UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

SCHEDULE 14A

(RULE 14a-101)

 

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.     )

 

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Filed by a Party other than the Registrant o

 

Check the appropriate box:

 

o  Preliminary Proxy Statement.

o  Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2)).

þ  Definitive Proxy Statement.

o  Definitive Additional Materials.

o  Soliciting Material Pursuant to §240.14a-12.

 

Federal National Mortgage Association

(Name of Registrant as Specified in Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

1.  Title of each class of securities to which transaction applies:

 

 

 

1.  Amount previously paid:

 

2.  Form, Schedule or Registration Statement No.:

 

3.  Filing Party:

 

4.  Date Filed:

3900 Wisconsin Avenue NW

Washington, DC 20016

 

April 4, 2008

 

Dear Shareholder:

 

We cordially invite you to attend the annual shareholders’ meeting of the Federal National Mortgage Association (Fannie Mae). The meeting will be held on Tuesday, May 20, 2008, at 10:00 A.M. (local time) at The Westin New Orleans Canal Place, 100 Rue Iberville, New Orleans, Louisiana 70130.

 

Our annual shareholders’ meeting in New Orleans comes two and one half years after Hurricanes Katrina and Rita ravaged the Gulf Coast. Fannie Mae has already committed $40 billion in financing for housing and redevelopment in the Gulf region since Hurricane Katrina in 2005 and we expect to invest more in the years ahead. We remain committed to our many partners in this region and to all the communities who are still rebuilding. Holding our annual meeting here is just one indication of that continued support.

 

At the meeting, shareholders will vote on a number of important matters. Our 2007 Annual Report to Shareholders includes our audited financial statements for the year ended December 31, 2007, along with a discussion and analysis of our financial results. Please take the time to review our 2007 Annual Report to Shareholders and to read carefully each of the proposals described in the attached proxy statement.

 

Whether or not you plan to attend, please vote by Internet, telephone, or, if you received a paper copy of the materials by mail, mark, sign, date, and return your proxy card, so that your shares are represented at the meeting.

 

Thank you for your continued support and ownership of Fannie Mae.

 

Sincerely,

 

 

Stephen B. Ashley
Chairman of the Board

 

This Proxy Statement and the accompanying form of proxy
are first being sent to our common shareholders on or about April 4, 2008.

3900 Wisconsin Avenue NW

Washington, DC 20016

 

Notice of Annual Meeting of Shareholders

 

Dear Shareholder:

 

Fannie Mae’s 2008 Annual Meeting of Shareholders will be held on Tuesday, May 20, 2008, at 10:00 A.M. (local time) at The Westin New Orleans Canal Place, 100 Rue Iberville, New Orleans, Louisiana 70130.

 

At the meeting, shareholders will be asked to:

 

 

The close of business on March 21, 2008 was the record date for determining shareholders entitled to notice of, and to vote at, the annual meeting.

 

In accordance with the rules of the Securities and Exchange Commission, we mailed our proxy materials or sent notice and provided access to our proxy materials over the Internet, beginning on April 4, 2008, for the holders of record and beneficial owners of our common stock as of the close of business on the record date.

 

Your proxy is important. Whether or not you plan to attend the annual meeting, please vote by Internet, telephone, or, if you received a paper copy of the materials by mail, mark, sign, date, and return your proxy card, so that your shares will be represented at the annual meeting.

 

By Order of the Board of Directors,

 

Beth A. Wilkinson
Secretary

 

April 4, 2008

 

Table of Contents

 

 

Who can vote at the 2008 annual meeting?

 

You are entitled to vote or direct the voting of your shares of Fannie Mae common stock if you were a shareholder at the close of business on March 21, 2008, which is the record date for the annual meeting (the “Record Date”). Both “shareholders of record” and “street name holders” are entitled to vote or direct the voting of their Fannie Mae common stock.

 

You are a “shareholder of record” if you hold Fannie Mae common stock that is registered in your name at our transfer agent, Computershare, Inc.

 

You are a “street name holder” if you hold the common stock indirectly through a nominee, such as a broker, bank or similar institution. You may not directly vote the common stock you hold as a street name holder. However, as the beneficial owner of these shares, you have the right to direct your nominee on how to vote your shares. If you are a street name holder, these materials are being sent to you by your nominee and you will receive voting instructions from them, which may be different from the instructions provided here.

 

What will I be voting on?

 

You will be voting on:

 

 

Who is soliciting my vote?

 

The Board of Directors of Fannie Mae is soliciting your vote at the 2008 annual meeting.

 

How do I vote?

 

You can vote by proxy or in person at the annual meeting.

 

If voting by proxy, you may vote in any of the following three ways.

 

 

You may also vote in person at the annual meeting. If you intend to attend the meeting, please bring personal, government-issued identification for admission, and evidence of your ownership of Fannie Mae common stock as of the close of business on the Record Date so that you can vote. This evidence may be in the form of your Notice of Internet Availability, your proxy or voting instruction card, or a bank or brokerage account statement.

 

To ensure your vote is counted, please remember to submit your vote so that it is received by 11:59 P.M. (EST) on May 19, 2008. If you are a street name holder, your nominee’s instructions may be different.

 

How many votes do I have?

 

You will have one vote for each share of Fannie Mae common stock you owned on the Record Date.

How many votes can be cast by all shareholders?

 

982,322,357, consisting of one vote for each share of Fannie Mae common stock that was outstanding on the Record Date. The number of shares of common stock outstanding includes shares of restricted stock. No other class of voting stock is outstanding. There is no cumulative voting.

 

How many shares of common stock must be present to hold the annual meeting?

 

Shares of common stock representing a majority of the votes that can be cast, or voted, by all holders of common stock, or 491,161,179 shares, must be present in person or represented by proxy to hold the meeting. Abstentions will be counted for the purpose of establishing a quorum at the annual meeting.

 

How are my votes counted?

 

Election of Directors

 

You may vote FOR or AGAINST the election of any director, but may not vote ABSTAIN with respect to the election of any director. Under our bylaws as amended in 2007, directors are elected by a majority vote in uncontested elections and by plurality vote in contested elections. A contested election is one in which the number of nominees exceeds the number of directors to be elected.

 

For the election of directors at the 2008 annual meeting, the number of nominees is not expected to exceed the number of directors to be elected and, therefore, majority voting will govern.

 

As a result, the number of shares cast FOR a director must exceed the number of votes cast AGAINST that director in order for the director to be elected. If a director receives FOR votes that total less than the majority of the votes cast, that director will be required to tender his or her resignation to the Board of Directors for its consideration.

 

Ratification of Selection of Auditors and Shareholder Proposal

 

You may vote FOR or AGAINST or you may ABSTAIN from voting on each of the other proposals. Each of the other proposals will pass if a majority of the votes cast on the particular proposal are voted FOR that proposal. Abstentions will not count either FOR or AGAINST and will therefore not have any effect on the outcome of a vote on such proposal.

 

If I return a signed proxy or voting instruction card without indicating my vote, how will my shares be voted?

 

If you return a signed proxy or voting instruction card without indicating your vote, your shares will be voted:

 

 

If any other matter or business is properly brought before the annual meeting or any adjournment thereof, the proxy holders may vote the proxy in their discretion.

 

Can my shares be voted if I do not vote by telephone, by Internet, or by returning my proxy or voting instruction card, and I do not attend the annual meeting?

 

If you are a shareholder of record and do not vote shares registered in your name, your shares will not be voted.

 

If you are a street name holder and do not direct your nominee as to how to vote your shares, your broker generally may vote your shares on any of the routine matters scheduled to come before the meeting. Routine matters at the 2008 annual meeting are the election of directors and the ratification of Deloitte & Touche LLP’s appointment.

