Exhibit 10.3

EMPLOYMENT AGREEMENT

between

FANNIE MAE

and

J. TIMOTHY HOWARD

 

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TABLE OF CONTENTS

                      Page
ARTICLE 1
  DEFINITIONS     2  
Section 1.1.
  Agreement Term     2  
Section 1.2.
  Annual Incentive Plan     2  
Section 1.3.
  Award Period     2  
Section 1.4.
  Base Salary     2  
Section 1.5.
  Board     2  
Section 1.6.
  Cause     2  
Section 1.7.
  Compete     2  
Section 1.8.
  Corporation     3  
Section 1.9.
  Effective Date     3  
Section 1.10.
  Employee     3  
Section 1.11.
  Employment     3  
Section 1.12.
  Executive Pension Plan     3  
Section 1.13.
  Existing Agreement     3  
Section 1.14.
  Failure to Extend     3  
Section 1.15.
  Good Reason     3  
Section 1.16.
  OFHEO     4  
Section 1.17.
  Option     4  
Section 1.18.
  Performance Share Award     4  
Section 1.19.
  Qualifying Termination     4  
Section 1.20.
  Restricted Stock     4  
Section 1.21.
  Serious Illness or Disability     4  
Section 1.22.
  Stock Compensation Plan     4  
Section 1.23.
  Surviving Spouse     4  
Section 1.24.
  Termination of Employment     5  
ARTICLE 2
  PERIOD OF EMPLOYMENT AND DUTIES     5  
Section 2.1.
  Period of Employment     5  
Section 2.2.
  Duties     5  
ARTICLE 3
  COMPENSATION AND BENEFITS     6  
Section 3.1.
  Base Salary     6  
Section 3.2.
  Benefits     6  
ARTICLE 4
  TERMINATION OF EMPLOYMENT     10  
Section 4.1.
  Termination of Employment By the Corporation     10  
Section 4.2.
  Termination of Employment By Employee     12  
Section 4.3.
  Other Termination of Employment     13  
Section 4.4.
  Resignation as Member of the Board of Directors     13  
ARTICLE 5
  COMPENSATION AND BENEFITS FOLLOWING TERMINATION        
 
  OF EMPLOYMENT     13  

 

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Section 5.1.
  Voluntary Termination Pursuant to Section 4.2(b)     13  
Section 5.2.
  Termination for Cause     13  
Section 5.3.
  Qualifying Termination (Other Than by Reason Of Death)     14  
Section 5.4.
  Termination of Employment By Reason of Death     17  
ARTICLE 6
  MISCELLANEOUS     18  
Section 6.1.
  Noncompetition     18  
Section 6.2.
  Payment of Certain Expenses     20  
Section 6.3.
  Assignment by Employee     20  
Section 6.4.
  No Funding Required     21  
Section 6.5.
  Disclosure of Information to the Corporation     21  
Section 6.6.
  Nondisclosure of Confidential Information     21  
Section 6.7.
  Waiver     21  
Section 6.8.
  Notice     22  
Section 6.9.
  Applicable Law     22  
Section 6.10.
  Taxes     22  
Section 6.11.
  Benefit     22  
Section 6.12.
  Entire Agreement     23  
Section 6.13.
  Arbitration     23  
Section 6.14.
  Severability     23  
Section 6.15.
  Regulatory Approval     24  

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EMPLOYMENT AGREEMENT

     THIS EMPLOYMENT AGREEMENT (this “Agreement”) is between FANNIE MAE (the
“Corporation”) and J. TIMOTHY HOWARD (“Employee”).

     WHEREAS, the Corporation and Employee are parties to an employment
agreement dated as of July 1, 2003, which terminates on June 30, 2004 (the
“Existing Agreement”);

     WHEREAS, under the termination provisions of the Existing Agreement, which
were approved by OFHEO, Employee is contractually entitled to certain
compensation and benefits if, among other circumstances, Employee’s employment
is not extended;

     WHEREAS, Employee has successfully discharged his responsibilities under
the Existing Agreement and has earned certain vested amounts, as described in
his Existing Agreement, over the course of his employment; and

     WHEREAS the Corporation and Employee agree that the terms of the agreement
set forth if approved in their entirety to the extent required would provide
compensation and benefits to Employee that are at least as favorable as the
compensation and benefits provided under the Existing Agreement, it being
understood and acknowledged, however, that absent approval by OFHEO of the
provisions set forth below relating to benefits upon termination of employment,
the compensation and benefits described below would not be comparable or
substantially equivalent to those provided under the Existing Agreement and in
the aggregate would be materially less favorable to Employee than those provided
under the Existing Agreement;

     NOW, THEREFORE, the Corporation and Employee agree as follows:

 

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ARTICLE 1

DEFINITIONS

     The following terms shall have the meanings set forth below:

     Section 1.1. Agreement Term means the period of time beginning on the
Effective Date and ending on June 30, 2007 or such later date as may be agreed
to pursuant to Section 2.1.

