LOS ANGELES - Countrywide Financial Corp. said Tuesday its second-quarter profit shrank by nearly a third as softening home prices led to rising delinquencies and mortgage defaults among the most creditworthy borrowers.

The huge mortgage lender was forced to take impairment charges as it braced for the possibility of more people failing to make their mortgage payments.

Countrywide also said the market will become increasingly challenging as loan production subsides as lenders compete with one another more fiercely.

'This is a huge battleship and it's headed in the wrong direction,' Chief Executive Angelo R. Mozilo said during a lengthy conference call with Wall Street analysts.

'Looking to the second half of 2007, we expect difficult housing and mortgage market conditions to persist.'

The news sent shares of the Calabasas-based company sliding $3.56, or 10.45 percent, to close at $30.50 Tuesday.

The rise in credit-related costs was primarily related to the company's investments in prime home equity loans, Mozilo said.

Unlike subprime loans, which target borrowers with spotty credit histories, prime loans are typically available only to those with solid credit profiles who are considered less risky.

The rise in delinquencies and projections of more defaults led Countrywide to write down the value of securities backed by prime home equity loans by $388 million in the quarter, reducing earnings by 40 cents a share.

It also recorded $25 million in charges on subprime residuals and other securities.

Countrywide reported second-quarter net income of $485 million, or 81 cents a share, in the quarter ended June 30, compared with $722 million, or $1.15 a share, in the year-ago period.

Analysts polled by Thomson Financial forecast profit of 95 cents a share.

Revenue shrank 15 percent to $2.55 billion from $3 billion. Analysts expected revenue of $2.86 billion.

The company cut its earnings projection for the year to between $2.70 and $3.30 a share, down from the $3.50 to $4.30 a share figure provided in April.

The company has set aside $292.9 million in preparation for borrowers missing payments on loans, with some $181 million of that amount for prime home equity loan losses. The reserve is more than four times the size of the reserve established in the second quarter of last year.

Countrywide issued $123.07 billion in home loans during the quarter, an 18.8 percent increase.

Mozilo said the number of unsold homes must fall before the market can begin to recover.

He doesn't expect the market will turn around until 2009 at the earliest.

The mortgage lending industry has been grappling with a spike in mortgage defaults and foreclosures as the housing market has cooled.

Countrywide said 4.56 percent of its prime home equity loans were delinquent at the end of the quarter, up from 1.77 percent in the year-ago period.

About 23.71 percent of its subprime loans were delinquent, up from 15.33 percent.