Pursuant to New York Stock Exchange (“NYSE”) rules, your broker will not be able to vote on any shareholder proposal because this type of proposal is not considered a routine matter. If you do not give your broker instructions on how to vote your shares on this proposal, the votes will be “broker non-votes.” We count broker non-votes for quorum purposes, but we do not count broker non-votes as votes cast as it relates to a particular proposal and, therefore, they will not have any effect on the outcome of a vote on such proposal.

 

Can I change my vote?

 

Yes. Any shareholder giving a proxy has the power to revoke it at any time before it is exercised.

 

You may revoke your proxy by:

 

 

Could other matters be decided at the 2008 annual meeting?

 

We do not know of any other matters that will be considered at the annual meeting. If any other matter is properly brought before the meeting, the proxies will be voted at the discretion of the proxy holders.

 

What happens if the 2008 annual meeting is postponed or adjourned?

 

Your proxy will still be valid and may be voted at the postponed or adjourned meeting. You will still be able to change or revoke your proxy until it is voted.

 

Who can attend the 2008 annual meeting?

 

You must be a shareholder to attend the annual meeting. See “How do I vote?” above for requirements for meeting attendance. In addition, if you represent an entity that is a holder of Fannie Mae common stock on the Record Date, you must present evidence of your authority to act as the legal representative for that entity.

 

If I cannot attend the 2008 annual meeting in person, will it be Web cast?

 

Yes, there will be a live audio Web cast of the annual meeting at www.fanniemae.com. Note that you must be a shareholder and present in person at the annual meeting to ask questions. The Web cast of the annual meeting will be available for 30 days after the meeting.

 

 

The Board and management of Fannie Mae continually monitor the latest developments in corporate governance, as well as the most recent laws, rules, and regulations so that the Company adopts the latest and best corporate governance practices. Some examples of our practices include:

 

 

We continue to evaluate legal and regulatory requirements and emerging best practices and will adopt them as appropriate.

 

Our corporate governance materials, including our Corporate Governance Guidelines (“Guidelines”), Codes of Conduct, and Board committee charters are available on our Web site at www.fanniemae.com, under “Corporate Governance.” These materials are also available in print to any shareholder upon request. The Board regularly reviews corporate governance developments and modifies our Guidelines, committee charters, and key practices as warranted.

 

We have a Code of Conduct and all of our employees, including our officers, are required to read and certify their compliance with the Code of Conduct annually. Our employee Code of Conduct includes the code of ethics for chief executive officers and senior financial officers that is described in the Sarbanes-Oxley Act of 2002 and provided for in the implementing regulations of the Securities and Exchange Commission (“SEC”). We also have a Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors. Directors are required to read and certify their compliance with this code annually.

 

We will post on our Web site any change to or waiver from the employee Code of Conduct for any of our executive officers and any change to or waiver from the Code of Conduct and Conflict of Interests Policy for Members of the Board of Directors for any of our directors.

 

We believe that a central component of good corporate governance is having a Board that is composed of a substantial majority of directors who are independent from management. The Board of Directors has adopted standards for director independence that meet, and in some respects exceed, those of the NYSE.

 

Even if no relationship or transaction exists that would disqualify a director from being “independent” under these standards, the Board does not consider a director to be “independent” unless the Board affirmatively makes a determination that the director has no material relationship with Fannie Mae, either directly or through an organization that has a material relationship with us. A relationship is “material” if, in the judgment of the Board, it would interfere with the director’s independent judgment. In addition, under the NYSE’s listing requirements for audit committees, members of a company’s audit committee must meet additional, heightened independence criteria. Our own independence standards, which are included in our Guidelines, require all of our independent directors to meet these more rigorous criteria.

 

The independence standards for our directors, which are included in the Guidelines, are set forth below.

 

Employment.  A director will not be considered independent if, within the preceding five years:

 

 

Auditor Affiliation.  A director will not be considered independent if:

 

 

Compensation Committee Interlocks.  A director will not be considered independent if, within the preceding five years:

 

 

Compensation.  A director will not be considered independent if, within the preceding five years:

 

 

Business Relationships.  A director will not be considered independent if:

 

 

Charitable Contributions.  A director will not be considered independent if the director or the director’s spouse is an executive officer, employee, director, or trustee of a nonprofit organization to which we or the Fannie Mae Foundation makes or has made contributions within the preceding three years that, in a single year, were in excess of 5% of the organization’s consolidated gross annual revenues, or $100,000, whichever is less. Amounts contributed under our matching gifts program are not included in the contributions calculated for purposes of this standard.

 

Our independence standards also provide that, after considering the relevant facts and circumstances, our Board may determine in its judgment that a director is independent (in other words, the director has no relationship with us that would interfere with the director’s independent judgment), even though the director does not meet the standards listed above, as long as the determination of independence is consistent with the NYSE definition of “independence.” If neither our Guidelines nor the NYSE independence requirements address a particular relationship, the determination of whether the relationship is material, and whether a director is independent, will be made by our Board, based upon the recommendation of the Nominating and Corporate Governance Committee.

 

Our Board of Directors, with the assistance of the Nominating and Corporate Governance Committee, has reviewed the independence of all current Board members under the listing standards of the NYSE, and the standards of independence adopted by the Board contained in our Guidelines, as outlined above. Based on its

review, the Board has affirmatively determined that all of our independent directors meet the director independence standards of our Guidelines and the NYSE, and that each of the following 11 directors is independent: Stephen B. Ashley, the non-executive Chairman, Dennis R. Beresford, Louis J. Freeh, Brenda J. Gaines, Karen N. Horn, Bridget A. Macaskill, Leslie Rahl, John C. Sites, Jr., Greg C. Smith, H. Patrick Swygert, and John K. Wulff.

 

In determining the independence of each of our Board members, the Board of Directors considered the following relationships in addition to those addressed by the standards contained in our Guidelines as set forth above:

 

 

Mr. Mudd is not considered an independent director under the Guidelines because of his position as our Chief Executive Officer.

 

Our non-management directors meet regularly in executive session without management present. Time for an executive session is reserved at every regularly scheduled Board meeting. Stephen B. Ashley, in his capacity as Chairman of the Board, presides over these sessions. During 2007, our non-management directors met 12 times in executive session.

 

Policies and Procedures Relating to Transactions with Related Persons.  We review relationships and transactions in which we are a participant and in which any of our directors or executive officers, or an immediate family member of either, has an interest to determine whether any of those persons has a material interest in the relationship or transaction. Our current written policies and procedures for review, approval, or ratification of relationships or transactions with related persons are set forth in our:

 

 

Our Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors prohibits our directors from engaging in any conduct or activity that is inconsistent with our best interests. It requires each of our directors to excuse himself or herself from voting on any issue before the Board that could result in a conflict, self-dealing, or other circumstance wherein his or her position as a director would be detrimental to us or result in a non-competitive, favored, or unfair advantage to either the director or the director’s associates. In addition, our directors must disclose to the Chair of the Nominating and Corporate Governance Committee,

or another member of the committee, any situation that involves or appears to involve a conflict of interest. This includes, for example, any financial interest of a director, an immediate family member of a director, or a business associate of a director in any transaction being considered by the Board, as well as any financial interest a director may have in an organization doing business with us.

 

Our Board’s delegation of authorities and reservation of powers requires the Nominating and Corporate Governance Committee of the Board of Directors to review and approve any transaction with any current director, director nominee, or executive officer or any immediate family member of a current director, director nominee, or executive officer, that is required to be disclosed under the SEC rules as a related party transaction.

 

Our Code of Conduct for employees requires that we and our employees seek to avoid any actual or apparent conflict between our business interests and the personal interests of our employees or their relatives or associates. An employee who knows or suspects a violation of our Code of Conduct must raise the issue with the employee’s manager, another appropriate member of management, a member of our Human Resources division, or our Compliance and Ethics division.

