July 1 (Bloomberg) -- CIT Group Inc. gained the most in three months in New York trading after abandoning the collapsing mortgage market with the $1.8 billion sale of businesses to Lone Star Funds and Warren Buffett's Berkshire Hathaway Inc.

Lone Star, the Dallas-based buyout fund, will purchase CIT's home-lending unit for $1.5 billion and take on $4.4 billion of debt and other liabilities, New York-based CIT said today. Berkshire will buy CIT's portfolio of loans backing factory-built homes for $300 million.

CIT, which may use the money to pay maturing debt this year and in 2009, is turning its focus to commercial lending. Chief Executive Officer Jeffrey Peek, who drew down $7.3 billion of emergency credit, cut the dividend and sold shares this year after funding costs and client defaults advanced, is also seeking a buyer for the company's railcar-leasing business.

Today's sales are ``a step in the right direction,'' said David Chiaverini, an analyst with BMO Capital Markets in New York. ``In this market environment, lenders and corporate debt buyers are concerned about commercial debt as well.''

CIT rose $2.02, or 30 percent, to $8.83 at 4:15 p.m. in New York Stock Exchange composite trading. The stock has fallen 84 percent since it closed at $54.83 a year ago as it posted four consecutive quarterly losses.

Peek, 61, said in May the company would try to raise as much as $12 billion through asset sales and financings. Losses caused by bad home and student loans, including $249.7 million in the first quarter, raised concern that the 100-year-old company faced bankruptcy. Goldman Sachs Group Inc. agreed last month to provide $3 billion in financing.

Pretax Loss

CIT expects to record a pretax loss of about $2.5 billion for the home-lending segment in the second quarter, the company said in a statement. About $2.2 billion of the loss is attributable to the sale and $350 million to operations during the period, the company said. The unit employs about 300 people in servicing units in Oklahoma City and Marlton, New Jersey.

``This is lock, stock and barrel; we are out'' of residential mortgages, Peek said in a conference call. ``It mitigates the risk around this business and resolves a key area of concern'' with shareholders and rating companies.

Standard & Poor's and Moody's Investors Service downgraded CIT's credit rating one level in March, and Moody's reduced it again in May. S&P today said the sales ``will remove a significant amount of uncertainty in terms of future profitability.'' CIT had ``favorable'' conversations in recent weeks with the ratings companies, said Chief Financial Officer Joseph Leone.

`Tough Pill to Swallow'

The loss on the sale is ``a tough pill to swallow, but in this environment it's the going market rate,'' said Chiaverini, who has a ``market perform'' rating on the stock. ``That's encouraging to see Buffett getting involved here.''

Buffett's Berkshire bought the assets through Vanderbilt Mortgage and Finance Inc., an affiliate of Clayton Homes. The billionaire investor said at the company's annual meeting in May that Omaha, Nebraska-based Berkshire would be searching for opportunities amid the global credit crunch.

``When there are market dislocations, we're always going to take advantage of them,'' Buffett said. ``Berkshire will make some extra money out of this.''

Berkshire spokeswoman Jackie Wilson didn't return a call for comment today.

Lone Star, started by John Grayken in 1995, is investing a $5 billion fund that targets financial and real-estate assets. The firm mainly invests in Asia, a region competitors including Blackstone Group LP and Kohlberg Kravis Roberts & Co. are also targeting.

`Ugly Prices'

``Ugly prices, but this basically had to happen in order for CIT to survive,'' said David Havens, a credit analyst with UBS AG in Stamford, Connecticut, in a note to investors. ``CIT continues to make progress in addressing thorny liquidity issues.''

CIT credit-default swaps fell 40 basis points to 730 basis points, according to broker Phoenix Partners Group, indicating improved perception of credit quality.

The swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

JPMorgan Chase & Co. and Morgan Stanley advised CIT, which was founded in 1908 as the Commercial Credit and Investment Co.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Erik Holm in New York at eholm2@bloomberg.net.

Last Updated: July 1, 2008 16:59 EDT