<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 1, 1995
REGISTRATION NO. 33-56547
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
CWM MORTGAGE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 95-3983415
(STATE OR OTHER JURISDICTION OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
</TABLE>
35 NORTH LAKE AVENUE
PASADENA, CALIFORNIA 91101-1857
(800) 669-2300
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
DAVID S. LOEB
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
CWM MORTGAGE HOLDINGS, INC.
35 NORTH LAKE AVENUE
PASADENA, CALIFORNIA 91101-1857
(800) 669-2300
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
THE COMMISSION IS REQUESTED TO SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
EDWARD J. FINE OMER S.J. WILLIAMS
BROWN & WOOD THACHER PROFFITT & WOOD
ONE WORLD TRADE CENTER TWO WORLD TRADE CENTER
NEW YORK, NEW YORK 10048 NEW YORK, NEW YORK 10048
(212) 839-5300 (212) 912-7400
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
SHARES MAXIMUM MAXIMUM AMOUNT OF
TITLE OF SHARES TO BE OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE(2)
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share.............. 1,150,000 $9 $10,035,000 $3,569
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457, based on the average of the high and low sales prices
of the Common Stock on January 25, 1995 as reported on the New York Stock
Exchange.
(2) Paid by wire transfer to the Commission's account at Mellon Bank.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
________________________________________________________________________________
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED FEBRUARY 1, 1995
PROSPECTUS
7,000,000 SHARES
[LOGO]
COMMON STOCK
------------------------------
All of the shares of Common Stock offered hereby are being sold by CWM
Mortgage Holdings, Inc. ('CWM').
The Common Stock of CWM is traded on the New York Stock Exchange under the
symbol 'CWM.' On January 31, 1995, the last reported sale price for the Common
Stock of CWM on the New York Stock Exchange was $9 3/8 per share. The shares of
Common Stock offered hereby are subject to repurchase and certain restrictions
on ownership and transfer. The Certificate of Incorporation and Bylaws of CWM
prohibit governmental entities and other 'disqualified organizations' from
owning shares of the Common Stock. In addition, tax-exempt organizations should
note that a portion of the dividends paid on the Common Stock is expected to be
treated as unrelated business taxable income. See 'Description of Common Stock'
and 'Certain Federal Income Tax Considerations.'
FOR A DISCUSSION OF CERTAIN INVESTMENT CONSIDERATIONS, SEE 'RISK FACTORS.'
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) CWM(2)
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
(1) CWM has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See 'Underwriting.'
(2) Before deducting expenses payable by CWM estimated to be $700,000.
(3) CWM has granted the several Underwriters an option to purchase up to an
additional 1,050,000 shares of Common Stock to cover over-allotments. If all
such shares of Common Stock are purchased, the total Price to Public,
Underwriting Discount and Proceeds to CWM will be $ , $ and
$ , respectively. See 'Underwriting.'
------------------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
approval of certain legal matters by counsel for the Underwriters and certain
other conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer and to reject orders in whole or in part. It is expected that
delivery of the shares of Common Stock will be made in New York, New York on or
about , 1995.
------------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS INCORPORATED
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
------------------------------
The date of this Prospectus is February , 1995.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
CWM AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
AVAILABLE INFORMATION
CWM is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the 'Exchange Act'), and in accordance therewith files
reports, proxy statements and other information with the Securities and Exchange
Commission (the 'Commission'). Such reports, proxy statements and other
information filed by CWM can be inspected and copied at the Public Reference
Room of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York
10048 and Chicago Regional Office, Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can also
be obtained at prescribed rates from the Public Reference Section of the
Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549. CWM's Common Stock is listed on the New York Stock Exchange and
reports, proxy statements and other information concerning CWM can also be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(together with all amendments and exhibits, referred to as the 'Registration
Statement') filed by CWM with the Commission under the Securities Act of 1933,
as amended (the 'Securities Act'). This Prospectus omits certain of the
information contained in the Registration Statement, and reference is hereby
made to the Registration Statement for further information with respect to CWM
and the Common Stock offered hereby. Any statement contained or incorporated by
reference herein concerning the provisions of any document is not necessarily
complete, and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement or otherwise filed with the
Commission. Each such statement is qualified in its entirety by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents, heretofore filed by CWM with the Commission
pursuant to the Exchange Act, are hereby incorporated by reference, except as
superseded or modified herein:
1. CWM's Annual Report on Form 10-K for the fiscal year ended December
31, 1993, as amended by Forms 10-K/A dated January 6, 1995 and February 1,
1995;
2. CWM's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994, as amended by Form 10-Q/A dated February 1, 1995;
3. CWM's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994, as amended by Forms 10-Q/A dated November 17, 1994 and February 1,
1995;
4. CWM's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, as amended by Forms 10-Q/A dated January 6, 1995 and February 1,
1995; and
5. The description of CWM's Common Stock contained in CWM's
Registration Statement on Form 8-A dated August 8, 1985 under the Exchange
Act, including any amendment or report filed to update such description.
Each document filed subsequent to the date of this Prospectus pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination
of the offering of the Common Stock shall be deemed to be incorporated by
reference in this Prospectus and shall be a part hereof from the date of filing
of such document. Any statement contained herein or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained in any subsequently filed document deemed to be incorporated herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of the Registration Statement or this Prospectus.
CWM will provide without charge to each person, including any beneficial
owner, to whom a copy of this Prospectus is delivered, upon the written or oral
request of any such person, a copy of any or all of the documents incorporated
herein by reference (other than exhibits to such documents, unless such exhibits
are specifically incorporated by reference therein). Requests for such copies
should be directed to CWM Mortgage Holdings, Inc., 35 North Lake Avenue,
Pasadena, California 91101-1857, Attention: Investor Relations. CWM's telephone
number is (800) 669-2300.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information and selected consolidated
financial data and consolidated financial statements appearing elsewhere in this
Prospectus or incorporated by reference herein. See 'Risk Factors' for a
discussion of certain factors that should be considered in connection with an
investment in the Common Stock. See 'Index of Certain Definitions' for a
reference guide to certain terms used in this Prospectus. Unless otherwise
indicated, the information in this Prospectus assumes that the over-allotment
option described in 'Underwriting' will not be exercised.
THE COMPANY
CWM Mortgage Holdings, Inc. (formerly Countrywide Mortgage Investments,
Inc.), a real estate investment trust, operates three businesses: its principal
business, a non-conforming mortgage loan conduit conducted through Independent
National Mortgage Corporation (formerly Countrywide Mortgage Conduit, Inc.)
('INMC'), a warehouse lending division, Warehouse Lending Corporation of America
('WLCA') and a construction lending division, Construction Lending Corporation
of America ('CLCA'). INMC is an intermediary between the originators of
non-conforming mortgage loans and permanent investors in mortgage-backed
securities secured by or representing an ownership interest in such mortgage
loans. WLCA provides secured short-term revolving financing to mortgage bankers
and brokers, and CLCA provides single-family subdivision construction lending to
developers ('tract construction') and assists INMC in purchasing and
administering combined construction and permanent financing to individual
borrowers who are constructing or remodeling their homes. Unless the context
otherwise requires, references to 'CWM' mean CWM Mortgage Holdings, Inc. or CWM
Mortgage Holdings, Inc. and each of its consolidated subsidiaries, and
references to the 'Company' mean CWM Mortgage Holdings, Inc., its consolidated
subsidiaries and INMC. INMC is a taxable corporation that is not consolidated
with CWM for financial reporting or income tax purposes. All of the preferred
stock and 99% of the economic interest in INMC is owned by CWM.
The Company's principal sources of income from its mortgage conduit
operations are gains recognized on the sale of mortgage loans and securities,
the net spread between interest earned on mortgage loans owned by the Company
and the interest costs associated with the borrowings used to finance such loans
pending their securitization, and net interest income earned on its investment
portfolio of mortgage loans, master servicing fees receivable and
mortgage-backed securities. See 'Business -- Mortgage Conduit Operations.' The
Company's principal sources of income from its warehouse lending and
construction lending operations are the net spread between interest earned on
the warehouse loans and construction loans and the interest costs associated
with the borrowings used to finance such loans and the fee income paid to the
Company by the borrowers in connection with such loans. See
'Business -- Warehouse Lending' and ' -- Construction Lending.'
The Company's mortgage conduit operations consist of the purchase and
securitization of mortgage loans secured by first liens on single (one-to-four)
family residential properties that are originated in accordance with the
Company's underwriting guidelines. The Company's mortgage conduit operations
provide mortgage loan sellers with an expanded and competitively priced array of
non-conforming mortgage loan products; timely purchasing of loans; flexible
master commitments; and mandatory, best efforts and optional rate-locks. The
Company's response time efficiencies, purchase commitment options and pricing
offered by its mortgage conduit operations have enabled it to compete
effectively with other non-conforming mortgage loan conduits.
As of September 30, 1994, 407 companies had been approved by the Company as
being eligible to participate in its mortgage conduit operations. During the
nine months ended September 30, 1994, the Company purchased $4.4 billion
aggregate principal amount of mortgage loans from sellers that had been so
approved (including $27.8 million from Countrywide Funding Corporation ('CFC')).
As of September 30, 1994, the Company had outstanding rate-locks to purchase
mortgage loans at specified prices in the aggregate principal amount of
approximately $852.2 million. In addition, during the first nine months of 1994,
the Company sold $4.1 billion of non-conforming mortgage loans in connection
3
<PAGE>
with the issuance of 20 series of multiple-class mortgage-backed securities in
the form of real estate mortgage investment conduits ('REMICs') and sold $0.3
million of non-conforming mortgage loans as whole loans. As of September 30,
1994, the Company had committed to sell approximately $175 million of
non-conforming mortgage loans in connection with the issuance of one REMIC
security in the fourth quarter of 1994. As of September 30, 1994, the Company's
master servicing portfolio totalled 27,084 loans with an aggregate outstanding
principal balance of approximately $6.3 billion. As of September 30, 1994, the
Company had extended 81 committed lines of credit under its warehouse lending
program in the aggregate principal amount of approximately $328.3 million, of
which $60.5 million was outstanding. The Company has only recently commenced its
construction lending activities; consequently, amounts outstanding as of
September 30, 1994 under the tract construction and combined construction and
permanent loan programs were immaterial. See 'Business -- Construction Lending.'
Prior to 1993, the Company was principally a long-term investor in
single-family, first-lien, residential mortgage loans and in mortgage-backed
securities representing interests in such loans. The Company's mortgage
investment portfolio consisted principally of fixed-rate mortgage pass-through
certificates issued by the Federal Home Loan Mortgage Corporation ('FHLMC') or
the Federal National Mortgage Association ('FNMA') and non-conforming mortgage
loans. The principal source of earnings for the Company historically was
interest income generated from investments in such mortgage loans and
mortgage-backed securities, net of the interest expense on the collateralized
mortgage obligations ('CMOs') or reverse repurchase agreements used to finance
such mortgage investments. The Company expects its principal activities going
forward to be its mortgage conduit, warehouse lending and construction lending
operations.
Although the Company faces substantial competition in all of its business
activities, its relationships with Countrywide Credit Industries, Inc. ('CCI')
and CCI's subsidiary, CFC, provide significant benefits to its various
operations. See 'Business -- Relationships with Countrywide Entities.' CCI is a
diversified financial services company whose principal subsidiary, CFC, is the
nation's leading residential mortgage lender. Countrywide Asset Management
Corporation ('CAMC'), another subsidiary of CCI, is the manager of the Company
and employs the personnel who conduct the Company's mortgage conduit, warehouse
lending and construction lending operations. The Company's operations not only
benefit from the mortgage banking experience and management expertise of CCI,
CAMC and CFC, but also utilize CFC as a resource for loan servicing, personnel
administration and loan production.
The Company's warehouse lending and construction lending operations are
conducted through Independent Lending Corporation ('ILC'), a qualified real
estate investment trust subsidiary that is consolidated with CWM for financial
reporting and income tax purposes. ILC conducts warehouse lending operations
through its WLCA division, and conducts construction lending operations through
its CLCA division.
THE OFFERING
<TABLE>
<S> <C>
Shares Offered to the Public................. 7,000,000 Shares
Shares to be Outstanding After the
Offering................................... 39,256,156 Shares
Use of Proceeds.............................. To increase the Company's mortgage loan acquisition and
securitization capabilities, to expand its warehouse lending
activities and to fund its construction lending operations.
Pending such application, the Company intends to use such
proceeds temporarily to reduce its outstanding indebtedness.
NYSE Symbol.................................. 'CWM'
</TABLE>
4
<PAGE>
RISK FACTORS
Before investing in the shares of Common Stock offered hereby, prospective
investors should give special consideration to the information set forth below,
in addition to the information incorporated by reference and set forth elsewhere
in this Prospectus.
CHANGES IN INTEREST RATES
The Company's earnings will be affected by changes in market interest
rates. In conducting its mortgage conduit operations, the Company is subject to
the risk of rising mortgage interest rates between the time the Company commits
to purchase mortgage loans at a fixed price and the time the Company sells or
finances to maturity those mortgage loans. To mitigate this risk, the Company,
principally through INMC, enters into transactions designed to hedge interest
rate risks, including mandatory and optional forward selling of mortgage loans
or mortgage-backed securities, mandatory forward selling or financing using
REMICs or CMOs, mandatory and optional selling of futures and other financial
futures transactions. The nature and quantity of these hedging transactions are
determined by the management of the Company based on various factors, including
market conditions and the expected volume of mortgage loan purchases. No
assurance can be given that such hedging transactions will offset the risks of
rising interest rates, and it is possible that there will be periods during
which the Company could incur losses after accounting for its hedging
activities. The Company will not engage in any financial futures transaction
unless the Company or CAMC, as appropriate, would be exempt from the
registration requirements of the Commodity Exchange Act ('CEA') or would
otherwise be in compliance with the provisions thereof.
Higher rates of interest may discourage potential mortgagors from
refinancing mortgage loans or borrowing to purchase a home, thus decreasing the
volume of loans available to be purchased through the Company's mortgage conduit
operations. In addition, an increase in short-term interest rates may decrease
or eliminate or, under certain circumstances, cause to be negative, the
Company's net interest spread during the accumulation of mortgage loans held for
sale or the net interest spread on mortgage loans held for investment when such
loans are financed through reverse repurchase agreements. Should short-term
interest rates exceed long-term interest rates (an 'inverted yield curve'
scenario), the negative effect on the Company's net interest spread would likely
be coupled with a reduction in the Company's earnings on its master servicing
portfolio to the extent prepayments on the underlying mortgage loans increased
as long-term interest rates declined. Higher rates of interest may have a
negative effect, in particular, on the yield on the Company's portfolio of
'principal only' securities and other types of mortgage-backed securities
purchased at a discount and may also negatively affect the Company's warehouse
and construction lending operations. If under such circumstances the Company
were required to dispose of its 'principal only' securities, a loss could be
incurred. Furthermore, because some of the warehouse loans and construction
loans made by the Company bear interest based upon an intermediate-term index
while the Company's borrowings to fund such loans bear interest based upon a
short-term index, the Company is subject to the risk of narrowing interest rate
spreads. See ' -- Liquidity.'
Lower long-term rates of interest may negatively affect the yield on the
Company's portfolio of 'interest only' securities, master servicing fees
receivable and other mortgage loans and mortgage-backed securities purchased at
a premium. It is also possible that in certain low interest rate environments
the Company would not fully recoup its initial investment in such securities or
investments.
RISKS RELATING TO RETENTION OF MORTGAGE-BACKED SECURITIES AND ISSUANCE OF CMOS
The Company has made, and expects to continue to make, investments in
mortgage-backed securities. The Company's portfolio of mortgage-backed
securities consists principally of securities retained in connection with its
issuance of mortgage-backed securities in the form of REMICs, but also includes
securities purchased in third party transactions. A mortgage-backed security is
a type of derivative security, the cash flow on which is derived from payments
on an underlying pool of mortgage loans. The yield derived from certain classes
of mortgage-backed securities, including, but not limited
5
<PAGE>
to, 'interest only,' 'principal only' and subordinated securities, is
particularly sensitive to interest rate, prepayment and credit risks. As used
herein, 'subordinated securities' refers to mortgage-backed securities that are
rated below AAA by Standard & Poor's Corporation or below an equivalent rating
by another nationally recognized rating agency. The Company's investment
portfolio includes each of these classes of securities, as well as investments
in master servicing fees receivable, which have characteristics comparable to
'interest only' securities insofar as their value tends to decline as prepayment
rates increase.
The yield on the Company's portfolio of 'interest only' securities, master
servicing fees receivable and similar investments would decline considerably as
a result of rapid prepayments occasioned by declining interest rates. It is also
possible that under certain high prepayment scenarios the Company would not
recoup its initial investment in such securities or investments. In the case of
'principal only' securities, it is possible that under certain low prepayment
scenarios, the Company's yield on such investments would be lower than the
anticipated yield at the time such securities were purchased, and in the event
such securities were sold under such circumstances, a loss could be incurred.
Because subordinated securities, in general, bear all losses prior to the
related senior securities, the amount of credit risk associated with the
Company's investment in such subordinated securities is significantly greater
than that which would be associated with a comparable investment in the related
senior securities and, on a percentage basis, the risk is greater than holding
the underlying mortgage loans directly. See ' -- Credit Risks' and
'Business -- Mortgage Conduit Operations -- Securitization Process.'
Net earnings generated from the Company's investments in mortgage loans and
mortgage-backed securities financed through the issuance of CMOs are derived
primarily from the excess of the cash flow generated from such mortgage loans
and mortgage-backed securities over the amounts required for debt service on the
CMOs and related administrative expenses ('Residual Cash Flow'). In addition,
earnings from the Company's CMO portfolios are reduced by amortization of the
related premium, original issue discount and bond issuance costs. The Company's
earnings from its CMO portfolio are primarily affected by changes in prepayment
rates on the underlying mortgage loans. From 1992 through the beginning of 1994,
the Company's earnings were negatively impacted by high prepayment rates caused
primarily by low interest rates and the refinancing of mortgage loans securing
CMOs issued by the Company. See 'Business -- Historical Operations.' To the
extent classes of CMOs have variable interest rates, the Residual Cash Flow from
such CMOs may decrease in a rising interest rate environment or increase in a
declining interest rate environment. In any interest rate scenario, the
Company's earnings over time from its CMO portfolio will decline as the earlier
maturity, lower interest-cost classes of CMOs are repaid, thereby decreasing the
remaining net interest spread, if any, and as administrative expenses associated
with the CMOs become a larger percentage of the remaining Residual Cash Flow.
Although increased levels of interest rates may decrease prepayments and
mitigate the negative impact on the Company's earnings on its existing CMO
portfolio, the Company anticipates no significant future earnings on its
existing CMO portfolio, regardless of the level of interest rates or
prepayments. See ' -- Changes in Interest Rates.'
LIQUIDITY
The Company uses proceeds from, among other things, reverse repurchase
agreements to meet its working capital needs. The Company's reverse repurchase
arrangements are subject to collateral maintenance agreements whereby the
Company, in effect, may borrow a specified percentage of the market value of the
mortgage loans and mortgage-backed securities which are the subject of the
arrangements. The market value of such collateral is generally determined by the
lender under such arrangements and may, due to the sometimes illiquid and
volatile markets in certain of such collateral, as well as the lender's
discretion in determining such market value, be somewhat uncertain. To the
extent that the market value of the collateral declines (as will be the case if
interest rates increase), additional collateral is required to secure such
borrowings. If the required amount of collateral is increased, the Company's
ability to raise funds through subsequent similar arrangements may be
diminished, and the Company's ability to finance the accumulation of mortgage
loans may be reduced. If the Company fails to post such additional collateral,
the lender may terminate such arrangement, accelerate the Company's obligations
and retain or immediately liquidate the existing collateral in order
6
<PAGE>
to satisfy the Company's debt. The Company has implemented a hedging strategy
for the portion of its mortgage portfolio held for sale which to some extent may
mitigate the effect of adverse market movement. See ' -- Risks Relating to
Retention of Mortgage-Backed Securities and Issuance of CMOs.'
Currently, the Company does not have committed financing facilities
available for the portion of its warehouse lending programs pursuant to which
the Company may make loans that are secured by servicing rights, servicing sales
receivables and foreclosure and repurchase mortgage loans, nor does the Company
have committed financing facilities available for its newly organized
construction lending programs. If the Company is unable to obtain financing for
these assets and operations, the Company may have to discontinue these programs,
which may have a negative impact on earnings. Although the Company has committed
and uncommitted financing facilities available for its mortgage conduit
operations, the aggregate amount outstanding under its reverse repurchase
agreements has from time to time exceeded the maximum committed amount, and may
from time to time exceed such maximum committed amount in the future.
The REIT provisions of the Internal Revenue Code require CWM to distribute
to its shareholders substantially all of its net earnings. As a result, such
provisions restrict CWM's ability to retain earnings and replenish the capital
committed to its business activities.
The Company's liquidity is also affected by its ability to access the debt
and equity capital markets. To the extent that the Company is unable to
regularly access such markets, the Company could be forced to sell assets at
unfavorable prices or discontinue various business activities in order to meet
its liquidity needs. As a result, any such inability to access the capital
markets could have a negative impact on the Company's earnings.
Substantially all of the Company's assets are pledged to secure the
repayment of CMOs, reverse repurchase agreements and other borrowings. It is
anticipated that substantially all of the mortgage loans the Company acquires in
the future will also be pledged to secure borrowings pending their
securitization or sale or as a part of their long-term financing. The cash flows
received by the Company from its investments that have not yet been distributed,
pledged or used to acquire mortgage loans or other investments may be the only
unpledged assets available to unsecured creditors and stockholders in the event
of liquidation of the Company. For a discussion of the Company's borrowings, see
'Business -- Financing Sources.'
COMPETITION
In purchasing mortgage loans and issuing mortgage-backed securities, the
Company competes with established mortgage conduit programs, investment banking
firms, savings and loan associations, banks, FNMA, FHLMC, the Government
National Mortgage Association ('GNMA'), mortgage bankers, insurance companies,
other lenders and other entities purchasing mortgage assets. Certain changes
currently taking place in the mortgage industry, including technological
initiatives promoted by FNMA and FHLMC which could give such entities direct
access to mortgage borrowers, may have an adverse impact upon current sellers to
the Company's mortgage conduit operations. Continued consolidation in the
mortgage banking industry may also reduce the number of such sellers, thus
reducing the Company's potential customer base, resulting in the Company's
purchasing a larger percentage of mortgage loans from a smaller number of
sellers. Such changes could negatively impact the Company's mortgage conduit
operations. See ' -- Demand for Residential Mortgage Loans and the Company's
Non-Conforming Loan Products' and 'Business -- Mortgage Conduit
Operations -- Marketing and Production -- Mortgage Loans Acquired.'
Mortgage-backed securities issued through the Company's mortgage conduit
operations face competition from other investment opportunities available to
prospective investors.
The Company faces competition in its warehouse lending operations from
banks and other warehouse lenders, including investment banks and other
financial institutions. Similarly, the Company faces competition in its
construction lending operations from banks and other financial institutions.
Many of the institutions with which the Company competes in its mortgage
conduit, warehouse lending and construction lending operations have
significantly greater financial resources than the Company.
7
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CREDIT RISKS
The REMICs and CMOs created by the Company have been structured so that, in
general, substantially all of such securities are rated investment grade by at
least one nationally recognized rating agency. The ratings of the Company's
mortgage-backed securities are based on the perceived credit risk by the
applicable rating agency of the underlying mortgage loans, the structure of the
securities and the associated level of credit enhancement. The Company currently
provides credit enhancement principally by issuing mortgage-backed securities in
senior/subordinated structures. In a senior/subordinated structure, the
subordinated portion of the structure absorbs losses before the senior portion
is affected. The Company, however, is at risk for credit losses on mortgage
loans prior to their securitization and, to the extent it retains any of the
mortgage-backed securities evidencing interests in such mortgage loans,
subsequent to their securitization in an amount up to the amount of securities
retained. Although the Company has recourse against the seller of the affected
mortgage loan in the event of fraud or misrepresentation during the mortgage
loan origination process or upon early payment default, the Company is at risk
of loss to the extent that such seller does not perform its obligations. The
Company also assumes credit risk for mortgage loans held for investment.
In the future, the Company expects to continue to provide credit
enhancement principally through the issuance of mortgage-backed securities in
senior/subordinated structures. The Company has retained, and expects to
continue to retain, certain of the subordinated securities so issued on a short-
term or long-term basis and may occasionally purchase similar subordinated
securities from other entities. Subordinated securities retained or acquired by
the Company subject the Company to credit risk on the underlying mortgage loans
up to the amount of the securities retained or acquired.
Credit risks associated with jumbo loans and other non-conforming loans may
be greater than those associated with conforming loans which comply with FNMA
and FHLMC guidelines. Non-conforming mortgage loans generally consist of jumbo
mortgage loans (loans with a principal balance in excess of $203,150) or loans
which are originated in accordance with underwriting or product guidelines that
differ from those applied by FNMA, FHLMC or GNMA. The principal differences
between conforming loans and the non-conforming loans purchased by the Company
include the applicable loan-to-value ratio, the credit history and income of the
mortgagor, the documentation required for approval of the mortgagor, the type of
property securing the mortgage loan, loan size and the mortgagor's occupancy
status with respect to the mortgaged property. As a result of these and other
factors, the interest rates charged on non-conforming loans are often higher
than those charged for conforming loans. The combination of different
underwriting criteria and higher rates of interest may lead to higher
delinquency rates and/or credit losses for non-conforming as compared to
conforming loans and could have an adverse effect on the Company to the extent
that the Company retains such loans or securities evidencing interests in such
loans.
As a warehouse and construction lender, the Company is a secured creditor
of mortgage bankers and builders and is subject to the risks associated with
such businesses, including the risks of fraud, borrower default and bankruptcy,
any of which could result in credit losses for the Company. Any claim of the
Company as a secured lender in a bankruptcy proceeding may be subject to
adjustment and delay. See ' -- Construction Lending Risks' below and
'Business -- Warehouse Lending.'
DEMAND FOR RESIDENTIAL MORTGAGE LOANS AND THE COMPANY'S NON-CONFORMING LOAN
PRODUCTS
The availability of mortgage loans meeting the Company's criteria is
dependent upon, among other things, the size of and level of activity in the
residential real estate lending market and, in particular, the demand for
non-conforming mortgage loans. The size and level of activity in the residential
real estate lending market depend on various factors, including the level of
interest rates, regional and national economic conditions and inflation and
deflation in residential property values. To the extent the Company is unable to
obtain sufficient mortgage loans meeting its criteria, the Company's business
will be adversely affected.