 

Under our Conflict of Interest Policy and Conflict of Interest Procedure for employees, an employee who has a potential conflict of interest must request review and approval of the conflict. Conflicts requiring review and approval include situations where the employee or a close relative of the employee has (1) a financial interest worth more than $100,000 in an entity that does business, seeks to do business, or competes with us or (2) a financial interest worth more than $10,000 in such an entity combined with the ability to control or influence our relationship with the entity. In accordance with its charter, our Nominating and Corporate Governance Committee, in the case of potential conflicts involving our Chief Executive Officer, Chief Business Officer, Chief Operating Officer, Chief Financial Officer, Chief Risk Officer, General Counsel, Chief Audit Executive, or Chief Compliance Officer, must determine whether a conflict exists, any required steps to address the conflict, and whether or not to grant a waiver of the conflict under our Conflict of Interest Policy. In the case of conflicts involving other executive officers, our Chief Executive Officer makes the determination.

 

Our Employment of Relatives Practice prohibits, among other things, situations where an employee would exercise influence, control, or authority over the employee’s relative’s areas of responsibility or terms of employment, including but not limited to job responsibilities, performance ratings, or compensation. Employees have an obligation to disclose the existence of any relation to another current employee prior to applying for any position or engaging in any other work situation that may give rise to prohibited influence, control, or authority.

 

We require our directors and executive officers, not less than annually, to describe to us any situation involving a transaction with us in which a director or executive officer could potentially have a personal interest that would require disclosure under the SEC rules as a related party transaction.

 

Transactions with 5% Shareholders.  Citigroup Inc. (“Citigroup”) beneficially owned more than 5% of the outstanding shares of our common stock during 2007. During 2007, we engaged in securities and other financial instrument transactions in the ordinary course of business with Citigroup and its affiliates. We have extensive, multi-billion dollar relationships with Citigroup. During 2007, Citigroup and/or its affiliates engaged in some or all of the following types of transactions and activities: distributing our debt securities as a dealer; committing to sell or buy mortgage-related securities or mortgage loans as a dealer; delivering mortgage loans to us for purchase by our mortgage portfolio or for securitization into Fannie Mae mortgage-backed securities; issuing investments held in our liquid investment portfolio; and acting as a derivatives counterparty or a counterparty involved in other financial instrument or investment transactions with us.

 

Alliance Capital Management L.P. and AllianceBernstein L.P. may have beneficially owned more than 5% of the outstanding shares of our common stock during 2007, through their management of shares reported as beneficially owned by AXA and its related entities. Until November 2007, a majority of the assets in the Fannie Mae Retirement Plan were managed by Alliance Capital Management L.P. and AllianceBernstein L.P.

 

These transactions with our 5% shareholders did not require review, approval, or ratification under any of our policies and procedures relating to transactions with related persons. All of these transactions were on

substantially the same terms as those prevailing at the time for comparable transactions with unrelated third parties.

 

Transactions with The Duberstein Group.  Kenneth Duberstein, a former director of Fannie Mae, is Chairman and Chief Executive Officer and a stockholder of The Duberstein Group, Inc., an independent strategic planning and consulting firm that has provided services to us since 1991. The Duberstein Group previously provided us consulting services related to legislative and regulatory issues, and associated matters. Under that agreement, the firm provided services on an annual fixed-fee basis of $375,000. We entered into a new agreement with the Duberstein Group in June 2007 under which the firm provides us consulting services related to industry and trade issues. Under our new agreement, we pay an annual fixed fee of $400,000. The fees we paid to The Duberstein Group in 2007 are included in the “2007 Non-Employee Director Compensation Table” under “Proposal 1: Election of Directors—Directors’ Compensation.”

 

Our entry into a new agreement with The Duberstein Group in 2007 was not considered by the Chair of our Nominating and Corporate Governance Committee, nor did it require approval by our Nominating and Corporate Governance Committee under our Board’s delegation of authorities and reservation of powers because, at the time we entered into the new agreement, Mr. Duberstein was no longer a Fannie Mae director. Our relationship with Mr. Duberstein’s firm under our previous agreement was disclosed to the Chair of our Nominating and Corporate Governance Committee in 2006 but did not require approval by our Nominating and Corporate Governance Committee under our Board’s delegation of authorities and reservation of powers because they had not yet been implemented.

 

Employment Relationships.  Barbara Spector, the sister of Robert J. Levin, who is our Chief Business Officer, is a non-officer employee in our Technology division. The Technology division does not report, nor has it ever reported, to Mr. Levin. From January 1, 2007 through February 29, 2008, we paid or awarded Ms. Spector approximately $158,000 in salary and cash bonuses for her services during that period. She also receives benefits under our compensation and benefit plans that are generally available to our employees, including our retirement plan.

 

Rebecca Senhauser, the wife of William Senhauser, our Chief Compliance Officer, served as a Senior Vice President in our Housing and Community Development division until July 31, 2007. The Housing and Community Development division never reported to Mr. Senhauser. Mr. and Ms. Senhauser recused themselves from any matters that might have directly and significantly affected the other, including compensation and performance evaluation matters. For her services from January 1, 2007 through July 31, 2007, we paid or awarded Ms. Senhauser approximately $209,000 in salary. In November 2007 and January 2008, Ms. Senhauser also received an aggregate of 3,965 shares under our performance share program, or PSP, for the unpaid three-year cycles that ended on December 31, 2005 and December 31, 2006. Ms. Senhauser received benefits under our compensation and benefit plans that are generally available to our employees, including our retirement plan. As a member of senior management, she also received benefits under our compensation and benefit plans available to senior officers, including participation in the Supplemental Pension Plan and 2003 Supplemental Pension Plan and participation in our elective deferred compensation plan. In July 2007, Ms. Senhauser entered into a separation agreement with us under our management severance program. Under the terms of her separation agreement, Ms. Senhauser received early payment of approximately $154,000 in previously awarded but unpaid cash bonuses and gave up approximately $158,000 in previously awarded but unpaid cash bonuses as a result of her termination of employment. In addition, she became entitled to early vesting of 8,125 shares of restricted stock and payment of 1,439 shares of common stock under our PSP; she forfeited 8,439 shares of restricted stock. Pursuant to her separation agreement, Ms. Senhauser also received a cash bonus of $226,111 for 2007 under our annual incentive plan, based on corporate performance and prorated for her seven months of service during 2007. Under her separation agreement, Ms. Senhauser also received a severance payment of approximately $396,000, accelerated vesting of options to purchase 4,770 shares of our common stock, medical coverage worth up to an estimated $21,000 and up to $18,000 in outplacement services.

 

Other than the terms of Ms. Senhauser’s separation agreement, which were approved by the Board’s Nominating and Corporate Governance Committee, our employment relationship with and compensation of

Mr. Levin’s sister and Mr. Senhauser’s wife did not require review or approval under any of our policies and procedures relating to transactions with related persons.

 

Interested parties wishing to communicate any concerns or questions about the company to the non- executive Chairman of the Board or to our non-management directors as a group may do so by electronic mail addressed to “board@fanniemae.com,” or by U.S. mail addressed to Fannie Mae Directors, c/o Office of the Corporate Secretary, Fannie Mae, Mail Stop 1H 2S/05, 3900 Wisconsin Avenue NW, Washington, DC 20016-2892. Communications may be addressed to a specific director or directors, or to our independent directors as a group.

 

The Office of the Corporate Secretary is responsible for processing all communications to a director or directors. Communications that are commercial solicitations, ordinary course customer inquiries or complaints, incoherent, or obscene, will not be forwarded to the Board.

 

The following table shows the beneficial ownership of our common stock by each of our current directors, director nominees, and certain executive officers, and all current directors, director nominees, and current executive officers as a group, as of March 21, 2008, unless otherwise indicated. As of that date, neither any director, director nominee, or executive officer, nor all directors, director nominees, and executive officers as a group, owned as much as 1% of our outstanding common stock.