     Section 1.2. Annual Incentive Plan means the Federal National Mortgage
Association Annual Incentive Plan as from time to time amended and in effect, or
any successor plan.

     Section 1.3. Award Period is defined in the Stock Compensation Plan.

     Section 1.4. Base Salary means the dollar amount of Employee’s annual base
compensation as determined by the Board.

     Section 1.5. Board means the Board of Directors of the Corporation, acting
without the participation of the Vice Chairmen of the Board of Directors.

     Section 1.6. Cause is defined in Section 4.1(b).

     Section 1.7. Compete means directly or indirectly to manage, operate,
control, participate in the ownership, management, operation or control of, be
connected as an officer, employee, partner, director, consultant or otherwise
with, or have any financial interest in, (i) any business if a substantial part
of such business involves originating, purchasing, selling, servicing or
otherwise dealing in the residential mortgage market (provided, that Employee
shall not be deemed, directly or indirectly, to Compete solely by virtue of
Employee’s employment by a business that engages in transactions in the
residential mortgage market so long as Employee himself does not participate
directly in the residential mortgage business), (ii) Freddie Mac, or (iii) any
part of the Federal Home Loan Bank System (including any one of the Federal Home
Loan Banks or the Federal Home Loan Banks Office of Finance). Employee shall not
be

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deemed to Compete solely by reason of ownership, for personal investment
purposes only, of less than 2% of the voting interests of any business.

     Section 1.8. Corporation means Fannie Mae.

     Section 1.9. Effective Date means July 1, 2004, subject, however, to the
provisions of Section 6.15 (“Regulatory Approval”).

     Section 1.10. Employee means J. Timothy Howard.

     Section 1.11. Employment means Employee’s employment by the Corporation
under this Agreement.

     Section 1.12. Executive Pension Plan means the Executive Pension Plan of
the Federal National Mortgage Association as from time to time amended and in
effect, or any successor plan.

     Section 1.13. Existing Agreement is defined in the preamble to this
Agreement.

     Section 1.14. Failure to Extend means notification of Employee by the
Corporation that it does not desire to extend the Agreement Term (or the term of
any successor agreement) or that it desires to do so only on terms in the
aggregate that are materially less favorable to Employee than those applicable
to Employee at the time of said notice. If the Corporation notifies Employee
that it desires to extend the Agreement Term (or the term of any successor
agreement) on terms that are in the aggregate substantially similar to or more
favorable than those applicable to Employee at the time of said notice, any
nonextension shall not be deemed to be a Failure to Extend.

     Section 1.15. Good Reason means (a) a material reduction by the Corporation
of Employee’s authority or a material change in Employee’s functions, duties or
responsibilities that in any material way would cause Employee’s position to
become less important, (b) a

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reduction in Employee’s Base Salary, (c) a requirement by the Corporation that
Employee relocate his office outside of the Washington, D.C. area, or (d) a
breach by the Corporation of any material obligation of the Corporation under
this Agreement, unless, within 30 days of the written notice given by Employee
and specifying a circumstance constituting Good Reason, the Corporation
eliminates such circumstance.

     Section 1.16. OFHEO means the Office of Federal Housing Enterprise
Oversight.

     Section 1.17. Option is defined in the Stock Compensation Plan.

     Section 1.18. Performance Share Award is defined in the Stock Compensation
Plan.

     Section 1.19. Qualifying Termination means Termination of Employment (i) by
the Corporation without Cause, (ii) by Employee for Good Reason, (iii) upon
expiration of the Agreement Term (or the term of any successor agreement) if
there has been a Failure to Extend, (iv) by reason of Employee’s acceptance of
an appointment to a senior position in the U.S. Federal Government, (v) by
reason of Serious Illness or Disability or (vi) by reason of Employee’s death.

     Section 1.20. Restricted Stock is defined in the Stock Compensation Plan.

     Section 1.21. Serious Illness or Disability means a serious physical or
mental illness or disability which, in the reasonable determination of the
Board, prevents Employee from performing his duties under this Agreement for a
period of at least six months in any twelve-month period.

     Section 1.22. Stock Compensation Plan means either or both, as the context
requires, of the Fannie Mae Stock Compensation Plan of 1993 and the Fannie Mae
Stock Compensation Plan of 2003, in each case as from time to time amended and
in effect, or any successor plan.

     Section 1.23. Surviving Spouse is defined in the Executive Pension Plan.

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     Section 1.24. Termination of Employment means the cessation of Employment
for any reason.

ARTICLE 2

PERIOD OF EMPLOYMENT AND DUTIES

     Section 2.1. Period of Employment. The Corporation shall continue to employ
Employee, and Employee shall continue to serve, as Vice Chairman of the
Corporation’s Board of Directors and Chief Financial Officer of the Corporation,
upon the terms and conditions of this Agreement, for the period July 1, 2004
through the last day of the Agreement Term unless there is an earlier
Termination of Employment. The Agreement Term may be extended by mutual written
agreement of the parties entered into at any time prior to the date the
Agreement Term would otherwise expire.