FNMA, FHLMC and GNMA are not currently permitted to purchase mortgage loans
with original principal balances above $203,150. If this dollar limitation is
increased without a commensurate increase in home prices, the Company's ability
to maintain or increase its current acquisition levels could be
8
<PAGE>
adversely affected as the size of the non-conforming mortgage loan market may be
reduced, and FNMA, FHLMC and GNMA may be in a position to purchase a greater
percentage of the mortgage loans in the secondary market than they currently
acquire.
In general, lower interest rates prompt greater demand for mortgage loans,
because more individuals can afford to purchase residential properties (assuming
incomes do not decline), and refinance transactions increase. However, if low
interest rates are accompanied by a weak economy and high unemployment, demand
for housing and residential mortgage loans may decline. Conversely, higher
interest rates and lower levels of housing finance and refinance activity may
decrease mortgage loan purchase volume levels, resulting in decreased economies
of scale and higher costs per unit, reduced fee income, smaller gains on the
sale of non-conforming mortgage loans and lower net income during the
accumulation phase.
The Company anticipates that the properties that secure the Company's
mortgage loans will continue to have their largest concentration in California.
Since 1989, the California economy has been adversely affected by an economic
recession. A continued decline of general economic conditions in California or
in the California real estate market resulting in decreased home purchasing and
refinancing activity could have an adverse effect on the Company's ability to
acquire mortgage loans in California. In addition, of the $4.5 billion in
mortgage loans acquired by the Company during the nine months ended September
30, 1994, $3.4 billion (or 76%) were acquired from the Company's top ten sellers
by volume of sales, and $2.6 billion (or 59%) were acquired from the top three
of such sellers. None of such top ten sellers is an affiliate of the Company. If
any one of the top three sellers were to cease selling mortgage loans to the
Company and the Company were to be unable to replace the volume attributable to
such seller, the Company's business could be adversely affected. While the
Company is taking steps to increase the diversification of its top sellers, no
assurance can be given that such steps will be successful. See
'Business -- Mortgage Conduit Operations -- Marketing and Production -- Mortgage
Loans Acquired.'
CONSTRUCTION LENDING RISKS
In connection with its construction lending operations, the Company
provides single family subdivision construction lending to developers. Risks
involved in construction lending include both project risks and market risks,
among others.
Project risks, those risks directly related to the construction effort,
include cost overruns, product liability for materials used in construction,
borrower credit risk/completion risk, general contractor credit risk, and
environmental and other hazards risk. The Company attempts to detect and avoid
potential cost overruns through detailed, independent cost estimation reviews
completed prior to funding and at each disbursement of funds. The Company
believes that product liability and/or faulty materials risks are mitigated by
careful selection of the builders with whom the Company does business, the
generally standard and tested materials used in residential construction and the
Company's requirement for product liability insurance. The Company attempts to
identify and assess borrower and general contractor credit risk through credit
checks of the borrower and general contractor, guarantor and principals prior to
loan approval and through a loan structure requiring full recourse to the
borrower and, if necessary, third party guarantees to supplement the same.
Completion risk is similarly addressed by an assessment of the financial
strength of the borrower/guarantor and testing of the budget at each
disbursement for adequacy to complete the project. The Company believes that
environmental risks are reduced by the requirement for independent environmental
assessments prior to loan approval.
Market risks are those risks associated with the sale of the completed
residential units and include interest rate/affordability risk, risks posed by
competing projects and product design risk. The Company attempts to manage
interest rate and affordability risk through the use of loan-to-cost and
loan-to-value guidelines and by requiring that construction of larger projects,
and associated advances of funds, be carried out in successive phases. The
Company gathers information through city or county planning departments as well
as commercial market information services in order to try to identify and assess
potential competing projects. The Company tries to reduce product design risk
through a review of project plans and specifications by a cost estimator, the
Company's underwriting staff and an
9
<PAGE>
independent appraiser. Other risks include fraud and borrower bankruptcy. No
assurance can be given that the Company's attempts to mitigate project risks and
market risks will be successful.
As a new entrant to the construction lending field, the Company has no
record of successful lending in such field and has little experience in
originating and administering construction loans. Demand for the Company's
construction loans is also affected by conditions prevailing in the regional
economies where the Company makes construction loans and by the level of
interest rates. The Company does not currently have committed financing
facilities available to it with which to finance its construction lending
operations and, as a consequence, must currently finance its construction
lending operations with its equity capital. In the event that the Company is
unable to obtain alternative financing, the Company may be required to curtail
its construction lending activities. The Company faces competition in its
construction lending operations from banks and other financial institutions,
many of which have significantly greater financial resources than the Company.
POTENTIAL CONFLICTS OF INTEREST
Although the Company believes that its relationships with CAMC, CCI and CFC
provide significant benefits to its various operations, the Company is subject
to potential conflicts of interest arising from its relationship with its
manager, CAMC, and CAMC's affiliates. CAMC, through its affiliation with CFC,
has interests that conflict with those of the Company in fulfilling certain of
its duties. The Company relies upon CAMC (which has entered into a subcontract
with CFC to provide certain management services to the Company) for the
day-to-day operation of its business. Currently, the Company has no employees
and relies upon CAMC and its employees to conduct the Company's business
including its mortgage conduit, warehouse lending and construction lending
operations. In conducting its operations, the Company may also utilize CFC as a
resource for loan servicing, personnel administration and loan production. No
assurance can be given that the Company's relationships with CAMC and its
affiliates will continue indefinitely. The failure or inability of CAMC to
provide the services required of it under the management agreement (or of CFC to
perform its obligations under its subcontract with CAMC) or any other agreements
or arrangements with the Company could have a material adverse effect on the
Company's business. In addition, as sole holder of all outstanding voting stock
of INMC, CFC has the right to elect all directors of INMC. Such directors elect
the INMC officers and determine the dividend policy of INMC.
Although the Company generally purchases mortgage loans on a servicing
retained basis (where the seller retains the servicing rights) and CFC purchases
mortgage loans on a servicing released basis (where the buyer acquires the
servicing rights), the Company may from time to time compete with CFC for the
purchase of mortgage loans in those cases where sellers are evaluating servicing
retained as well as servicing released sales options. If this competition were
to increase or if CFC were to compete with the Company in other areas of its
business, such competition, supported by CFC's greater financial and other
resources, could result in lower volumes of loans purchased by the Company and,
consequently, reduced earnings (or increased losses) for the Company.
RESTRICTIONS ON OWNERSHIP OF COMMON STOCK
CWM's Certificate of Incorporation and Bylaws prohibit concentrated
ownership of CWM which might jeopardize its qualification as a real estate
investment trust under the Internal Revenue Code of 1986, as amended (the
'Code'). See 'Description of Common Stock.' These provisions may inhibit market
activity and the resulting opportunity for CWM's stockholders to receive a
control premium for their shares, since CWM's Certificate of Incorporation
prohibits ownership of more than 9.8% of CWM's outstanding shares of Common
Stock by any one person or group. Although CWM's directors do not anticipate
that CWM will repurchase or otherwise reduce the number of outstanding shares of
CWM's Common Stock (except in the event of mandatory purchases of Excess Shares,
as defined herein), investors seeking to acquire substantial holdings in CWM
should be aware that this ownership limitation may be exceeded by a stockholder
without any action on his or her part if the number of outstanding shares of
CWM's capital stock is reduced.
10
<PAGE>
CWM's Certificate of Incorporation and Bylaws provide that 'disqualified
organizations' within the meaning of Section 860E(e)(5) of the Code, which
generally include governmental entities and other tax-exempt persons not subject
to tax on unrelated business taxable income, are ineligible to hold CWM's
shares. Accordingly, the shares of Common Stock offered hereby should not be
purchased or held by such disqualified organizations. See 'Certain Federal
Income Tax Considerations.'
CONSEQUENCES OF FAILURE TO QUALIFY AS A REAL ESTATE INVESTMENT TRUST
Although CWM has satisfied and intends to continue to satisfy Sections 856
through 860 of the Code (the 'Real Estate Investment Trust Provisions of the
Code'), no assurance can be given that the future operations of CWM will
continue to satisfy such requirements. If in any tax year CWM should not qualify
as a real estate investment trust, it would be taxed as a corporation, and
distributions to CWM's stockholders would not be deductible by CWM in computing
its taxable income. In that event, CWM would not be eligible again to elect real
estate investment trust status until the fifth taxable year that begins after
the year for which CWM's election was terminated unless certain relief
provisions apply. Failure to qualify would reduce the amount of after-tax
earnings available for distribution to stockholders and could result in CWM
incurring substantial indebtedness (to the extent borrowings are feasible), or
disposing of substantial investments, in order to pay the resulting taxes or, in
the discretion of CWM, to maintain the level of CWM's distributions to its
stockholders. See 'Certain Federal Income Tax Considerations.'
The value of any one issuer's securities owned by CWM (other than stock in
another REIT, a qualified REIT subsidiary or temporary investments of new
capital) may not exceed 5% of the value of CWM's total assets. Although CWM
intends to manage its investment in INMC's securities such that the value of
INMC's securities held by CWM will satisfy this 5% asset test, the valuation of
such securities is subject to various uncertainties and the failure of CWM to
satisfy the 5% asset test could result in its disqualification as a REIT.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data is qualified in its
entirety by, and should be read in conjunction with, the consolidated financial
statements and notes thereto incorporated by reference in this Prospectus. The
consolidated financial data for each of the five years in the period ended
December 31, 1993 has been derived from audited financial statements. The
consolidated financial information for the nine months ended September 30, 1994
and 1993 has been derived from unaudited consolidated financial statements;
however, in the opinion of management of CWM, all adjustments (consisting of
only normal recurring adjustments) necessary for a fair presentation of the
results for such periods have been included. The operating results of CWM for
the nine months ended September 30, 1994 are not necessarily indicative of the
operating results to be expected for the entire year.
The consolidated financial statements include the accounts of CWM and its
consolidated subsidiaries. CWM also owns all the preferred stock and has a 99%
economic interest in INMC, a taxable corporation. Previously, INMC was
consolidated with CWM. The 1993 financial statements have been restated to
account for CWM's investment under a method similar to the equity method. The
directors and senior officers of INMC are also senior officers of CWM. In
addition, INMC's operations and technology are dependent upon and closely
integrated with CWM and CWM is the sole supplier of its mortgage loans.
Accordingly, INMC is accounted for under a method similar to the equity method
because CWM (as opposed to affiliates of CWM) has the ability to exercise
significant influence over the financial and operating policies of INMC through
its ownership of the preferred stock and other contracts. Under this method,
original investments are recorded at cost and adjusted by CWM's share of
earnings or losses and decreased by dividends received.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- -------- ---------- ---------- ----------
(RESTATED) (RESTATED) (RESTATED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SELECTED EARNINGS STATEMENT DATA:
Interest income
Mortgage loans held for sale.. $ 26,290 $ 12,992 $ 21,086 $ -- $ -- $ -- $ --
Collateral for CMOs........... 16,899 33,701 41,685 68,692 106,863 123,124 137,747
Mortgage loans held for
investment.................. 6,121 -- -- -- -- -- --
Mortgage securities, net...... -- 674 674 37,378 41,771 38,889 47,734
Master servicing, net......... 4,578 -- -- -- -- -- --
Advances to INMC.............. 2,964 619 914 -- -- -- --
Other......................... 3,882 434 1,942 -- -- -- --
---------- ---------- ---------- -------- ---------- ---------- ----------
Total interest income.... 60,734 48,420 66,301 106,070 148,634 162,013 185,481
Interest expense
Reverse repurchase agreements
and other borrowings........ 22,077 6,141 10,354 23,953 28,714 32,073 43,059
CMOs.......................... 21,607 43,409 54,958 83,558 106,681 117,438 130,530
---------- ---------- ---------- -------- ---------- ---------- ----------
Total interest expense... 43,684 49,550 65,312 107,511 135,395 149,511 173,589
---------- ---------- ---------- -------- ---------- ---------- ----------
Net interest income (expense)...... 17,050 (1,130) 989 (1,441) 13,239 12,502 11,892
Equity in earnings of INMC......... 4,426 2,372 2,523 -- -- -- --
Gain on sale of mortgage loans and
securities....................... -- 917 917 9,031 735 -- --
Salaries, general, and
administrative expenses.......... (1,934) (1,111) (1,549) (1,606) (1,485) (1,538) (1,595)
Management fees to affiliate....... (481) (312) (400) (997) (1,622) (1,451) (1,652)
---------- ---------- ---------- -------- ---------- ---------- ----------
Net earnings............. $ 19,061 $ 736 $ 2,480 $ 4,987 $ 10,867 $ 9,513 $ 8,645
---------- ---------- ---------- -------- ---------- ---------- ----------
---------- ---------- ---------- -------- ---------- ---------- ----------
Earnings per share................. $0.59 $0.04 $0.13 $0.36 $0.78 $0.70 $0.63
Dividends per share (declared for
earnings of the period).......... $0.60 $0.36 $0.48 $0.48 $0.78 $0.69 $0.64
SELECTED BALANCE SHEET DATA AT PERIOD
END:
Mortgage loans held for sale....... $ 420,856 $ 491,962 $ 794,132 $ -- $ -- $ -- $ --
Mortgage loans held for
investment....................... 307,566 -- -- -- -- -- --
Total assets....................... 1,271,898 1,120,985 1,396,738 714,225 1,852,057 1,737,731 1,844,483
CMOs, including accrued interest... 214,112 485,353 365,886 571,857 1,040,495 1,220,905 1,352,824
Reverse repurchase agreements,
including accrued interest....... 793,369 447,105 770,334 21,950 688,860 394,056 369,241
Total shareholders' equity......... 256,267 189,263 250,608 119,995 122,403 121,147 120,776
SELECTED OTHER DATA:
Mortgage loans acquired............ $4,410,075 $1,886,107 $3,451,119 -- -- -- --
</TABLE>
12
<PAGE>
CWM MORTGAGE HOLDINGS, INC.
GENERAL
CWM was incorporated in the State of Maryland on July 16, 1985 and
reincorporated in the State of Delaware on March 6, 1987. CWM has elected to be
taxed as a real estate investment trust under the Code. As a result of this
election, CWM will not, with certain limited exceptions, be taxed at the
corporate level on the net earnings distributed to CWM's stockholders.
The principal executive offices of CWM are located at 35 North Lake Avenue,
Pasadena, California 91101-1857, and its telephone number is (800) 669-2300.
RECENT DEVELOPMENTS
On January 17, 1995, CWM announced unaudited earnings of $8.8 million, or
$0.27 per share, for the quarter ended December 31, 1994, as compared with
earnings of $1.7 million, or $0.07 per share, for the quarter ended December 31,
1993. For the year ended December 31, 1994, CWM unaudited earnings were $27.8
million, or $0.86 per share, as compared with earnings of $2.5 million, or $0.13
per share, for the year ended December 31, 1993. CWM also declared a dividend
per share of $0.27 for the quarter ended December 31, 1994, payable March 8,
1995 to stockholders of record as of February 21, 1995.
BUSINESS
The Company operates three businesses: its principal business, a
non-conforming mortgage loan conduit conducted through INMC, a warehouse lending
division (WLCA) and a construction lending division (CLCA). The Company's
principal sources of income from its mortgage conduit operations are gains
recognized on the sale of mortgage loans and securities, the net spread between
interest earned on mortgage loans owned by the Company and the interest costs
associated with the borrowings used to finance such loans pending their
securitization ('net interest spread') and the net interest income earned on its
investment portfolio of mortgage loans, master servicing fees receivable and
mortgage-backed securities. See ' -- Mortgage Conduit Operations.' The Company's
principal sources of income from its warehouse lending and construction lending
operations are the net spread between interest earned on the warehouse lending
and construction loans and the interest costs associated with the borrowings
used to finance such loans and the fee income paid to the Company by the
borrowers in connection with such loans. See ' -- Warehouse Lending' and
' -- Construction Lending.' Prior to 1993, the Company had been exclusively a
long-term investor in single-family, first-lien, residential mortgage loans and
in mortgage-backed securities representing interests in such loans. See
' -- Historical Operations.'
MORTGAGE CONDUIT OPERATIONS
GENERAL
As a non-conforming mortgage loan conduit, the Company is an intermediary
between the originators of mortgage loans that do not currently meet the
guidelines for purchase by the government and government sponsored entities
(i.e., GNMA, FNMA and FHLMC) that guarantee mortgage-backed securities
('non-conforming mortgage loans') and permanent investors in mortgage-backed
securities secured by or representing an ownership interest in such mortgage
loans. All loans purchased by CWM for which a REMIC transaction or whole loan
sale is contemplated are committed for sale to INMC at the same price at which
the loans were acquired by CWM. INMC does not purchase any loans from entities
other than CWM. The Company's mortgage conduit operations consist of the
purchase and securitization of mortgage loans secured by first liens on single
(one-to-four) family residential properties that are originated in accordance
with the Company's underwriting guidelines. Sellers generally retain the rights
to service the mortgage loans purchased by the Company.
Based upon its experience in the mortgage banking industry and in the
mortgage conduit business, management of the Company believes it can compete
effectively by providing mortgage loan sellers
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<PAGE>
with an expanded and competitively priced array of non-conforming mortgage loan
products; timely purchasing of loans; flexible master commitments; and
mandatory, best efforts and optional rate-locks. The Company also believes the
response time efficiencies, purchase commitment options and pricing offered by
its mortgage conduit operations have enabled it to compete effectively with
other non-conforming mortgage loan conduits.
MARKETING AND PRODUCTION
Marketing Strategy. The Company's mortgage conduit operations are designed
to attract both large and small sellers of non-conforming mortgage loans by
offering a variety of products, pricing and loan underwriting methods designed
to be responsive to such sellers' needs. The Company expects to continue to
introduce niche products from time to time, which may give the Company temporary
competitive advantages. The Company's products include fixed-rate,
adjustable-rate and negative amortization mortgage loans, combined construction
and permanent mortgage loans, mortgage loans for cooperatives, model homes and
investment properties and mortgage loans to foreign nationals. In response to
the perceived needs of non-conforming mortgage loan sellers, the Company's
marketing strategy offers competitive pricing, response time efficiencies in the
purchase process, direct and frequent contact through a trained sales force and
flexible commitment programs. The Company recently restructured its sales and
marketing staff by consolidating its sales force for its three businesses.
Management believes that these restructuring efforts will encourage
cross-selling of the Company's mortgage conduit, warehouse lending and
construction lending products and, at the same time, reduce overall marketing
costs. Additionally, the Company believes that this restructuring will assist it
in targeting smaller mortgage bankers. The Company's sale of mortgage loans it
purchases through the issuance of mortgage-backed securities enables the Company
to offer sellers competitive pricing.
The Company utilizes a computer-based seller/servicer guide for sellers
(the 'Seller/Servicer Guide') which is available in hard copy format and
diskette, and may be accessed through a third-party computer documentation
network. In addition, sellers have direct access to the Company's senior
management to resolve issues or to design solutions to their specific needs.
The Company has established three loan underwriting methods designed to be
responsive to the needs of non-conforming mortgage loan sellers. The first
method established by the Company is a delegated underwriting program pursuant
to which mortgage loans are underwritten in accordance with the Company's
guidelines by the seller and purchased on the basis of the seller's financial
strength, historical loan quality and other qualifications. The delegated
underwriting program enables sellers to deliver loans to the Company without
time delay imposed by the Company's underwriters or a third party underwriter,
such as a mortgage pool insurer. A sample of such loans is subsequently reviewed
by the Company in accordance with its expanded quality control guidelines. The
efficiencies and other features of the delegated underwriting program have
helped differentiate the Company's mortgage conduit operations from its
competitors.
The delegated underwriting program consists of two separate subprograms.
The Company's principal delegated underwriting subprogram is designed for loan
sellers that meet higher financial and performance criteria than those
applicable to sellers generally. While certain sellers have delegated
underwriting authority for all mortgage products under this subprogram, others
have delegated authority only with respect to certain products. As of September
30, 1994, 55 sellers had received full delegated underwriting approval, and
during the nine months ended September 30, 1994, the Company had purchased
approximately $3.45 billion aggregate principal amount of mortgage loans from
these sellers through this subprogram. The Company also operates a restricted
delegated underwriting subprogram that is available to substantially all of the
Company's sellers. Under this more limited subprogram, only the Company's
standard loan products with loan-to-value ratio (i.e., the percentage obtained
by dividing the principal amount of a loan by the lower of the sales price or
appraised value of the mortgaged property when the loan is originated) and
outstanding balance requirements which are more restrictive than the Company's
standard guidelines may be submitted. During the nine months ended September 30,
1994, the Company purchased approximately $1 million aggregate principal amount
of mortgage loans through this subprogram.
14
<PAGE>
Under the Company's second underwriting method, sellers submit to the
Company mortgage loans for which there is no pool insurance commitment, to be
underwritten in accordance with the Company's guidelines. During the nine months
ended September 30, 1994, the Company purchased approximately $552 million
aggregate principal amount of mortgage loans under this program.
The Company's third method is designed to serve sellers who generally
obtain mortgage pool insurance commitments in connection with the origination of
their loans. Under the third method, the Company does not perform a full
underwriting review of such mortgage loans, but instead relies on the credit
review and analysis of the mortgage pool insurer and its own follow-up quality
control procedures. During the nine months ended September 30, 1994, the Company
purchased $488 million aggregate principal amount of mortgage loans under this
program. The Company expects that significantly fewer mortgage loans will be
purchased pursuant to this program in future periods than in recent periods.
Under all three methods, loans are purchased by the Company only after
completion of a legal documentation and eligibility criteria review. See
' -- Underwriting and Quality Control.'
The Company has experienced no material differences in the rates of
delinquencies and credit losses with respect to mortgage loans purchased
pursuant to each of its three loan underwriting methods. Although the delegated
underwriting program could be deemed to present inherently greater risks due to
the lower level of individual loan review, the Company believes that this risk
is mitigated by the higher net worth requirements applicable to loan sellers
eligible for the delegated underwriting program, thereby enhancing the financial
support for the representations and warranties made by such sellers to the
Company, and such sellers' experience and demonstrated performance with the
government sponsored entities referred to above with respect to the delegated
underwriting program.
In addition to its three loan underwriting methods, the Company has
established five methods for verifying borrower income and assets in order to be
responsive to the needs of non-conforming mortgage loan sellers. With respect to
all five methods, generally as the standards for required documentation are
lowered, the borrower down payment requirements are increased and the required
loan-to-value ratios are decreased, the borrower must have a stronger credit
history, more cash reserves are required, and the appraisal of the subject
property is reviewed more conservatively. The Company's first method of
verifying borrower income and assets requires third party written verification
of the borrower's liquid assets and income. The second method requires written
evidence, obtained directly from the borrower, of the borrower's liquid assets
and income. This includes W-2 forms, pay stubs and tax returns to verify income
and bank and broker statements to verify assets. The third method requires third
party written verification of assets. With respect to the borrower's income
under this method, the borrower provides unverified information on the loan
application and provides the Company with a tax form that can be used to verify
income at a later date. The fourth method requires third party written
verification of assets; however, no information is obtained regarding the
borrower's income. Under the final method, the borrower provides unverified
asset information in the loan application and no information is obtained
regarding the borrower's income. The latter two methods are only available to
borrowers with a strong asset base and perfect credit history and who have a
demonstrated track record in making mortgage payments on a timely basis.
As part of its marketing strategy, the Company emphasizes the advantages to
the seller of retaining the rights to service the loans purchased by the
Company. In general, retention of servicing rights may be advantageous, because
earnings from a servicing portfolio may to some extent offset the effect of
increasing interest rates on loan origination revenues. In addition, retention
of servicing rights for non-conforming mortgage loans enables sellers to
maintain direct contact with the non-conforming mortgage loan borrowers and may
provide opportunities for the seller or its affiliates to offer other services
or products. Maintaining an ongoing relationship may increase the likelihood
that such borrowers will choose the seller or its affiliates for future real
estate or financial transactions.
Mortgage Loans Acquired. Substantially all of the mortgage loans purchased
through the Company's mortgage conduit operations have been non-conforming
mortgage loans. Non-conforming mortgage loans are loans that do not qualify for
purchase by FHLMC or FNMA or for inclusion in a loan guarantee program sponsored
by GNMA. Currently, the maximum principal balance for a conforming loan is
$203,150. Loans that exceed such maximum principal balance are referred to as
'jumbo loans.' Non-conforming mortgage loans generally consist of jumbo mortgage
loans or loans
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<PAGE>
which are originated in accordance with underwriting or product guidelines that
differ from those applied by FNMA, FHLMC and GNMA. Such non-conforming loans may
involve some greater risk as a result of such different product structures and
underwriting guidelines.
Non-conforming loans purchased by the Company pursuant to its underwriting
programs typically differ from those purchased pursuant to the guidelines
established by FNMA, FHLMC and GNMA primarily with respect to loan-to-value
ratios, borrower income or credit history, required documentation, interest
rates, borrower occupancy of the mortgaged property and/or property types. To
the extent that these programs reflect underwriting standards different from
those of FNMA, FHLMC and GNMA, the performance of loans made thereunder may
reflect higher delinquency rates and/or credit losses.
The Company's focus on the acquisition of jumbo and non-conforming mortgage
loans may affect the Company's financial performance. For example, the purchase
market for jumbo and non-conforming loans has typically provided for higher
interest rates in order to compensate for the lower liquidity of such loans,
thereby potentially enhancing the interest income earned by the Company during
the accumulation phase for loans held for sale and during the holding period for
loans held for investment. In addition, due to the lower level of liquidity in
the jumbo and non-conforming loan market, the Company may realize higher returns
upon securitization of such loans than would be realized upon securitization of
conforming loans. On the other hand, such lower level of liquidity may from time
to time cause the Company to hold such loans or other mortgage related assets
supported by such loans. In addition, by retaining for investment either the
loans or other mortgage-related assets supported by such loans, the Company
assumes the potential risk of any increased delinquency rates and/or credit
losses as well as interest rate risk. See 'Risk Factors -- Changes in Interest
Rates' and ' -- Credit Risks.'