 

 

 

 

 

The following table shows information about the beneficial ownership of our common stock by each holder of more than 5% of our common stock as of December 31, 2007.

 

 

 

 

Our directors and officers file with the SEC reports on their ownership of our stock and on changes in their stock ownership. Based on a review of forms filed during 2007 or with respect to 2007 and on written representations from our directors and officers, we believe that all of our directors and officers filed all required reports and reported all transactions reportable during 2007, except that each of Mr. Kenneth Bacon, Ms. Linda Knight, Mr. Levin, Mr. Thomas Lund, Mr. Mudd, Mr. Niculescu, Mr. Senhauser, and Mr. Williams reported one transaction late in September 2007.

 

The following table provides information as of December 31, 2007 with respect to shares of common stock that may be issued under our existing equity compensation plans.

 

 

 

 

Under the Charter Act, our Board of Directors consists of 18 directors, five of whom are appointed by the President of the United States, with the remainder elected by shareholders. The terms of office of the most recent Presidential appointees to Fannie Mae’s Board expired on May 25, 2004, and the President has not reappointed or replaced any of them. Pursuant to the Charter Act, those five Board positions will remain open unless and until the President names new appointees.

 

We engage a third-party executive search firm to identify potential director nominees. In addition, members of our Board of Directors and members of our executive management from time to time recommend a person for consideration as a potential director nominee. All potential director nominees are then evaluated by the third-party executive search firm, and we also engage outside counsel to help evaluate the independence of potential director nominees.

 

The Nominating and Corporate Governance Committee recommends nominees for election as Fannie Mae directors to the Board for consideration. Guidelines for the consideration of all director candidates are contained in the Nominating and Corporate Governance Committee charter and in our Guidelines, and there is no separate policy governing the consideration of director candidates recommended by shareholders.

 

It is the policy of the Board that a substantial majority of the seated Fannie Mae directors will be independent, in accordance with the standards adopted by the Board. In addition, the Board, as a group, must be knowledgeable in business, finance, capital markets, accounting, risk management, public policy, mortgage lending, real estate, low-income housing, homebuilding, regulation of financial institutions, and any other areas that may be relevant to the safe and sound operation of Fannie Mae. The Nominating and Corporate Governance Committee seeks out Board members who possess:

 

 

The Nominating and Corporate Governance Committee also considers whether a prospective candidate for the Board has the ability to attend meetings and fully participate in the activities of the Board, including whether the candidate’s service on outside boards will permit the candidate sufficient time to devote to responsibilities associated with being a Fannie Mae director.

 

In considering members of the Board for re-nomination, the Nominating and Corporate Governance Committee takes into consideration:

 

 

Upon the recommendation of the Nominating and Corporate Governance Committee, the Board of Directors has nominated the 12 persons identified below to stand for election at the 2008 annual meeting. You may not vote for more than the number of nominees for election as directors. Under the Charter Act, each director is elected or appointed for a term ending on the date of our next shareholders’ meeting. In accordance with the Charter Act and our bylaws, each nominee for director who is elected will serve a term ending on the date of the annual meeting of shareholders in 2009 and until the director’s successor is chosen and qualified or, if earlier, until the director dies, resigns, retires, or is removed from office in accordance with the law.

 

There will be six vacancies on the Board of Directors after the meeting. As described above, only the U.S. President can fill five of these vacancies. There is one fewer nominee for director than the number of directors to be elected by shareholders under the Charter Act because we are still engaged in the process of identifying an appropriate and qualified candidate. If we find a qualified individual with appropriate skills to fill the vacancy, then we anticipate that, following the Nominating and Corporate Governance Committee’s recommendation of the candidate to serve as a director, the Board will appoint the person to fill the vacancy. The shareholders will not elect the candidate because, under the Charter Act, a vacancy on the Board may be filled by the affirmative vote of the majority of the directors then serving as directors. A director who is elected by the Board to fill a vacancy on the Board will serve as a director until the next annual meeting of shareholders and until the director’s successor is chosen and qualified or, if earlier, until the director dies, resigns, retires, or is removed from office in accordance with the law.

 

Because the number of director nominees does not exceed the number of directors to be elected, each nominee for director will be elected if the votes cast FOR the director exceed the votes cast AGAINST the director. In addition, although our Board consists of 18 directors under the Charter Act, proxies cannot be voted for a greater number of persons than the 12 nominees named below under “Nominees for Election.”

 

Each director nominee has consented to being named in this proxy statement and to serve if elected. If any nominee should become unwilling or unable to serve as a director, the proxy holders, in the absence of contrary instruction, will vote the proxies for the election of such persons as the Board of Directors designates. In addition, each director nominee has submitted a contingent irrevocable resignation that will become effective if the nominee does not receive a majority of the votes cast and, based on the recommendation of the Nominating and Corporate Governance Committee of the Board, the Board decides to accept the nominee’s resignation.

 

Any shareholder who wishes to submit a candidate for consideration by the Nominating and Corporate Governance Committee should submit written notice as described below under “Shareholder Proposals and Director Nominations for 2009.”

 

The following section presents information provided by the nominees about their principal occupation, business experience, directorships, and other matters.

 

The Board of Directors recommends
that shareholders vote FOR each of the nominees.

 

The Board of Directors met 22 times during 2007. During 2007, each of our current directors attended at least 75% of the total number of meetings of the Board of Directors and Board committees on which he or she served. We have a policy that all directors are expected to attend the annual meeting of shareholders in person. All 12 directors remaining in office after Fannie Mae’s 2007 annual meeting of shareholders were in attendance at the meeting, except that Ms. Gaines was not in attendance due to a family medical emergency.

 

The standing committees of the Board are:

 

 

All of the committees (other than the Executive Committee) consist entirely of independent directors. In addition, these committees are governed by written charters, copies of which are posted on our Web site, www.fanniemae.com, under “Corporate Governance,” and are available in print free of charge to any shareholder upon request.

 

The Audit Committee oversees:

 

 

The Audit Committee met 18 times in 2007.

 

The Compensation Committee discharges the responsibilities of the Board relating to compensation of our executives and among other things:

 

 

 

The Compensation Committee met 11 times in 2007.

 

The Compliance Committee both monitors and coordinates our compliance with the provisions of the Consent Order entered into between the Office of Federal Housing Enterprise Oversight (“OFHEO”) and Fannie Mae on May 23, 2006 (the “OFHEO Consent Order”), and oversees our compliance with legal and regulatory requirements. The Compliance Committee is also responsible under its charter for reviewing the employee Code of Conduct. The Compliance Committee met 6 times in 2007.

 

The Executive Committee has all the authority of the Board during the periods between Board meetings, except for certain specified powers listed in our bylaws. The Executive Committee did not meet in 2007.

 

The Housing and Community Finance Committee oversees our single-family mortgage, capital markets and housing and community development divisions, as well as the company’s contribution to affordable housing and community development. In addition, the Housing and Community Finance Committee monitors public policy surrounding housing issues. The Housing and Community Finance Committee met 5 times in 2007.

 

The Nominating and Corporate Governance Committee proposes to the Board prospective candidates for consideration as nominees for election by the shareholders as Fannie Mae directors, develops and recommends to the Board corporate governance guidelines, and plays a leadership role in shaping the corporation’s corporate governance. The Nominating and Corporate Governance Committee oversees the evaluation of the Board and its committees, including evaluating the adequacy and appropriateness of the content, format and distribution of the written information, and evaluating reports and other material provided to the Board. The Nominating and Corporate Governance Committee is responsible for overseeing compliance with the Code of Conduct and Conflicts of Interest Policy for Members of the Board of Directors. The Nominating and Corporate Governance Committee is also responsible for recommending compensation for non-management directors on the Board to the Board of Directors and reviews non-management director compensation once a year. The Nominating and Corporate Governance Committee met 7 times in 2007.

