Sept. 19 (Bloomberg) -- CIT Group Inc. said it will sell as much as $4.2 billion of mortgage-backed securities to Freddie Mac as part of a plan to close its home-lending business.

CIT, the largest independent commercial-finance company in the U.S., also received a $2 billion loan from Morgan Stanley to finance its operations until the home mortgage business is shut down, the New York-based company said in a statement today.

CIT's home-loan unit, which specialized in subprime mortgages to borrowers with poor credit, is one of least 110 home lenders to halt operations or seek a buyer since the start of 2006 because of a rise in delinquencies and foreclosures. CIT shares had plunged almost 40 percent this year as investors shunned mortgage bonds not guaranteed by government-linked entities such as Freddie Mac.

The ``stock came under pressure for liquidity in addition to credit issues surrounding the company's subprime portfolio,'' David Chiaverini, an analyst at Bank of Montreal's BMO Capital Markets division in New York, said in an interview. CIT managed to obtain funding ``for a portfolio of subprime mortgages in a market that's been very illiquid.''

The $3.5 billion to $4.2 billion of AAA rated bonds being sold to Freddie Mac will be backed by $6 billion of residential mortgages, CIT said.

``They essentially are going to absorb the first 30 percent of losses which likely means that unless those assets deteriorate by more than 30 percent, Freddie Mac is not going to be impacted at all,'' Chiaverini said. ``They'd probably have to sell them at a bigger discount than what they think the losses ultimately are going to be in the portfolio.''

Shares, Bonds Improve

C. Curtis Ritter, a spokesman for CIT, didn't immediately return a telephone call seeking comment.

CIT rose $1.06, or 2.6 percent, to $41.89 today in New York Stock Exchange trading. The stock rose 7.4 percent yesterday after the Federal Reserve cut its benchmark interest-rate target half a percentage point. The shares are now down 25 percent this year.

The perceived risk of owning CIT bonds fell to the lowest in more than six weeks, according to credit-default swap traders who speculate on the company's ability to repay its debt. Five-year contracts dropped 60 basis points to 170 basis points, signaling improvement in the perception of credit quality, according to broker Phoenix Partners Group in New York.

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.

Difficult Times

Chief Executive Officer Jeffrey Peek said in July that CIT would quit the home-loan business after losses rose more than expected and investor demand for mortgages waned. The unit, which accounted for about 10 percent of CIT income, focused on subprime borrowers, the loan category that has seen the fastest increase in delinquencies and foreclosures.

Peek today resigned from Freddie Mac's board to avoid a conflict of interest over the debt sale.

Until CIT decided to quit the mortgage business, the company acquired subprime loans to hold on its balance sheet, relying on sales of commercial paper and unsecured notes and bonds to fund the portfolio, Chiaverini said.

Irvine, California-based Impac Mortgage Holdings Inc. has found it ``extremely difficult'' to sell certain mortgages, Chief Executive Officer Joseph Tomkinson said in the statement yesterday announcing the closure of its mortgage businesses.

Accounting Designation

The amount of bonds backed by the CIT mortgage pool to be sold will be determined by credit-rating services, CIT said. CIT will change the accounting designations of the underlying loans from ``assets held for sale'' to ``assets held for investment.''

McLean, Virginia-based Freddie Mac is the second-largest provider of money for U.S. home loans. The government-chartered company owns or guarantees about 20 percent of the $11.5 trillion U.S. residential mortgage market.

The purchase of AAA rated mortgage bonds isn't unusual for Freddie Mac, according to company spokeswoman Sharon McHale.

``It's a regular way we have been providing liquidity to the mortgage market,'' she said.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net.

Last Updated: September 19, 2007 17:12 EDT