     Section 2.2. Duties. Employee shall serve the Corporation under this
Agreement as Vice Chairman of the Corporation’s Board of Directors and as Chief
Financial Officer. Employee shall devote his full business time and attention to
the Corporation and shall faithfully and diligently perform such duties for the
Corporation as may be determined from time to time by the Chairman of the Board
of Directors, provided that such duties are reasonable and customary for a
corporate vice chairman and chief financial officer. Employee shall be subject
to the Corporation’s standards of conduct and similar policies and procedures
applicable generally to members of the Board of Directors or to the
Corporation’s executive officers, as the case may be. Employee may (a) serve on
corporate, civic or charitable boards or committees or (b) manage personal
investments, so long as such activities do not materially interfere with the
performance of his responsibilities under this Agreement and so long as such
activities comply with the aforementioned standards, policies and procedures of
the Corporation. During his

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Employment, Employee shall be nominated for election to the Corporation’s Board
of Directors and shall be identified as a nominee recommended for election by
the Board, at each annual meeting of the stockholders of the Corporation.

ARTICLE 3

COMPENSATION AND BENEFITS

     Section 3.1. Base Salary. During Employee’s Employment, the Corporation
shall pay to Employee Base Salary of not less than his base salary at June 30,
2004. The Board shall from time to time review Employee’s Base Salary and may
increase (but in no event decrease) such Base Salary by such amounts as it deems
proper.

     Section 3.2. Benefits.

     (a) Executive Pension Plan. The parties acknowledge that the Corporation
has previously designated Employee as a participant in the Executive Pension
Plan. Employee’s “Pension Goal” under the Executive Pension Plan shall at all
times be equal to at least 50% of his “High-Three Total Compensation,” as those
terms are defined in the Executive Pension Plan. The Corporation may amend the
Executive Pension Plan from time to time; provided, however, that no such
amendment shall decrease Employee’s Pension Goal or the vested benefits to which
Employee or his Surviving Spouse, if any, would have been entitled under such
Plan, as modified in this Agreement, as in effect on the Effective Date or, if
benefits are improved, as of the date of such improvement.

     (b) Options. Employee shall be considered for grants of Options consistent
with the compensation philosophy of the Corporation set forth in the charter of
the Compensation Committee of the Board.

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(c) Annual Incentive Plan. Employee shall be considered for a potential award
under the Annual Incentive Plan for each year during Employment consistent with
the compensation philosophy of the Corporation set forth in the charter of the
Compensation Committee of the Board.

     (d) Performance Share Awards. Employee shall be considered for grants of
Performance Share Awards consistent with the compensation philosophy of the
Corporation set forth in the charter of the Compensation Committee of the Board.

     (e) Restricted Stock. Employee shall be considered for grants of Restricted
Stock consistent with the compensation philosophy of the Corporation set forth
in the charter of the Compensation Committee of the Board.

     (f) Life Insurance and Death Benefits. Employee shall receive life
insurance benefits consistent with the Corporation’s life insurance policies and
programs as from time to time in effect.

     (g) Other Benefits. The Corporation shall provide Employee with the
following additional benefits during Employment:

       (i) The Corporation shall pay or reimburse Employee for reasonable
expenses incurred by Employee in obtaining tax and investment assistance and
advice, up to $25,000 per calendar year.

       (ii) The Corporation shall pay or reimburse the legal expenses incurred
by Employee in connection with the negotiation of this Agreement.

       (iii) The Corporation shall provide Employee with access to a car and
driver for transportation relating to the Corporation’s business purposes.

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       (iv) The Corporation shall pay or reimburse Employee for actual expenses
incurred by Employee for a complete annual physical examination at a medical
facility of his choice.

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     (h) General Rights Under Benefit Plans.

       (i) Employee shall at all times during the Employment Term be entitled to
participate in all long- or short-term bonus, stock option, restricted stock,
and other executive compensation plans, and in all perquisite programs and
disability, retirement, stock purchase, thrift and savings, health, medical,
life insurance, expense reimbursement and similar plans of the Corporation which
are from time to time in effect and in which other senior officers of the
Corporation generally are entitled to participate. Except as otherwise provided
in this Agreement, Employee’s participation in such plans and programs shall be
in accordance with the provisions of such plans and programs applicable from
time to time, it being the intent of the parties hereto that nothing in this
Agreement shall decrease the rights and benefits of Employee under any such
plans and programs as may be in effect from time to time. Employee’s rights as a
participant under any compensation, benefit or fringe benefit plan or
arrangement of the Corporation that is from time to time in effect and in which
other senior officers of the Corporation generally are entitled to participate
shall be subject to this Agreement and modified to the extent expressly provided
herein, but except as so modified shall be determined under the applicable
provisions of such plans and programs, including, without limitation, the
provisions thereof applicable to retirement; provided, that all such plans and
programs and this Agreement shall be construed and administered to avoid any
duplication of benefits under any such plan or program and this Agreement.