 

The Risk Policy and Capital Committee assists the Board in overseeing our capital management and risk management, including overseeing the management of credit risk, market risk, liquidity risk, and operational risk. The Risk Policy and Capital Committee met 16 times in 2007.

 

The Technology and Operations Committee provides oversight of Fannie Mae’s technology and operations environment, including our infrastructure, organization, and key controls. The Technology and Operations Committee met 6 times in 2007.

The following table shows the current membership of each committee:

 

 

 

 

In 2007, our non-management directors received cash compensation and restricted stock awards that vested during the year as described in more detail below. The Nominating and Corporate Governance Committee reviews non-management director compensation once a year and makes recommendations for compensation of our non-management directors to the Board. Our Board determines cash compensation, and has the authority to vary the amount of equity compensation. To be consistent with the compensation philosophy applicable to senior management, total compensation for non-management directors is targeted at the median of companies in our comparator group. Compensation for the directors is designed to be reasonable, appropriate, and commensurate with the duties and responsibilities of their Board service. The Board uses the executive compensation consulting firm of Semler Brossy Consulting Group to provide director compensation information and advice.

 

The total 2007 compensation for our non-management directors is shown in the table below. Mr. Mudd, who is our only director who is an employee of Fannie Mae, does not receive the benefits provided to our non-management directors other than those provided under the Matching Gifts Program, which is available to all of our employees, and those available under the Director’s Charitable Award Program.

2007 Non-Employee Director Compensation Table

 

 

 

 

Cash Compensation.  During 2007, our non-management directors, with the exception of the non-executive Chairman of our Board, were paid a retainer at an annual rate of $35,000, plus $1,500 for attending each Board or Board committee meeting in person or by telephone. Committee chairs received an additional retainer at an annual rate of $10,000, plus an additional $500 for each committee meeting chaired in person and $300 for each telephonic committee meeting chaired.

 

In recognition of the substantial amount of time and effort necessary to fulfill the duties of non-executive Chairman of the Board during 2007, Mr. Ashley received an annual fee of $500,000.

 

Effective January 1, 2008, our non-management directors, with the exception of the non-executive Chairman of our Board, have been paid and will be paid a retainer at an annual rate of $100,000, and meeting fees have been eliminated. Committee chairs receive an additional retainer at an annual rate of $25,000 for the Audit Committee chair and $15,000 for all other committee chairs. Mr. Ashley’s annual fee remains $500,000. Our Board has the authority to change or otherwise vary the amount of cash compensation to non-management directors.

 

Restricted Stock Awards.  Prior to the amendment of the Fannie Mae Stock Compensation Plan of 2003 (the “2003 Plan”) in 2007, an award of restricted stock to non-management directors was scheduled to be made immediately following the 2006 annual meeting. The award was to have a fair market value of $75,000, and the shares were to vest on the day before each annual meeting at the rate of 25% each year. Directors who joined the Board before the next grant in 2010 were to receive a pro rata grant. In light of the restatement of our financial statements and its negative impact on Fannie Mae’s shareholders, the non-management directors voluntarily agreed in 2007 to forgo this grant of restricted stock. The 2003 Plan as amended reflects the voluntary elimination of this grant.

 

Under the 2003 Plan as amended by shareholders at the annual meeting of shareholders in 2007, each non-management director will receive an annual grant of restricted stock units immediately following the annual meeting of shareholders, beginning with the annual meeting of shareholders in 2008. The aggregate fair market value on the date of grant in 2008 will equal $135,000. The value of each annual grant in the future will continue to be $135,000, unless the Board determines, prior to the annual meeting of shareholders for that year, that it will use a different value. A non-management director who is newly appointed or elected after an annual meeting of shareholders will receive a grant of restricted stock units prorated based on the number of full calendar months between the annual meeting of shareholders that took place immediately prior to the director’s appointment or election and the date of the director’s appointment or election.

 

Restricted stock units generally may not be sold, transferred, or encumbered. The restricted stock units granted under the 2003 Plan as amended will vest in full on the day before the next annual meeting of shareholders, but in no event later than one year after the grant. Unvested restricted stock units are subject to forfeiture if a director ceases to be a director for any reason other than death or disability.

 

The Compensation Committee has the authority to grant additional restricted stock and restricted stock unit awards to non-management directors based on market compensation data or other information or circumstances.

 

In October 2003, we granted 2,600 shares of restricted common stock to each non-management director who was a member of the Board at that time, scheduled to vest in four equal annual installments beginning with the May 2004 annual meeting. We subsequently made pro rata grants to non-management directors who joined the Board after October 2003 and prior to the scheduled time of the last vesting in May 2007. The last tranche of these grants vested in December 2007 with the annual meeting. As a result, as of December 31, 2007, none of our non-management directors held unvested shares of our common stock.

 

Stock Option Awards.  Under the terms of the 2003 Plan prior to its amendment in 2007, each non-management director was granted an annual nonqualified stock option to purchase 4,000 shares of common stock immediately following the annual meeting of shareholders at the fair market value on the date of grant. In light of the restatement of our financial statements and its negative impact on Fannie Mae’s shareholders, the non-management directors voluntarily agreed in 2007 to forgo the grant of annual stock option awards that would have been made following the annual meetings in 2005 and 2006, had they occurred, and which were

to be granted following the annual meeting in December 2007. In addition, under the 2003 Plan as amended, automatic annual option grants for future years have been discontinued.

 

The Compensation Committee has the authority to grant option awards to non-management directors as appropriate, based on market compensation data or other information or circumstances.

 

One-Time Supplemental Cash Retainer.  In January 2008, the Board awarded our non-management directors, including Mr. Ashley, a one-time supplemental cash retainer during the period from January to May 2008 in the amount of $56,250 in consideration of the transition to our new director compensation program. The amount of the one-time supplemental cash retainer is meant to be equivalent to the pro rata value of restricted stock units that would have vested under the new compensation program between January 2008 and May 2008 if an equity grant had been made under the program in January 2008. The Board’s independent compensation consultant concurred that the award was reasonable and appropriate.

 

Deferred Compensation.  Non-management directors may irrevocably elect to defer up to 100% of their annual retainer and all fees payable to them in their capacity as a member of the Board in any calendar year into the deferred compensation plan. Plan participants receive an investment return on the deferred funds as if the funds were invested in a hypothetical portfolio chosen by the participant from among the available investment options, which are described in more detail below under “Nonqualified Deferred Compensation—Elective Deferred Compensation Plans.” Prior to the deferral, plan participants must elect to receive the deferred funds either (1) in a lump sum, (2) in approximately equal annual installments, or (3) in an initial payment followed by approximately equal annual installments, with a maximum of 15 installments. Deferral elections generally must be made prior to the year in which the compensation otherwise would have been paid, and payments will be made as specified in the deferral election. Participants in the plan are unsecured creditors and are paid from our general assets.

 

Under the 2003 Plan as amended, non-management directors are also able to elect to convert their cash retainer to deferred shares. In addition, non-management directors are generally able to elect to defer receipt of their annual award of restricted stock units. In either case, dividend equivalents for the vested deferred shares are credited to the director’s account and reinvested in additional deferred shares. The deferred shares of common stock are paid to the director six months after the director ceases to be a director and separates from service on the Board.

 

Stock Ownership Guidelines for Directors.  Under our Guidelines in 2007, each non-management director was expected to own shares of our common stock (including restricted stock, restricted stock units, or deferred shares) that have a total value equal to at least five times the annual cash retainer for service as a member of our Board (in 2007, five times $35,000, or $175,000). Directors had five years from the time of election or appointment to reach the expected ownership level, excluding trading blackout periods we impose. Effective January 1, 2008, the cash retainer for each non-management director increased to an annual rate of $100,000. Therefore, directors have five years to increase the value of their common stock ownership from the current expected level of $175,000 to $500,000, excluding any company-wide blackout periods during which directors are prohibited from buying or selling Fannie Mae securities.

