Pasadena, Calif.

First, Countrywide Financial Corp. went down, as the nation's biggest mortgage lender was acquired in a rescue operation July 1 by Bank of America Corp. Now Countrywide's offspring, IndyMac Bancorp Inc., is on the ropes.

Reuters IndyMac CEO Michael Perry, left, and Angelo Mozilo, former head of Countrywide, which created IndyMac.

The Pasadena-based mortgage lender and savings bank, founded two decades ago by Countrywide, on Tuesday began dismantling most of its business amid heavy losses from mortgage defaults that have made it impossible to raise needed capital.

IndyMac said Monday that it will reduce its work force by 53% to about 3,400 and stop making most types of mortgage loans. Its Financial Freedom unit will continue to provide reverse mortgages -- a type of loan that allows people 62 or older to receive payments from the bank; the loans are repaid, with interest, when the borrower sells the house, moves out or dies.

IndyMac was the ninth-largest U.S. mortgage lender last year in terms of loan volume, according to trade publication Inside Mortgage Finance.

The company's chief executive officer, Michael Perry, hoped IndyMac could survive default-related losses, unlike hundreds of smaller rivals. As recently as May, Mr. Perry told investors he believed IndyMac was on the mend. "You have to have some faith," he said.

There is little faith left among investors. On Tuesday, the stock price dropped 38% to 44 cents on the New York Stock Exchange. A report from the investment bank Friedman, Billings, Ramsey & Co. warned of a risk that the shares could prove worthless.

Some depositors have been pulling out their money over the past two weeks, but there has been no sign of general panic. George Carrington, a retired Pasadena businessman, went to an IndyMac branch Tuesday and withdrew funds he had in a certificate of deposit. Mr. Carrington said he was lured to IndyMac five years ago by high interest rates and also bought stock in the company. "Boy, am I going down the tubes there," he said.

On Monday, IndyMac said it still had about $18 billion of deposits, nearly all insured by the Federal Deposit Insurance Corp. A spokesman declined to discuss how much money flowed out of the savings bank Tuesday.

In 1985, Countrywide set up a real-estate investment trust that eventually became IndyMac, whose name is short for Independent National Mortgage. The original company invested in jumbo mortgage loans, those too big to be sold to government-sponsored investors Fannie Mae and Freddie Mac. In 1997, IndyMac severed most of its links with Countrywide.

IndyMac acquired a savings bank in 2000 and became a large lender, specializing in Alt-A loans, a category between prime and subprime that typically doesn't require borrowers to fully document their income.

Countrywide and IndyMac became rivals, but Angelo Mozilo, chief executive of Countrywide until last month, retained a soft spot for Mr. Perry, a former accountant recruited to run IndyMac in 1993. In an interview last year, Mr. Mozilo said Mr. Perry was "like my son."

Mr. Perry last year told investors that IndyMac had avoided some of the mistakes Countrywide made, such as relying heavily on the capital markets for short-term borrowings.

But IndyMac made its own errors. Like Countrywide, it continued expanding its staff and making risky loans as the housing market crumbled, hoping to grab market share from weaker competitors. Now, IndyMac has agreed to sell more than 60 mortgage branches, employing some 750 people, to Prospect Mortgage Co., of Northbrook, Ill., for an undisclosed amount.

Unlike Countrywide, IndyMac also became a major lender to home builders. At the end of the first quarter, IndyMac said it classifies as nonperforming 52% of its $1.06 billion of loans outstanding to home builders, mostly in California.

--Lingling Wei contributed to this article.

Write to James R. Hagerty at bob.hagerty@wsj.com and Jonathan Karp at jonathan.karp@wsj.com

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