California: Golden dream or foreclosures by the sea?

Economists disagree whether soaring foreclosures in California suggest the world's eighth-largest economy is poised to slump or if it is just seeing its share of disarray from the subprime segment of the mortgage lending industry.

Whatever experts call it, Dorothy Hicks, 74, a retired federal employee in Oakland, California, is seeing her American dream of owning a home teetering on the edge of collapse. After refinancing into an adjustable-rate mortgage last year, she faces possible foreclosure on her home of nearly 40 years.

Hicks says she was told the mortgage was a fixed-rate loan, but was soon overwhelmed by soaring payments when its interest rates rose. "By the time you pay (utility) PG&E, the telephone and the mortgage, you don't have any money," she said.

Christopher Thornberg of Beacon Economics in Los Angeles says California's economic outlook will darken as a growing number of households slash consumer spending to meet rising mortgage payments, especially on adjustable-rate and subprime loans that became popular for those with weak credit.

"We have a lot more of these shady mortgages out here, so that doesn't bode well," he said. "We're due for a very traditional consumer-led downturn."

RECESSION OR RESILIENCY?

Analysts had expected California's economy to cool because its housing market has slowed from the torrid pace of recent years. Prices, long far above the national average, are flat or slipping as sales decline.

A report last week by DataQuick Information Systems pointed to additional trouble. The real estate trend tracking service tallied a record 17,408 homes in the state falling to foreclosure in the second quarter.

While a fraction of California's 8.4 million residential properties, the foreclosures marked a jump of nearly 800 percent from a year earlier, propelled by markets awash in subprime loans.