 

In addition, under our Guidelines, a non-management director may not sell or otherwise transfer shares of our common stock received pursuant to his or her service as a Board member (other than shares received in lieu of the director’s annual cash retainer) until the earlier of when the director has served on the Board for a period of five years or when he or she leaves the Board.

 

Fannie Mae Director’s Charitable Award Program.  In 1992, we established our Director’s Charitable Award Program. The purpose of the program is to acknowledge the service of our directors, recognize our own interest and that of our directors in supporting worthy institutions, and enhance our director benefit program to enable us to continue to attract and retain directors of the highest caliber. Under the program, we make donations upon the death of a director to up to five charitable organizations or educational institutions of the director’s choice. We donate $100,000 for every year of service by a director up to a maximum of $1,000,000. To be eligible to receive a donation, a recommended organization must be an educational institution or charitable organization and must qualify to receive tax-deductible donations under the Internal Revenue Code

of 1986. The program is generally funded by life insurance contracts on the lives of participating current and former directors. The Board of Directors may elect to amend, suspend, or terminate the program at any time.

 

Matching Gifts.  To further our support for charitable giving, non-employee directors are able to participate in our matching gifts program on the same terms as our employees.

 

Under this program, gifts made by employees and directors to 501(c)(3) charities are matched, up to an aggregate total of $10,000 in any calendar year, including up to $500 that may be matched on a 2-for-1 basis. Prior to 2008, matching gifts under the program were made by the Fannie Mae Foundation rather than Fannie Mae.

 

Other Expenses.  We also pay for or reimburse directors for out-of-pocket expenses incurred in connection with their service on the Board, including travel to and from our meetings, accommodations, meals, and training.

 

Our executive officers, other than Daniel H. Mudd, who is a nominee for election to the Board of Directors and whose background is described above, have provided the following information about their principal occupation, business experience, and other matters.

 

 

 

 

 

Under our bylaws, each officer holds office until his or her successor is chosen and qualified or, if earlier, until he or she dies, resigns, retires, or is removed from office by the Board of Directors.

 

Executive Summary

 

2007 was a challenging year for Fannie Mae. We were and continue to be in the midst of a significant disruption in the housing and mortgage markets, and like other participants in the U.S. residential mortgage market, we have experienced adverse effects from this market disruption. In particular, our financial performance was severely and adversely affected by the challenges of the housing market and the tightening credit environment, although we were successful in generally meeting or exceeding the expectations for our other 2007 corporate performance goals.

 

Due to our poor financial performance in 2007, the Board determined that our named executives’ total direct compensation (salary, annual cash bonus, and long-term incentive stock award) should generally reflect an overall decrease from their 2006 total direct compensation, while still rewarding our positive performance on our other important corporate goals. The Board’s 2007 compensation decisions for our named executives also took into account the importance of retaining our management team, which delivered leadership, performance, and continuity in very adverse market conditions. The principles that the Board applied in making compensation determinations for 2007 are discussed below under “How did we determine the amount of each element of 2007 cash and stock compensation?”

 

Our Named Executives for 2007

 

This Compensation Discussion and Analysis discusses the material elements of our compensation of our named executives for 2007, as identified below.

 

 

What are the objectives of our compensation program?

 

Our compensation philosophy for named executives is that our compensation program should attract, retain, and reward the skilled talent needed to successfully manage a leading financial services company. In addition, the Charter Act requires that a significant portion of potential compensation must be based on our performance.

 

Consistent with our compensation philosophy and the Charter Act, our compensation program is designed to:

 

 

How does comparability factor into our executive compensation decisions?

 

In accordance with our compensation philosophy, we maintain a comparator group, consisting of diversified financial services companies that we compete with for executive talent. In composing this group, primary consideration was given to the size, scope, and complexity of these companies and the business segments in which they operate. The members of the comparator group were initially identified by management’s outside executive compensation consultant, Johnson Associates, Inc., and were reviewed by the Compensation Committee’s independent executive compensation consultant, Semler Brossy Consulting Group. The composition of the comparator group was reviewed and approved by the Compensation Committee. We used the same comparator group in 2007 as we did in 2006.

 

The members of our comparator group for 2007 were:

 

 

Our executive compensation philosophy provides that we should consider as a guideline the market median, or 50th percentile, of the total direct compensation paid at companies similar to us. While the market median is used as the guideline for total direct compensation, the Compensation Committee and Board have the authority to pay compensation as they deem appropriate for each named executive. In addition, our compensation must be consistent with the Charter Act, which requires that compensation of our executives be reasonable and comparable with the compensation of executives performing similar duties in similar businesses.

 

How do we use outside executive compensation consultants?

 

As described below, management has engaged Johnson Associates, Inc. to provide executive compensation consulting services, including providing market data for positions other than the chief executive officer. Semler Brossy Consulting Group, LLC provides compensation consulting services to the Board, including providing market data for the chief executive officer.

 

Johnson Associates, Inc.  With respect to our named executives other than Mr. Mudd, management instructed Johnson Associates to provide market data to assist us in making recommendations for 2007 compensation. Johnson Associated provided us with compensation data for our comparator group. In addition, to establish a comprehensive view of compensation, Johnson Associates provided published survey data from a nationally recognized compensation consulting firm and Johnson Associates’ proprietary client and market information. The published survey data consisted of aggregated compensation data from many companies, segregated by industry, size (as measured by revenue and/or assets), and job function. For the purpose of this Compensation Discussion and Analysis, “market data,” when used with respect to the named executives other than Mr. Mudd, collectively refers to such comparator group data, survey data, and proprietary information provided by Johnson Associates.

 

Johnson Associates also analyzed the comparability of our compensation practices for our management, including our named executives other than Mr. Mudd, by reviewing each job relative to the market data. In addition, Johnson Associates provided us with data and analyses in connection with the hiring of Mr. Swad and the hiring and promotions of other management employees.

 

Johnson Associates also provided advice regarding our compensation programs for 2008. Johnson Associates provided no other services to us for 2007.

 

Semler Brossy Consulting Group, LLC.  Under its charter, our Compensation Committee has the authority to retain advisors as it determines appropriate to assist it in the full performance of its functions. The Compensation Committee believes that the use of an independent consultant supports good corporate governance by allowing the Compensation Committee access to independent advice and recommendations

regarding executive compensation. Guidance issued by our regulator, OFHEO, also supports the engagement of a compensation consultant that is independent of management. Our Compensation Committee uses Semler Brossy as its independent executive compensation consultant, and Semler Brossy reports directly to the Compensation Committee. Semler Brossy advised the Compensation Committee on all significant aspects of 2007 compensation and benefits for our named executives and other members of senior management, as requested, and certain changes to our long-term incentive awards and retirement benefits for 2008.

 

With respect to 2007 compensation, Semler Brossy provided the Compensation Committee with data from our comparator group for CEO compensation. For the purpose of this Compensation Discussion and Analysis, “market data,” when used with respect to Mr. Mudd, refers to CEO compensation data from our comparator group provided by Semler Brossy. Semler Brossy advised the Compensation Committee on the principal aspects of Mr. Mudd’s compensation based on market data, its assessment of best practices in compensation, and Mr. Mudd’s award history and outstanding equity awards. Semler Brossy also participated in discussions held by the Compensation Committee, and provided advice, with respect to setting the overall target percentages for 2007 cash bonuses and long-term incentive stock awards for the named executives and other members of management, and with respect to the Compensation Committee’s determination of recommendations for 2007 compensation for each named executive and other members of management. In connection with providing this advice, at the request of the Compensation Committee, Semler Brossy reviewed market data provided by Johnson Associates with regard to 2007 compensation.