       (ii) Except as specifically set forth in this Agreement, or as
specifically permitted by the terms of any such plan or program, no right or
benefit under any such plan or program shall become vested or exercisable after
Termination of Employment.

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ARTICLE 4

TERMINATION OF EMPLOYMENT

     Section 4.1. Termination of Employment By the Corporation.

     (a) Without Cause. The Corporation shall have the right to terminate
Employee’s Employment without Cause at any time for any reason in the
Corporation’s sole discretion by giving at least 90 days’ prior written notice
to Employee.

     (b) For Cause. The Corporation may terminate Employee’s Employment for
Cause. For purposes of this Agreement, termination for “Cause” shall have the
meaning set forth at Section 4.1(b)(i) below, and Employee’s Employment shall
not be treated as having been terminated for Cause unless such termination is
accomplished in accordance with Section 4.1(b)(ii) below.

       (i) For purposes of this Agreement, Employee shall be treated as having
been terminated for “Cause” only if Employee has (A) been convicted of, or
pleaded nolo contendere with respect to, a felony, or (B) participated
personally in an act of fraud in the discharge of his duties under this
Agreement that demonstrably discredits the Corporation and that cannot be cured,
or (C) continued for 30 days following written notice from the Corporation to
engage in activities that are not contemplated or permitted by this Agreement
and that involve a material conflict of interest with Employee’s duties and
responsibilities under this Agreement, or (D) continued for 30 days following
written notice from the Corporation to fail substantially to perform the
material duties of his office (other than as a result of total or partial
incapacity due to physical or mental illness or disability), or (E) failed to
cure, within 30 days following written notice from the Corporation, any material
breach of the material terms of this Agreement or of any written noncompetition,
nondisclosure or nonsolicitation policy or agreement to which

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Employee is at the time subject or by which he is at the time bound. The
Corporation’s written notice to Employee referred to in (C), (D) and (E) above
will not be deemed to have been given unless it identifies with particularity
the asserted basis or bases for a for-Cause termination and requests, with
specific reference to this Section 4.1(b)(i), that it or they be corrected or
cured.

       (ii) The Corporation by written notice may terminate Employee’s
employment for Cause at any time following the occurrence of an event described
in Section 4.1(b)(i)(A) above. Within 10 days following the occurrence of an act
described in Section 4.1(b)(i)(B) above, or following the end of the 30-day
correction or cure period described in any of Section 4.1(b)(i)(C), (D) or
(E) above, if the basis or bases asserted by the Board for a for-Cause
termination thereunder have not been corrected or cured, the Board shall give
written notice to Employee setting forth with particularity the asserted basis
or bases for a for-Cause termination and giving Employee a reasonable
opportunity, including reasonable access to information and documents, to appear
with counsel before the Board to contest the asserted basis or bases for such
termination. Employee shall not be treated as having been terminated for Cause
unless, following such opportunity to contest the basis or bases for
termination, the Board determines in writing by the affirmative vote of a
majority of its members that the asserted basis or bases for termination exist
under Section 4.1(b)(i)(B) through (E), as applicable, above and that Employee
is therefore terminated for Cause. During the pendency of any process described
in the immediately preceding sentence, the Corporation may transfer some or all
of Employee’s duties and responsibilities to one or more other persons, but
until Employee’s employment is terminated in accordance with the preceding
provisions of

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this Section 4.1(b)(ii) he shall continue during the Agreement Term to be
entitled to all the remuneration and employee benefits to which he would
otherwise be entitled as an active employee under this Agreement. In any
proceeding before the Board described in this Section 4.1(b)(ii), where
Employee’s good faith in the performance of his duties is in question, such good
faith shall be presumed unless the preponderance of the evidence indicates
otherwise.

     (c) By Reason of Serious Illness or Disability. In the event of Employee’s
Serious Illness or Disability during Employment, the Corporation may terminate
Employee’s Employment by giving Employee at least 60 days’ advance written
notice specifying the date of termination. If, on or before the date of
termination specified in such notice, Employee recovers and is again able to
perform his duties hereunder, such notice shall be void, and Employee’s
Employment shall not be terminated thereby.

     Section 4.2. Termination of Employment By Employee.

     (a) For Good Reason, etc. Employee shall have the right to terminate his
Employment for Good Reason, unless the Corporation prior to such termination
shall have cured the asserted basis for the Good Reason claim, by giving not
less than 30 days’ prior written notice to the Corporation, which notice must be
given within six calendar months after the event giving rise to the Good Reason.
Employee shall also have the right to terminate his Employment at any time by
written notice to the Corporation in the circumstances described in
Section 1.19(iv).