The credit quality of the loans purchased by the Company will vary
depending upon the specific program offered by the Company under which such
loans are purchased. For example, a principal credit risk inherent in
adjustable-rate mortgage loans is the potential 'payment shock' experienced by
the borrower as rates rise, which could result in increased delinquencies and
credit losses. In the case of negative amortization mortgage loans, a portion of
the interest due accrues to the underlying principal balance of the loan,
thereby increasing the loan-to-value ratio of the mortgage loan; as a general
rule, mortgage loans with higher loan-to-value ratios are vulnerable to higher
delinquency rates given the borrower's lower equity investment in the underlying
property. Limited documentation mortgage loans, by contrast, must meet lower
loan-to-value ratios and more rigorous criteria for borrower credit quality in
order to compensate for the reduced level of lender due diligence with respect
to the borrower's earnings history and capacity. The Company regularly reviews
its delinquency and foreclosure statistics against those of other major mortgage
loan conduits, and believes that its delinquency and foreclosure rates compare
favorably with those of its major competitors. There can be no assurance,
however, that the Company will continue to experience such relatively favorable
delinquency and foreclosure rates.
The Company's loan purchase activities focus on those regions of the
country where higher volumes of non-conforming mortgage loans are originated,
including California, Connecticut, Florida, Hawaii, Illinois, Maryland,
Michigan, New Jersey, New York, Ohio, Texas, Virginia, Washington and
Washington, D.C. The Company's highest concentration of non-conforming mortgage
loans relates to properties located in California because of the generally
higher property values and mortgage loan balances prevalent there. Mortgage
loans secured by California properties have accounted for approximately 69% of
the mortgage loans purchased during the nine months ended September 30, 1994. In
addition, of the $4.4 billion in loans acquired during the nine months ended
September 30, 1994, $3.4 billion (or 76%) were acquired from the Company's top
ten sellers by volume of sales, and $2.6 billion (or 59%) were acquired from the
top three of such sellers. Headlands Mortgage Company, First California Mortgage
Company and Imperial Credit Industries, Inc. were each responsible for sales to
the Company of in excess of 10% of total loans acquired by the Company during
the first nine months of 1994. None of such sellers is an affiliate of the
Company. The Company is attempting to reduce its seller concentration by
increasing its marketing efforts with respect to smaller and mid-sized loan
sellers and by providing increased incentives to its sales force to develop such
accounts. See 'Risk Factors -- Demand for Residential Mortgage Loans and the
Company's Non-Conforming Loan Products' and ' -- Competition.'
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Mortgage loans acquired by the Company are secured by first liens on single
(one-to-four) family residential properties with either fixed or adjustable
interest rates. During the nine months ended September 30, 1994, fixed-rate
mortgage loans accounted for approximately 56% of the mortgage loans purchased
by the Company. Fixed-rate mortgage loans have a constant interest rate over the
life of the loan, which is generally 15, 20 or 30 years. As interest rates have
risen in recent periods, the volume of adjustable-rate mortgages ('ARMs')
purchased by the Company has grown, and, in the quarter ended September 30,
1994, ARMs accounted for approximately 50% of all mortgage loans purchased by
the Company. ARM loans provide for the periodic adjustment of the rate of
interest, which equals the sum of a fixed margin and an interest index, subject
to periodic and lifetime interest rate adjustment caps. The Company anticipates
that all mortgage loans it purchases will fully amortize over their remaining
terms. In connection with its mortgage conduit operations, the Company currently
purchases (i) fixed-rate mortgage loans that have original terms to maturity
ranging from 5 to 30 years, (ii) ARM mortgage loans that adjust based on the one
year constant maturity Treasury index (the 'CMT Index'), the six month
Certificate of Deposit rate or the six month London interbank offered rate
('LIBOR'), (iii) negative amortization payment-capped ARM mortgage loans that
adjust based on the one-month eleventh district cost of funds index and the
one-month LIBOR, (iv) negative amortization graduated payment mortgage loans,
(v) 5/25 mortgage loans that adjust on a one-time basis approximately five years
following origination to an interest rate based upon the ten-year U.S. Treasury
Note at such adjustment date and (vi) ARM 3/1, ARM 5/1, ARM 7/1 and ARM 10/1
mortgage loans that adjust yearly commencing three, five, seven or ten years,
respectively, following origination based on the CMT Index. All of the Company's
ARM mortgage loans are 30-year amortizing mortgage loans. The Company may from
time to time purchase mortgage loans with other interest rate and maturity
characteristics.
The Company also purchases ARM loans which provide the borrower with the
future option to convert to a fixed rate of interest. Although the Company
generally plans to sell or securitize these ARM loans in connection with its
mortgage conduit operations, it will generally be obligated to repurchase the
fixed-rate loans resulting from any such conversion. Although the Company
generally has the right to require repurchase of any such converted mortgage
loan by the servicer or seller of such loan, no assurance can be given that the
servicer or seller will be able to honor its obligations.
The Company intends to commence during the first quarter of 1995 the
purchase and securitization of 'B' and 'C' grade residential mortgage loans, and
the Company is currently in the process of hiring an executive officer to
oversee the program. In general, 'B' and 'C' grade loans are residential
mortgage loans made to borrowers with lower credit ratings than borrowers of
higher quality, or so called 'A' grade mortgage loans, and are normally subject
to higher rates of loss and delinquency than the other non-conforming loans
purchased by the Company. As a result, 'B' and 'C' grade loans normally bear a
higher rate of interest, and may be subject to higher fees (including greater
prepayment fees and late payment penalties), than non-conforming loans of 'A'
quality. The Company will develop new underwriting guidelines to govern the
acquisition of such loans. In general, greater emphasis is placed upon the value
of the mortgaged property and, consequently, the quality of appraisals thereof,
and less upon the credit history of the borrower in underwriting 'B' and 'C'
grade mortgage loans than in underwriting 'A' grade loans. In addition, 'B' and
'C' grade loans are generally subject to lower loan-to-value ratios than 'A'
grade loans.
The Company intends to purchase such 'B' and 'C' grade loans on a
servicing-released basis rather than on a servicing-retained basis, as is its
usual practice, due to its belief that control over the servicing and collection
functions with respect to such loans is important to the realization of a
satisfactory return thereon. In connection therewith, the Company intends to
contract with CFC for the performance of such servicing functions. As part of
this process, the Company may form a separate collection group to assist CFC in
the servicing of these loans.
In connection with the securitization of 'B' and 'C' grade loans, the
Company expects the levels of subordination required as credit enhancement for
the more senior classes of securities issued in connection therewith to be
higher than that with respect to the non-conforming loans usually securitized by
it. Thus, to the extent that the Company retains any of the subordinated
securities created in connection with such securitizations and losses with
respect to such pools of 'B' and 'C' grade loans
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are higher than expected, the Company's earnings could be adversely affected.
Furthermore, the Company expects to utilize a number of CAMC's existing
personnel in connection with the sales, production and secondary marketing of
'B' and 'C' grade loans. As a result, the Company anticipates that it will need
to hire only a relatively small number of employees to manage and assist in the
administration of its 'B' and 'C' loan program. The Company does not expect to
commit a material amount of funds to the acquisition and securitization of 'B'
and 'C' grade loans during 1995, and the Company does not expect such activities
to contribute materially to the Company's earnings during such period.
Seller Eligibility Requirements. The mortgage loans acquired pursuant to
the Company's mortgage conduit operations are originated by various sellers,
including savings and loan associations, banks, mortgage bankers and other
mortgage lenders. Sellers are required to meet certain regulatory, financial,
insurance and performance requirements established by the Company before they
are eligible to participate in the Company's mortgage loan purchase program, and
must submit to periodic reviews by the Company to ensure continued compliance
with these requirements. The Company's current criteria for seller participation
generally include a tangible net worth of at least $1 million, approval as a
FNMA or FHLMC Seller/Servicer in good standing, and approval as a HUD approved
mortgagee in good standing or a financial institution that is insured by the
FDIC or comparable federal or state agency and is supervised and examined by a
federal or state authority. In addition, sellers are required to have
comprehensive loan origination quality control procedures. In connection with
its qualification, each seller enters into an agreement that provides for
recourse by the Company against the seller in the event of any material breach
of a representation or warranty made by the seller with respect to mortgage
loans sold to the Company, any fraud or misrepresentation during the mortgage
loan origination process or upon early payment default on such loans. As of
September 30, 1994, 407 sellers have been approved by the Company as being
eligible to participate in its mortgage conduit operations.
Servicing Retention. Sellers of mortgage loans to the Company are generally
expected to retain the rights to service the mortgage loans purchased by the
Company. Servicing includes collecting and remitting loan payments, making
required advances, accounting for principal and interest, holding escrow or
impound funds for payment of taxes and insurance, if applicable, making required
inspections of the mortgaged property, contacting delinquent borrowers and
supervising foreclosures and property dispositions in the event of unremedied
defaults in accordance with the Company's guidelines. The servicer receives fees
generally ranging from 1/4% to 1/2% per annum on the declining principal
balances of the loans serviced. Under certain circumstances, sellers have the
option to require the Company to purchase such servicing rights at a previously
determined price. During 1993 and through September 30, 1994, the Company
purchased servicing rights with respect to approximately $2.3 billion in initial
aggregate principal amount of mortgage loans which it had previously purchased
on a servicing-retained basis from sellers, and sold such servicing rights with
respect to approximately $1.8 billion in initial aggregate principal amount of
mortgage loans to CFC in June 1994. If a seller/servicer breaches certain of its
representations and warranties made to the Company, the Company may terminate
the servicing rights of such seller/servicer and assign such servicing rights to
another servicer, including CFC.
The Company acts as master servicer with respect to the mortgage loans it
sells. Master servicing includes collecting loan payments from servicers of
loans and remitting loan payments, less master servicing fees and other fees, to
a trustee for each series of mortgage-backed securities master serviced. In
addition, as master servicer, the Company monitors compliance with its servicing
guidelines and is required to perform, or to contract with a third party to
perform, all obligations not adequately performed by any servicer.
The master servicer typically employs servicers to carry out servicing
functions. Servicers typically perform servicing functions for the master
servicer as independent contractors. A servicer's duties include collection and
remittance of principal and interest payments, administration of mortgage escrow
accounts, collection of certain insurance claims and, if necessary, foreclosure.
The master servicer may permit the servicer to contract with subservicers to
perform some or all of the servicer's servicing duties, but the servicer is not
thereby released from its servicing obligations. A master servicer may also
permit a servicer to transfer its servicing rights and obligations to a third
party.
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The Company from time to time acquires the rights to service, as opposed to
master service, mortgage loans that it has previously purchased. The Company
generally purchases mortgage loans on a servicing-retained basis (where the
seller retains the servicing rights), and does not presently intend to acquire
the rights to service loans owned by other investors, since the Company does not
possess the personnel or management systems necessary to efficiently perform
such servicing. However, in order to compete effectively with other major
conduits and other purchasers who acquire mortgage loans on a servicing-released
basis, the Company has found it necessary to offer its sellers the opportunity
to sell the servicing rights associated with the mortgage loans purchased by the
Company from time to time, typically on a quarterly basis. In view of the
Company's decision not to act as a primary servicer of mortgage loans, the
Company has on occasion entered into contracts with qualified entities,
including CFC, which provide for the subservicing of the mortgage loans whose
servicing rights have been acquired by the Company. Typically, the Company has
accumulated servicing rights, and provided for the subservicing thereof by other
entities, for only so long as necessary to accumulate a servicing portfolio
which could be economically sold at a reasonable approximation of fair market
value. In June and December of 1994, the Company entered into contracts with CFC
for the bulk sale of such portfolios of accumulated servicing rights, and in
both cases the Company experienced gains on the sale of such servicing rights.
See 'Selected Consolidated Financial Data' and ' -- Securitization Process.'
However, there can be no assurance that the Company's acquisition of servicing
rights will continue to provide such gains in the future.
In connection with REMIC issuances, the Company master services on a
non-recourse basis substantially all of the mortgage loans it purchases. Each
series of mortgage-backed securities is typically fully payable from the
mortgage assets underlying such series, and the recourse of investors is limited
to those assets and any credit enhancement features, such as insurance.
Generally, any losses in excess of the credit enhancement obtained are borne by
the security holders. Except in the case of a breach of the standard
representations and warranties made by the Company when mortgage loans are
securitized, the securities are non-recourse to the Company. Typically, the
Company will have recourse to the sellers of loans for any such breaches, but
there can be no assurance as to the sellers' abilities to honor their respective
obligations.
As of September 30, 1994, the Company was master servicing 27,084 loans
with an aggregate outstanding principal balance of approximately $6.3 billion,
and master servicing fees receivable comprised approximately 10% of the
Company's assets. The table below sets forth certain of the material
characteristics of the Company's master servicing fees receivable asset as of
September 30, 1994. See ' -- Mortgage Conduit Operations.'
<TABLE>
<S> <C>
Outstanding principal balance........................................................... $6.3 billion
Master servicing fees receivable........................................................ $146 million
Gross weighted average coupon........................................................... 7.221%
Weighted average maturity............................................................... 318 months
Weighted average master servicing fee................................................... 0.508%
Percentage of fixed-rate loans.......................................................... 76.48%
</TABLE>
PURCHASE COMMITMENT PROCESS AND PRICING
Master Commitments. As part of its marketing strategy, the Company
establishes mortgage loan purchase commitments ('Master Commitments') with
sellers that, subject to certain conditions, entitle the seller to sell and
obligate the Company to purchase a specified dollar amount of non-conforming
mortgage loans over a period generally ranging from three months to one year.
The terms of each Master Commitment specify whether a seller may sell loans to
the Company on a mandatory, best efforts or optional basis, or a combination
thereof. Master Commitments do not obligate the Company to purchase loans at a
specific price, but rather provide the seller with a future outlet for the sale
of its originated loans based on the Company's quoted prices at the time of
purchase. Master Commitments specify the types of mortgage loans the seller is
entitled to sell to the Company and generally range from $5 million to $1
billion in aggregate committed principal amount. The provisions of the Company's
Seller/Servicer Guide are incorporated in each Master Commitment and may be
modified by negotiations between the parties. In addition, there are
individualized Master Commitment options
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available to sellers which include alternative pricing structures. In order to
obtain a Master Commitment, each seller is generally expected to pay a
non-refundable upfront or non-delivery fee, or both, to the Company. As of
September 30, 1994, the Company had outstanding Master Commitments with 100
sellers to purchase mortgage loans in the aggregate principal amount of
approximately $9.3 billion over periods ranging from three months to one year,
of which $2.4 billion had been purchased or committed to be purchased pursuant
to rate-locks (as defined below).
Sellers that have entered into Master Commitments sell mortgage loans to
the Company by executing individual, bulk or other rate-locks (each, a
'rate-lock'). Each rate-lock, in conjunction with the related Master Commitment,
specifies the terms of the related sale, including the quantity and price of the
mortgage loans or the formula by which the price will be determined, the
rate-lock type and the delivery requirements. The upfront fee paid by a seller
to the Company to obtain a Master Commitment on a mandatory delivery basis is
often refunded pro rata as the seller delivers loans pursuant to rate-locks.
Bulk and Other Rate-Locks. The Company also acquires mortgage loans from
sellers that are not purchased pursuant to Master Commitments. These purchases
may be made on a bulk or individual rate-lock basis. Bulk rate-locks obligate
the seller to sell and the Company to purchase a specific group of loans,
generally ranging from $1 million to $50 million in aggregate committed
principal amount, at set prices on specific dates. Bulk rate-locks enable the
Company to acquire substantial quantities of loans on a more immediate basis.
The specific pricing, delivery and program requirements of these purchases are
determined by negotiation between the parties but are generally in accordance
with the provisions of the Company's Seller/Servicer Guide. Due to the active
presence of investment banks and other substantial investors in this area, bulk
pricing is extremely competitive. Loans are also purchased from individual
sellers (typically smaller originators of mortgage loans) who do not wish to
sell pursuant to either a Master Commitment or bulk rate-lock. The terms of
these individual purchases are based primarily on the Company's Seller/Servicer
Guide and standard pricing provisions, and are offered on a mandatory or best
efforts basis.
Mandatory, Best Efforts and Optional Rate-Locks. Mandatory rate-locks
require the seller to deliver a specified quantity of loans to the Company over
a specified period of time regardless of whether the loans are actually
originated by the seller or whether circumstances beyond the seller's control
prevent delivery. The Company is required to purchase all loans covered by the
rate-lock at prices established at the time of rate-lock. If the seller is
unable to deliver the specified loans, it may instead deliver comparable loans
approved by the Company within the specified delivery time. Failure to deliver
the specified mortgage loans or acceptable substitute loans under a mandatory
rate-lock obligates the seller to pay the Company a penalty, and, if the
Company's mortgage loan yield requirements have declined, the present value of
the difference in yield the Company would have obtained on the mortgage loans
that the seller agreed to deliver and the yield available on similar mortgage
loans subject to mandatory rate-lock issued at the time of such failure to
deliver. In contrast, mortgage loans sold on a best efforts basis must be
delivered to the Company only if they are actually originated by the seller. The
best efforts rate-lock provides sellers with an effective way to sell loans
during the origination process without any penalty for failure to deliver.
However, the Company generally requires a higher yield, a price adjustment or an
upfront fee for best efforts rate-locks. Optional rate-locks give the seller the
option to deliver mortgage loans to the Company at a fixed price on a future
date and require the payment of upfront fees to the Company. Upfront fees paid
in connection with best efforts and optional rate-locks are retained by the
Company whether or not the loans are delivered.
As of September 30, 1994, the Company had outstanding rate-locks to
purchase mortgage loans at specified prices in the aggregate principal amount of
approximately $852.2 million. These rate-locks were made pursuant to Master
Commitments, bulk rate-locks and other negotiated rate-locks. During the nine
months ended September 30, 1994, sellers have elected to sell more than 90% of
the mortgage loans purchased by the Company pursuant to mandatory rate-locks.
The Company expects this trend to continue in the future.
Pricing. The Company sets purchase prices at least once every business day
for mortgage loans it acquires for its conduit operations based on prevailing
market conditions. Different prices are
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established for the various types of loans, rate-lock periods and types of
rate-locks (mandatory, best efforts or optional). The Company's standard pricing
is based on the anticipated price the Company will receive upon sale or
securitization of the loans, the anticipated interest spread realized during the
accumulation period, the targeted profit margin and the anticipated issuance,
credit enhancement and ongoing administrative costs associated with such sale or
securitization. Alternatively, such pricing may be based on the anticipated cost
of financing such loans to maturity plus associated costs. The credit
enhancement cost component of the Company's pricing is established for
individual mortgage loans or pools of mortgage loans based upon the
characteristics of such loan or loan pool. As the characteristics of the loan or
loan pool vary, this cost component is correspondingly adjusted upward or
downward to reflect the variation. For example, an upward adjustment to the
Company's required yield would be made for loan characteristics which increase
the cost of credit enhancement, such as loans with reduced documentation,
outstanding principal amounts in excess of $650,000, loan-to-value ratios in
excess of 85%, non-owner occupied properties, cash-out refinancings and mortgage
loans secured by properties in California. The Company's adjustments are
reviewed periodically by management to reflect changes in the costs of credit
enhancement. Adjustments to the Company's standard pricing may also be
negotiated on an individual basis under master commitments or bulk or individual
rate-locks with sellers.
Following the issuance of a specific rate-lock, the Company is subject to
the risk of interest rate fluctuations and will, principally through INMC, enter
into hedging transactions to diminish such risk. Hedging transactions may
include mandatory or optional forward sales of mortgage loans or mortgage-backed
securities, mandatory forward sales or financings using REMICs or CMOs,
mandatory or optional sales of futures and other financial futures transactions.
See ' -- Securitization Process.' The nature and quantity of hedging
transactions will be determined by the management of the Company based on
various factors, including market conditions and the expected volume of mortgage
loan purchases. In addition, the Company will not engage in any financial
futures transaction unless the Company or CAMC, as appropriate, would be exempt
from the registration requirements of the CEA or otherwise comply with the
provisions thereof. Gains and losses on hedging transactions will be deferred as
an adjustment to the carrying value of the related mortgage loans.
UNDERWRITING AND QUALITY CONTROL
Purchase Guidelines. The Company has developed comprehensive purchase
guidelines for its acquisition of mortgage loans. Subject to certain exceptions,
each loan purchased must conform to the loan eligibility requirements specified
in the Company's Seller/Servicer Guide with respect to, among other things, loan
amount, type of property, loan-to-value ratio, type and amount of insurance,
credit history of the borrower, income ratios, sources of funds, appraisals and
loan documentation. The Company also performs a legal documentation review prior
to the purchase of any loan. For loans with mortgage pool insurance commitments,
the Company does not perform a full underwriting review prior to purchase, but
instead relies on the credit review and analysis performed by the mortgage pool
insurer and its own post-purchase quality control review. In contrast, for
mortgage loans that have not been underwritten for mortgage pool insurance and
are not part of the delegated underwriting program, the Company performs a full
credit review and analysis to ensure compliance with its loan eligibility
requirements. This review specifically includes, among other things, an analysis
of the underlying property and associated appraisal and an examination of the
credit, employment and income history of the borrower. For loans purchased
pursuant to the delegated underwriting program, the Company relies on the credit
review performed by the seller and its own follow-up quality control procedures.
Delegated Underwriting Program. The Company has established a delegated
underwriting program which is similar in concept to the delegated underwriting
programs established by FNMA, FHLMC and GNMA. Under this program, qualified
sellers are required to underwrite loans in compliance with the Company's
underwriting guidelines as set forth in the Company's Seller/Servicer Guide or
an individual Master Commitment. As part of the approval process, the seller
must submit a small sample of loans for a post-purchase quality control review
by the Company. If the submitted loans comply with the Company's underwriting
guidelines and the seller meets the Company's financial and performance
criteria, the seller will be approved for the delegated underwriting program. In
connection with its approval, the seller must represent and warrant to the
Company that all mortgage loans sold to the Company will be of a similar or
higher quality than the submitted sample of loans reviewed by the
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Company. The Company, however, has implemented certain additional guidelines for
seller participation in this program. The Company's principal delegated
underwriting program is specifically designed for those sellers that meet higher
financial and performance criteria than those applicable to sellers generally.
The current financial, historical loan quality and other criteria for seller
participation in this program generally include a minimum net worth of $3
million (including the values of the seller's servicing portfolio), a minimum
servicing portfolio of $75 million, overall residential mortgage loan
delinquency and default ratio experience equal to or below industry standards as
published by the Mortgage Bankers Association for the region(s) in which loans
are originated, and a satisfactory repurchase history with FNMA, FHLMC and GNMA.
As of September 30, 1994, 55 sellers had been qualified by the Company for
participation in the delegated underwriting program. The Company also operates a
restricted delegated underwriting program that is available to substantially all
of the Company's sellers under which only the Company's standard loan products
with loan-to-value ratio and outstanding balance requirements that are more
restrictive than the Company's standard guidelines may be submitted. See
' -- Marketing Strategy.'
As part of its quality control process, all loans subsequently submitted to
the Company for purchase from a participating seller under the delegated
underwriting program are subject to a pre-purchase legal documentation review
of, among other things, the promissory note, deed of trust or mortgage and title
policy. The Company also conducts a full post-purchase underwriting review of
50% of the loans purchased during the first two months of a seller's
participation in the delegated underwriting program to ensure ongoing compliance
with the Company's guidelines. The percentage of loans fully reviewed is
thereafter reduced bimonthly in 10% increments to 20% after six months and
maintained at this level throughout the seller's participation in the delegated
underwriting program.
Failure to comply with the Company's underwriting guidelines may result in
a seller's suspension from participation in the delegated underwriting program
or termination of a seller's participation in any loan acquisition program of
the Company. In addition, the Company has the right to require a seller to
repurchase any loan that fails to meet the Company's guidelines within five
business days after receipt of a repurchase request from the Company. There is
no assurance, however, that any such seller will be able to honor its repurchase
obligations.
Quality Control. Ongoing quality control reviews are conducted by the
Company to ensure that the mortgage loans purchased meet the Company's quality
standards. The type and extent of the quality control review will depend on the
nature of the seller and the characteristics of the loans. Loans acquired under
the delegated underwriting program are reviewed in accordance with the quality
control procedures described above. The Company reviews on a post-purchase basis
approximately 10% of all loans submitted to the Company with mortgage pool
insurance commitments or underwritten by the Company for compliance with the
Company's guidelines. In addition, a higher percentage of mortgage loans with
certain specified characteristics are reviewed by the Company either before or
after their purchase, including loans in excess of $650,000 in principal amount,
loans on which 12 or more payments have been made and loans made in connection
with cash-out refinancings. In performing a quality control review on a loan,
the Company analyzes the underlying property and associated appraisal and
examines the credit, employment and income history of the borrower. In addition,
all documents submitted in connection with the loan, including insurance
policies, appraisals, credit records, title policies, deeds of trust and
promissory notes, are examined for compliance with the Company's underwriting
guidelines. Furthermore, the Company reverifies the employment, income and
source of funds documentation, as appropriate, of each borrower and obtains a
new credit report and independent appraisal with respect to 10% of the reviewed
loan sample.
SECURITIZATION PROCESS
General. The Company primarily uses reverse repurchase agreements and
equity to finance the initial acquisition of mortgage loans from sellers. When a
sufficient volume of mortgage loans with similar characteristics has been
accumulated, generally $100 million to $500 million, they are securitized
through the issuance of mortgage-backed securities in the form of REMICs or CMOs
or resold in bulk whole loan sales. The length of time between when the Company
commits to purchase a mortgage loan and when it sells or securitizes such
mortgage loan generally ranges from ten to 90 days, depending on
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certain factors, including the length of the purchase commitment period, the
loan volume by product type and the securitization process.
The Company is subject to various risks due to potential interest rate
fluctuations during the period of time after the Company commits to purchase a
mortgage loan at a pre-determined price until such mortgage loan is ultimately
sold, either on a whole loan basis or in the form of a REMIC or CMO security.
For example, the Company is exposed to the risk that an increase in short-term
interest rates could lead to a corresponding increase in the financing expenses
paid by the Company pursuant to its reverse repurchase agreements used to fund
mortgage loans purchased, thereby reducing or causing to be negative the net
interest spread earned by the Company on such mortgage loans during the
accumulation period. See 'Risk Factors -- Changes in Interest Rates.' In
addition, increases in interest rates during the accumulation phase could lead
to a decline in value of the mortgage loans acquired, thus reducing the amount
realized thereon by the Company upon sale and/or securitization of such loans.
The Company has attempted to mitigate such risks through the implementation
of hedging policies and procedures. In accordance with its hedging policies and
procedures, the Company seeks to utilize financial instruments whose price
sensitivity has very close inverse correlation to the price sensitivity of the
related mortgage loans as a result of changes in applicable interest rates. With
respect to the Company's portfolio of jumbo and non-conforming fixed rate loans,
the financial instrument which has historically demonstrated close inverse
correlation, and also trades in a relatively liquid and efficient manner, is a
forward commitment to sell a FNMA or FHLMC security of comparable maturity and
average weighted interest rate.
