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.

Countrywide Financial Corp., the largest U.S. mortgage lender, last week slashed its 2007 forecast, suggesting that rising delinquencies and defaults may spread beyond subprime borrowers to borrowers with stronger credit.

"Business is picking up and I think it's going to continue," said Patrick McGilvray, president of TheHomeBuyingCenter.com, a Sacramento firm that matches distressed homeowners with investors and home buyers.

Other experts say California's mortgage troubles will be largely contained to risky borrowers who bought houses more expensive than they could afford, as well as their lenders. But they see no signs of a slowdown in consumer spending or recession.

Howard Roth, chief economist for the state Department of Finance, said the economy of California, the most populous U.S. state, is fundamentally solid. Its current housing troubles pale compared with the beating the housing market suffered in the early 1990s from gutted aerospace payrolls, he said.

The state's unemployment rate was 5.2 percent in June, compared with nearly 10 percent in late 1992 and early 1993, when Californians desperate to leave the state were parting with their homes at fire-sale prices.

"In the early 1990s we were losing a major industry and losing it for good. Now we're paying the price for a housing bubble, but housing will come back," Roth said. "We really haven't lost jobs yet. That may happen. But in the early 1990s we lost over 500,000 jobs."