     (b) Other Than For Good Reason. Employee shall have the right to terminate
his Employment at any time for any reason other than as described in
Section 4.2(a) above in his sole discretion by giving not less than 90 days’
prior written notice to the Corporation, which notice may not be given after the
Corporation has provided a written notice of termination to

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Employee under Section 4.1(b). Upon receipt of any such notice from Employee,
the Corporation shall have the option, exercisable by giving Employee written
notice within 30 days of such receipt, to designate any date (not earlier than
30 days after the date of Employee’s notice) as the date on which Employee’s
Employment shall cease. The effective date of the Termination of Employment
hereunder shall be the date so designated by the Corporation if earlier than the
date specified by Employee. In no event shall the Termination of Employment by
the Corporation without Cause, by Employee as described in Section 4.2(a) or by
reason of a Failure to Extend be deemed to be a Termination of Employment by
Employee pursuant to this Section 4.2(b).

     Section 4.3. Other Termination of Employment. Employee’s Employment shall
also terminate on Employee’s death.

     Section 4.4. Resignation as Member of the Board of Directors. A Termination
of Employment shall constitute, unless otherwise requested by the Board,
Employee’s resignation as a member of the Corporation’s Board of Directors,
effective on the date of the Termination of Employment.

ARTICLE 5

COMPENSATION AND BENEFITS FOLLOWING TERMINATION OF EMPLOYMENT

     Section 5.1. Voluntary Termination Pursuant to Section 4.2(b). If the
Termination of Employment is a voluntary termination pursuant to Section 4.2(b),
Employee shall be entitled to payment of all accrued but unpaid Base Salary
amounts.

     Section 5.2. Termination for Cause. In the event of a Termination of
Employment for Cause, Employee shall be entitled to payment of all accrued but
unpaid Base Salary amounts. Any award made on or after the Effective Date under
the Annual Incentive Plan that is

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outstanding at the time of the Termination of Employment, and all awards, if
any, of Options, Performance Share Awards, and/or Restricted Stock that were
made on or after the Effective Date and that are outstanding at the time of the
Termination of Employment shall be forfeited or canceled without payment.

     Section 5.3. Qualifying Termination (Other Than by Reason Of Death). If
there is a Qualifying Termination (other than by reason of Employee’s death),
Employee shall be entitled to prompt payment of all accrued but unpaid Base
Salary amounts and all amounts payable (but unpaid) under the Annual Incentive
Plan with respect to any year ended on or prior to the Qualifying Termination,
plus the following:

     (a) Continuation of Base Salary. Unless such Qualifying Termination shall
have been by reason of a Qualifying Termination described in Section 1.19(iv):

       (i) The Corporation shall pay to Employee in cash, on the normal payroll
schedule applicable to his Base Salary, cash compensation at an annual rate
equal to his Base Salary as in effect at the time of the Qualifying Termination.
Such cash compensation shall continue to be paid until the later of the
expiration of the Agreement Term or the first anniversary of the date of the
Qualifying Termination; provided, that if the Qualifying Termination is by
reason of a Failure to Extend, such cash compensation shall continue to be paid
following the date of the Termination of Employment only until the first
anniversary of the date of notification by the Corporation constituting the
Failure to Extend. The Corporation may accelerate the payment of any portion or
all of any amount payable under this Section 5.3(a)(i).

       (ii) Notwithstanding (i) above, if Employee obtains other employment
(including self-employment, but excluding service on boards of directors)
following his

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            Termination of Employment hereunder, any income received by Employee
from such employment shall reduce, on a dollar-for-dollar basis (but not below
zero), the Corporation’s obligation to pay cash compensation to Employee
pursuant to this Section 5.3(a). If the Corporation has already paid any cash
compensation under Section 5.3(a)(i) to which an offset would otherwise have
applied, Employee shall promptly reimburse the Corporation the amount of such
compensation. In the event of a Qualifying Termination by reason of Serious
Illness or Disability, if Employee becomes entitled to and receives disability
benefits under any disability payment plan, including disability insurance, the
amount of cash compensation otherwise payable by the Corporation to Employee
pursuant to Section 5.3(a) shall be paid at a rate equal to the excess of
(A) the rate at which such cash compensation would otherwise be paid over
(B) the disability benefits for which Employee is eligible under such plan or
insurance to the extent those benefits are attributable to premium payments made
by the Corporation.

     (b) Annual Incentive Plan. Except in the case of a Qualifying Termination
by reason of a Failure to Extend and except as hereinafter provided, the
Corporation shall pay to Employee at the time of payment of awards to other
participants in the Annual Incentive Plan for the year in which the Qualifying
Termination occurs (even if Employee is not employed by the Corporation on the
last day of such year) a prorated amount equal to (i) the award that would have
been payable to Employee for such year had he remained in Employment, based on
actual results for such year, multiplied by (ii) a fraction, the numerator of
which is the number of days of Employment during such year and the denominator
of which is 365. In the case of a Qualifying Termination described in
Section 1.19(iv), the Corporation shall promptly accelerate the payment of the
prorated Annual Incentive Plan payment described in this Section 5.3(b). In the

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case of any other Qualifying Termination subject to this Section 5.3, the
Corporation in its discretion may accelerate the payment of any portion or all
of such prorated Annual Incentive Plan payment. In any case where payment under
this Section 5.3(b) is accelerated, the amount determined under clause (i) above
shall be the award that the Board determines Employee would have received for
the year in which the Qualifying Termination occurs based on the Board’s
determination of the likelihood of the Corporation’s achievement of targets for
such year.