However, the Company's private-label mortgage securities typically trade at
a discount (or 'spread') compared to the corresponding FNMA or FHLMC securities.
Accordingly, while the Company's hedging strategy may mitigate the impact that
changes in interest rates would have on the price of agency mortgage securities
(and therefore to some extent on the price of the Company's private-label
mortgage securities), such strategy does not protect the Company against the
effect of a widening or narrowing in the pricing spread between agency
securities and the Company's private-label securities. Therefore, any
significant widening or narrowing of the spread commanded by agency mortgage
securities compared to the Company's private-label securities could have a
negative effect on the financial performance of the Company, regardless of the
efficiency of the Company's execution of its hedging strategy.
With respect to the Company's portfolio of jumbo and non-conforming
adjustable rate loans, the Company generally utilizes forward sales of
short-term Treasury futures to hedge against the effect of interest rate
fluctuations. Although short-term Treasury futures may protect the Company's
adjustable rate loan portfolio against fluctuations in short-term interest
rates, such hedging activities may not always result in precise inverse
correlation to changes in the values of the underlying mortgage loans. The lack
of exact inverse correlation is due to such factors as changes in the relative
pricing discount between mortgage securities and Treasury securities,
differences between the applicable adjustable rate index and the underlying
Treasury security and credit risks in the whole loan market. To the extent any
changes in the value of the instruments used to hedge the risk of interest rate
fluctuations do not inversely correlate precisely to the risks affecting the
value of the Company's adjustable rate mortgage loan portfolio, the financial
performance of the Company could be negatively or positively impacted.
The Company's decision to form REMICs or CMOs or sell the loans in bulk is
influenced by a variety of factors. REMIC transactions are generally accounted
for as sales of the mortgage loans and can eliminate or minimize any long-term
residual investment in such loans. REMIC securities consist of one or more
classes of 'regular interests' and a single class of 'residual interest.' The
regular interests are tailored to the needs of investors and may be issued in
multiple classes with varying maturities, average lives and interest rates.
These regular interests are predominately senior securities but, in conjunction
with providing credit enhancement, may be subordinated to the rights of other
regular interests. The residual interest represents the remainder of the cash
flows from the mortgage loans (including, in some instances, reinvestment
income) over the amounts required to be distributed to the regular interests. In
some cases, the regular interests may be structured so that there is no
significant residual cash flow, thereby allowing the Company to sell its entire
interest in the mortgage loans. As a
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result, in some cases the capital originally invested in the mortgage loans by
the Company may be redeployed in the mortgage conduit operations. The Company
may retain regular and residual interests on a short-term or long-term basis.
The creation of REMIC securities through INMC is the Company's preferred method
of securitizing mortgage loans, because this method provides the maximum
flexibility in structuring securities for sale to the broadest group of
investors and may permit the immediate redeployment of a portion of the
originally invested capital of the Company. During the first nine months of
1994, the Company sold $4.1 billion of non-conforming mortgage loans in
connection with the issuance of 20 series of multiple-class mortgage-backed
securities in the form of REMICs and sold $0.3 million of non-conforming
mortgage loans as whole loans. As of September 30, 1994, the Company had
committed to sell approximately $175 million of non-conforming mortgage loans in
connection with the issuance of one REMIC security in the fourth quarter of
1994. Beginning in the third quarter of 1993, the Company began issuing all of
its REMIC securities utilizing a shelf registration statement established by
CWMBS, Inc., a wholly owned limited purpose finance subsidiary of CCI. Neither
CWMBS, Inc. nor CCI derived any financial benefit from such issuances.
As an alternative to REMIC sales, the Company may issue CMOs to finance
mortgage loans to maturity. For accounting and tax purposes, the mortgage loans
financed through the issuance of CMOs are treated as assets of the Company, and
the CMOs are treated as debt of the Company. The Company earns the net interest
spread between the interest income on the mortgage loans and the interest and
other expenses associated with the CMO financing. The net interest spread will
be directly impacted by the levels of prepayment of the underlying mortgage
loans and, to the extent CMO classes have variable rates of interest, may be
affected by changes in short term interest rates. The Company is required to
retain a residual interest in its issued CMOs. See 'Risk Factors -- Risks
Relating to Retention of Mortgage-Backed Securities and Issuance of CMOs.' The
Company may issue CMOs from time to time based on the Company's current and
future investment needs, market conditions and other factors. CMOs, however, do
not offer the Company the structuring flexibility of REMICs and are expected to
be a secondary method of securitizing the Company's mortgage loans.
Credit Enhancement. REMICs or CMOs created by the Company are structured so
that in general substantially all of such securities are rated investment grade
by at least one nationally recognized rating agency. In contrast to
mortgage-backed securities in which the principal and interest payments are
guaranteed by the U.S. government or an agency thereof, securities created by
the Company do not benefit from any such guarantee. The ratings for the
Company's mortgage-backed securities are based on the perceived credit risk by
the applicable rating agency of the underlying mortgage loans, the structure of
the securities and the associated level of credit enhancement. Credit
enhancement is designed to provide protection to the security holders in the
event of borrower defaults and other losses including those associated with
fraud or reductions in the principal balances or interest rates on mortgage
loans as required by law or a bankruptcy court. The Company can utilize multiple
forms of credit enhancement, including mortgage pool and special hazard
insurance, reserve funds, letters of credit, surety bonds and subordination or
any combination thereof.
In determining whether to provide credit enhancement through mortgage pool
insurance, subordination or other credit enhancement methods, the Company will
take into consideration the costs associated with each method. The Company
principally provides credit enhancement through the issuance of mortgage-backed
securities in senior/subordinated structures. The subordinated securities may be
sold, retained by the Company and accumulated for sale in subsequent
transactions or retained as long term investments.
Each series of mortgage-backed securities is typically fully payable from
the mortgage assets underlying such series, and the recourse of investors is
limited to such assets and any associated credit enhancement features, such as
senior/subordinated structures. To the extent the Company holds subordinated
securities, a form of credit enhancement, the Company will generally bear all
losses prior to the related senior security holders. Generally, any losses in
excess of the credit enhancement obtained will be borne by the security holders.
Except in the case of a breach of the standard representations and warranties
made by the Company when mortgage loans are securitized, such securities are
non-recourse to the Company. Typically, the Company will have recourse to the
sellers of
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<PAGE>
loans for any such breaches, but there can be no assurance of the sellers'
abilities to honor their respective obligations.
Ratings of mortgage-backed securities are based primarily upon the
characteristics of the pool of underlying mortgage loans and associated credit
enhancement. A decline in the credit quality of such pools (including
delinquencies and/or credit losses above initial expectations), or of any third
party credit enhancer, or adverse developments in general economic trends
affecting real estate values or the mortgage industry, could result in
downgrades of such ratings. The Company does not believe that downgrades in the
ratings of mortgage-backed securities previously sold by the Company would have
a substantial financial impact on the Company other than to reduce the value of
any subordinated securities retained by the Company in connection with such
sales. However, a sustained decline in the credit quality of mortgage loans
acquired by the Company, or generally adverse economic developments, could
increase the costs of securitizing mortgage loans held for sale if the Company
were thereby required to increase subordination levels of the related
securities. Such an increase in the costs of securitization could in turn
require the Company to offer less competitive pricing for such mortgage loans,
thereby reducing the Company's volume of loans purchased.
Retention of Mortgage-Backed Securities and Other Investments. In
connection with the issuance of mortgage-backed securities or other investments
in the form of REMICs or CMOs, the Company may retain subordinated securities or
regular or residual interests (including residual interests that may be
subordinated to other classes of securities) on a short-term or long-term basis.
Any such retained residual or regular interest may include 'principal only' or
'interest only' securities or other interest rate or prepayment sensitive
securities or investments. Any such retained securities or investments may
subject the Company to credit, interest rate and/or prepayment risks. The
Company anticipates it will retain such securities only on terms which it
believes are sufficiently attractive to compensate it for assuming such
associated risks. As of September 30, 1994, the Company held $19.1 million
principal amount of principal only securities, with a book value of $10.7
million. As of September 30, 1994, the Company also held an investment in one
inverse floater (a type of mortgage-backed security the interest rate on which
resets periodically based upon a designated index and that varies inversely in
accordance with such index, and that, absent default, entitles the holder
thereof to the return of the principal portion of the investment), with an
outstanding principal amount of $19.4 million and a book value of $7.5 million.
As of September 30, 1994, the Company held $146.2 million in master servicing
fees receivable, of which $110.8 million had been securitized. Master servicing
fees receivable have characteristics similar to interest only securities;
accordingly, they have many of the same risks inherent in interest only
securities, including the risk that they will lose a substantial portion of
their value as a result of rapid prepayments occasioned by declining interest
rates. It is also possible that under certain high prepayment scenarios the
Company would not fully recoup its initial investment in such receivables.
Management of the Company believes that because of the current level of interest
rates, investments in current coupon master servicing fees receivable are
prudent, and if interest rates rise, these investments will mitigate declines in
income that may occur in the Company's origination operations. The Company
intends to hold the master servicing fees receivable for investment. Currently
there is no liquid secondary market for master servicing fees receivable;
accordingly, it is unlikely the Company could sell these receivables at or above
the values at which they are currently carried by the Company.
The Company has also retained subordinated securities, with ratings ranging
from AA to unrated, with principal amounts totalling $87.9 million and a book
value of $71 million as of September 30, 1994. The portfolio of subordinated
securities consists of fixed-rate securities with an aggregate principal amount
of $52.5 million and a book value of $42 million and adjustable rate securities
with an aggregate principal amount of $35.5 million and a book value of $29
million. The fixed-rate securities primarily evidence interests in 30-year
mortgages. The adjustable-rate securities primarily evidence interests in
30-year amortizing mortgage loans that adjust every six months and annually
based on the 6-month LIBOR and 1-year CMT rates, respectively. In general,
subordinated classes of a particular series of securities bear all losses prior
to the related senior classes. Losses in excess of expected losses at the time
such securities are purchased would adversely affect the Company's yield on such
securitization and, in extreme circumstances, could result in the failure of the
Company to recoup its initial
25
<PAGE>
investment. See 'Risk Factors -- Changes in Interest Rates' and ' -- Risks
Relating to Retention of Mortgage-Backed Securities and Issuance of CMOs.'
In an effort to generate continuing earnings that would be less dependent
upon quarterly loan purchase volumes than the Company's loan purchase and
securitization activities, during the fourth quarter of 1994 the Company
increased its portfolio of mortgage loans held for investment from $307.6
million to $899.7 million. The acquisition of such loans was financed with
borrowings under the reverse repurchase agreements referred to under
' -- Financing Sources' below. While the Company intends to continue to increase
its portfolio of mortgage loans held for investment, the Company does not expect
to continue to acquire mortgage loans for investment at the same rate as in the
fourth quarter of 1994.
WAREHOUSE LENDING
WLCA engages in warehouse and secured lending operations for small and
medium-sized mortgage bankers and brokers. The standard warehouse lending
facilities typically provide short-term revolving financing to mortgage
companies to finance mortgage loans during the time between the closing of a
loan and its sale to investors. Although the loans financed by WLCA through its
standard warehouse lending activities represent a broader line of mortgage
products than those purchased by INMC, at present all of such loan products are
eligible for financing by WLCA under the reverse-repurchase agreements used by
WLCA to fund its operations. WLCA also provides financing through credit
facilities secured by other mortgage-related assets such as servicing rights and
servicing sales receivables. WLCA offers credit facilities to mortgage bankers
and brokers with a minimum audited net worth of $100,000 and subject to a
maximum debt to net worth ratio of 20 to 1. The specific terms of any warehouse
line of credit, including the amount, are determined based upon the financial
strength, historical performance and other qualifications of the mortgage banker
or broker. All such lines of credit are subject to the prior approval of a
credit committee comprised of senior officers and Directors of CWM. WLCA
finances this program through a combination of reverse repurchase agreements and
equity. WLCA has two committed two-year reverse repurchase agreement facilities
with investment banks with sublimits in an aggregate amount of up to $500
million for certain of its warehouse lending operations. As of September 30,
1994, WLCA had extended mortgage warehouse lines of credit under this program to
81 borrowers in the aggregate principal amount of approximately $328.3 million.
Outstanding amounts under these warehouse lines totalled $60.5 million at that
date. It is anticipated that the amount outstanding under this program will grow
as newly approved lines are utilized.
As a warehouse lender, WLCA is a secured creditor of the mortgage bankers
and brokers to which it extends credit and subject to the risks inherent in that
status, including the risks of borrower default and bankruptcy. Any claim of
WLCA as a secured lender in a bankruptcy proceeding may be subject to adjustment
and delay.
CONSTRUCTION LENDING
The Company's new construction lending division, CLCA, which began
operations in August 1994, offers tract construction loans to developers and
assists INMC in purchasing combined construction and permanent mortgage loans
from mortgage companies and administering the construction draws. The tract
construction loans are made to small-and mid-size builders of single-family
residences. The target project for CLCA's construction lending division is 15 to
100 units of single-family homes, built in one to five phases, that are marketed
to entry level/first-time or trade-up buyers. The maximum loan size is $15
million. The specific terms of any construction loan, including the principal
amount thereof, are determined based upon the financial strength, historical
performance and other qualifications of the builder. All construction loans to
developers are subject to the prior approval of a credit committee comprised of
senior officers and Directors of CWM. Combined construction and permanent loans
are originated by INMC's sellers to borrowers who want to construct or remodel
their residences. CLCA's construction lending division assists INMC in the
purchase of such loans and administers the construction draws. Under this
program, advances to borrowers to fund the purchase of a lot before construction
begins are subject to a 60% loan-to-value limitation, as well as other detailed
criteria. Criteria for permanent loans are similar to those applied by INMC to
loan purchases generally. The maximum loan size is $1 million. As of September
30, 1994, CLCA had extended commitments of $4
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million and $750,000, of which $350,000 and $200,000 were outstanding, under the
tract construction and combined construction and permanent loan programs,
respectively. For a discussion of the risks inherent in construction lending,
see 'Risk Factors -- Construction Lending Risks.'
FINANCING SOURCES
The Company uses proceeds from the sale of REMIC securities and CMOs,
reverse repurchase agreements, other borrowings and proceeds from the issuance
of common stock to meet its working capital needs. CWM may also borrow up to $10
million from CFC to meet collateral maintenance requirements under reverse
repurchase agreements or margin calls on forward securities sales. These
borrowings can be made pursuant to a one-year, unsecured line of credit which
expires on September 30, 1995 subject to extension by CFC and CWM. As of
September 30, 1994, CWM had no outstanding borrowings under this agreement, and
no drawings were made by CWM pursuant to this agreement during the first nine
months of 1994.
CWM has established two committed reverse repurchase facilities with
Merrill Lynch Mortgage Capital Inc., in an aggregate amount of up to $500
million, for its mortgage conduit operations and its warehouse lending
operations. The expiration date for these two repurchase facilities is April 1,
1996; however, the committed credit limit of the mortgage conduit repurchase
facility declines on April 1, 1995 from $300 million to $200 million, and on
November 1, 1995 from $200 million to $100 million. CWM has also obtained credit
approval from the same lender to enter into additional reverse repurchase
agreements associated with the mortgage conduit operations, under which
individual transactions and their terms will be subject to agreement by the
parties based upon market conditions at the time of each transaction. As of
September 30, 1994, an aggregate amount of $864.4 million was outstanding under
these repurchase facilities. In October 1994, CWM signed a master repurchase
agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, and a master
assignment agreement with Merrill Lynch Mortgage Capital Inc., in an aggregate
amount of $225 million, to provide financing for certain mortgage-related
securities which have been retained or purchased by CWM. These agreements expire
two years from the date of execution. As of September 30, 1994, an aggregate
amount of $114.8 million was outstanding under these two facilities. Merrill
Lynch Mortgage Capital Inc. is an affiliate of Merrill Lynch, Pierce, Fenner &
Smith Incorporated. Merrill Lynch, Pierce, Fenner & Smith Incorporated is one of
the representatives of the underwriters of the shares of Common Stock being
offered hereby.
In August 1994, the Company entered into a committed reverse repurchase
facility with Nomura Asset Capital Corporation in an aggregate amount of $300
million for the Company's mortgage conduit operations and warehouse lending
operations. This agreement expires in August 1996. As of September 30, 1994,
$12.1 million was outstanding under this repurchase facility.
In December 1994, the Company entered into a master repurchase agreement
with Lehman Commercial Paper Inc. to provide a committed line of credit in the
amount of $500 million for the Company's mortgage conduit operations and
warehouse lending operations. This agreement expires two years from the date of
execution. As of December 31, 1994, there were no amounts outstanding under this
credit facility.
The maximum balance outstanding under reverse repurchase agreements with
all lenders during the third quarter of 1994 was $1.5 billion. CWM may, to the
extent permitted by its Bylaws, issue other debt securities or incur other types
of indebtedness from time to time. See 'Risk Factors -- Liquidity.'
None of the foregoing lenders (other than CFC) is affiliated with the
Company.
MANAGEMENT AGREEMENT
Since its inception, CWM has each year entered into a management agreement
with CAMC pursuant to which CAMC advises the Company on various facets of its
business and manages its day-to-day operations, subject to the supervision of
CWM Board of Directors. CAMC conducts the day-to-day mortgage conduit, warehouse
lending and construction lending operations. CFC has guaranteed the performance
of the duties and obligations of CAMC under the management agreement. CAMC has
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<PAGE>
subcontracted with CFC to provide certain management services to the Company.
Such subcontract may be terminated by either party upon 60 days' prior notice.
Under the terms of the management agreement with CWM, CAMC is entitled to
receive a base management fee of 1/8 of 1% per annum of the average invested
assets of the Company's mortgage conduit (which, for purposes of the management
agreement, means the average of the aggregate book value of the assets of the
mortgage conduit invested in loans secured by real estate, but excluding any
mortgage loans or Agency Securities (as defined herein) securitized through the
issuance of mortgage-backed securities in the form of REMICs or CMOs) or pledged
to secure other mortgage collateralized debt. In addition, CAMC is entitled to
receive a warehouse lending management fee equal to 1/5 of 1% of the average
daily balance of the outstanding amounts under CWM's warehouse lending
facilities. Incentive compensation will also be paid to CAMC if CWM's
'annualized return on equity' during any fiscal quarter is in excess of the then
current Ten Year U.S. Treasury Rate plus 2%. In such event, CAMC will receive
25% of such excess amount. As used in calculating CAMC's incentive compensation,
the term 'annualized return on equity' means the annualized return on
stockholders' equity during a quarter, calculated by dividing CWM's annualized
'net income' for the quarter by its 'average net worth' for the quarter, in each
case determined in accordance with generally accepted accounting principles. For
such calculations, the 'net income' of CWM means total revenues less expenses
and 'average net worth' is defined as the arithmetic average of the sum (as of
the beginning of each quarter and at the end of each calendar month in the
quarter) of the gross proceeds from any offering of equity securities by CWM,
before deducting any underwriting discounts and commissions and other expenses
and costs relating to the offering, plus or minus any retained earnings or
losses of CWM. CAMC, however, has agreed to waive 25% of its incentive
compensation, if any, for 1994. In addition, all operating expenses incurred by
the Company or CAMC on behalf of the Company in 1994 will be paid directly by
the Company. For the nine months ended September 30, 1994, management fees were
$702,000, consisting of $256,000 in base compensation and $446,000 in incentive
management fees. The Company does not expect CAMC to waive any part of its
management fees in future years.
As of September 30, 1994, CAMC had a total of 113 employees, all of whom
were dedicated to the Company's mortgage conduit, warehouse lending,
construction lending and other operations. The Company also has access to the
expertise of CAMC's affiliates, including CFC and CCI, in the mortgage banking
area. CCI is a diversified financial services company whose principal
subsidiary, CFC, is the nation's leading residential mortgage lender. CAMC,
another subsidiary of CCI, is the manager of the Company and employs the
personnel who conduct the Company's mortgage conduit, warehouse lending and
construction lending operations. The Company not only benefits from the mortgage
banking experience and management expertise of CCI, CAMC and CFC, but also
utilizes CFC as a resource for loan servicing, technology, information services
and loan production. The Company also believes that its relationship with CFC
benefits the Company in its sale of mortgage-backed securities, since CFC is one
of the largest mortgage loan sellers in the secondary market, with established
relationships with dealers in mortgage-backed securities. No assurances can be
given that the Company's relationships with CAMC and its affiliates will
continue indefinitely.
RELATIONSHIPS WITH COUNTRYWIDE ENTITIES
CWM and CCI are both publicly traded companies whose shares of common stock
are listed on the New York Stock Exchange. As previously described, the Company
utilizes the mortgage banking experience, management expertise and resources of
CCI, CAMC and CFC in conducting its new mortgage conduit operations. CAMC and
CFC are both wholly owned subsidiaries of CCI. After giving effect to this
offering, CCI, directly or indirectly, will own approximately 2.8% of the Common
Stock of CWM. In addition, a number of Directors and officers of CWM and INMC
also serve as Directors and/or officers of CCI, CAMC and/or CFC. See
'Management.' The Company also has a $10 million line of credit from CFC, and
the Company may utilize CFC as a resource for loan servicing, technology,
information services and loan production. See 'Risk Factors -- Potential
Conflicts of Interest.' CFC owns all of the voting common stock and a 1%
economic interest in INMC, and CWM owns all of the preferred stock and a 99%
economic interest in INMC.
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With a view toward protecting the interests of CWM's stockholders, the
Certificate of Incorporation and the Bylaws of CWM provide that a majority of
the Board of Directors (and a majority of each committee of the Board of
Directors) must not be 'Affiliates' of CAMC, as that term is defined in the
Bylaws, and that the investment policies of the Company must be reviewed
annually by a majority of these unaffiliated directors. Moreover, approval of
the management agreement requires the affirmative vote of a majority of the
unaffiliated directors, and a majority of such unaffiliated directors may
terminate the management agreement with CAMC at any time upon 60 days' notice.
HISTORICAL OPERATIONS
Prior to the initiation of the Company's mortgage conduit and warehouse
lending operations in 1993 and the initiation of its construction lending
operations in 1994, the Company was principally a long-term investor in
single-family, first-lien, residential mortgage loans and in mortgage-backed
securities representing interests in such loans. The Company's mortgage
investment portfolio consisted primarily of fixed-rate mortgage pass-through
certificates issued by FHLMC or FNMA (collectively, 'Agency Securities') and
non-conforming mortgage loans. The principal source of earnings for the Company
historically had been interest income generated from investments in such
mortgage loans and mortgage-backed securities, net of the interest expense on
the CMOs or reverse repurchase agreements used to finance such mortgage
investments. In 1987, CWM began to invest in Agency Securities representing
undivided interests in pools of adjustable-rate mortgages ('Agency ARMs')
purchased through various broker-dealers and financed primarily through reverse
repurchase agreements. During 1992, CWM sold substantially all of its portfolio
of Agency ARMs, resulting in a gain of approximately $9 million, and the
remainder of such portfolio was sold during the first quarter of 1993 at its
approximate carrying value. At September 30, 1994, CWM's assets included
approximately $246 million of fixed-rate non-conforming mortgage loans and
Agency Securities (including cash held in trust and accrued interest receivable)
which were pledged to secure outstanding CMOs issued by the Company's
subsidiaries.
During 1992, 1993 and continuing in the beginning of 1994, long-term
interest rates, including mortgage rates, fell to their lowest levels in nearly
20 years. These lower interest rates affected CWM's portfolios of fixed-rate and
ARM assets and their related debt in dramatically different fashions. The
portfolio of mortgage investments financed by CMOs experienced substantial
prepayments, resulting in significantly decreased net earnings, and as mortgage
loan premiums, original issue discount and bond issuance costs were required to
be amortized, losses on the portfolio were realized. The portfolio of Agency
ARMs served in part as a hedge against the effects of declining interest rates.
The decline in interest rates lowered the cost of financing this portfolio
through reverse repurchase agreements substantially more quickly than the level
of interest income earned on the Agency ARMs declined and, consequently, the net
interest income generated from the ARM portfolio improved significantly. During
1992, CWM sold substantially all of its Agency ARMs to recognize the increased
market values of these assets and to provide capital for CWM's new operating
plan. These sales helped to offset the negative effects of lower interest rates
and higher prepayment rates on the performance of CWM's CMO portfolio.
Regardless of the level of interest rates or prepayments, CWM anticipates no
significant earnings from this CMO portfolio. Any continued negative performance
of this CMO portfolio will continue to adversely impact the earnings of CWM to
the extent of its investment in such portfolio. For a discussion of the effect
of higher interest rates, which have occurred in 1994, see 'Risk Factors --
Changes in Interest Rates.'
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USE OF PROCEEDS
The net proceeds to CWM from the sale of the Common Stock offered hereby
are estimated to be $ ($ if the Underwriters' over-allotment option
is exercised in full). CWM intends to apply such proceeds to increase the
Company's mortgage loan acquisition and securitization capabilities, to expand
its warehouse lending activities and to fund its construction lending
operations. See 'Business.' Pending application of the net proceeds of this
offering, CWM intends to use such proceeds temporarily to reduce its outstanding
indebtedness under various reverse repurchase agreements. These reverse
repurchase agreements are the equivalent of short-term secured borrowings by
CWM, in that they mature within one year. The implied interest rate on these
reverse repurchase agreements ranges from LIBOR plus 0.6% to LIBOR plus 0.95%
per annum. As this indebtedness is reduced, the assets of CWM that were pledged
to the repayment of the indebtedness become unencumbered and may be pledged as
collateral for additional future borrowings or securitized through the issuance
of mortgage-backed securities or resold in bulk whole loan sales.