 

In 2007, Semler Brossy also advised the Board’s Nominating and Corporate Governance Committee on the updated compensation structure for our non-management members of the Board that became effective in January 2008. Prior to making its recommendations to the Board, Semler Brossy provided the Nominating and Corporate Governance Committee with a review of director compensation practices, both among our comparator group and in the broad market. Semler Brossy provided no other services to us for 2007.

 

What were the elements of compensation for our named executives during 2007?

 

Compensation for our named executives for 2007 consisted of salaries, cash bonuses, long-term incentive stock awards, employee benefits, and perquisites. We provided this compensation mix in order to maintain a competitive compensation program and reinforce our corporate objectives. Salaries are determined at the beginning of the year or in connection with a new hire, while annual cash bonuses and long-term incentive stock awards are determined after the end of the year to which they relate.

 

Salaries, Cash Bonuses, and Long-Term Incentive Stock Awards.

 

 

From time to time we also use sign-on bonuses or guaranteed first-year bonus minimums to recruit executives with critical skills. In 2007, Mr. Swad received $500,000 as a sign-on bonus in connection with his hire. In addition, we agreed that Mr. Swad’s cash bonus for 2007 under our Annual Incentive Plan would not be prorated based on his hire date in May 2007.

 

 

From time to time we also use long-term incentive stock awards to recruit executives with critical skills. In 2007, Mr. Swad received a grant of 80,000 restricted shares in connection with his hire, a portion of which was awarded to compensate him for equity he forfeited when he left his prior employer to join us.

 

Employee Benefits.  Our employee benefits are a fundamental part of our compensation program, and serve as an important tool in recruiting and retaining executives.

 

 

Perquisites.  In 2007, we provided our named executives limited perquisites not available to our general employee population, to the extent we believed they were appropriate for retaining and attracting named executives or based on the business needs of the named executives in the performance of their job responsibilities.

 

We evaluate our existing perquisites from time to time and eliminate any that are deemed no longer appropriate. We recently eliminated several perquisites, effective as of or before January 1, 2008, including reimbursement for financial counseling, use of company transportation for any non-business purposes without reimbursement to us, personal use of company-owned memberships at country clubs, excess liability insurance, and tax “gross-ups” for taxes due on excess liability insurance and life insurance that we provided to officers.

 

Mr. Mudd’s employment agreement provides that we will reimburse Mr. Mudd’s legal expenses incurred in connection with any subsequent negotiation, amendment, or discussion of his employment agreement. This perquisite was provided in connection with Mr. Mudd’s appointment as President and Chief Executive Officer in June 2005. In addition, Mr. Mudd, in his capacity as a director, participated in our Director’s Charitable Award Program in 2007 along with other members of our Board of Directors.

 

How did we determine the amount of each element of 2007 cash and stock compensation?

 

Overview of the Process for Determining 2007 Compensation.  The Board (or, in the case of Mr. Mudd, the independent members of the Board) determines compensation for our named executives, based on the recommendations of the Compensation Committee. In making recommendations to the Board for 2007 compensation, the Compensation Committee gave substantial consideration to our performance against our corporate goals in 2007.

 

In making recommendations to the Board for Mr. Mudd’s 2007 compensation, the Compensation Committee also reviewed an assessment of Mr. Mudd’s performance by the Chairman of the Board, a self-evaluation and year-end report to the Board by Mr. Mudd, and information provided by Semler Brossy with respect to CEO compensation in our comparator group. In making recommendations to the Board for 2007 compensation for our other named executives, the Compensation Committee also considered Mr. Mudd’s assessment of, and his compensation recommendations for, each of these executives, and reviewed the market data provided by Johnson Associates. The Compensation Committee reviewed the current compensation for each named executive as of the most recent year end, including the executive’s then current annual compensation, deferred compensation, the value of outstanding long-term incentive stock awards, and retirement benefits.

 

The following table shows amounts approved by the Board for base salaries that were paid to our named executives in 2007, and cash bonuses and long-term incentive stock awards that were paid or granted to the named executives for 2007 performance. The table also shows the total value of these components relative to

amounts paid in 2006 or for 2006 performance and the percentage change. The table is not intended to replace the summary compensation table, required under applicable SEC rules, which is included below under “Compensation Tables—Summary Compensation Table.” The figures shown below represent the way in which the Compensation Committee and the Board viewed and considered our named executives’ compensation.

 

Compensation Paid or Granted for 2007

 

 

 

 

We have analyzed below how each element of our named executives’ total direct compensation was determined in 2007 and how their salary was determined for 2008.

 

Analysis of Determination of Salaries

 

Salaries for Messrs. Mudd, Blakely, Levin, Williams, and Niculescu were increased in early 2007 based on their 2006 performance and market data on compensation paid for executives with similar roles and responsibilities. The salary for Mr. Swad was determined by the Board in connection with his hire in May 2007 based on market data, Mr. Swad’s compensation from his prior employer, and arms-length negotiation in recruiting him.

 

Consistent with our compensation philosophy that considers, as a guideline, the market median of total direct compensation paid at companies similar to us, Mr. Niculescu’s salary was increased to $625,950 in 2008. No other named executive received a salary increase for 2008.

 

Analysis of Determination of Cash Bonuses and Long-Term Incentive Stock Awards for 2007

 

Review of Our Performance Against the 2007 Corporate Performance Goals.  In February 2007, our Board established five categories of corporate performance goals under our Annual Incentive Plan, which focused on successfully operating the business while undertaking significant initiatives to address our financial reporting and compliance issues. The Compensation Committee reviewed our performance against these 2007 corporate performance goals to set the overall target percentage for cash bonuses and 2007 total direct compensation, as described below. We describe each of the five categories and the goals that comprise each category below.

 

In evaluating our performance against the corporate performance goals, the Compensation Committee took into account management’s assessment of our performance as well as its own evaluation of our performance against these goals. The Compensation Committee did not have a pre-established formula for assigning a relative weight to any category or any goal within any category. Although we generally met or exceeded expectations for these goals in the aggregate, the Compensation Committee in reviewing our performance against these goals after year-end, determined that one goal, the overall financial performance goal, constituted the material goal in making annual compensation determinations, even though it was only one goal in one category during 2007. The overall financial performance goal had no set quantitative targets in light of the lack of current GAAP-compliant financial statements for recent periods at the time the goals were established and the volatility of various financial metrics. Except for the overall financial performance goal, the Compensation Committee and the Board did not consider any of the five categories of corporate performance goals more important than any other category nor did the Compensation Committee or the Board consider any goal within any single category to be material or give any more weight to such goal than to any other goal in completing their review.

 

With respect to the overall financial performance goal, in light of both the net loss we experienced in 2007 and the decline in our stock price, the Compensation Committee determined that we failed to meet expectations with regard to achieving this goal. The Board agreed with the determinations made by the Compensation Committee.

 

Principles Developed by the Compensation Committee.  As a result of its review of our 2007 corporate performance, the Compensation Committee developed and applied the principles set forth below in making recommendations for 2007 total direct compensation for our named executives. These principles were the primary factors in determining cash bonuses and long-term incentive stock awards for our named executives in addition to the overall target percentage for such bonuses and the overall guideline for such stock awards described below. Salaries for our named executives were not impacted because they had been paid in 2007.

 

 

 

Overall Target Percentage Guideline for Cash Bonuses.  Our compensation philosophy provides that cash bonuses for management, including our named executives, are expected to be in the range of 50% to 150% of previously established targets, although the Board is not restricted to this range. As a result of the review of our 2007 corporate performance and in applying the principles above, the Compensation Committee determined that the overall target percentage for cash bonuses for all executive vice presidents and above, including the named executives, should be 80% of the targets previously established in February 2007. The Compensation Committee also determined that the overall target percentage for senior vice presidents and below should be 90% of the previously established targets, which was consistent with the Compensation Committee’s principle that management with more senior positions should bear a higher level of responsibility for financial performance. The Compensation Committee determined that the overall target percentage for executive vice presidents and above appropriately acknowledged the achievement of other corporate performance goals in the aggregate and, consistent with its principles, resulted in this group bearing a greater level of responsibility for the overall financial performance. The Compensation Committee evaluated the executive vice presidents and above as a team in setting the award percentage. However, the Compensation Committee expected that its final individual recommendations for each named executive might differ from the overall target percentage, primarily as a result of its review of the appropriateness of the actual dollar amounts in light of the principle that compensation for our named executives at the most senior level should reflect a greater negative impact.

