The regulator in charge of Fannie Mae has asked it to take immediate action to improve its financial reporting system after a yearlong investigation found systemic flaws in the giant mortgage guarantor’s accounting practices.

The findings of the Office of Federal Housing Enterprise Oversight were detailed in a 211-page report released late Wednesday night.

“The findings raised such serious safety and soundness concerns that immediate action is warranted, rather than waiting until the completion of the full special examination,” said Ofheo’s director, Armando Falcon Jr., in a letter to Fannie’s Board of Directors.

Accounting problems at Fannie Mae detailed in the Ofheo report have also led to an “informal inquiry” by the Securities and Exchange Commission.

The Ofheo report, which it called a “special examination,” said the company’s accounting problems forced “potentially large” financial consequences. The most serious of these would be the restatement of prior years’ earnings as $19.4 billion worth of derivative and hedging losses were recognized.

Fannie Mae also likely faces a series of grim decisions in the near future as more information emerges about the scandal, analysts say. These decisions include whether to restate the past several years’ earnings, make changes within the ranks of senior management, and expand regulation of its business lines.

The report heaped a large measure of scorn on Fannie’s high-profile chief financial officer and vice-chairman, Tim Howard.

“The special examination found that Mr. Howard failed to provide adequate oversight to key control and reporting functions within Fannie Mae,” the report read. Ofheo reached this conclusion after exhaustive testimony of Fannie’s former vice president of financial standards, Jonathan Boyles, who said that managing earnings by deferring the recognition of losses was a key component of the company’s financial management.

As details emerged of Ofheo’s findings, Fannie Mae’s widely held stock took another beating, closing down $3.54 at $67.15, down 5%. Since the regulator announced its findings, Fannie’s stock has lost $8.21 billion in market value.

The losses – $12.2 billion of “deferred losses” from hedges and $7.2 billion worth of value adjustments to liabilities – were contained in a separate account called “accumulated other comprehensive income” that did not immediately count against Fannie Mae’s earnings. Moreover, the company had been writing off these losses over a period of time, allowing for a more predictable earnings stream. In turn, Fannie’s uninterrupted earnings growth gave analysts and investors the confidence to bid the share price higher, on the view that the company’s exposure to interest-rate risk was minimal.

It gets worse. Fannie Mae’s shareholder equity stood at $26.1 billion as of August 30. A write-down of even a portion of the $19.4 billion against the shareholder equity figure would put the company in danger of violating long-standing capital requirement rules. The company would be forced to raise capital, presumably by selling stock or convertible bonds. This would immediately force the company’s already battered stock price lower.

A Fannie spokeswoman, Janice Daue, declined to comment, other than to say, “The board and Ofheo are working together to deal with the issues raised in the report.” The company yesterday hired a former senator, Warren Rudman, as outside counsel to the board as the investigation continues, and has retained Ernst & Young to perform audit duties.

Bondholders are feeling the pain as well, as the company’s benchmark 10-year bonds widened an additional three basis points against treasuries, while similar maturity bonds of its smaller rival, Freddie Mac, were unchanged. Since Fannie Mae is one of the largest debt issuers in the world, with $963.2 billion in debt on its books, and as it funds its operations by issuing debt on a daily basis, every basis point of spread-widening adds millions of dollars worth of interest expense.

Yesterday afternoon, Standard & Poor’s announced they were going to begin a process of re-evaluating Fannie Mae’s ratings, and placed the company on Creditwatch negative. Moody’s Investor Services analyst John Kriz declined to comment on what his firm would do, other than to say, “We are reflecting on a [re-evaluation] of our ratings.” Both companies have assigned the coveted triple-A to its debt. Smaller, independent ratings agency Egan-Jones, which does not take money from the companies it rates, has Fannie’s debt rated four notches below at single-A.

One bond analyst, Friedman Billings Ramsey’s Michael Youngblood, a 20-year veteran of the mortgage-backed securities market, said, “‘Potentially large’ is perhaps too kind. This will likely change things there for some time to come.”