     (c) Performance Share Awards. Notwithstanding any provision of the Stock
Compensation Plan to the contrary, in the case of any Qualifying Termination,
the Corporation shall deliver to Employee all amounts payable (but unpaid) under
any Performance Share Award with respect to an Award Cycle that had ended as of
the date of the Termination of Employment plus, with respect to each Performance
Share Award then held by Employee as to which at least 18 months of the related
Award Period has elapsed as of the date of the Termination of Employment, after
the end of such Award Period, the product of (i) the award that would have been
payable to Employee for such Award Period had he remained in Employment, based
on actual results for such Award Period, and (ii) a fraction, the numerator of
which is the number of days of Employment in such Award Period and the
denominator of which is the total number of days in such Award Period. In the
case of a Qualifying Termination described in Section 1.19(iv), the Corporation
shall promptly accelerate the payment of all prorated Performance Share Award
payments described in this Section 5.3(c). In the case of any other Qualifying
Termination subject to this Section 5.3, the Corporation in its discretion may
accelerate the payment of any portion or all of any such payments. In any case
where payment under this Section 5.3(c) is accelerated, the amount determined
under clause (i) above shall be the award that the Board determines Employee
would have received for the Award Period in

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which the Qualifying Termination occurs based on the Board’s determination of
the likelihood of the Corporation’s achievement of targets for such Award
Period.

     (d) Restricted Stock. All Restricted Stock granted to Employee after
July 1, 2003 shall continue to vest on the same basis as if Employee had
remained employed through June 30, 2007.

     (e) Medical and Dental Coverage. In the case of a Qualifying Termination by
reason of a termination by the Corporation without Cause or by Employee for Good
Reason, to the extent permitted under the Corporation’s medical and dental plans
the Corporation shall continue the medical and dental coverage elected by
Employee for Employee and Employee’s spouse and dependents (but in the case of
employee’s dependents only for so long as they remain dependents or until age 21
if later), without premium payments by Employee, until the end of the Agreement
Term. If, for any reason, it is not possible for Employee, Employee’s spouse or
the other eligible dependents of Employee to participate in medical and dental
coverage pursuant to the immediately preceding sentence, the Corporation shall
make arrangements to provide comparable coverage.

     Section 5.4. Termination of Employment By Reason of Death. If there is a
Termination of Employment by reason of Employee’s death, then in addition to the
payment to Employee’s estate of Employee’s accrued but unpaid Base Salary:

     (a) Annual Incentive Plan. The Corporation shall pay to Employee’s
designated beneficiary or, if none, to Employee’s estate, as soon as is
practicable after the date of Employee’s death, all amounts payable (but unpaid)
under the Annual Incentive Plan with respect to any year ended on or prior to
death plus, for the year of death, a prorated amount equal to (i) the award that
the Board determines Employee (had he lived) would have received for the

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year in which his death occurs based on the Board’s determination of the
likelihood of the Corporation’s achievement of targets for such year, multiplied
by (ii) a fraction, the numerator of which is the number of days of Employment
during such year prior to his death and the denominator of which is 365.

     (b) Performance Share Awards. The Corporation shall pay to Employee’s
designated beneficiary or, if none, to Employee’s estate, as soon as is
practicable after the date of Employee’s death, all amounts payable (but unpaid)
under any Performance Share Award with respect to an Award Cycle that had ended
on or prior to the date of death, plus an amount with respect to Performance
Share Awards made for each Award Period that had not ended prior to the date of
death and as to which at least 18 months had elapsed prior to the date of death
equal to the award that the Board determines Employee (had he lived) would have
received for the Award Period in which his death occurs based on the Board’s
determination of the likelihood of the Corporation’s achievement of targets for
such Award Period, multiplied by a fraction, the numerator of which is the
number of days in the Award Period that had elapsed prior to Employee’s death
and the denominator of which is the total number of days in the Award Period.

     (c) Restricted Stock. All Restricted Stock granted to Employee after
July 1, 2003 shall continue to vest on the same basis as if Employee had
remained employed through June 30, 2007.

ARTICLE 6

MISCELLANEOUS

     Section 6.1. Noncompetition.

