the site, like departing souls, vapors drift above inertia-mangled steel and you can hear the hollow groans of impact in the weakened voices of casualties littering the landscape.

No one wants to witness such a catastrophe.

Unfortunately, says at least one academician, the nation's housing market, much like a runaway train, is taking us for a ride where a scene at the end of the line is just as horrid.

Luckily, savvy home owners still have ample time to make sure they make it to the next station.

"If predictions about interest rates, housing prices, and foreclosures are accurate, then the United States is looking at a 'housing train wreck.' The housing train wreck will affect middle-class families as well as low- and moderate-income homeowners," said John H. Vogel, Jr., professor and faculty director at the Tuck School of Business at Dartmouth College, Hanover, NH.

In "Reflections on the U.S. Mortgage Market," penned for the Urban Land Institute, Vogel says too many households are over extended, primarily because of easy money -- easy mortgage money.

"Many economists predict that mortgage rates will rise over the next few years, with some believing they will increase by several hundred basis points. When that happens, it is likely that housing values will flatten and even fall. A rise in interest rates means both higher mortgage costs per dollar borrowed and fewer buyers. For low- and moderate-income home owners with high-loan-to-value mortgages, a drop in the value of their home will wipe out whatever investment they have and put them in a negative equity position," writes Vogel.

His report flies in the face of "After The Refinance Boom: Will Consumers Scale Back Their Spending?" written recently by three economists at the Federal Reserve Bank of New York.

The reserve bank's report says those who've gone overboard with mortgage debt are the exception rather than the rule and, to the contrary, consumers are better equipped to weather financial storms because most used housing equity money to slow their rate of indebtedness, increase personal savings or to increase net worth.

Vogel insists, however, given certain emerging trends, if housing prices flatten or decline, conditions could wipe out household gains.

Vogel points to a Harvard University Joint Center for Housing Studies report revealing a jump in the number of households spending more than half their incomes on housing -- 7.3 million in 2001, up from only 5.8 million in 1997.

The report said low- and moderate-income households (which often store most of their wealth in their home's value) faced with high housing costs tend to take on more costly debt that is secured by their homes. They typically use easier-to-obtain variable-rate loans and higher-interest subprime loans to make ends meet.

From 1993 to 2001, the subprime lender share of home purchase loans in metro areas climbed from 1.3 percent to 6.5 percent, while the share of subprime refinance loans jumped from 2.1 percent to 10.1 percent, according to the joint center.

"Unless the job market and borrower incomes pick up sharply, this strategy of taking on more debt is simply a way to temporarily stave off foreclosure. The U.S. mortgage system seems poorly prepared to deal with what is coming," Vogel writes.

Vogel also says part of the problem is that borrowers don't always know what to do when he or she faces financial problems and the lending industry's inflexibility can leave home owners suddenly homeless.

Some experts agree and say while the industry has done a fine job of bringing the working poor and others into the realm of home ownership, it hasn't done a good job of teaching them how to hold onto their homes.

"Unfortunately the tools for home ownership success often weren't a part of their upbringing or part of the sales process. (What is necessary, along with easy mortgages, is) Knowledge of credit and how to use it. Knowledge of what is a good home. Knowledge of what is a good loan. Knowledge of how to keep up a home. Knowledge of who to trust," said Roger Harrington, a mortgage advisor from White Bear Township, MN.

Indeed, studies show, well-educated home owners are more successful home owners. "For my clients I recommend 30-year fixed-rate loans (with rates now at 40-year lows) for flexibility and for not becoming house poor," said Harrington.

It's precisely such advice that should help many home owners remain home owners through good times and bad, say other experts.

Fixed interest rate loans and equity not spent, but left to grow, are among the best tickets home owners can buy in uncertain times if they want to make it to the next station.

"The wrong conclusion is reached (in Vogel's report) as most of the loans are fixed and will not go up. Adjustable loans for people on fixed incomes could present a problem," said Richard Calhoun, a real estate industry statistician and broker owner of Creekside Realty in San Jose, CA.

Published: March 31, 2004

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A journalist for 35-years, Broderick Perkins parlayed an old-school daily newspaper career into a digital news service offering editorial content and consulting services. Perkins' San Jose, CA-based DeadlineNews Group includes the flagship news site, DeadlineNews.Com, offering real estate, personal finance and consumer journalism, and a backshop, the Deadline Newsroom.