MARKET PRICES AND DIVIDEND DATA
The Common Stock of CWM is traded on the New York Stock Exchange under the
symbol 'CWM.' The following table sets forth, for the periods indicated, the
high and low sales prices per share of Common Stock as reported on the New York
Stock Exchange composite tape and the cash dividends paid per share of Common
Stock:
<TABLE>
<CAPTION>
STOCK PRICES
--------------------------- CASH
HIGH LOW DIVIDENDS
------------ ----------- ---------
<S> <C> <C> <C>
1992
First quarter.......................................................... $ 6 1/2 $ 4 3/4 $0.12
Second quarter......................................................... 5 7/8 4 1/2 0.12
Third quarter.......................................................... 5 1/8 4 5/8 0.12
Fourth quarter......................................................... 5 1/2 4 3/4 0.12
1993
First quarter.......................................................... $ 6 3/4 $ 5 1/4 $0.12
Second quarter......................................................... 6 3/4 5 5/8 0.12
Third quarter.......................................................... 10 1/8 5 3/4 0.12
Fourth quarter......................................................... 11 3/8 8 1/4 0.12
1994
First quarter.......................................................... $ 11 3/4 $ 9 1/2 $0.16
Second quarter......................................................... 10 3/8 7 0.18
Third quarter.......................................................... 9 1/8 7 1/8 0.26
Fourth quarter......................................................... 9 3/8 7 5/8 0.27
</TABLE>
On January 31, 1995, the last reported sale price for the Common Stock was
$9 3/8 per share. As of January 8, 1995, CWM's 32,256,156 outstanding shares of
Common Stock were held by approximately 1,797 stockholders of record.
CWM declared a dividend of $0.26 per share, $0.18 per share and $0.16 per
share for each of the quarters ended September 30, June 30 and March 31, 1994,
respectively. In order to maintain its status as a qualified real estate
investment trust, CWM is generally required to and intends to pay dividends
equal to at least 95% of its taxable income. Taxable income, if any, not
distributed through regular quarterly dividends will be distributed annually, at
or near year end, in a special dividend. This dividend policy is subject to
revision at the discretion of the Board of Directors. All distributions will be
made by CWM at the discretion of the Board of Directors. In determining CWM's
dividend policy on an ongoing basis, the Board of Directors will take into
account, among other factors, results of operations, CWM's cash flow
requirements, the occurrence of any extraordinary transactions during the
quarter in question and CWM's overall business plans and prospects.
In 1993, CWM declared dividends in excess of its taxable income. 1993 was a
transition period during which CWM was in the process of implementing a new
business strategy. See 'Business -- Historical Operations.' Because CWM believed
that its new business strategy would generate
30
<PAGE>
additional taxable income within a relatively short period, CWM elected to
maintain dividend payments at the minimum level of taxable income it anticipated
would be achieved by such new business plan. In 1994, CWM declared dividends
equal to its taxable income.
DIVIDEND REINVESTMENT PLAN
CWM maintains a dividend reinvestment plan for stockholders who wish to
reinvest their distributions in additional shares of Common Stock. The dividend
reinvestment plan currently provides for the purchase of additional shares of
Common Stock on the open market for the accounts of its participants.
CAPITALIZATION
The consolidated capitalization and indebtedness of CWM, as of September
30, 1994, and as adjusted to reflect the sale of the shares of Common Stock
offered hereby, is as follows:
<TABLE>
<CAPTION>
AS OF SEPTEMBER
AS OF SEPTEMBER 30, 1994 AS
30, 1994 ACTUAL ADJUSTED
--------------- ---------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Reverse repurchase agreements....................................... $ 793,369 $ 793,369
Collateralized mortgage obligations................................. 214,112 214,112
--------------- ---------------
Total borrowings.......................................... 1,007,481 1,007,481
--------------- ---------------
Shareholders' equity
Common Stock, par value $.01; authorized -- 60,000,000 shares;
outstanding -- 32,256,156 shares(1), 39,256,156 shares, as
adjusted..................................................... 323
Additional paid-in capital.......................................... 257,815
Net unrealized gain on available-for-sale mortgage securities held
by INMC........................................................... 166 166
Cumulative earnings................................................. 91,367 91,367
Cumulative distributions to shareholders............................ (93,404) (93,404)
--------------- ---------------
Total shareholders' equity................................ 256,267
--------------- ---------------
Total capitalization...................................... $ 1,263,748 $
--------------- ---------------
--------------- ---------------
</TABLE>
- ------------
(1) Does not include shares of Common Stock reserved for issuance under the 1985
Stock Option Plan and the 1994 Stock Incentive Plan.
31
<PAGE>
MANAGEMENT OF CWM MORTGAGE HOLDINGS, INC.
The following table provides information regarding the executive officers
and Directors of CWM. Biographical information for each of the individuals named
in the table is presented below.
<TABLE>
<CAPTION>
CURRENT
TITLE DIRECTOR
NAME AGE TITLE SINCE SINCE
- ------------------------------ --- ------------------------------------------------------- ------- --------
<S> <C> <C> <C> <C>
David S. Loeb................. 70 Chairman of the Board of Directors and Chief Executive 1985 1985
Officer
Angelo R. Mozilo.............. 55 Vice Chairman of the Board of Directors and President 1985 1985
Lyle E. Gramley............... 67 Director -- 1993
Thomas J. Kearns.............. 55 Director -- 1990
Frederick J. Napolitano....... 64 Director -- 1985
Michael W. Perry.............. 32 Executive Vice President and Chief Operating Officer 1993 --
S. Blair Abernathy............ 33 Senior Vice President, Secondary Marketing 1994 --
Carmella L. Grahn............. 31 Senior Vice President, Chief Accounting Officer 1993 --
Kellie A. Johnson............. 33 Senior Vice President, Sales and Marketing 1993 --
Maxine L. Matteo.............. 38 Senior Vice President, Warehouse Lending 1994 --
Kathleen H. Rezzo............. 40 Senior Vice President, Construction Lending 1994 --
Richard H. Wohl............... 36 Senior Vice President, General Counsel & Secretary 1994 --
N. Lance Jackson.............. 38 Vice President, Corporate Credit 1993 --
Peter L. Konkowski............ 32 Vice President, Quality Control 1994 --
Steven E. West................ 33 Vice President, Treasurer 1993 --
</TABLE>
David S. Loeb has been Chairman of the Board of Directors and Chief
Executive Officer of CWM since its formation in July 1985. He is co-founder of
CCI and has been Chairman and President of CCI since its formation in March
1969. Mr. Loeb also serves as Chief Executive Officer of CAMC. In addition, Mr.
Loeb serves as Chairman of INMC.
Angelo R. Mozilo has been President of CWM since its formation and a
Director since October 1985. He has been Vice Chairman of the Board of Directors
since 1993. He is co-founder of CCI and has been Vice Chairman of the Board of
Directors and Executive Vice President of CCI since its formation in March 1969.
Mr. Mozilo serves as Chairman of the Board of CAMC. Mr. Mozilo has served since
1978 as President of CFC and, since 1994, has served as Chairman and Chief
Executive Officer of CFC. In addition, Mr. Mozilo serves as Vice Chairman of
INMC.
Lyle E. Gramley became a Director of CWM in January 1993. He is a former
member of the Board of Governors of the Federal Reserve System. Since September
1985, he has been employed by the Mortgage Bankers Association of America as its
chief economist and more recently as a consulting economist, and during that
period he has also been self-employed as an economic consultant. He also serves
on the Board of Trustees of the following mutual funds distributed by Dreyfus
Service Corporation: Cash Management, Cash Management Plus, Inc., Government
Cash Management, Treasury Cash Management, Treasury Prime Cash Management, Tax
Exempt Cash Management, Municipal Cash Management Plus and New York Municipal
Cash Management.
Thomas J. Kearns has been a Director of CWM since June 1990. He is
President of Thomas J. Kearns Inc., a financial consulting firm, and has been in
the securities business for 30 years. He spent approximately 16 years with
Merrill Lynch Capital Markets as a First Vice President. He is a Managing
Director of Commonwealth Associates and serves on the Board of Directors of
Jameson Inns, Inc., a hotel real estate investment trust.
Frederick J. Napolitano has been a Director of CWM since its inception and
has been Chairman of the Board of Pembroke Enterprises, Inc., a real estate
development company located in Virginia since 1973. He was also a Director of
Home Mortgage Access Corporation and serves on the board and
32
<PAGE>
executive committee of the National Association of Home Builders and was
President of the National Association of Home Builders in 1982. He served on the
Federal Home Loan Bank Board Advisory Council from 1983 to 1985, Federal Home
Loan Mortgage Corporation Advisory Committee from 1981 to 1983, Federal National
Mortgage Association Advisory Board from 1984 to 1985, was chairman of the
Hampton Roads Chamber of Commerce in 1989, and is a member of the Industrial
Development Services Advisory Board for the Commonwealth of Virginia.
Michael W. Perry is currently Executive Vice President and Chief Operating
Officer of CWM, President and Chief Executive Officer of INMC and Chairman and
CEO of ILC. Mr. Perry has been with CWM since January 1993 and has direct
responsibility for the management of CWM and its subsidiaries. From May 1987 to
December 1992, he served as Senior Executive Vice President in charge of the
Mortgage Banking Division of Commerce Security Bank. He has 11 years of business
experience with financial institutions, real estate firms and mortgage banking
companies, including four years as a certified public accountant with KPMG Peat
Marwick LLP.
S. Blair Abernathy is currently Senior Vice President of CWM and Executive
Vice President of INMC. He is responsible for secondary marketing (pricing,
hedging and mortgage finance), funding, master servicing (servicer compliance
and investor accounting) and new product development. Prior to joining CWM in
February 1994, Mr. Abernathy was Senior Vice President and Chief Financial
Officer of Commerce Security Bank in Sacramento, California. Mr. Abernathy was
also Vice President and Controller of Sunrise Bancorp of California, and worked
as a certified public accountant in the financial institutions group of KPMG
Peat Marwick LLP for four years.
Carmella L. Grahn is currently Senior Vice President, Chief Accounting
Officer of CWM and Executive Vice President, Chief Accounting Officer of each of
CWM's subsidiaries. Ms. Grahn is responsible for treasury, accounting, financial
reporting, taxes, human resources and the implementation and evaluation of
internal controls. Prior to joining CWM in October 1993, Ms. Grahn worked for
Price Waterhouse as a certified public accountant and audit manager. She also
served as Senior Vice President and Chief Financial Officer of Olympic National
Bank, a publicly held bank with assets of $150 million.
Kellie A. Johnson is currently Senior Vice President of Sales and Marketing
for CWM and Executive Vice President of Sales and Marketing for each of CWM's
operating subsidiaries. The sales and marketing group is made up of 11 national
account managers, 3 account executives and 7 production assistants responsible
for marketing INMC and warehouse and construction lending products. Prior to
joining CWM in March 1993, Ms. Johnson was Assistant Vice President and Builder
Division Manager for Cypress Financial Corporation in northern California. Ms.
Johnson also held various production positions at North American Mortgage
Company. Ms. Johnson has over 11 years experience in the mortgage industry and
is a licensed mortgage broker in the state of California.
Maxine L. Matteo is currently Senior Vice President of CWM, EVP-Warehouse
Lending of ILC and President and Chief Executive Officer of WLCA, a division of
ILC for which she oversees all sales and operations. Before joining CWM in March
1994, Ms. Matteo was executive vice president of GE Capital Mortgage Services,
Inc., where she headed a national jumbo mortgage conduit. Ms. Matteo has also
held various executive positions at firms such as the U.S. League of Savings
Institutions, PaineWebber Incorporated, and California First Bank.
Kathleen H. Rezzo is currently Senior Vice President of CWM,
EVP-Construction Lending of ILC and President and Chief Executive Officer of
CLCA, a division of ILC. From 1977 until joining CWM in August 1994, Ms. Rezzo
held various positions at Security Pacific National Bank, which included Chief
Credit Officer and positions within the Commercial Lending Group and the Real
Estate Industries Group. Ms. Rezzo also managed the Participating Mortgage Unit,
and held the position of Senior Vice President/Los Angeles Division Manager for
the Real Estate Industries Division, of Bank of America, where she was
responsible for a loan portfolio in excess of $2 billion and a staff of 40.
Richard H. Wohl is currently Senior Vice President, General Counsel and
Secretary for CWM and Executive Vice President, General Counsel and Secretary
for each of CWM's subsidiaries. Prior to joining CWM in April 1994, Mr. Wohl was
a senior associate at Morrison & Foerster in Los Angeles. In that capacity, he
worked extensively in the institutional lending and corporate areas, and
represented a number of major warehouse lenders and other financial institutions
in the mortgage banking industry.
33
<PAGE>
Mr. Wohl graduated with distinction from Stanford University and received his
J.D. from the Harvard Law School, where he was an editor of the Harvard Law
Review.
N. Lance Jackson is currently Vice President, Corporate Credit of CWM. Mr.
Jackson heads the Corporate Credit Department, which performs initial and
on-going due diligence on the customers of INMC and WLCA. Prior to joining CWM,
Mr. Jackson was a Senior Auditor at FHLMC, where he reviewed overall
origination, selling and servicing operations of seller/servicers located
throughout the United States. Prior to FHLMC, Mr. Jackson worked as a certified
public accountant in the position of Senior Accountant at KPMG Peat Marwick LLP
and as a loan officer for Great Western Bank.
Peter L. Konkowski is currently Vice President and Quality Control Manager
of CWM. Mr. Konkowski manages the quality control and underwriting areas, which
are responsible for the review of loans for which prior approval is required,
review and approval of prospective delegated underwriting clients and review of
loans on a post purchase basis. Prior to joining CWM in May 1994, Mr. Konkowski
served as Director of Client Relations for the Lender Express Conduit for the
Prudential Home Mortgage Company, a subsidiary of Residential Services
Corporation of America. Mr. Konkowski also worked for FSB Investors Corporation
as Marketing Representative and for Bank-Fund Staff Federal Credit Union as Loan
Closer.
Steven E. West is currently Vice President and Treasurer of CWM and each of
its subsidiaries. He is responsible for financing the various products offered
by CWM and managing overall liquidity. Prior to joining CWM in November 1993,
Mr. West managed the processing and investor reporting departments within the
loan administration division for First Nationwide Bank and was also responsible
for developing correspondent banking relationships and managing overall cash
flow. Mr. West is a former employee of KPMG Peat Marwick LLP and graduated from
California State University.
COMMON STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information regarding stock options and
stock ownership for directors, certain executive officers and CCI. Except as
otherwise noted, CWM knows of no agreements among its stockholders that relate
to voting or investment power of its shares of Common Stock.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OF COMMON OPTIONS AT OCTOBER 31, IN-THE-MONEY OPTIONS
STOCK OWNED PERCENT 1994(4) AT OCTOBER 31, 1994(4)
BENEFICIALLY AS OF OF --------------------------- ---------------------------
NAME OCTOBER 31, 1994(1)(2)(4) CLASS EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------- ------------------------- ------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David S. Loeb............. 255,600 * 25,000 30,000 $ 64,063 $ 22,500
Angelo R. Mozilo.......... 174,431(3) * 80,000 30,000 226,250 22,500
Lyle E. Gramley........... 62,425 * -- 30,000 -- 22,500
Thomas J. Kearns.......... 102,000 * 40,000 30,000 95,938 22,500
Frederick J. Napolitano... 176,400 * 25,000 30,000 64,063 22,500
Michael W. Perry.......... 25,000 * 20,000 120,000 58,750 143,750
All directors and
executive officers as a
group (14 persons)...... 797,356 2.5% 190,000 297,500 509,064 287,656
</TABLE>
- ------------
* Less than one percent of class.
(1) Unless otherwise indicated, includes sole voting and investment power.
(2) Includes shares which may be purchased through stock options exercisable
within 60 days of October 31, 1994 held by the following persons: Mr. Loeb,
25,000 shares, Mr. Mozilo, 80,000 shares, Mr. Kearns, 40,000 shares, Mr.
Napolitano, 25,000 shares, Mr. Perry, 20,000 shares, and all directors and
executive officers as a group, 190,000 shares.
(3) Includes 1,000 shares owned by Phyllis Mozilo, the wife of Angelo Mozilo, as
to which shares he disclaims any beneficial interest.
(4) As of October 31, 1994, CCI owned 1,100,000 shares of CWM's Common Stock,
which represents 3.4% of such class as of such date.
34
<PAGE>
DESCRIPTION OF COMMON STOCK
The authorized capital stock of CWM consists of 60,000,000 shares of Common
Stock, $.01 par value. Each share is entitled to participate equally in
dividends when and as declared by the Board of Directors and in the distribution
of assets of CWM upon liquidation. Each share of Common Stock is entitled to one
vote and will be fully paid and non-assessable by CWM upon issuance. Shares of
the Common Stock of CWM have no preference, conversion, exchange, preemptive or
cumulative voting rights. The authorized capital stock of CWM may be increased
and altered from time to time as permitted by Delaware law.
Meetings of the stockholders of CWM are to be held annually and special
meetings may be called by the Board of Directors, the Chairman of the Board, the
President or a majority of the unaffiliated directors. The Certificate of
Incorporation reserves to CWM the right to amend any provision thereof in the
manner prescribed by law.
Repurchase of Shares and Restrictions on Transfer. Two of the requirements
of qualification for the tax benefits accorded by the Real Estate Investment
Trust Provisions of the Code are that (i) during the last half of each taxable
year not more than 50% in value of the outstanding shares may be owned directly
or indirectly by five or fewer individuals and (ii) there must be at least 100
stockholders on 335 days of each taxable year of 12 months.
In order that CWM may meet these requirements at all times, the Certificate
of Incorporation prohibits any person or group of persons from acquiring or
holding, directly or indirectly, ownership of a number of shares of capital
stock in excess of 9.8% of the outstanding shares. Shares of capital stock owned
by a person or group of persons in excess of such amounts are referred to herein
as 'Excess Shares.' For this purpose, the term 'ownership' is defined in
accordance with the Real Estate Investment Trust Provisions of the Code, the
constructive ownership provisions of Section 544 of the Code and Rule 13d-3
promulgated by the Commission under the Exchange Act and the term 'group' is
defined to have the same meaning as that term has for purposes of Section
13(d)(3) of the Exchange Act. Accordingly, shares of capital stock owned or
deemed to be owned by a person who individually owns less than 9.8% of the
shares outstanding may nevertheless be Excess Shares.
The constructive ownership provisions applicable under Section 544 of the
Code attribute ownership of securities owned by a corporation, partnership,
estate or trust proportionately to its stockholders, partners or beneficiaries,
attribute ownership of securities owned by family members and partners to other
members of the same family, treat securities with respect to which a person has
an option to purchase as actually owned by that person, and set forth rules as
to when securities constructively owned by a person are considered to be
actually owned for the application of such attribution provisions (i.e.,
'reattribution'). For purposes of determining whether a person holds Excess
Shares, a person or group will thus be treated as owning not only shares of
Common Stock actually or beneficially owned, but also any shares of Common Stock
attributed to such person or group under the attribution rules described above.
Ownership of shares of CWM's Common Stock through such attribution is generally
referred to as constructive ownership.
The Certificate of Incorporation also provides that in the event any person
acquires Excess Shares, such Excess Shares are deemed tendered for purchase to
CWM. Except as set forth below, the purchase price for such Excess Shares shall
be the closing price on the purchase date of such share of capital stock on the
New York Stock Exchange or other national securities exchange on which the stock
is listed, the closing bid price on the NASDAQ System if the stock is not listed
on any such exchange or, if neither listed on an exchange nor quoted on the
NASDAQ System, the net asset value of such share as determined in good faith by
the Board of Directors. The purchase price of any shares so purchased shall be
paid, at the option of CWM, in cash or in the form of an unsecured, subordinated
promissory note of CWM bearing interest and having a term to maturity (to be not
less than five nor more than 20 years) as shall be determined by the Board of
Directors. From and after the date fixed for purchase by the Board of Directors
and the tender by CWM of the purchase price therefor, each as specified in CWM's
notice of acceptance of the offer of sale which must be sent to the holder, the
holder of any shares to be so purchased shall cease to be entitled to any rights
as a holder of such shares, excepting only the right to receive payment of the
purchase price for such shares.
35
<PAGE>
Under the Certificate of Incorporation any acquisition of shares of CWM
that would result in the disqualification of CWM as a real estate investment
trust under the Code is void to the fullest extent permitted by law, and the
Board of Directors is authorized to refuse to transfer shares to a person if, as
a result of the transfer, that person would own Excess Shares. Prior to any
transfer or transaction which, if consummated, would cause a stockholder to own
shares in excess of 9% of the outstanding shares of CWM, and in any event upon
demand by the Board of Directors, a stockholder is required to file with CWM an
affidavit setting forth, as to that stockholder, the information required to be
reported in returns filed by stockholders under Regulation 1.857-9 issued by the
Internal Revenue Service (the 'IRS') and in reports held under Section 13(d) of
the Exchange Act. Additionally, each proposed transferee of shares of Common
Stock, upon demand of the Board of Directors, also may be required to file a
statement or affidavit with CWM setting forth the number of shares already owned
by the transferee and any related person.
Restrictions on Ownership. CWM's Certificate of Incorporation and Bylaws
provide that 'disqualified organizations' within the meaning of Section
860E(e)(5) of the Code, which generally include governmental entities and other
tax-exempt persons not subject to tax on unrelated business taxable income, are
ineligible to hold CWM's shares. Accordingly, the shares of Common Stock offered
hereby should not be purchased or held by such disqualified organizations. See
'Certain Federal Income Tax Considerations.'
Transfer Agent and Registrar. The transfer agent and registrar for CWM's
Common Stock is Chemical Trust Company of California.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
FEDERAL INCOME TAXATION OF STOCKHOLDERS
The following is a summary of certain anticipated material federal income
tax consequences of an investment in CWM that should be considered by
prospective stockholders. This summary is based on existing provisions of the
Code, final and proposed Treasury regulations promulgated thereunder, judicial
decisions and administrative rulings, all of which are subject to change or
alternative construction with possible retroactive effect. This summary does not
purport to deal with all federal income tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
Prospective stockholders should consult their own tax advisors to determine the
federal, state, local and other tax consequences to them of their investment in
CWM. Prospective stockholders should also note that no rulings have been
obtained by CWM from the IRS concerning any of the matters discussed below, and
no assurance can be given that the IRS will not take contrary positions.
Management of CWM believes that CWM has operated in such manner as to qualify
for taxation as a 'real estate investment trust' under Sections 856 to 860 of
the Code, commencing with its taxable year ending December 31, 1985, and CWM
intends to continue to operate in such manner. However, no assurance can be
given that it has operated or will be able to continue to operate in a manner so
as to qualify or to remain qualified. These sections of the Code are highly
technical and complex. The following is a general summary of the sections that
govern the Federal income tax treatment of a real estate investment trust and
its stockholders. This summary is qualified in its entirety by the applicable
Code provisions, rules and regulations promulgated thereunder, and
administrative and judicial interpretations thereof. Brown & Wood has acted as
tax counsel to CWM in connection with the operation of CWM and the preparation
of the Registration Statement of which this Prospectus is a part.
In the opinion of Brown & Wood, CWM was organized in conformity with the
requirements for qualification as a real estate investment trust commencing with
its taxable and fiscal year ending December 31, 1985, and its proposed method of
operation will enable it to meet the requirements for qualification and taxation
as a real estate investment trust under the Code. This opinion is based on
various assumptions and is conditioned upon certain representations made by CWM
as to factual matters relating to CWM's stock ownership, the nature of its
assets, sources of its income, and distributions it has made. Such qualification
and taxation as a REIT depends upon CWM's ability to meet, through actual annual
operating results, distribution levels and diversity of stock ownership, and
36
<PAGE>
the various qualification tests imposed under the Code discussed below, the
results of which have not been reviewed by Brown & Wood. Accordingly, no
assurance can be given that the actual results of CWM's operation for any
particular taxable year will satisfy such requirements. See ' -- Failure to
Qualify.'
If CWM qualifies for taxation as a real estate investment trust, it will
generally not be subject to Federal corporate income taxes on net income that is
currently distributed to stockholders. This treatment substantially eliminates
the 'double taxation' of dividends (at the corporate and stockholder levels)
that generally results from investment in a corporation. However, CWM will be
subject to Federal income tax as follows: First, under Section 857(b) of the
Code CWM will be taxed at regular corporate rates on any undistributed real
estate investment trust taxable income, including undistributed net capital
gains. Second, under certain circumstances, CWM may be subject to the
'alternative minimum tax' of Section 55 of the Code on its items of tax
preference. Third, if CWM has (i) net income from the sale or other disposition
of 'foreclosure property' which is held primarily for sale to customers in the
ordinary course of business or (ii) other nonqualifying income from foreclosure
property, under Section 857(b)(4) of the Code it will be subject to tax at the
highest regular corporate rate on such income. Fourth, if CWM has net income
from 'prohibited transactions' (which are, in general, certain sales or other
dispositions of property (other than foreclosure property) held primarily for
sale to customers in the ordinary course of business, (i.e., when CWM is acting
as a dealer)), such income will be subject to a 100% tax under Section 857(b)(6)
of the Code. Fifth, if CWM should fail to satisfy the 75% gross income test or
the 95% gross income test (as discussed below), but has nonetheless maintained
its qualification as a real estate investment trust because certain other
requirements have been met, it will be subject to a 100% penalty tax under
Section 857(b)(5) of the Code on an amount equal to (i) the gross income
attributable to the greater of the amount by which CWM fails the 75% or 95%
test, multiplied by (ii) a fraction intended to reflect CWM's profitability.
Sixth, if CWM should fail to distribute each year at least the sum of (i) 85% of
its real estate investment trust ordinary income for such year, (ii) 95% of its
real estate investment trust capital gain net income for such year, and (iii)
any undistributed taxable income from prior periods, CWM will be subject to a 4%
excise tax under Section 4981 of the Code on the excess of such required
distribution over the amounts actually distributed. Seventh, if CWM acquires any
asset from a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in certain transactions in which the basis of the asset in
CWM's hands is determined by reference to the basis of the asset (or any other
property) in the hands of the C corporation, and CWM recognizes gain on the
disposition of such asset during the 10-year period (the 'Recognition Period')
beginning on the date on which such asset was acquired by CWM, then, to the
extent of the built-in gain (i.e., the excess of the fair market value of such
asset on the date such asset was acquired by CWM over CWM's adjusted basis in
such asset on such date), such gain will be subject to tax at the highest
regular corporate rate pursuant to IRS Notice 88-19, 1988-1 C.B. 486 and
Treasury Regulations that have not yet been promulgated under Section 337(d) of
the Code. Eighth, if CWM has record shareholders that are 'disqualified
organizations' within the meaning of Section 860E(e)(5) of the Code (generally a
government organizations and other tax-exempt persons not subject to the tax on
unrelated business taxable income ('UBTI') imposed by Section 511 of the Code)
and CWM earns income from CMOs or REMIC residuals in excess of particular yields
('excess inclusion income'), it will be subject to tax at the highest corporate
rate on such record shareholders' share of its excess inclusion income. However,
CWM's Certificate of Incorporation and Bylaws provide that disqualified
organizations are ineligible to hold CWM's shares.
