Federal regulators told Fannie Mae's board that they doubted the ability of the mortgage company's current management to correct the extensive problems found in a probe of the company's accounting and internal controls.

"[W]e must consider the accountability of management and whether we have sufficient confidence in management to . . . bring about broad cultural and operational changes in the areas of concern," Armando Falcon Jr., director of the Office of Federal Housing Enterprise Oversight, wrote in a letter the agency released yesterday. The regulators' findings "make it difficult to assert such confidence," Falcon said.

The government-chartered company has been led since 1999 by Franklin D. Raines, federal budget director in the Clinton administration.

OFHEO last year forced Fannie's competitor, Freddie Mac, to replace chief executive Gregory J. Parseghian and its general counsel during an investigation of accounting manipulations at Freddie.

In a regulatory filing yesterday, Fannie Mae reported that at the behest of OFHEO it amended the employment agreements of Raines and two other top executives, Chief Operating Officer Daniel H. Mudd and Chief Financial Officer J. Timothy Howard, in the last week to make it easier for them to be fired, which can reduce their severance benefits.

OFHEO tried to block $50 million in compensation to Leland C. Brendsel, another ousted Freddie Mac chief executive, but a federal judge recently ruled the agency did not have the authority to do so.

An OFHEO official said the changes in the three executives' employment contracts had been in the works before the critical report and Falcon's Monday letter.

Howard came in for heavy criticism in the report OFHEO issued late Wednesday. The report accused Fannie of using improper accounting to smooth fluctuations in its earnings, tolerating weak internal controls, having a "dysfunctional" system for making accounting policies, and failing to adequately investigate a former employee's allegations of an intentional accounting misstatement. Those problems called into question Fannie's financial safety and soundness, the report said.

Regulators have been negotiating with Fannie directors over steps that Falcon has said must be taken to protect the safety and soundness of the company.

Fannie Mae presiding director Ann McLaughlin Korologos quoted from Falcon's letter in a news release Wednesday, but her statement did not include some of the regulator's sharpest comments. The company was not commenting publicly yesterday.

The economic fallout for Fannie continued yesterday as its stock price fell 3.5 percent, after declining by 6.6 percent the day before. Trading in Fannie's bonds drove up the company's borrowing costs compared with those of Freddie Mac and the U.S. Treasury, said Nancy Vanden Houten, a debt analyst at the research firm Stone & McCarthy. "It indicates that market participants think there's a bit more risk associated with these securities than they thought a few days ago," she said.

Some analysts have predicted that the regulators' criticism of Fannie Mae could become a debate over arcane or fuzzy accounting questions, but Falcon suggested otherwise in his letter summarizing his agency's conclusions.

"These findings cannot be explained as mere differences in interpretation of accounting principles, but clear instances in which management sought to misapply and ignore accounting principles for the purposes of meeting investment analyst expectations" and making the company's earnings trend look smoother, Falcon said in a part of the letter not quoted in Fannie Mae's news release.

The alleged accounting manipulations, which the report cited as early as 1998, continued into 2004.

The report described a series of accounting decisions at Fannie Mae last year and early this year that regulators considered suspicious. Some of those actions occurred months after the accounting scandal at Freddie Mac had toppled Freddie's senior management and prompted OFHEO to announce plans to scrutinize Fannie's accounting.

For example, in December, Wall Street analysts expected Fannie to report fourth-quarter earnings of $1.75 per share, but without an adjustment made directly to the company's general ledger during the process of completing the financial statements, Fannie would have reported earnings of only $1.72 per share, the report said. With the adjustment, Fannie earned $1.76 per share.

Though regulators found "no specific evidence" the adjustments were made to match the estimates, the circumstances suggest "that results were generated to achieve desired financial results," the report said.

Agency officials said yesterday they do not know how much Fannie's alleged accounting improprieties may affect the company's previously reported financial results. They said they do not even know whether, overall, the company understated or overstated its earnings.

Banking analyst Bert Ely, a longtime critic of Fannie Mae, faulted OFHEO for issuing a report before it could quantify Fannie's accounting problems. "Where is the meat?" Ely said.

The Securities and Exchange Commission, which considers itself the final arbiter of publicly traded companies' compliance with accounting rules, has been investigating Fannie informally since early this year, an SEC official said.

Staff writers Terence O'Hara and Albert B. Crenshaw contributed to this report.

OFHEO Director Armando Falcon Jr. wrote that findings go beyond accounting interpretations.