WASHINGTON (AP) – Senior executives at Fannie Mae manipulated accounting to collect millions in “maximum, undeserved bonuses” and deceive investors, a federal report charged Tuesday. The government-sponsored mortgage company was fined $400 million.

The blistering report by the Office of Federal Housing Enterprise Oversight, the result of an extensive three-year investigation, was issued as Fannie Mae struggles to emerge from an $11 billion accounting scandal. Also Tuesday, the housing oversight agency and the Securities and Exchange Commission announced a $400 million civil penalty against Fannie Mae in a settlement over the alleged accounting manipulation.

The company also agreed to limit the growth of its multibillion-dollar mortgage holdings and to make “top-to bottom” changes in its corporate culture, accounting procedures and ways of managing risk. Several executives and employees at the company as well as others who have left will be reviewed for possible disciplinary action or termination.

Washington-based Fannie Mae neither admitted nor denied wrongdoing under the settlement but did agree to refrain from future violations of securities laws.

“The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a facade,” James B. Lockhart, the acting director of OFHEO, said in a statement as the report was released. “Our examination found an environment where the ends justified the means. Senior management manipulated accounting, reaped maximum, undeserved bonuses, and prevented the rest of the world from knowing.”

The report also faulted Fannie Mae’s board of directors for failing to exercise its oversight responsibilities and failing to discover “a wide variety of unsafe and unsound practices” at the largest buyer and guarantor of home mortgages in the country.

The OFHEO review, involving nearly 8 million pages of documents, details what the agency calls an arrogant and unethical corporate culture. From 1998 to mid-2004, the smooth growth in profits and precisely-hit earnings targets each quarter reported by Fannie Mae were “illusions” deliberately created by senior management using faulty accounting, the report says.

The Bush administration, which has been pushing for legislation to reduce the massive mortgage portfolios of Fannie Mae and its smaller government-sponsored sibling, Freddie Mac, quickly seized on the regulators’ report to buttress its position.

The report “shows that Fannie Mae’s faults were not limited to violating accounting and corporate governance standards, but included excessive risk-taking and poor risk management as well,” Randal Quarles, Treasury undersecretary for domestic finance, said in a statement. “OFHEO’s findings are a clear warning about the very real risk the improperly-managed investment porfolios of (Fannie Mae and Freddie Mac) pose to the greater financial system.”

Fannie Mae said that its board had read the report and is committed to making the changes required under the deal with the regulators.

“We are glad to resolve these matters. We have all learned some powerful lessons here about getting things right and about hubris and humility,” Daniel Mudd, the company’s president and CEO, said in a statement. “We are a much different company than before. But we also recognize that we have a long road ahead of us.”

The accounting manipulation tied to executives’ bonuses occurred from 1998 to 2004, according to the report, a much longer period than was previously known.

Regulators had earlier said that Fannie Mae in 1998 improperly put off accounting for $200 million in expenses to future periods so executives could collect $27 million in bonuses.

“By deliberately and intentionally manipulating accounting to hit earnings targets, senior management maximized the bonuses and other executive compensation they received, at the expense of shareholders,” the report says. The manipulation “made a significant contribution” to the compensation of former chairman and chief executive Franklin Raines, which totaled more than $90 million from 1998 to 2003, it says, including some $52 million directly tied to the company hitting earnings targets.

Fannie Mae employees falsified signatures on accounting transactions that helped the company meet the 1998 earnings targets, according to congressional testimony by the former director of OFHEO. The agency first discovered in 2004 the accounting-rule violations and alleged earnings manipulation by Fannie Mae to meet Wall Street targets _ disclosures that stunned the financial markets.

In December 2004, the SEC ordered Fannie Mae to restate its earnings back to 2001 _ a correction expected to reach an estimated $11 billion. The Justice Department has been pursuing a criminal investigation.

Raines and former chief financial officer Timothy Howard were swept out of office by Fannie Mae’s board in December 2004.

OFHEO levied a record $125 million fine in 2003 against Freddie Mac, Fannie Mae’s smaller rival in the multitrillion-dollar home mortgage market, for misstating earnings _ mostly underreporting them _ by $5 billion for 2000-2002.

On Friday, Fannie Mae said it was replacing the chairman of its board’s audit committee, a key position as the second-largest U.S. financial institution reworks its accounting and struggles to emerge from the scandal. The company said the board had named accounting professor Dennis Beresford to replace audit committee chairman Thomas Gerrity.

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On the Net:

Fannie Mae: http://www.fanniemae.com

Freddie Mac: http://www.freddiemac.com

Office of Federal Housing Enterprise Oversight: http://www.ofheo.gov

Securities and Exchange Commission: http://www.sec.gov