     (a) Following Termination of Employment for any reason other than for Cause
or by reason of a voluntary termination by Employee pursuant to Section 4.2(b),
during the period

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from the date of the Termination of Employment to the later of the last day of
the Agreement Term or the first anniversary of the date of the Termination of
Employment Employee shall not, directly or indirectly, (i) Compete in the United
States, (ii) solicit any officer or employee of the Corporation or any of its
affiliates to engage in any conduct prohibited hereby for Employee or to
terminate any existing relationship with the Corporation or such affiliate or
(iii) assist any other person to engage in any activity in any manner prohibited
hereby to Employee. Following Termination of Employment for Cause or by reason
of a voluntary termination by Employee pursuant to Section 4.2(b), Employee
shall not, directly or indirectly, engage in any of the activities described in
(i), (ii) or (iii) of the immediately preceding sentence during the one-year
period following the date of the Termination of Employment. In any case where
Employee is contemplating an activity described in Section 6.1(a)(i) above,
other than an activity described in Section 1.7(ii) or (iii) or an activity
described in Section 1.7(i) as it relates to the secondary mortgage market, the
Board, upon the request of Employee for a waiver, shall determine in good faith
whether Employee’s engaging in the proposed activity would prejudice the
interests of the Corporation and shall not unreasonably withhold its consent to
such request for a waiver if it determines that the proposed activity would not
prejudice the interests of the Corporation.

     (b) The need to protect the Corporation against Employee’s competition, as
well as the nature and scope of such protection, has been carefully considered
by the parties hereto in light of the uniqueness of Employee’s talent and his
importance to the Corporation. Accordingly, Employee agrees that, in addition to
any other relief to which the Corporation may be entitled, the Corporation shall
be entitled to seek and obtain injunctive relief (without the requirement of a
bond) from a court of competent jurisdiction for the purpose of restraining
Employee from any actual or threatened breach of the covenant contained in
Section 6.1(a).

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     (c) If for any reason a final decision of any court determines that the
restrictions under this Section 6.1 are not reasonable or that the consideration
therefore is inadequate, such restrictions shall be interpreted, modified or
rewritten by such court to include as much of the duration, scope and geographic
area identified in this Section 6.1 as will render such restrictions valid and
enforceable.

     Section 6.2. Payment of Certain Expenses. As promptly as permitted by law
the Corporation shall pay or advance to Employee all legal fees and expenses
that Employee may reasonably incur as a result of any contest or arbitration
requested by the Corporation, Employee or others of the validity or
enforceability of, or liability under, any provision of this Agreement
(including any contest initiated by Employee concerning the amount of any
payment due pursuant to this Agreement), plus in each case interest at the
applicable federal rate provided for in Section 7872(f)(2)(A) of the Internal
Revenue Code of 1986, as amended, on any payment of legal fees and expenses that
is delayed by more than 10 days following delivery by Employee to the
Corporation of a proper request for payment. If as to any such contest or
arbitration Employee does not prevail, and only in such case, within 10 days
following written demand from the Corporation Employee shall repay any advance
made by the Corporation pursuant to the immediately preceding sentence with
respect to such contest or arbitration, with interest at the applicable federal
rate provided for in Section 7872(f)(2)(A) of the Internal Revenue Code of 1986,
as amended, from the date of the Corporation’s payment.

     Section 6.3. Assignment by Employee. Except as otherwise expressly provided
herein or in the Corporation’s benefit plans, the obligations, rights and
benefits of Employee hereunder are personal to him, and no such obligation,
right or benefit shall be subject to voluntary or involuntary alienation,
assignment, delegation or transfer.

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     Section 6.4. No Funding Required. Nothing in this Agreement shall be
construed as requiring the Corporation to establish a trust or otherwise to fund
any payments to be made under this Agreement, but the Corporation in its
discretion may establish such nonqualified trusts or other arrangements as it
determines to be appropriate to assist it in meeting its obligations under this
Agreement.

     Section 6.5. Disclosure of Information to the Corporation. In the event
Section 5.3 becomes applicable, Employee or, in the event of Employee’s
incapacity or death, his personal representative shall make available to the
Corporation on a confidential basis such records, documents and other
information reasonably necessary to enable the Corporation to verify the amount
of income available to offset the payments otherwise due Employee.

     Section 6.6. Nondisclosure of Confidential Information. Employee
acknowledges that he is bound by the terms of an Agreement on Ideas, Inventions
and Confidential Information dated March 16, 2001. Nothing in this Agreement
shall be construed as limiting Employee’s obligations under the aforesaid
Agreement on Ideas, Inventions and Confidential Information or any successor
thereto, which shall be treated for all purposes also as obligations of Employee
under this Agreement. This Agreement in no way limits the ability of Employee to
provide information covered by this Agreement to a government entity in order to
assist the government entity in the fulfillment of its duties.

     Section 6.7. Waiver. The failure of either party hereto to insist upon
strict compliance by the other party with any term, covenant or condition of
this Agreement shall not be deemed a waiver of such term, covenant or condition,
nor shall any waiver or relinquishment or failure to insist upon strict
compliance of any right or power hereunder at any one time or more times be
deemed a waiver or relinquishment of such right or power at any other time or
times.

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     Section 6.8. Notice. Any notice required or desired to be given pursuant to
this Agreement shall be sufficient if transmitted in writing by hand delivery or
sent by prepaid courier or by registered or certified mail, postage prepaid,
(i) if notice is to the Corporation, to the Corporation’s address hereinafter
set forth, or (ii) if notice is to Employee, to Employee’s address in the
metropolitan District of Columbia area contained in the records of the
Corporation, or, in either such case, to such other address of a party as such
party may designate in writing and transmit to the other party in such manner.
Any such notice shall be deemed given, if transmitted by hand delivery, one
business day after deposit with a prepaid courier service or, if sent by
registered or certified mail, three business days after deposit in the United
States mail.