REQUIREMENTS FOR QUALIFICATION
Section 856(a) of the Code defines a real estate investment trust as a
corporation, trust or association (i) which is managed by one or more trustees
or directors, (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest,
(iii) which would be taxable, but for Sections 856 through 860 of the Code, as a
domestic corporation, (iv) which is neither a financial institution nor an
insurance company subject to certain provisions of the Code, (v) the beneficial
ownership of which is held by 100 or more persons, (vi) during the last half of
each taxable year not more than 50% in value of the outstanding stock of which
is owned, actually or constructively, by five or fewer individuals (as defined
in the Code to include certain entities), and (vii)
37
<PAGE>
which meets certain other tests, described below, regarding the amount of its
distributions and the nature of its assets and source of its income. Section
856(b) of the Code provides that conditions (i) to (iv), inclusive, must be met
during the entire taxable year and that condition (v) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months.
INCOME TESTS
In order to maintain qualification as a real estate investment trust, there
are three gross income requirements that must be satisfied annually. First,
under Section 856(c)(3) of the Code at least 75% of CWM's gross income
(excluding gross income from prohibited transactions) for each taxable year must
be derived directly or indirectly from investments relating to real property or
mortgages on real property (including 'interest on obligations secured by
mortgages on real property' and 'rents from real property' as defined in the
Code) or from certain types of temporary investment income. Second, under
Section 856(c)(2) of the Code at least 95% of CWM's gross income (excluding
gross income from prohibited transactions) for each taxable year must be derived
from such real property or mortgage investments, dividends, interest (as defined
in the Code) and gain from the sale or disposition of stock or securities or
from any combination of the foregoing. Third, under Section 856(c)(4) of the
Code short-term gain from the sale or other disposition of stock or securities,
gain from prohibited transactions and gain on the sale or other disposition of
real property held for less than four years (apart from involuntary conversions
and sales of foreclosure property) must represent less than 30% of CWM's gross
income for each taxable year.
If CWM fails to satisfy one or both of the 75% or the 95% gross income
tests for any taxable year, it may nevertheless qualify as a real estate
investment trust for such year if it is entitled to relief under certain
provisions of the Code. These relief provisions will be generally available if
CWM's failure to meet such tests was due to reasonable cause and not due to
wilful neglect, CWM attaches a schedule of the sources of its income to its
income tax return, and any incorrect information on the schedule was not due to
fraud with intent to evade tax. It is not possible, however, to state whether in
all circumstances CWM would be entitled to the benefit of these relief
provisions. As discussed above, even if these relief provisions apply, a tax
would be imposed on CWM.
ASSET TESTS
Generally, CWM, at the close of each quarter of its taxable year, must also
satisfy three tests relating to the nature of its assets. First, under Section
856(c)(5)(A) of the Code at least 75% of the value of CWM's total assets must be
represented by real estate assets (including (i) assets held by subsidiaries of
CWM that have been wholly owned by CWM throughout the subsidiary's entire
existence (each, a 'qualified REIT subsidiary' within the meaning of Section
856(i) of the Code), but excluding assets held by any subsidiary of CWM that is
not a qualified REIT subsidiary and (ii) stock or debt instruments held for not
more than one year, purchased with the proceeds of a stock offering or long-term
(more than five years) public debt offering of CWM), cash, cash items and
government securities. Second, under Section 856(c)(5)(B) of the Code not more
than 25% of CWM's total assets may be represented by securities other than those
in the 75% asset class. Third, of the investments included in the 25% asset
class, under Section 856(c)(5)(B) of the Code the value of any one issuer's
securities owned by CWM (other than another REIT or a qualified REIT subsidiary)
may not exceed 5% of the value of CWM's total assets and CWM may not own more
than 10% of any one issuer's outstanding voting securities.
CWM currently owns certain assets through subsidiaries. As set forth above,
the ownership of more than 10% of the voting securities of any one corporation
(other than another REIT or a qualified REIT subsidiary) by a real estate
investment trust is prohibited by the asset tests. Other than INMC, CWM's
subsidiaries are 'qualified REIT subsidiaries' and CWM does not own any voting
securities of INMC. In addition, CWM intends to manage its investment in INMC's
securities such that the value of INMC's securities held by CWM will satisfy the
5% asset test referred to above. The valuation of such securities is subject to
various uncertainties and the failure of CWM to satisfy the 5% asset test could
result in its disqualification as a REIT. See 'Failure to Qualify' below. CWM
owns 100% of the non-voting
38
<PAGE>
preferred stock in INMC which represents 99% of the economic interest therein.
Although the IRS has previously issued private letter rulings (which may only be
relied upon by the taxpayers that received them) that approved similar
structures, the IRS has informally indicated that it will no longer issue such
rulings. Moreover, it is possible the IRS could assert that such an arrangement
should be treated as if the REIT involved owned more than 10% of the voting
securities of such a subsidiary. Such an argument, if successful, would result
in REIT disqualification. In the opinion of Brown & Wood, however, under current
law if the IRS asserted that the Company owns more than 10% of INMC's voting
securities, it would not prevail. In addition, with respect to the 5% asset test
referred to above, CWM intends to manage its investment in INMC's securities
such that the value of INMC's securities held by CWM will satisfy such test. The
valuation of such securities is subject to various uncertainties and the failure
of CWM to satisfy the 5% asset test would result in its disqualification as a
REIT. See 'Failure to Qualify' below. Also, because INMC is not a qualified REIT
subsidiary, INMC is subject to applicable federal and state income taxes, and
CWM will include in its real estate investment trust taxable income the net
income earned by INMC at the time INMC distributes such earnings to CWM.
ANNUAL DISTRIBUTION REQUIREMENTS
CWM, in order to qualify as a real estate investment trust, is required
under Section 857(a) of the Code to distribute dividends (other than capital
gain dividends) to its stockholders in an amount at least equal to (a) the sum
of (i) 95% of CWM's 'real estate investment trust taxable income' (computed
without regard to the dividends paid deduction and CWM's net capital gain) and
(ii) 95% of the net income (after tax), if any, from foreclosure property, minus
(b) the sum of certain items of non-cash income. In addition, as discussed
above, if CWM disposes of any asset (acquired from a C corporation in certain
transactions in which the basis of the asset in CWM's hands is determined by
reference to the basis of the asset (or any other property) in the hands of the
C corporation) during its Recognition Period, CWM will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at least
95% of the built-in-gain (after tax), if any, recognized on the disposition of
such asset. Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before CWM timely files its
tax return for such year, if paid on or before the first regular dividend
payment date after such declaration and if CWM so elects and specifies the
dollar amount in its tax return. To the extent that CWM does not distribute all
of its net long-term capital gain or distributes at least 95%, but less than
100%, of its 'real estate investment trust taxable income,' as adjusted, under
Section 857(b) of the Code it will be subject to tax thereon at regular
corporate tax rates. Furthermore, if CWM should fail to distribute during each
calendar year at least the sum of (i) 85% of its real estate investment trust
ordinary income for such year, (ii) 95% of its real estate investment trust
capital gain income for such year, and (iii) any undistributed taxable income
from prior periods, CWM would be subject to a 4% excise tax under Section 4981
of the Code on the excess of such required distribution over the amounts
actually distributed. CWM intends to make timely distributions sufficient to
maintain its tax status as a real estate investment trust. It is possible that
CWM, from time to time, may not have sufficient cash or other liquid assets to
meet the 95% distribution requirement, due to timing differences between (i) the
actual receipt of income and actual payment of deductible expenses and (ii) the
inclusion of such income and deduction of such expenses in arriving at taxable
income of CWM. In the event that timing differences occur, CWM may find it
necessary to arrange for borrowings if available or consider liquidating
substantial investments to meet the 95% distribution requirement.
Under certain circumstances, CWM may be able to rectify a failure to meet
the distribution requirement for a year by paying 'deficiency dividends' to
stockholders in a later year, which may be included in CWM's deduction for
dividends paid for the earlier year. CWM may be able to avoid being taxed on
amounts distributed as deficiency dividends; however, CWM will be required to
pay interest based upon the amount of any deduction taken for deficiency
dividends. In addition, as discussed above, failure to meet certain other
distribution requirements may result in the imposition of an excise tax.
39
<PAGE>
FAILURE TO QUALIFY
If CWM fails to qualify for taxation as a real estate investment trust in
any taxable year, and the relief provisions do not apply, CWM will be subject to
tax (including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which CWM
fails to qualify will not be deductible by CWM, nor will they be required to be
made. In such event, CWM will be treated as a regular corporation and,
accordingly, to the extent of current and accumulated earnings and profits, all
distributions to stockholders will be dividends taxable as ordinary income, and,
subject to certain limitations in the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, under Section 856(g)(3) of the Code CWM will also
be disqualified from taxation as a real estate investment trust for the four
taxable years following the year during which qualification was lost. It is not
possible to state whether in all circumstances CWM would be entitled to the
statutory relief. Failure to qualify for even one year could result in CWM's
incurring substantial indebtedness (to the extent borrowings are feasible) or
liquidating substantial investments in order to pay the resulting taxes or, in
the discretion of CWM, to maintain the level of CWM's distributions to its
stockholders.
SPECIAL CONSIDERATIONS -- TAX-EXEMPT AND CERTAIN OTHER INVESTORS
For CMOs issued by CWM or a qualified real estate investment trust
subsidiary after December 31, 1991, pursuant to regulations not yet published,
the portion of any dividends paid to stockholders attributable to 'excess
inclusion income' on the retained residual interests in such CMOs would be
subject to certain special rules. Such rules include (i) the characterization of
excess inclusion income as UBTI for tax-exempt stockholders (including employee
benefit plans and individual retirement accounts), (ii) the application of
federal income tax withholding at the maximum rate (without reduction for any
otherwise applicable income tax treaty) on any excess inclusion income allocable
to foreign stockholders and (iii) the inability of a stockholder generally to
offset excess inclusion income with net operating losses. Generally, tax-exempt
entities are subject to federal income tax on excess inclusion income and other
unrelated business income in excess of $1,000 per year. Excess inclusion income
is generally taxable income with respect to a residual interest in excess of a
specified return on investment in the residual interest. In some cases,
substantially all taxable income with respect to a residual interest may be
considered excess inclusion income. Until regulations or other guidance are
issued, CWM will use methods it believes are appropriate for calculating the
amount of excess inclusion income it recognizes from CMOs issued after December
31, 1991, and allocating any excess inclusion income to its stockholders.
CWM may invest in or otherwise acquire residual interests in REMICs. In
general, a REMIC is a fixed pool of mortgage instruments in which investors hold
multiple classes of interests and for which a REMIC election has been made. Part
or all of any income derived by CWM from a REMIC residual interest may be excess
inclusion income. If CWM pays any dividends to its stockholders that are
attributable to such excess inclusion income, the stockholders who receive such
dividends would also be subject to the rules described above.
TAXATION OF DISTRIBUTIONS BY CWM
Assuming that CWM maintains its status as a real estate investment trust,
any distributions that are properly designated as 'capital gain dividends'
generally will be taxed to stockholders as long-term capital gains, regardless
of how long a stockholder has owned his shares. Any other distributions out of
CWM's current or accumulated earnings and profits will be dividends taxable as
ordinary income, generally in the year paid. However, any dividend declared by
CWM in October, November or December of any year payable to a stockholder of
record on a specific date in any such month will be treated as both paid by CWM
and received by the stockholder on December 31 of such year, provided that the
dividend is actually paid by CWM during January of the following calendar year.
Stockholders will not be entitled to dividends-received deductions with respect
to any dividends paid by CWM. Distributions in excess of CWM's current or
accumulated earnings and profits will be treated as tax-free returns of capital,
to the extent of the stockholder's basis in his shares of Common Stock, and as
gain
40
<PAGE>
from the disposition of shares, to the extent they exceed such basis.
Stockholders may not include on their own returns any of CWM's ordinary or
capital losses.
Dividends paid by CWM to organizations that are exempt from federal income
tax under Section 501(a) of the Code generally will not be taxable to them as
UBTI except to the extent that (i) purchase of shares of Common Stock was
financed by 'acquisition indebtedness' or (ii) such dividends are attributable
to excess inclusion income. CWM expects that tax-exempt investors will be
required to treat a portion of their dividends as UBTI, because CWM expects that
a portion of its income will be treated as excess inclusion income. Because an
investment in CWM may give rise to UBTI or trigger the filing of an income tax
return that otherwise would not be required, tax-exempt organizations should
give careful consideration to whether an investment in CWM is prudent.
TAXATION OF DISPOSITION OF SHARES OF THE COMMON STOCK
In general, any gain or loss realized upon a taxable disposition of shares
will be treated as long-term capital gain or loss if the shares have been held
for more than 12 months and otherwise as short-term capital gain or loss.
However, any loss realized upon a taxable disposition of shares held for six
months or less will be treated as long-term capital loss to the extent of any
capital gain dividends received with respect to such shares. All or a portion of
any loss realized upon a taxable disposition of shares of Common Stock may be
disallowed if other shares of Common Stock are purchased (under a dividend
reinvestment plan or otherwise) within 30 days before or after the disposition.
BACKUP WITHHOLDING
CWM generally is required to withhold and remit to the United States
Treasury 31% of the dividends paid to any stockholder who (i) fails to furnish
CWM with a correct taxpayer identification number, (ii) has underreported
dividend or interest income to the IRS or (iii) under certain circumstances,
fails to certify to CWM that he is not subject to backup withholding. An
individual's taxpayer identification number is his social security number.
STATE AND LOCAL TAX CONSIDERATIONS
State and local tax laws may not correspond to the federal income tax
principles discussed in this section. Accordingly, prospective investors should
consult their tax advisors concerning the state and local tax consequences of an
investment in CWM.
FOREIGN INVESTORS
The preceding discussion does not address the federal income tax
consequences to foreign investors of an investment in CWM. Foreign investors in
CWM should consult their own tax advisors concerning the federal income tax
consequences to them of a purchase of shares of CWM's Common Stock, including
the application of United States withholding tax on distributions made to them.
Any excess inclusion income allocated to a foreign investor would be subject to
such withholding without reduction by any otherwise applicable income tax treaty
between the United States and the foreign investor's country.
ERISA MATTERS
The Employee Retirement Income Security Act of 1974, as amended ('ERISA'),
imposes certain restrictions on employee benefit plans subject to ERISA
('Plans'). Fiduciaries of Plans should consult their legal advisors when
considering an investment in the shares of Common Stock regarding, among other
matters, the investment's compliance with the Plans' governing documents and the
normal fiduciary investment standards of ERISA, including prudence and
diversification, as well as the fact that an investment in such shares may give
rise to UBTI being recognized by the Plans and other tax-exempt investors. See
'Certain Federal Income Tax Considerations.' CWM believes that the shares of
Common Stock are 'publicly offered securities' under United States Department of
Labor regulation 29 C.F.R.
41
<PAGE>
SS2510.3-101. Accordingly, CWM believes that its underlying assets will not be
considered 'plan assets' of Plans which purchase shares of Common Stock.
UNDERWRITING
Subject to the terms and conditions set forth in a purchase agreement (the
'Purchase Agreement'), CWM has agreed to sell to each of the Underwriters named
below, and each of the Underwriters, for whom Merrill Lynch, Pierce, Fenner &
Smith Incorporated, Alex. Brown & Sons Incorporated, Dean Witter Reynolds Inc.,
PaineWebber Incorporated and Salomon Brothers Inc are acting as representatives
(the 'Representatives'), has severally agreed to purchase, the number of shares
of Common Stock set forth below opposite its respective name. The Underwriters
are committed to purchase all of such shares if any are purchased. Under certain
circumstances, the commitments of non-defaulting Underwriters may be increased
as set forth in the Purchase Agreement.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................................
Alex. Brown & Sons Incorporated..................................................
Dean Witter Reynolds Inc. .......................................................
PaineWebber Incorporated.........................................................
Salomon Brothers Inc.............................................................
---------
Total.............................................................. 7,000,000
---------
---------
</TABLE>
The Representatives of the Underwriters have advised CWM that they propose
initially to offer the shares of Common Stock to the public at the public
offering price set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $. per share. The
Underwriters may allow, and such dealers may reallow, a discount not in excess
of $. per share on sales to certain other dealers. After the initial public
offering, the public offering price, concession and discount may be changed.
CWM has granted the Underwriters an option, exercisable for 30 days after
the date hereof, to purchase up to 1,050,000 additional shares of Common Stock
to cover over-allotments, if any, at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. If the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase approximately the same
percentage thereof which the number of shares to be purchased by it shown in the
foregoing table is of the 7,000,000 shares of Common Stock initially purchased
by the Underwriters.
CWM has agreed that, for a period of 180 days from the date of this
Prospectus, it will not, without the prior written consent of the
Representatives, directly or indirectly sell, offer to sell, grant any option
for the sale of, or otherwise dispose of any shares of Common Stock or any
security convertible into Common Stock, except, with respect to CWM, for Common
Stock or options issued pursuant to reservations, agreements, employee benefit
plans or stock option plans. CCI has agreed that, for a period of 180 days from
the date of this Prospectus, it will not, without 30 days' prior written notice
to the Representatives, directly or indirectly sell, offer to sell, grant any
option for the sale of, or otherwise dispose of any shares of Common Stock or
any security convertible into Common Stock of CWM, and
42
<PAGE>
that the Representatives shall have a right of first refusal to purchase any
such Common Stock or security convertible into Common Stock from CCI.
CWM has agreed to indemnify the several Underwriters against certain civil
liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for CWM by
Brown & Wood and for the Underwriters by Thacher Proffitt & Wood.
EXPERTS
The consolidated financial statements and schedules of CWM and its
subsidiaries and the financial statements of INMC included in CWM's Annual
Report on Form 10-K for the year ended December 31, 1993, as amended, which is
incorporated herein by reference, have been audited by Grant Thornton LLP,
independent certified public accountants, as set forth in their reports, and
have been so incorporated in reliance upon such reports and upon the authority
of such firm as experts in accounting and auditing.
43
<PAGE>
INDEX OF CERTAIN DEFINITIONS
Set forth below is a list of certain terms used in this Prospectus,
together with the pages on which the terms are defined or described.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Adjustable-Rate Mortgage (ARM)............................................................................. 16
Agency ARMs................................................................................................ 28
Agency Securities.......................................................................................... 28
Best Efforts Rate-Lock..................................................................................... 20
Bulk Rate-Lock............................................................................................. 20
Collateralized Mortgage Obligation (CMO)................................................................... 4
Commodity Exchange Act (CEA)............................................................................... 5
Constant Maturity Treasury Index (CMT Index)............................................................... 16
Construction Lending Corporation of America (CLCA)......................................................... 3
Countrywide Asset Management Corporation (CAMC)............................................................ 4
Countrywide Credit Industries, Inc. (CCI).................................................................. 4
Countrywide Funding Corporation (CFC)...................................................................... 3
Disqualified Organization.................................................................................. 11
Excess Shares.............................................................................................. 35
Federal Home Loan Mortgage Corporation (FHLMC)............................................................. 4
Federal National Mortgage Association (FNMA)............................................................... 4
Government National Mortgage Association (GNMA)............................................................ 7
Independent Lending Corporation (ILC)...................................................................... 4
Independent National Mortgage Corporation (INMC)........................................................... 3
Loan-to-Value (LTV)........................................................................................ 14
Master Commitment.......................................................................................... 19
Mortgage Conduit........................................................................................... 13
Net Interest Spread (Net Spread)........................................................................... 13
Non-conforming Mortgage Loans.............................................................................. 15
Purchase Agreement......................................................................................... 42
Qualified Real Estate Investment Trust Subsidiary.......................................................... 38
Rate-lock.................................................................................................. 19
Real Estate Investment Trust Provisions of the Code........................................................ 11
Real Estate Mortgage Investment Conduit (REMIC)............................................................ 3
Residual Cash Flow......................................................................................... 6
Subordinated Securities.................................................................................... 6
Tract Construction......................................................................................... 3
Unrelated Business Taxable Income.......................................................................... 37
Warehouse Lending Corporation of America (WLCA)............................................................ 3
</TABLE>
44
<PAGE>
_____________________________ _____________________________
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY AGENT,
DEALER OR UNDERWRITER. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE AN IMPLICATION THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY STATE IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
- ----------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information....................................................................................................... 2
Incorporation of Certain Information by Reference........................................................................... 2
Prospectus Summary.......................................................................................................... 3
Risk Factors................................................................................................................ 5
Selected Consolidated Financial Data........................................................................................ 12
CWM Mortgage Holdings, Inc.................................................................................................. 13
Business.................................................................................................................... 13
Use of Proceeds............................................................................................................. 30
Market Prices and Dividend Data............................................................................................. 30
Dividend Reinvestment Plan.................................................................................................. 31
Capitalization.............................................................................................................. 31
Management of CWM Mortgage Holdings, Inc.................................................................................... 32
Common Stock Ownership of Management........................................................................................ 34
Description of Common Stock................................................................................................. 35
Certain Federal Income Tax Considerations................................................................................... 36
ERISA Matters............................................................................................................... 41
Underwriting................................................................................................................ 42
Legal Matters............................................................................................................... 43
Experts..................................................................................................................... 43
Index of Certain Definitions................................................................................................ 44
</TABLE>
7,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
FEBRUARY , 1995
_____________________________ _____________________________
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.*
<TABLE>
<S> <C>
Securities and Exchange Commission filing fees and expenses....................... $ 24,983
Printing and engraving............................................................ 175,000
Legal fees and expenses........................................................... 300,000
NASD filing fee................................................................... 7,745
Accounting fees and expenses...................................................... 75,000
Blue Sky qualifications and expenses (including legal fees)....................... 15,000
Listing fees...................................................................... 25,000
Miscellaneous..................................................................... 77,272
--------
Total................................................................... $700,000
--------
--------
</TABLE>
- ------------
*All expenses except Securities and Exchange Commission and NASD filing fees are
estimates.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the General Corporation Law of the State of Delaware
provides that a corporation shall have the power, and in some cases is required,
to indemnify an agent, including an officer or director, who was or is a party
or is threatened to be made a party to any proceedings, against expenses,
judgments, fines, settlements and other amounts under certain circumstances.
The Certificate of Incorporation and Bylaws of CWM provide, in effect,
that, to the extent and under the circumstances permitted by Section 145 of the
General Corporation Law of Delaware, CWM shall indemnify any person who was or
is a party or is threatened to be made a party to any action, suit or proceeding
by reason of the fact that he or she is or was a director, officer, employee or
agent of CWM. CWM maintains insurance covering certain liabilities of the
directors and officers of CWM. CWM has also entered into contractual
arrangements with its directors and officers pursuant to which such persons may
be entitled to indemnity from CWM against certain liabilities arising from the
discharge of their duties in such capacities.
ITEM 16. EXHIBITS.
<TABLE>
<S> <C>
1.1** -- Form of Purchase Agreement.
4.1* -- Certificate of Incorporation for CWM (incorporated by reference to Exhibit 3.1 to the Company's Form
10-Q filed with the Commission on November 14, 1994).
4.2* -- Bylaws of CWM (incorporated by reference to Exhibit 4.2 to CWM's Form 10-Q filed with the Commission on
August 12, 1993).
4.3* -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.3 to CWM's Registration
Statement on Form S-3, as amended (File No. 33-63034)).
5.1** -- Opinion of Brown & Wood as to the legality of the Common Stock being offered.
8.1** -- Opinion of Brown & Wood as to tax matters.
10.1** -- Wet Ink and Interim Funding Facility (Conforming and Nonconforming Mortgage Loans) dated December 9,
1994 by and among CWM Mortgage Holdings, Inc., Independent National Mortgage Corporation, Independent
Lending Corporation and Lehman Commercial Paper, Inc. (Portions of this Exhibit have been omitted
pursuant to a request for confidential treatment of such omitted information.)
10.2*** -- Promissory Note of CWM Mortgage Holdings, Inc., Independent National Mortgage Corporation and
Independent Lending Corporation dated December 9, 1994. (Portions of this Exhibit have been omitted
pursuant to a request for confidential treatment of such omitted information.)
10.3*** -- Pledge Agreement dated as of December 9, 1994 by and among Lehman Commercial Paper, Inc. and CWM
Mortgage Holdings, Inc., Independent National Mortgage Corporation and Independent Lending Corporation.
(Portions of this Exhibit have been omitted pursuant to a request for confidential treatment of such
omitted information.)
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
10.4** -- Wet Ink and Interim Funding Facility Tri-Party Custody Agreement dated December 9, 1994 by and among
CWM Mortgage Holdings, Inc., Independent National Mortgage Corporation and Independent Lending
Corporation and Lehman Commercial Paper Inc. and State Street Bank and Trust Company of California, N.A.
23.1** -- Consent of Grant Thornton LLP.
23.2** -- Consent of Brown & Wood (included in Exhibit 5.1 and Exhibit 8.1).
24.1** -- Power of Attorney (included on page II-3 of the Registration Statement).
</TABLE>
- ------------
* Incorporated by reference.
** Previously filed.
*** Filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 15 above, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted against the Registrant by such director, officer or
controlling person in connection with the securities being registered hereby,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Amendment
No. 2 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Pasadena, State of
California, on the 1st day of February 1995.
CWM MORTGAGE HOLDINGS, INC.
By /s/ MICHAEL W. PERRY
...................................
MICHAEL W. PERRY
EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 2 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<S> <C> <C>
* Director, Chief Executive Officer February 1, 1995
......................................... and Chairman of the
(DAVID S. LOEB) Board of Directors
(Principal Executive Officer)
* Director, President and Vice February 1, 1995
......................................... Chairman of the Board
(ANGELO R. MOZILO) of Directors
/S/ MICHAEL W. PERRY Executive Vice President and February 1, 1995
......................................... Chief Operating Officer
(MICHAEL W. PERRY) (Principal Financial Officer)
/S/ CARMELLA L. GRAHN Senior Vice President and February 1, 1995
......................................... Chief Accounting Officer
(CARMELLA L. GRAHN) (Principal Accounting Officer)
* Director February 1, 1995
.........................................
(LYLE E. GRAMLEY)
* Director February 1, 1995
.........................................
(THOMAS J. KEARNS)
* Director February 1, 1995
.........................................
(FREDERICK J. NAPOLITANO)
* By: /s/ MICHAEL W. PERRY
...................................
MICHAEL W. PERRY
ATTORNEY-IN-FACT
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
- ------- ---------------------------------------------------------------------------------------------- ----------
<S> <C> <C>
1.1** -- Form of Purchase Agreement.................................................................