 

Overall Guideline for Long-Term Incentive Stock Awards.  Long-term incentive stock awards were not subject to corporate performance goals in 2007, and therefore the targets previously established in February 2007 were not adjusted for this performance. The Compensation Committee determined that long-term incentive stock awards should be granted using a guideline of 100% of the previously established targets, in accordance with previous practice. The Compensation Committee decided not to make an exception to this approach in order to:

 

 

Mr. Mudd did not have a pre-determined 2007 target for his long-term incentive stock award. The Compensation Committee used his actual 2006 long-term incentive stock award as a guideline for determining his 2007 award.

 

In considering the long-term incentive awards for our named executives, the Compensation Committee considered the appropriate level of decrease in total direct compensation compared with 2006, or, in the case

of Mr. Swad who was not employed by us in 2006, the appropriate overall negative impact on his total direct compensation.

 

Determination for Mr. Mudd.  While taking into account the guideline for long-term incentive stock awards as described above, and consistent with the principle described above that management in the most senior positions should bear the greatest responsibility for our overall financial performance, Mr. Mudd, as our Chief Executive Officer, received 75% of his target cash bonus for 2007 and 90% of the dollar value of his 2006 long-term incentive stock award. As a result, Mr. Mudd’s 2007 total direct compensation decreased by 15.4% from his 2006 total direct compensation, the greatest percentage decline among the named executives who were employed by us in 2006 and remain employed in 2008.

 

Determinations for Each Named Executive other than Mr. Mudd.  While taking into account the guideline for long-term incentive stock awards as described above, and consistent with the principle described above that more senior positions should bear a higher level of responsibility for our overall financial performance, Messrs. Levin, Swad, and Williams, as the most senior officers, along with Mr. Mudd, experienced a higher level of decrease in their total direct compensation compared with 2006. As a result, Mr. Levin received 75% of his target cash bonus and 100% of his target long-term incentive stock award, which caused his 2007 total direct compensation to decrease by 10.9% compared with 2006. Mr. Williams received 80% of his target cash bonus and 104% of his target long-term incentive stock award, which caused his 2007 total direct compensation to decrease by 11.7% compared with 2006. As shown above in the table titled “Compensation Paid or Granted for 2007,” Mr. Williams and Mr. Levin had the second and third greatest percentage decline, respectively, after Mr. Mudd. While Mr. Swad was not employed by us in 2006, his 2007 total direct compensation was negatively impacted in that he received 70% of the previously established target for his cash bonus. The Compensation Committee determined this was appropriate because his 2007 bonus was not prorated based on his hire date in May 2007.

 

Consistent with the principles described above, the long-term incentive stock awards with respect to Messrs. Swad and Levin were awarded at 100% of the previously established targets. Messrs. Niculescu and Williams received long-term incentive stock awards in excess of the target because the decline in their total direct compensation would otherwise have been too great, but it was not appropriate to increase their cash bonuses. Retaining our senior management team was an important consideration in determining the long-term incentive awards.

 

The Compensation Committee determined that Mr. Blakely’s cash bonus was appropriate because of his position as a member of the senior management team during 2007. Mr. Blakely did not receive a long-term incentive stock award because of his retirement in January 2008.

 

Is there any regulatory oversight of our compensation process for our named executives?

 

Yes, our regulator, OFHEO, has a role in the compensation of our named executives and certain other officers identified by OFHEO. As long as the Fannie Mae Capital Restoration Plan is in effect, we must obtain OFHEO approval for non-salary compensation actions that relate to this group of executives. We have received the required approval from OFHEO for the 2007 cash bonuses and long-term incentive awards. In addition, OFHEO must approve any termination benefits we wish to offer to this group of executives. We also notify OFHEO of all compensation programs intended primarily for executives.

 

What are our stock ownership requirements?

 

We encourage our directors, officers, and other employees to own our common stock in order to align their interests with the interests of shareholders. We also require our officers above the level of vice president to own our common stock.

 

Our Chief Executive Officer is required to hold shares of our common stock with a value equal to five times his base salary, plus a portion of the stock he received as part of his long-term incentive stock award for 2006. Our other named executives are required to hold common stock with a value equal to three times base salary. Common stock held to meet the ownership requirements may be in the form of restricted stock, restricted

stock units, or deferred shares. Our Chief Executive Officer and other named executives have five years from the time of appointment to reach the required ownership level.

 

In addition to our stock ownership requirements, all employees, including our named executives, are prohibited from purchasing and selling derivative securities related to our equity securities, including warrants, puts and calls, or from dealing in any derivative securities other than pursuant to our stock-based benefit plans.

 

What is our compensation recoupment policy?

 

Under the OFHEO Consent Order dated May 23, 2006, we have agreed that any future employment contracts with named executives will include an escrow of certain payments if OFHEO or any other agency has communicated allegations of misconduct concerning the named executive’s official duties at Fannie Mae, and OFHEO has directed us to escrow such funds. In addition, we have agreed to include appropriate provisions in future employment agreements to address terminations for cause and recovery of compensation paid to executives where there are proven allegations of misconduct. All future employment agreements with named executives will contain these provisions.

 

What written agreements do we have with our named executives that provide for continued employment?

 

On November 15, 2005, we entered into an employment agreement with Mr. Mudd, effective June 1, 2005 when he was appointed our President and Chief Executive Officer. We entered into a letter agreement with Mr. Levin, dated June 19, 1990, that provides for severance in connection with a termination without “cause.” In connection with our recruitment of Mr. Swad, we agreed to pay him severance benefits if we terminate his employment prior to the end of 2008 for reasons other than “cause.” The severance benefits provided under these agreements are described below under “Compensation Tables—Potential Payments Upon Termination or Change-in-Control.”

 

Report of the Compensation Committee of the Board of Directors

 

Summary Compensation Table for 2006 and 2007

 

The following table shows summary compensation information for 2006 and 2007 for the named executives.

 

 

 

 

 

          Components of “All Other Compensation” for 2007

 

						Universal				Universal				Excess				Excess
		401(k)				Life				Life				Liability				Liability
		Plan				Insurance				Insurance				Insurance				Insurance				Charitable
		Matching				Coverage				Tax				Coverage				Tax				Award				Included
Named Executive		Contributions				Premiums				Gross-up				Premiums				Gross-up				Programs				Perquisites
Daniel Mudd		$	6,750			$	58,650			$	47,890			$	975			$	795			$	23,251			$	15,220
Stephen Swad			—				21,482				11,265				—				—				5,000				—
Robert Blakely			—				86,709				70,801				975				795				4,615				—
Robert Levin			6,750				31,715				25,326				975				779				5,000				—
Peter Niculescu			6,750				18,101				13,216				975				712				—				—
Michael Williams			6,750				23,304				18,610				975				779				5,000				—

 

 

Grants of Plan-Based Awards in 2007

 

The following table shows grants of awards made under our Annual Incentive Plan and the 2003 Plan to the named executives during 2007.

 

 

 

Outstanding Equity Awards at 2007 Fiscal Year-End

 

The following table shows outstanding stock option awards, unvested restricted stock, restricted stock unit awards, and performance share program awards held by the named executives as of December 31, 2007. The market value of stock awards shown in the table below is based on a per share price of $39.98, which was the closing market price of our common stock on December 31, 2007.