March 20 (Bloomberg) -- New Century Financial Corp., struggling to stay in business after a wave of defaults by subprime mortgage customers, said its home state of California ordered a lending halt and Fannie Mae stopped buying its loans.

California told New Century to quit taking applications in the state and turn over pending loans to rival lenders, the company said in a federal filing. The state accounted for 37 percent of New Century's loans in 2005, the most recent year for which data is available. Irvine, California-based New Century said similar orders came from Florida and Washington state.

Fannie Mae, the biggest source of money for U.S. mortgages, served notice it will no longer buy New Century's loans, according to the filing. New Century must deal with the latest cutoffs after at least 10 other states said they want the company to cease operations. The second-largest U.S. subprime lender said it expects more states will make the same demand.

While the impact of Fannie Mae's action is relatively small, the California order ``spells doom for the company,'' said Matt Howlett, an analyst at Fox-Pitt Kelton in New York. ``That is the crux of their operations. What little hope was left is gone now, in terms of ever coming back and operating as New Century.''

New Century's managers have said the company may go out of business if they can't find new funding. They're trying to avoid the fate of at least a dozen mortgage companies that have shut down or gone bankrupt in the past five months. Last week, New Century said Morgan Stanley and UBS AG were among Wall Street firms that cut off access to $17.4 billion in credit lines.

Another Irvine-based subprime mortgage company, People's Choice Financial Corp., filed for bankruptcy today.

Federal Probe

The U.S. Attorney's Office in Los Angeles is investigating trading in New Century's securities, as well as accounting errors that led to an understatement of liabilities for bad loans. The Securities and Exchange Commission also has opened an inquiry.

New Century has said it's in discussions with financial backers and cooperating with investigators. Laura Oberhelman, a New Century spokeswoman, declined to comment on whether the company was preparing itself for a sale or a bankruptcy filing.

Pending loan applications are being redirected to other lenders, she said. The company's 6,700 employees -- down from 7,200 at the end of December -- are still reporting to work regularly, she said.

No Billing

New Century made almost $60 billion in mortgages last year, ranking it behind only HSBC Holdings Plc among subprime lenders.

Fannie Mae, in addition to stopping loan purchases from New Century, said it was severing the company's billing-and- collections contracts. Washington, D.C.-based Fannie Mae alleged the lender violated terms of a loan sales-and-servicing contract, New Century said. Fannie Mae spokesman Brian Faith declined to comment.

``From an operational standpoint, it's not huge,'' because New Century sold few of its loans to Fannie Mae, Howlett said. ``It's a blow from a symbolic sense. If they can't deal with Fannie Mae, the writing's on the wall.''

U.S. subprime borrowers fell behind on their mortgages at the highest rate in four years in the fourth quarter and foreclosures on all types of home loans rose to a record, the Mortgage Bankers Association said last week. Rising defaults have cut investors' willingness to finance mortgage companies, making it harder for them to stay in business.

Santa Monica-based Fremont General Corp. said yesterday it may fire its subprime lending staff if a rescue plan isn't successful. Fremont has about 2,400 employees at its residential mortgage business. Only the ones who have been put on leave will receive the termination notices, spokesman Dan Hilley said.

Hedge-Fund Backer

One company that did find a backer was San Diego-based Accredited Home Lenders Holding Co., which said today it got a $200 million loan commitment from hedge fund Farallon Capital Management LLC. The loan may give the money-losing subprime mortgage company time to attract more financing or find a buyer.

Farallon is a San Francisco-based, $26 billion fund specializing in real estate and companies that face cash shortages. The fund was Accredited's fourth-biggest shareholder as of Dec. 31, with 1.975 million shares, or a 7.8 percent stake, according to Bloomberg data. Accredited's shares rose 20 percent.

Subprime loans are made to borrowers with a history of missed payments, untested credit or heavy debts. Such lenders charge two to three percentage points more than conventional mortgage companies because borrowers are more likely to default.

New Century's shares fell 48 cents, or 22 percent, to $1.69 at 3:59 p.m. New York time in over-the-counter trading. They've lost 95 percent this year.

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: March 20, 2007 18:15 EDT