     Section 6.9. Applicable Law. This Agreement shall be governed by the laws
of the District of Columbia without regard to any otherwise applicable conflict
of laws principles.

     Section 6.10. Taxes. The Corporation shall deduct from all amounts payable
under this Agreement all federal, state, local and other taxes required by law
to be withheld with respect to such amounts.

     Section 6.11. Benefit. Except as otherwise expressly provided herein, this
Agreement shall inure to the benefit of and be binding upon the Corporation, its
successors and assigns, and upon Employee, his spouse, heirs, executors and
administrators. The Corporation shall require any successor (whether direct or
indirect, by purchase, merger, reorganization, consolidation, acquisition of
property or stock, liquidation or otherwise) to all or a substantial portion of
its assets, by agreement in form and substance reasonably satisfactory to
Employee, expressly to assume and agree to perform this Agreement in the same
manner and to the same extent that the Corporation would be required to perform
this Agreement if no such succession had taken place.

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Regardless of whether such an agreement is executed, this Agreement shall be
binding upon any successor of the Corporation, and such successor shall be
deemed the “Corporation” for purposes of this Agreement.

     Section 6.12. Entire Agreement. This Agreement contains the entire
understanding and agreement between the parties relating to the terms of
Employee’s employment by the Corporation and, except as otherwise provided in
Section 6.15, supersedes all prior written or oral agreements between them,
other than the Agreement on Ideas, Inventions and Confidential Information dated
March 16, 2001 and an Indemnification Agreement between the Corporation and
Employee. This Agreement cannot be amended, modified or supplemented in any
respect except by an agreement in writing signed by both parties hereto.

     Section 6.13. Arbitration. Any controversy or claim arising out of or
relating to this Agreement or the breach of this Agreement shall be settled by
arbitration in the District of Columbia in accordance with the laws of the
District of Columbia. The arbitration shall be conducted in accordance with the
applicable rules of the American Arbitration Association. The costs and expenses
of the arbitrator(s) shall be borne by the Corporation. Except as otherwise
provided in Section 6.2, each party shall pay his or its own legal costs and
other expenses (other than the costs and expenses of the arbitrator(s)) relating
to an arbitration. The award of the arbitrator(s) shall be binding upon the
parties. Judgment upon the award rendered by the arbitrator(s) may be entered in
any court having jurisdiction.

     Section 6.14. Severability. Except as otherwise provided in Section 6.15,
it is the intent and understanding of each party hereto that, if any term,
restriction, covenant or promise herein is found to be invalid or otherwise
unenforceable, then such term, restriction, covenant or promise shall not
thereby be invalid or unenforceable but shall be deemed modified to the extent

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necessary to make it enforceable and, if it cannot be so modified, shall be
deemed amended to delete therefrom such provision or portion found to be invalid
or unenforceable, such modification or amendment in any event to apply only with
respect to the operation of this Agreement in the particular jurisdiction in
which such finding is made.

     Section 6.15. Regulatory Approval.

     The parties hereto acknowledge and agree that pursuant to Section 309(d) of
the Federal National Mortgage Association Charter Act, as amended by the Federal
Housing Enterprises Financial Safety and Soundness Act of 1992 (as so amended,
the “Act”), 12 U.S.C. 1723a(d), no provision of this Agreement relating to
Employee’s benefits upon termination of employment shall be effective unless and
until such provision has been reviewed and approved by the Director (the
“Director”) of the Office of Federal Housing Enterprise Oversight (“OFHEO”). The
parties therefore agree as follows:

     (a) The Corporation shall promptly hereafter submit this Agreement to the
Director for his review and approval of those terms hereof relating to benefits
upon termination of employment and shall seek diligently to obtain such
approval;

     (b) This Agreement shall take effect as of the Effective Date if the
Director’s approval of terms hereof relating to benefits upon termination of
employment is given by January 1, 2005. If such approval does not occur by such
date, Employee shall have the benefit of all other terms of this Agreement until
that date and Employee, in his sole discretion, may designate that failure to
obtain approval as a “failure of the Corporation to extend” the Existing
Agreement.

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     IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized representative, and Employee has executed this
Agreement.

     
Witness:
  FANNIE MAE

  3900 Wisconsin Avenue, N.W.

  Washington, D.C. 20016

           
___/s/ Monica Medina_________
  By:___/s/ Anne Mulcahy___

              Chairman of the Compensation

              Committee of the Board

   

   
Date:___4/19/04______________
  Date:___4/19/04__________

   

   
Witness:
   

   

   
___/s/ Judith C. Dunn_________
  ___/s/ J. Timothy Howard___

         J. TIMOTHY HOWARD

   

   
Date:___5/5/04______________
  Date:___5/5/04___________

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