4.1* -- Certificate of Incorporation for CWM (incorporated by reference to Exhibit 3.1 to the
Company's Form 10-Q filed with the Commission on November 14, 1994).........................
4.2* -- Bylaws of CWM (incorporated by reference to Exhibit 4.2 to the Company's Form 10-Q filed
with the Commission on August 12, 1993).....................................................
4.3* -- Form of Common Stock Certificate (incorporated by reference to Exhibit 4.3 to CWM's
Registration Statement on Form S-3, as amended (File No. 33-63034)).........................
5.1** -- Opinion of Brown & Wood as to the legality of the Common Stock being offered...............
8.1** -- Opinion of Brown & Wood as to tax matters..................................................
10.1** -- Wet Ink and Interim Funding Facility (Conforming and Nonconforming Mortgage Loans) dated
December 9, 1994 by and among CWM Mortgage Holdings, Inc., Independent National Mortgage
Corporation, Independent Lending Corporation and Lehman Commercial Paper, Inc. (Portions of
this Exhibit have been omitted pursuant to a request for confidential treatment of such
omitted information.)
10.2*** -- Promissory Note of CWM Mortgage Holdings, Inc., Independent National Mortgage Corporation
and Independent Lending Corporation dated December 9, 1994. (Portions of this Exhibit have
been omitted pursuant to a request for confidential treatment of such omitted information.)
10.3*** -- Pledge Agreement dated as of December 9, 1994 by and among Lehman Commercial Paper, Inc.
and CWM Mortgage Holdings, Inc., Independent National Mortgage Corporation and Independent
Lending Corporation. (Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment of such omitted information.)
10.4** -- Wet Ink and Interim Funding Facility Tri-Party Custody Agreement dated December 9, 1994 by
and among CWM Mortgage Holdings, Inc., Independent National Mortgage Corporation and
Independent Lending Corporation and Lehman Commercial Paper Inc. and State Street Bank and
Trust Company of California, N.A.
23.1** -- Consent of Grant Thornton LLP..............................................................
23.2** -- Consent of Brown & Wood (included in Exhibit 5.1 and Exhibit 8.1)..........................
24.1** -- Power of Attorney (included on page II-3 of the Registration Statement)....................
</TABLE>
- ------------
* Incorporated by reference.
** Previously filed.
*** Filed herewith.
<PAGE>
(Certain confidential portions of this Exhibit have been omitted, as indicated
by an * in the text, and filed with the Commission separately pursuant to a
request for confidential treatment)
PROMISSORY NOTE
$500,000,000 Dated: December 9, 1994
FOR VALUE RECEIVED, the undersigned CWM Mortgage Holdings, Inc., Independent
National Mortgage Corporation and Independent Lending Corporation ('Customer'),
HEREBY PROMISES TO PAY to the order of Lehman Commercial Paper Inc. ('Lehman'),
in lawful money of the United States of America, the principal amount of each
Advance made by Lehman to Customer pursuant to the Wet Ink and Interim Funding
Facility dated as of the same date as indicated above (as amended from time to
time, the 'Facility') between Lehman and Customer, on the Maturity Date,
together with interest on each such Advance outstanding from and including the
date on which such Advance is made until the principal amount of such Advance is
paid in full, on such Maturity Date (and, as to any overdue principal and
accrued interest thereon, on demand), at an interest rate per annum with respect
to such Advance equal to the relevant Quoted Rate (as defined in the Facility)
applicable to such Advance. Each Advance shall be made pursuant to an executed
Notice of Borrowing.
1. DEFINITIONS.
All capitalized terms not otherwise defined herein shall have the meanings
ascribed to them in the Pledge Agreement, dated as of the date hereof (as
amended from time to time, the 'Pledge Agreement'), between Lehman and Customer,
or the Facility.
2. LATE PAYMENTS.
Customer shall pay interest on any overdue principal of each Advance and (to the
extent permitted by applicable law) accrued interest thereon, at a fluctuating
interest rate per annum equal to 2% above the applicable Quoted Rate (the
'Default Rate'), each change in such Default Rate to take effect simultaneously
with any change in such prime rate.
3. WET INK AND INTERIM FUNDING FACILITY.
This Promissory Note ('Promissory Note') is the Promissory Note referred to in
the Facility and is entitled to the benefits thereof and shall be subject to the
provisions thereof and of the Pledge Agreement. This Promissory Note is secured
pursuant to the Pledge Agreement.
<PAGE>
4. PREPAYMENT.
Customer shall have the right to prepay the principal amount of any Advance at
any time, provided that for any term transactions prepaid, Customer shall pay
Lehman for any reasonable costs incurred by Lehman related to such prepayment.
Lehman shall provide Customer with an officer's certificate describing in
reasonable detail the calculations underlying any such costs.
5. PAYMENTS AND COMPUTATIONS.
Customer shall make each payment hereunder not later than 6:00 PM (New York
time) on the day when due to Lehman at Citibank, ABA Number 021000089, Lehman
Commercial Paper Inc. Account Number 40615659 in same day funds. All
computations of interest shall be made by Lehman on the basis of a year of 360
days for the actual number of days (including the first day but excluding the
last day) occurring in the period for which such interest is payable. Any
payment to be made hereunder on a day other than a Business Day shall be made on
the next succeeding Business Day and such extension of time shall in such case
be included in the computation of payment of interest.
6. EVENTS OF DEFAULT.
If any of the following events ('Events of Default') shall occur and be
continuing:
(a) Customer shall fail to pay any principal or interest due and
payable under this Promissory Note when due provided that any failure to pay
interest may be cured within two (2) business days after notice thereof; or
(b) Customer shall fail to perform or observe any other term, covenant
or agreement contained in the Relevant Agreements on its part to be performed or
observed when required and such failure shall
(i) continue for fifteen (15) days after receipt of notice of
such default; and
(ii) have a material adverse effect on the Customer's ability
to perform hereunder as determined by Lehman in its reasonable business
judgment, except that (i) and (ii) shall not apply to the failure to maintain
Collateral Value as required under Section 8(a) of the Facility for a period of
two (2) business days after notice thereof; or
(c) any representation or warranty made by Customer in the Relevant
Agreements or in any document delivered in connection therewith shall prove to
have been incorrect in any material respect when made; provided that any
representation or warranty concerning a Mortgage Loan proving to be incorrect
2
<PAGE>
in any material respect that does not have a material adverse effect on the
value or salability of the Mortgage Loans in the Borrowing Base as a whole shall
result solely in such Mortgage Loan being ineligible Collateral for purposes of
computing Collateral Value of the Borrowing Base under the Pledge Agreement; or
(d) Customer shall fail to pay any of its indebtedness for borrowed
money or any interest or premium thereon when due in excess of $ *
(whether by scheduled maturity, required prepayment, acceleration, demand or
otherwise) and such failure shall continue after the applicable grace period, if
any, specified in the agreement or instrument relating to such indebtedness; or
any other default under any agreement or instrument relating to any such
indebtedness, or any other event, shall occur and shall continue after the
applicable grace period, if any, specified in such agreement or instrument, if
the effect of such default or event is to accelerate the maturity of
indebtedness in excess of such amount; or if any indebtedness in excess of such
amount shall be declared to be due and payable, or required to be prepaid (other
than by a regularly scheduled required prepayment), prior to the stated maturity
thereof; or
(e) a custodian, receiver, conservator, liquidator, trustee or
sequestrator (or similar official) of Customer, or of any substantial portion of
its property, is appointed or takes possession of such property; or Customer
generally fails to pay its debts as they become due; or Customer is adjudicated
bankrupt or insolvent; or an order for relief is entered under the Federal
Bankruptcy Code, any successor or similar applicable statute, or any
administrative insolvency scheme, against Customer; or any substantial portion
of its property is sequestered by court or administrative order and not stayed
within * days of the date of such order; or a petition is filed against
Customer under any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any jurisdiction,
whether now or subsequently in effect and not stayed within * days of
the date of such filing; or
(f) Customer files a petition in voluntary bankruptcy or seeking relief
under any provision of any bankruptcy, reorganization, arrangement, insolvency,
readjustment of debt, dissolution or liquidation law of any jurisdiction whether
now or subsequently in effect; or consents to the filing of any petition against
it under any such law; or consents to the appointment of or taking possession by
a custodian, receiver, conservator, trustee, liquidator, sequestrator (or
similar official) of Customer, or of all or any substantial part of its
property; or makes an assignment for the benefit of its creditors; or
(g) Any litigation or proceeding affecting Customer that is likely to
be adversely determined and which, if adversely determined, would have a
material
3
<PAGE>
adverse effect on the Collateral as a whole or the ability of Customer to pay
and perform on the Obligations; or
(h) Customer consolidates or amalgamates with, or merges into or
transfers all or substantially all its assets to another entity, and, at the
time of such consolidation, amalgamation, merger or transfer:
(i) the resulting, surviving or transferee entity is not a
corporation organized under the laws of the United States of America or a
political subdivision thereof and fails to assume all the obligations of
Customer under the Relevant Agreements and each outstanding Advance pursuant to
written agreement reasonably satisfactory to Lehman; and
(ii) Customer or the surviving entity fails to provide Lehman
with satisfactory assurances or credit support relating to the Relevant
Agreements in such form and from such entity as is reasonably acceptable to
Lehman to the extent that
(a) Lehman is not reasonably satisfied with the
financial condition of the surviving entity; and
(b) Lehman has provided Customer 90 days prior
notice of its request for additional assurances.
(i) any judgment or order for the payment of money in excess of
$ * shall be rendered against Customer and shall not have been stayed or
bonded pending appeal within * days of the date of entry thereof; or
(j) any governmental authority or agency or any person, agency or
entity acting under governmental authority shall have taken any action to
condemn, seize or appropriate, or to assume custody or control of, all or any
substantial part of the property of Customer, or shall have taken any action to
displace the senior management of Customer or to materially curtail its
authority in the conduct of the business of Customer; or
(k) Customer shall default under, or fail to perform as requested
under, or shall otherwise breach the terms of any instrument, agreement or
contract between it and Lehman or any of Lehman's affiliates which default shall
result in a termination or early acceleration of such facility or otherwise
materially effect Customer's ability to perform hereunder; or
(l) any material adverse change occurs in the financial condition,
results of operations, or corporate structure of Customer;
4
<PAGE>
then, and in any such event, Lehman may (i) by notice to Customer, declare this
Promissory Note and all Advances made hereunder, all interest thereon and all
other amounts payable under the Relevant Agreements to be forthwith due and
payable, whereupon this Promissory Note and all such Advances, interest and
other amounts shall become and be forthwith due and payable, without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by Customer, and (ii) exercise or cause to be exercised
all rights and remedies of Lehman as secured party under the Pledge Agreement;
provided, that upon occurrence of any Event of Default described in paragraphs
(e) and (f) above, the outstanding principal of and accrued interest on this
Promissory Note and all other amounts payable under the Relevant Agreements
shall immediately and automatically become due and payable without presentment,
demand, protest or notice of any kind.
In the event there occurs a catastrophic event or events resulting in the
effective absence of a 'repo market' for a period of at least 30 consecutive
days respecting Mortgage Loans and the same results in Lehman not being able to
finance any Advance through the repo market with Lehman's traditional repo
counterparties, Lehman shall be entitled to terminate the Facility and its
obligation to make additional Advances, effective upon 90 days prior notice to
Customer. Upon the occurrence of the event described in this subparagraph (4),
Customer shall not be obligated to make any further payments of Commitment Fees,
and shall be entitled to have a pro rata portion of the Commitment Fee returned
to it for the balance of the unexpired term of the Commitment.
7. AMENDMENTS, ETC.
No amendment or waiver of any provision of this Promissory Note, nor consent to
any departure by Customer therefrom, shall in any event be effective unless the
same shall be in writing and signed by both parties and then such amendment,
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
8. NOTICES.
All written communications hereunder shall be mailed, telecopied or delivered at
the respective addresses as listed in the Custody Agreement or at such other
address as shall be designated by a party in a written notice to the other
parties. All such notices and communications shall be effective when delivered
to the party to which such notice is to be given.
9. NO WAIVER, REMEDIES.
No failure on the part of Lehman to exercise, and no delay in exercising, any
right hereunder shall operate as a waiver thereof; nor shall any single or
partial
5
<PAGE>
exercise of any right hereunder preclude any other or further exercise thereof
or the exercise of any other right. The remedies herein provided are cumulative
and not exclusive of any remedies provided by law.
10. BINDING EFFECT; GOVERNING LAW; VENUE.
This Promissory Note shall be binding upon Customer and its successors and
assigns, and shall inure to the benefit of Lehman. Lehman may sell
participations in its interests hereunder as provided in the Facility. This
Promissory Note shall be construed in accordance with, and governed by, the laws
of the State of New York, without giving effect to the conflict of law
principles thereof. Customer waives trial by jury. Customer hereby irrevocably
consents to the non-exclusive jurisdiction of any court of the State of New
York, or in the United States District Court for the Southern District of New
York, in any action or proceeding arising out of or relating to this Promissory
Note. Customer hereby submits to, and waives any objection it may have to
personal jurisdiction and venue in, the courts of the State of New York and the
United States District Court for the Southern District of New York, over any
disputes arising out of or relating to this Promissory Note. Customer consents
to service of process by mail at the address specified in the Custody Agreement
or designated pursuant to Section 8 hereof and waives any objection it may have
to the sufficiency or adequacy of such method of service of process.
IN WITNESS WHEREOF, Customer has caused this Promissory Note to be executed by
its officer thereunto duly authorized, as of the date first above written.
CWM MORTGAGE HOLDINGS, INC.
By:___________________________
Title:________________________
INDEPENDENT NATIONAL MORTGAGE CORPORATION
By:___________________________
Title:________________________
INDEPENDENT LENDING CORPORATION
By:___________________________
Title:________________________
6
<PAGE>
Exhibit A
Notice of Borrowing No.________
Lehman Commercial Paper Inc.
1 Battery Park Plaza, 2nd Floor
New York, NY 10004
Attn: Clearance/Pipeline Funding
Facsimile (212) 528-5841
Pursuant to the Facility dated ______________, 199__ between you and the
undersigned, the undersigned hereby gives notice of its election to borrow from
you one or more Advances and, in connection therewith, sets forth below the
following information (all capitalized terms used herein shall have the meaning
specified therefor in the Facility);
1. The outstanding principal balance of the Mortgage Loans in the
Borrowing Base is $__________.
2. The principal amount of this Advance is $________.
3. The Wet Ink or Interim (as applicable) Quoted Rate for this Advance
is_________ per annum.
4. The beginning Business Day of this Advance is ___________, 199__ .
5. The Maturity Date of the Advance requested hereby is ____________,
199__.
6. The Collateral Value of the items of Collateral in the Borrowing
Base is ________. The aggregate amount of all outstanding Advances is
___________.
7. All of the Mortgage Loans requested to be funded pursuant to this
Notice of Borrowing are first or second lien Mortgage Loans.
The undersigned hereby certifies that the following statements are true and
correct on the date hereof and shall be true and correct on the date of the
Advance requested herein, before and after giving effect thereto:
7
<PAGE>
A. Each of the representations and warranties contained in the Wet Ink
and Interim Funding Facility and the Pledge Agreement are true and correct in
all material respects;
B. No Default or Event of Default (as such terms are defined in the
Promissory Note) has occurred and is continuing;
C. Customer has satisfied all of the conditions precedent as specified
in Section 9 and covenants described in Section 8(a) of the Facility.
The Advance made pursuant hereto shall be made in connection with the items of
Collateral described in each Collateral Submission Summary submitted to date and
currently contained in the Borrowing Base.
CWM MORTGAGE HOLDINGS, INC.
By:___________________________
Title:________________________
INDEPENDENT NATIONAL MORTGAGE CORPORATION
By:___________________________
Title:________________________
INDEPENDENT LENDING CORPORATION
By:___________________________
Title:________________________
8
<PAGE>
(Certain confidential portions of this Exhibit have been omitted, as indicated
by an * in the text, and filed with the Commission separately pursuant to a
request for confidential treatment)
PLEDGE AGREEMENT
This PLEDGE AGREEMENT ('Pledge Agreement') is dated as of December 9, 1994 by
and among Lehman Commercial Paper Inc. ('Lehman'), and CWM Mortgage Holdings,
Inc., Independent National Mortgage Corporation and Independent Lending
Corporation (individually and collectively, 'Customer').
WHEREAS, Customer and Lehman have entered into a Wet Ink and Interim Facility
dated as of the same date as indicated above (the 'Facility'), pursuant to which
Lehman has agreed to make certain Advances (as defined below) to Customer to
finance the origination, purchase or financing of Mortgage Loans by Customer;
WHEREAS, Customer has agreed to secure its Obligations (as defined below) by
granting a security interest in certain Collateral (as defined below) pursuant
to the terms hereof;
WHEREAS, the parties hereto have agreed that certain items of Collateral are to
be deposited with and retained by custodian (as defined below) acting as bailee
and agent for Lehman and its participants;
WHEREAS, the parties hereto desire to set forth the terms and conditions for the
granting to Lehman a security interest in the Collateral;
Now, therefore, the parties hereto hereby agree as follows:
1. DEFINITIONS.
The following terms have the meanings indicated when used herein:
'Advance' means an Advance as defined in the Facility.
'Advance Date' means the date on which Lehman makes an Advance.
'Agency' means any of the Government National Mortgage Association ('GNMA'), the
Federal National Mortgage Association ('FNMA') or the Federal Home Loan Mortgage
Corporation ('FHLMC').
'Agency Mortgage Loan' means a mortgage loan described in a Collateral
Submission Summary and eligible and intended to secure or underlie Agency
Securities or eligible for purchase by an Agency.
'Agency Securities' means securities or certificates issued or guaranteed by
GNMA, FNMA or FHLMC.
<PAGE>
'Borrowing Base' means all Mortgage Loans identified as collateral security for
the Obligations and pledged hereunder.
'Business Day' means any day other than a Saturday, Sunday or a public or bank
holiday in New York City or California.
'Collateral' means as defined in Section 2.1 hereof.
'Collateral Submission Summary' means a document, in the form attached to the
Custody Agreement, submitted to Custodian with each delivery of Mortgage Loans
financed under this Facility, which contains a summary of all items of
Collateral submitted therewith, and certified by custodian.
'Collateral Value' means the product of the applicable (a) Advance Rate and (b)
the lesser of (i) aggregate Market Value or (ii) outstanding principal balance
of the Collateral, provided, however, that any Collateral remaining in the
Borrowing Base for more than 120 days (to the extent such Collateral constitutes
Mortgage Loans representing in the aggregate more than 40% of the Maximum Credit
(as defined in the Facility)) and any Collateral failing to meet the
representations and warranties contained in Appendix A hereto shall have a
Collateral Value of zero.
'Custodian' means such entity acting as custodian(s) in its capacity as bailee
and agent for Lehman pursuant to the Custody Agreement.
'Custody Agreement(s)' means one or more Tri-Party Custody Agreement(s), as
amended from time, to time, among Custodian, Customer and Lehman with respect to
Mortgage Loans delivered in conjunction with this Pledge Agreement.
'Default' means any event which with the giving of notice or the lapse of time
or both would constitute an Event of Default.
'Default Rate' means Default Rate as defined in the Promissory Note.
'Delivery Date' means the date on which the Customer shall deliver the Wet Ink
Funding Required Documents to the Custodian, which date shall be no later than
five (5) Business Days following the Advance Date.
'Event of Default' means an Event of Default in the Promissory Note.
'FHA/VA Commitment' means a commitment issued by the Federal Housing
Administration (the 'FHA') or the Veterans Administration (the 'VA') to insure
or guarantee a Mortgage Loan.
2
<PAGE>
'HUD' means the Department of Housing and Urban Development.
'Interim Date' means, with respect to each Advance, the date on which the
Custodian has in its possession all of the Wet Ink Required Documents for the
related Advance.
'Market Value' means the market bid price obtainable for an item of Collateral
as determined on a reasonable basis by Lehman. In the case of any good faith
disagreement by customer with such market value determination, mortgage value
shall be determined on a reasonable basis by Lehman with reference generally
to bids from at least three (3) dealers generally known as reputable in pricing
mortgage collateral, provided that such bids are obtainable in a reasonable
amount of time.
'Mortgage' means the mortgage, deed of trust or other instrument creating a
first or second lien on real property securing a Mortgage Note (as defined in
the Custody Agreement).
'Mortgage Loan' means an Agency or Nonagency Mortgage Loan.
'Nonagency Mortgage Loan' means a mortgage loan described in a Collateral
Submission Summary intended to be purchased for cash by Nonagency Purchaser.
'Nonagency Purchaser' means any bona fide purchaser specified on a list
delivered to Lehman by Customer and approved by Lehman, provided that if Lehman
revokes said approval, said revocation shall not be effective for a period of
sixty (60) days after notice of revocation is given by Lehman.
'Notice of Borrowing' means a notice of Borrowing as defined in the Facility.
'Obligations' means (a) all indebtedness for borrowed money of Customer to
Lehman, arising under, or in connection with, the Relevant Agreements, whether
now existing or hereafter arising (including, without limitation, future
Advances); (b) any and all sums reasonably paid by Lehman in order to preserve
the Collateral or its security interest therein; (c) in the event of any
proceeding for the collection or enforcement of any indebtedness for borrowed
money of Customer referred to in clause (a) after an Event of Default shall have
occurred and be continuing, the reasonable expenses of retaking, holding,
collecting, preparing for sale, selling or otherwise disposing of or realizing
on the Collateral, or of any exercise by Lehman of its rights under the Relevant
Agreements, together with reasonable attorneys' fees and disbursements and court
costs; and (d) all indemnity obligations of Customer to Lehman pursuant to the
Relevant Agreements.
3
<PAGE>
'Promissory Note' means the Promissory note dated as of the date first indicated
above issued by Customer, as amended from time to time.
'Purchase Commitment' means an obligation of (i) an Agency to purchase Agency
Mortgage Loans, or (ii) a Nonagency Purchaser to purchase Nonagency Mortgage
Loans.
'Quoted Rate' has the meaning set forth in Section 2 of the Facility.
'Relevant Agreements' means the Wet Ink and Interim Funding Documents, each
Notice of Borrowing, and each Collateral Submission Summary.
'Required Documents' means (i) with respect to Wet Funding Transactions, the
documents listed in Section 4 of the Custody Agreement and (ii) with respect to
Interim Transactions, the documents listed in Section 3 of the Custody
Agreement.
'Servicer Letters' means as defined in Section 4.4 (b) hereof.
'Subsidiaries' means all material operating subsidiaries of Customer.
'Wet Ink and Interim Funding Documents' means the Facility, this Pledge
Agreement, the Promissory Note, and the Custody Agreement.
'Wet Ink Required Documents' means as defined in the Custody Agreement.
2. SECURITY INTEREST.
2.1 Grant of Security Interest to Lehman. In consideration of the making of the
Advances and other good and valuable consideration, the receipt of which is
hereby acknowledged, Customer does hereby mortgage, hypothecate, pledge, grant
and assign to Lehman, as security for the payment of the Obligations, a first
priority security interest in and lien on all of Customer's right, title and
interest in, under and to the following properties, estates, rights and
privileges, whether existing or hereafter acquired (collectively the
'Collateral'):
(a) All Mortgage Loans described in a Collateral Submission Summary and
included in the Borrowing Base (provided that all Mortgage Loans contained in
each Collateral Submission Summary shall be included in the Borrowing Base
unless released by the Custodian upon Lehman's instruction pursuant Section 2.2.
hereof), and all related items constituting the complete file for each such
Mortgage Loan (such as escrow payments, mortgage notes, mortgages, applications,
appraisals, etc.); but even if all or part of the file is not delivered to
Custodian but is held by Customer or its designee, Lehman shall nevertheless
have a security interest in all such Mortgage Loans and related materials;
4
<PAGE>
(b) All FHA/VA Commitments and Purchase Commitments, to the extent
applicable, related to the Mortgage Loans which are described in subsection (a)
above, but even if all or part of the documents relating thereto are not
delivered to Custodian but are held by Customer or its designee Lehman shall
nevertheless have a security interest therein and in all related materials;
(c) All securities or cash on deposit with, or received by, Lehman or
Custodian for the account of Customer in connection with this transaction or in
respect of such Mortgage Loans or representing proceeds of Collateral;
(d) Any and all insurance and guarantees relating to such Mortgage
Loans, whether or not delivered to Custodian;
(e) any interest rate 'hedging' agreement entered into by Customer
which is related to the Mortgage Loans subject to the Facility;
(f) All proceeds of any of the foregoing.
2.2 Release of Collateral. To the extent that on any date the Collateral Value
of the Collateral in the Borrowing Base (after giving effect to any proposed
release pursuant to this section) equals or exceeds the aggregate dollar amount
of outstanding Advances, and so long as no Default or Event of Default has
occurred and is continuing, but subject to the rights of any holder of a lien on
the items of Collateral of which Lehman has notice, Lehman shall, upon the
request of Customer, direct Custodian to release any such excess amount of
Collateral. Any other requests for release of Required Documents and/or
Collateral shall be made pursuant to the Custody Agreement, subject to the
provisions of this Section 2.2.
3. REPRESENTATIONS AND WARRANTIES.
Customer as of the date hereof and as of each Advance Date hereby represents and
warrants to Lehman, as follows;
3.1 Ownership of Collateral; No encumbrance.
(a) Customer is the sole legal and equitable owner and holder of the
Collateral, free and clear of all liens, pledges, participation interests,
security interests or other encumbrances whatsoever, except (i) the security
interest granted hereunder, (ii) if payment hereunder will satisfy any existing
lien or encumbrance of the Collateral, and (iii) the ownership interest of the
owner thereof, where Customer is financing the origination or acquisition of
such Collateral by another person or entity (provided that Customer's security
interest will have been validly assigned and pledged to Lehman). All Agency
Securities,
5
<PAGE>
FHA/VA Commitments and Purchase Commitments have been or will be duly authorized
and validly issued and all Mortgage Loans which are part of the Collateral are
duly and validly made by, conveyed to or pledged to Customer. All of the items
of Collateral (A) comply with all of the requirements of this Pledge Agreement,
and (B) have been duly and validly pledged, or Customer's security interest
therein duly and validly assigned, to Lehman.
(b) At any time any Advance is made or shall be outstanding, the
Collateral Value of the Mortgage Loans in the Borrowing Base shall equal or
exceed the aggregate dollar amount of any such outstanding Advances.
3.2 Authority to Pledge Collateral. Customer has, and will continue to have, the
full right, power and authority to grant to Lehman a first priority security
interest in the Collateral or an assignment to Lehman of Customer's first
priority security interest in the Collateral.
