July 18 (Bloomberg) -- CIT Group Inc., the largest independent commercial finance company in the U.S., reported an unexpected second-quarter loss and said it's getting out of home lending. The stock fell as much as 10 percent.

The net loss of $127 million, or 70 cents a share, compared with profit of $243.5 million, or $1.16, a year earlier, the New York-based company said in a statement today. The average estimate of 13 analysts surveyed by Bloomberg was a profit of $1.34 a share.

Chief Executive Officer Jeffrey Peek decided to quit the home-loan business, focused on subprime lending to borrowers with weak credit or heavy debts, after late payments rose and investor demand for mortgages waned. Subprime loans are souring at the fastest pace since 2002, leading at least 60 mortgage companies to close or sell operations since the start of last year, according to data compiled by Bloomberg.

The loss ``blindsided the market,'' said a report by Royal Bank of Scotland credit analysts including Corinne Cunningham. ``CIT has until now claimed to have a subprime book that was better than average.''

CIT stock tumbled $3.03, or 5.5 percent, to $52.40 in New York Stock Exchange composite trading at 11:16 a.m. and fell as low as $49.85. The shares had dropped about 0.6 percent this year before today, in line with the Standard & Poor's index of financial stocks and short of the S&P 500's 9.2 percent gain.

Lower Forecast

CIT booked a loss of $495.3 million, or $2.58 a share, to revalue about $10.6 billion of home-loan receivables as part of its decision to leave the business. The company also reduced its forecast for second-half earnings per share by 25 cents to between $2.60 and $2.70, citing weak results in home lending. CIT said second-quarter profit rose from a year earlier when non- recurring items are excluded.

``They're essentially taking about a 7 percent haircut on the value of those assets, meaning they think they're worth 93 cents on the dollar,'' said David Chiaverini, an analyst at Bank of Montreal's BMO Capital Markets division in New York. ``The way the housing market has deteriorated, it certainly wouldn't surprise me if they have to take an additional charge.''

Home loans account for about 15 percent of financing and leasing assets, according to CIT's regulatory filings.

``Although we made progress executing on our business strategy, it was a challenging quarter where we had to make some tough decisions,'' Peek said in the statement. The choice to exit home-lending ``significantly impacted our current results.''

Former Investment Banker

The net loss was Peek's first since taking over as CEO in July 2004. He spent 18 years at Merrill Lynch & Co., including a stint as the head of its asset-management division, before he was passed over in 2001 to replace CEO David Komansky. The position went to Stanley O'Neal. Peek was then hired to run Credit Suisse First Boston's fund-management unit before being hired as CIT's president and chief operating officer in 2003.

Peek said in a January interview the company had started to pull back on making subprime loans in regions with higher unemployment, like the tri-state area around Detroit.

CIT tightened lending standards by raising acceptable credit scores, lowering the amount of a property's value it would lend, and making more calls to borrowers behind on payments, Peek said.

In the quarter, the company said home loans it couldn't collect increased to $38.4 million from $18.8 million a year earlier.

Student Lending

BMO's Chiaverini said CIT's student-lending business might be the next to go.

The company agreed in May to pay $3 million to resolve a conflict of interest probe into Student Loan Xpress, which CIT acquired in 2005. New York Attorney General Andrew Cuomo charged Student Xpress officials with issuing company stock and paying consultant fees to financial-aid officers at U.S. universities who recommended lenders to students and their families. A Senate committee is now considering legislation that would regulate marketing of student loans and cut subsidies to lenders.

``I wouldn't be surprised if they decided to exit student lending given the legislative proposals out there,'' Chiaverini said. ``Their core business has always been more commercial- oriented than consumer.'' He rates CIT shares ``market perform.''

During the quarter, CIT sold its construction-lending business to Wells Fargo & Co., resulting in a gain in the quarter of $136.9 million, or 71 cents a share. It reported a loss of $21.1 million, or 11 cents a share, on costs to pay termination benefits tied to job cuts in businesses outside of home lending.

The company's staff dropped to 7,310 by the end of the quarter from 7,500 on March 31.

Rivals Give Up

Subprime loans are made to borrowers with weak credit ratings or heavy debts. More than half a dozen subprime lenders including New Century Financial Corp. have gone bankrupt. Earlier this month, General Electric Co. said it plans to sell WMC Mortgage, the company's three-year-old U.S. subprime mortgage unit, following a surge in defaults by borrowers.

Founded in 1908 as the Commercial Credit and Investment Co., the company was renamed Commercial Investment Trust in 1915. CIT manages more than $65 billion in assets, including commercial loans and leases, and student and home loans. The company was spun off from Tyco International Ltd. in 2002.

To contact the reporter on this story: Will Edwards in Charlotte, North Carolina, at wiedwards@bloomberg.net.

Last Updated: July 18, 2007 11:29 EDT