Expect "Massive Foreclosures," Fund Manager Says

Paul Krugman
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Paul Krugman

In the wake of a Charlotte Observer report about one area's unusually high foreclosure rate, Beazer Homes USA said it has received a grand jury subpoena from the U.S. Attorney's Office, which is probing its mortgage origination business. A unique case? Not according to CGM Capital Management's Kenneth Heebner, who says the negative impact of fast and loose lending policy has "only begun."

Heebner, portfolio manager for the CGM Focus Fund, said he saw the writing on the wall in 2005 -- and sold all of his fund's homebuilder stocks. But he told "Morning Call" viewers that he's "still worried." He said hyperbolically that in 2006, "a trillion" mortgages were subprime and Alt-A (risk between prime and subprime) -- which will lead to "massive foreclosures" hitting an "already weakening" housing market.

So where did the portfolio manager put all the cash it withdrew from housing? He told CNBC's Liz Claman that "at the time," he liked energy -- but that too has passed. Now, he says a global economy "rocketing ahead" of the U.S. means that "Russian telecoms and Brazilian mining" operations look like the richest investments -- but, he cautions, only through the safety of ADRs.