3.3 Delivery of Documents. Customer has furnished to Custodian all Required
Documents, and will promptly furnish all Wet Ink Documents, under the terms and
conditions set forth in the Custody Agreement.
3.4 Lack of Other Agreements. Since its origination, purchase or financing by
Customer, there has been no assumption, material modification, consolidation or
extension agreement relating to each Mortgage Loan that will materially
adversely affect the Collateral Value of such Mortgage Loan, or any intervening
assignment of the related Mortgage.
3.5 Conformity; Eligibility. All Mortgage Loans, and Required Documents
applicable thereto, are in material conformity with the underwriting
requirements of the relevant Nonagency Purchaser.
3.6 Mortgage Loans.
(a) Each Agency Mortgage Loan meets all of the following requirements
as of the date delivered to Custodian and, except for (viii) below, continuously
while it is part of the Collateral:
(i) It is a bona fide Mortgage Loan of the type it purports to
be, made to one or more borrowers each having substantially the credit standing
he or she is represented to have;
(ii) it has been fully advanced in the face amount thereof;
(iii) It is and will be secured by a valid and enforceable
'first lien' or 'second lien' (as customarily referred to in the industry),
which lien upon
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an existing residential real property of the type represented to secure the
loan, having substantially the value represented in the appraisal;
(iv) The documents related thereto have been duly executed and
delivered by the parties thereto;
(v) It has been made in compliance with all applicable laws,
regulations, rules, directives and orders of all governmental authorities,
including all requirements of the Real Estate Settlement Procedures Act and the
federal Truth-In-Lending Act;
(vi) The promissory note, mortgage or deed of trust and all
other documents related to the Mortgage Loan are (and will be) valid and
enforceable in accordance with their terms, without defense, material offset, or
right of rescission, and, unless otherwise disclosed to Lehman, they have not
been (and will not be) materially modified or amended nor any material
requirements thereof waived;
(vii) Any private mortgage insurance with respect to such loan
is by a company of recognized standing acceptable to one of the four nationally
recognized rating agencies rated at least 'AA' at the time such loan was
originated; and
(viii) No default, nor, to the best of knowledge of the
Customer, any event which with notice or lapse of time or both would become a
default, has occurred and is continuing under any such Mortgage Loan.
(b) All Nonagency Mortgage Loans meet all of the above requirements and
the requirements set forth on Appendix A hereto and as of the date delivered to
Custodian and continuously while such Mortgage Loans are a part of the
Collateral.
(c) Each Mortgage Loan that is secured by a second lien mortgage
('Second Lien Mortgage Loans') shall also comply with the additional
representations and warranties set forth in Appendix B hereto.
(d) Each Mortgage Loan that is secured by shares of cooperative
property ('Co-Op Loans') shall also comply with the additional representations
and warranties as set forth in Apendix C hereto.
(e) Neither second lien Mortgage Loans nor Co-Op Loans, individually,
constitute more than * % of the Maximum Credit * .
3.7 Compliance with FHA/VA Requirements. Every Mortgage Loan which is designated
by Customer as being insured by the FHA or partially guaranteed by
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the VA has complied (and will comply) with all laws, rules and regulations with
respect to such insurance or guaranty, and such insurance or guaranty is (or
will be) in full force and effect.
3.8 Insurance Policies in Effect. Every fire and casualty insurance policy
covering each of the premises encumbered by a Mortgage Loan which is part of the
Collateral:
(a) Affords (and will afford) sufficient insurance against fire and
such other risks as are usually insured against in the broad form of extended
coverage insurance from time to time available, as well as insurance against
flood hazards if the same is required by (i) the FHA, the VA or the relevant
Agency or (ii) the relevant Nonagency Purchaser or rating agency;
(b) Is a standard policy of insurance for the locale where the premises
are located; is in full force and effect; and the amount of the insurance is in
the amount of the full insurable value of the premises on a replacement cost
basis or the unpaid balance of the Mortgage Loan, whichever is less;
(c) Names (and will name) the present owner of the premises as the
insured; and
(d) Contains a standard mortgagee loss payable clause in favor of the
servicer of the loan.
4. COVENANTS OF CUSTOMER.
4.1 Defense of Title. Customer warrants and will defend the right, title and
interest of Lehman in and to all Collateral against all adverse claims and
demands.
4.2 No Amendment or Compromise. Without Lehman's consent in advance, Customer
and those acting on behalf of Customer shall not materially amend or modify, or
waive any material term or condition of, or materially settle or compromise any
claim in respect of, any item of Collateral.
4.3 No Assignment. Customer shall not sell, assign, transfer or otherwise
dispose of, or grant any option with respect to, or pledge or otherwise encumber
(except pursuant to this Pledge Agreement), any of the Collateral included in
the Borrowing Base or any interest therein, but this shall not prevent transfers
of Collateral in accordance with this Pledge Agreement and the Custody
Agreement.
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4.4 Servicing of Mortgage Loans.
(a) Customer shall service or cause to be serviced all Mortgage Loans
which are part of the Collateral in accordance with standard industry practices,
employing at least the same procedures and exercising the same care that it
customarily employs in servicing Mortgage Loans for its own account, and in
accordance with all applicable requirements of the relevant Agency that covers
any of such Mortgage Loans. Customer shall hold or cause to be held all escrow
funds collected with respect to such Mortgage Loans in trust accounts and shall
apply or cause to be applied the same for the purposes for which such funds were
collected.
(b) Upon Lehman's request, and after an Event of Default has occurred
and is continuing, Customer shall provide to Lehman a letter addressed to each
servicer and subservicer of Mortgage Loans (the 'Servicer Letters') on
Customer's letterhead in form and substance reasonably satisfactory to Lehman
advising each such servicer and subservicer of Lehman's security interest in the
Collateral and such other matters as Lehman may reasonably request.
(c) If Customer should discover that, for any reason whatsoever, it or
any entity responsible to it by contract for managing or servicing or
subservicing any such Mortgage Loan has materially defaulted on Customer's
obligations under the Relevant Agreements or any of the payment obligations of
such entities with respect to the Collateral, Customer shall promptly so notify
Lehman.
4.5 Preservation of Collateral. Customer shall do all things necessary to
preserve the Collateral so that it remains effective security hereunder. Without
limiting the foregoing, Customer will, in its dealings with the Collateral,
comply in all material respects with all laws, regulations and rules. Customer
will not allow any material default for which it is responsible to occur under
any Collateral, and Customer shall fully perform or cause to be performed when
due all of its obligations under any Collateral in all material respects.
4.6 Maintenance of Papers, Records and Files.
(a) Customer shall cause its servicer to build, maintain and have
available a complete file in accordance with industry custom and practice for
each Mortgage Loan which is part of the Collateral. Customer shall provide
Lehman with such computer tape or other records containing relevant information
on the Mortgage Loans as Lehman shall reasonably request. Customer or such
servicer will maintain all such papers, records and files not in the possession
of Custodian in good and complete condition in accordance with industry
practices and preserve them against loss.
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(b) Customer shall cause its servicer to collect and maintain or cause
to be collected and maintained all papers, records and files relating to the
Collateral in accordance with industry custom and practice, including those
maintained pursuant to subparagraph (a) above, and all such materials shall be
in Custodian's, Customer's or such servicer's possession unless Lehman otherwise
approves. Customer will not allow any such papers, records or files which are an
original or an only copy to leave its, its servicer's or Custodian's possession,
except (i) for individual items removed in connection with servicing a specific
Mortgage Loan, in which event Customer will obtain or cause to be obtained a
receipt from a financially responsible person for any such paper, record or file
or (ii) in the case of delivery of the related Mortgage Loan to an investor or
its custodian and receipt of a bailee letter in a form acceptable to Lehman.
(c) For so long as Lehman has a security interest in any Collateral,
Customer will hold or cause to be held any paper, record or file related to the
Collateral in trust for Lehman.
(d) Upon reasonable advance notice from Custodian or Lehman, and during
regular business hours, Customer shall (or shall cause its servicer to) make any
or all such papers, records or files available to Custodian or Lehman to examine
any such papers, records and files, either by its own officers or employees, or
by agents or contractors, or both, and, at Lehman's expense if no Event of
Default has occurred, make copies of all or any portion thereof.
4.7 Preservation and Perfection of Security Interest. Customer shall execute and
deliver such further instruments and shall do and perform all matters and things
reasonably necessary or reasonably expedient to be done or observed for the
purpose of effectively perfecting, maintaining and preserving the security
interests and benefits intended to be afforded by this Pledge Agreement. This
shall include, upon reasonable request of Lehman, the delivery of documents to
Custodian, or additional filings and recordations with governmental agencies.
4.8 Stamp. Upon the occurrence and during the continuance of an Event of
Default, Customer shall, upon request of Lehman, (i) stamp on its records
concerning the Collateral or a portion thereof a notation, in form satisfactory
to Lehman, of the security interest of Lehman hereunder and (ii) shall cause all
applicable computer tape and records relating to the Mortgage Loans to reflect
the security interest of Lehman hereunder.
4.9 Additional Rights of Lehman. Upon the occurrence and during the continuance
of an Event of Default, Lehman, at its option, shall have the right to do, or
request Custodian to do, any or all of the following, and upon a request
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therefore by Lehman, Customer agrees to cooperate with Lehman and Custodian, as
the case may be, to accomplish the request:
(a) Lehman or, at its direction, Lehman's designee may take possession
of all original papers, records and files relating to the Collateral. In
Custodian's discretion, Custodian may move such records and files to a location
acceptable to an under the control of Custodian.
(b) Customer will instruct all persons servicing the Mortgage Loans
which are part of the Collateral to take instructions from, make all reports to,
and make all remittances to, Custodian for the account of Customer. If Lehman so
desires, Customer will use its best efforts to obtain consent to change the
servicer for any such Mortgage Loans to a company acceptable to Lehman.
(c) Customer shall cause all sums received by Customer with respect to
the Collateral to be deposited with Custodian.
4.10 Lehman Appointed Attorney-in Fact. Upon the occurrence and during the
continuance of an Event of Default, Lehman is hereby appointed the
attorney-in-fact of Customer for the purpose of carrying out the provisions
hereof and taking any action and executing any instruments which Lehman may deem
necessary or advisable to accomplish the purposes hereof, which appointment is
irrevocable and coupled with an interest. Without limiting the generality of the
foregoing, Lehman shall have the right and power to receive, endorse and collect
all checks made payable to the order of Customer representing any payment on
account of the Collateral and to give full discharge for the same.
4.11 Additional Information. Customer shall provide Lehman with such other
information relating to the Mortgage Loans as Lehman may reasonably request from
time to time.
5. DEFAULT - RIGHTS AND REMEDIES.
5.1 Events of Default; Remedies
(a) Should any Event of Default occur and be continuing, Lehman, at its
option, in addition to its rights and remedies under the Promissory Note, shall
have any or all of the following rights and remedies, which may be exercised by
Lehman or by Custodian in accordance with the instructions of Lehman:
(i) Lehman may cause the disposition of all or any portion of
the Collateral to be conducted following the occurrence and during the
continuance of an Event of Default, and upon the expiration of any period of
delay or notice required by law. Should Lehman decide to conduct more than one
such sale or disposition, Lehman may at its option cause the same to be
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conducted simultaneously or successively on the same day or upon such different
days or at such different times and in such order as Lehman may reasonably deem
to be in its best interests. Customer waives, to the fullest extent permitted by
law, any prejudice resulting to it from such multiple dispositions provided that
Lehman shall act in a commercially reasonable manner.
(ii) Lehman shall have the right to sell the Collateral in one
or more lots, at one or more times, at such place or places, at public or
private sales and with or without notice of any kind, as Lehman may reasonably
elect, at such prices and on such terms, as to cash or credit, as Lehman may
reasonably deem proper, provided that notwithstanding any provision of this
Pledge Agreement to the contrary, five (5) Business Days notice of all sales of
all or any portion of the Collateral shall be given to Customer. Lehman shall
have the right to become a purchaser at any such sale which is open to the
public and to apply all unpaid Obligations toward the purchase price of all or
any portion of the Collateral sold to Lehman. If notice is given of public sale,
it is agreed that notice shall be satisfactorily given if such notice is
published at least once in The Wall Street Journal not less than five (5)
Business Days prior to such sale. The foregoing notice provisions shall not
preclude Lehman's rights to foreclose upon the Collateral in any other manner
permitted under the Uniform Commercial Code; however, a sale of the Collateral
in accordance with such notice requirements shall be deemed a disposal of the
Collateral in a commercially reasonable manner. Lehman shall have the right to
sell the Collateral, or to foreclose, sue upon, or otherwise seek to enforce the
same in its own name or in the name of either Custodian or Customer. Subject to
the foregoing provisions of this paragraph, after an Event of Default shall
occur and be continuing, Lehman shall have the right to renew, extend the time
of payment of, or otherwise modify, amend, supplement, settle or compromise, in
any commercially reasonable manner, any obligations for the payment of money
included in the Collateral, any security therefor and any other agreements,
instruments, claims or causes of action of any kind, which may be included in
the Collateral. In view of the nature of the Collateral, the parties agree that
liquidation of the Collateral does not require a public sale and that one or
more good faith private sales at fair market value, including such private sales
at which Lehman shall have the right to become a purchaser, is a commercially
reasonable disposition of the Collateral.
(iii) Lehman, or upon its direction Custodian, may take
possession of all or any portion of the Collateral that is not already in its or
Custodian's possession, and Customer agrees to assemble and make available the
Collateral to Lehman at a convenient location. Lehman (acting through Custodian
if it so desires) may manage and protect the Collateral, do any reasonable acts
which Lehman deems proper to protect the Collateral as security hereunder, and
sue upon any contract or claim relating to the Collateral
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and receive any payments due thereon or any damages thereunder, and apply all
sums received to the payment of the Obligations in the order specified in
Section 5.3 below. Any such actions of Lehman (or Custodian) shall not, absent
written ratification by Lehman, be deemed to impose upon Lehman or Custodian any
of Customer's obligations under any contracts.
(iv) Lehman may direct the servicers and subservicers to take
such action with respect to the Collateral as Lehman, in its reasonable
judgment, determines is appropriate.
(b) Should any Event of Default occur and be continuing, Lehman shall
be entitled to the appointment of a receiver by any court having jurisdiction,
without notice, to take possession of and protect, collect, manage, liquidate,
and sell the Collateral or any portion thereof, and do anything that Lehman or
Custodian are authorized hereunder to do, consistent with the provisions of
subparagraph (a) above. Customer shall pay all reasonable costs and expenses
incurred by Lehman in connection with the appointment and activities of such
receiver.
(c) Should any Event of Default occur and be continuing, Lehman may
enforce its rights and remedies hereunder without prior judicial process or
hearing, and Customer hereby expressly waives, to the extent permitted by law,
any right Customer might otherwise have to require Lehman to enforce its rights
by judicial process. Customer also waives, to the extent permitted by law, any
defense Customer might otherwise have to the Obligations arising from use of
non-judicial process, enforcement and sale of all or any portion of the
Collateral or from any other election of remedies. Customer recognizes that
non-judicial remedies are consistent with the usages of the trade, are
responsive to commercial necessity and are the result of a bargain at arm's
length.
(d) Should any Event of Default occur and be continuing, Customer shall
take such action as Lehman may request, subject to applicable legal and
contractual obligations, to terminate existing servicing and subservicing
agreements and to transfer such servicing to a servicer designated by Lehman,
and in connection therewith, Customer shall comply with all applicable
requirements of law and contractual obligations relating to the transfer of
servicing.
(e) Notwithstanding the foregoing, upon the occurrence of any Event of
Default described in paragraphs 6 (e) and 6 (f) of the Promissory Note, Lehman
shall have the right to exercise any of its rights and/or remedies without
presentment, demand, protest or further notice of any kind, all of which are
hereby expressly waived by the Customer.
5.2 Delay not Waiver; Remedies are Cumulative.
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(a) No failure on the part of Lehman or Custodian to exercise, and no
delay in exercising, any right, power or remedy hereunder shall operate as a
waiver thereof; nor shall any single or partial exercise by Lehman or Custodian
of any right, power or remedy hereunder preclude any other or further exercise
thereof or the exercise of any other right, power or remedy.
(b) All remedies of Lehman or Custodian provided for herein are
cumulative and in addition to any and all other rights and remedies provided by
law and the other Relevant Agreements. Lehman may exercise at any time after the
occurrence and continuance of an Event of Default one or more remedies, as it so
desires, and may thereafter at any time and from time to time exercise any other
remedy or remedies.
5.3 Application of Proceeds. The proceeds of any sale or disposition of all or
any part of the Collateral pursuant to this Article shall be applied as follows:
(a) First, to the payment of the reasonable costs and expenses of such
sale or disposition, or any other enforcement action pursuant hereto, including
reasonable attorney's fees, and all other reasonable expenses incurred in
connection therewith, with a reasonable reserve for any liabilities incurred in
connection therewith and full repayment with interest of all advances made or
incurred by Lehman in connection therewith;
(b) Second, to the payment in full of (i) the outstanding principal of
the Promissory Note, (ii) accrued interest thereon, and (iii) all other
Obligations; and
(c) Finally, to the payment to the person or persons entitled thereto,
or as a court of competent jurisdiction directs.
If the proceeds of any such sale conducted in accordance with
this section are insufficient to cover the costs and expenses of such sale, as
aforesaid, and the payment in full of the Promissory Note and all other
Obligations, Customer shall remain liable for any deficiency.
5.4 Reimbursement. All reasonable sums expended by Lehman or Custodian in
connection with the exercise of any remedy provided for herein shall be and
remain the obligation of Customer. At the option of Lehman and upon notice to
Customer, all such sums may be paid from the Collateral (if an Event of Default
has occurred and is continuing), or may be advanced by Lehman or Custodian, in
which event they shall be deemed to have been advanced to Customer and shall be
reimbursed by Customer to the party advancing such amount, with interest at the
Default Rate if reimbursement is not made within five (5) Business Days of
demand. After the occurrence and during the continuance of an Event of Default,
Customer waives, and shall not have, any right to restrict or control
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the reasonable expenditures by Lehman or custodian from any cash which
constitutes Collateral.
5.5 Indemnity.
(a) The powers conferred on Lehman or Custodian hereunder are solely
for their protection, and do not impose any duty on them to exercise any such
powers. Customer agrees to indemnify and hold harmless Lehman and Custodian, and
any contractors hired and selected by them in good faith, and their respective
officers, agents, attorneys and employees, from each and every obligation,
liability, loss, cost, expense death, injury, or damage resulting from, or
arising out of any act or omission by Customer related to its obligations under
the Relevant Agreements, and all actions taken pursuant thereto (including,
without limitation, any such obligation, liability, loss, cost, expense, death,
injury or damage resulting from any action taken by Lehman or Custodian in
compliance with Section 5 hereof, other than those caused by the gross
negligence or willful misconduct of Lehman or Custodian).
(b) Without limiting the application of Section 5.5 (a), Customer
agrees to pay, or reimburse Lehman and Custodian for all reasonable fees and
taxes in connection with the recording or filing of instruments and documents in
public offices, payment or discharge of any taxes or liens upon or in respect of
the Collateral and all other reasonable fees, costs and expenses in connection
with protecting, maintaining or preserving the Collateral and Lehman's interest
therein, whether through judicial proceedings or otherwise, or in defending or
prosecuting any actions, suits or proceedings for which Customer would be liable
in accordance with Subparagraph 5.5 (a) above.
5.6 Survival. The indemnity obligations of Customer contained in this Pledge
Agreement shall continue in full force and effect notwithstanding the full
payment of the Promissory Note and all of the other Obligations and
notwithstanding the discharge thereof.
5.7 Waiver of Redemption and Deficiency Rights. Customer hereby expressly
waives, to the fullest extent permitted by law, right of redemption, any
moratorium or redemption period, any reduction in the proceeds of any Collateral
as a result of restrictions upon Lehman or Custodian contained in the Relevant
Agreements and any right which it may have to direct the order in which any of
the Collateral shall be disposed of in the event of any disposition pursuant
hereto.
6. MISCELLANEOUS.
6.1 Notices. All written communications hereunder shall be mailed, telecopied or
delivered at the respective address as listed in the Custody
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Agreement or at such other address as shall be designated by a party in a
written notice to the other parties. All such notices and communications shall
be effective when delivered to the party to which such notice is to be given.
6.2 Entire Agreement. This Pledge Agreement supersedes and integrates all
negotiations, contracts, agreements and understandings between the parties
relating thereto, and it, together with the other Relevant Agreements, contains
the entire final agreement of the parties. No prior negotiation, agreement,
understanding or prior contract shall have any validity hereafter.
6.3 Amendments, Etc. No amendment or waiver of any provision of this Pledge
Agreement nor consent to any departure herefrom shall in any event be effective
unless the same shall be in writing and signed by all the parties hereto, and
then such amendment, waiver or consent shall be effective only in the specific
instance and for the specific purpose for which given.
6.4 Severability. If any provision of this Pledge Agreement is declared invalid
by any court of competent jurisdiction, such invalidity shall not affect any
other provision, and this Pledge Agreement shall be enforced to the fullest
extent permitted by law.
6.5 Binding Effect; Governing Law. This Pledge Agreement shall be binding and
inure to the benefit of the parties hereto; provided, however, that neither
party may assign this Pledge Agreement or any of Customer's rights or
obligations hereunder except with the prior written consent of the other party,
provided, however, that Lehman shall be able to sell participation interests in
Advances made pursuant to the Relevant Agreements. This Agreement shall be
construed in accordance with, and governed by, the law of the State of New York,
without giving effect to the conflict of laws principles thereof.
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IN WITNESS WHEREOF, this Pledge Agreement has been executed by the parties
hereto as of the date first above written.
LEHMAN COMMERCIAL PAPER INC.
By:______________________________
Title:___________________________
CWM MORTGAGE HOLDINGS, INC.
By:______________________________
Title:___________________________
INDEPENDENT NATIONAL MORTGAGE CORPORATION
By:______________________________
Title:___________________________
INDEPENDENT LENDING CORPORATION
By:______________________________
Title:___________________________
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APPENDIX A
REPRESENTATIONS AND WARRANTIES REGARDING NONAGENCY MORTGAGE LOANS
(a) Mortgage Loans as Described. The information set forth in the
Collateral Submission Summary and related mortgage loan schedule (the 'Mortgage
Loan Schedule') is true and correct;
(b) Payments Current; No Default. All payments required to be made
under the terms of the mortgage note have been made and credited. No payment
required under the Mortgage Loan has been delinquent for more than thirty days
at any time since the date the Mortgage Loan was originated. There is no
material default, breach, violation or event of acceleration existing under the
mortgage or the mortgage note and no event which, with the passage of time or
with notice and the expiration of any grace or cure period, would constitute a
material default, breach, violation or event of acceleration, and neither
Customer nor its predecessors, to the best of Customer's knowledge, have waived
any material default, breach, violation or event of acceleration;
(c) No Outstanding Charges. There are no material defaults in complying
with the terms of the mortgage, and all material taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing have been paid,
or an escrow of funds has been established in an amount sufficient to pay for
every such item which remains unpaid and which has been assessed but is not yet
due and payable. Customer has not advanced funds, or induced, solicited or
knowingly received any advance of funds by a party other than the mortgagor,
directly or indirectly, for the payment of any amount required under the
Mortgage Loan, except for interest accruing from the date of the mortgage note
or date of disbursement of the Mortgage Loan proceeds, whichever is greater, to
the day which precedes by one month the due date of the first installment of
principal and interest;
(d) Original Terms Unmodified. The terms of the mortgage note and
mortgage have not been impaired, waived, altered or modified in any material
respect, except by a written instrument which has been recorded, if necessary to
protect the interests of Lehman and which has been delivered to Lehman or its
designee (including the Custodian). Except where otherwise provided by law, the
substance of any such material waiver, alteration, or modification has been
approved by the title insurer, to the extent required by the policy, and its
terms are reflected on the Mortgage Loan;
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(e) No Defenses. The Mortgage Loan is not subject to any material right
of rescission, setoff, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the mortgage
note or the mortgage, or the exercise of any right thereunder, render either the
mortgage note or the mortgage unenforceable, in whole or in material part, or
subject to any material right of rescission, setoff, counterclaim or defense,
including without limitation the defense of usury, and no such material right of
rescission, setoff, counterclaim or defense has been asserted with respect
thereto;
(f) Insurance Policies in Effect. The fire and casualty insurance
policy covering the mortgaged property (i) affords (and will afford) sufficient
insurance against fire and such other risks as are usually insured against in
the broad form of extended coverage insurance from time to time available, as
well as insurance against flood hazards if the mortgaged property is an area
identified by the Federal Emergency Management Agency as having special flood
hazards; (ii) is a standard policy of insurance for the locale where the
mortgaged property is located, is in full force and effect, and the amount of
the insurance is in the amount of the full insurable value of the mortgaged
property on a replacement cost basis or the unpaid balance of the Mortgage
Loans, whichever is less; (iii) names (and will name) the present owner of the
mortgaged property as the insured; and (iv) contains a standard mortgagee loss
payable clause in favor of Customer or its servicer (or, in the case of any
Cooperative Loan, in favor of the applicable cooperative housing corporation);
(g) Compliance with Applicable Laws. Any and all requirements of any
federal, state or local law including, without limitation, usury,
truth-in-lending, real estate settlement procedures, consumer credit protection,
equal credit opportunity or disclosure laws applicable to the Mortgage Loan have
been complied with in all material respects, and Customer or its servicer shall
maintain or cause to be maintained, available for Lehman's inspections, and
shall deliver to Lehman upon demand, evidence of compliance with all such
material requirements;
(h) No Satisfaction of Mortgage. The mortgage has not been satisfied,
canceled, subordinated or rescinded, in whole or in part, and the mortgaged
property has not been released from the lien of the mortgage, in whole or in
part, nor has any cancellation, subordination or rescission occurred;
(i) Use of Mortgaged Property. No portion of the mortgaged property is
used for commercial purposes:
(j) Valid First or Second Lien. Except in the case of a Cooperative
Loan, the mortgage is a valid, subsisting and enforceable first or second lien
on
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the mortgaged property, including all buildings on the mortgaged property and
all installations and mechanical, electrical, plumbing, heating and air
conditioning systems located in or annexed to such buildings, except where an
additional 'fixture filing' is required to perfect a security interest in such
assets and such filing has not been performed, and all additions, alterations
and replacements made at any time with respect to the foregoing. The lien of the
mortgage is subject only to:
(i) the lien of current real property taxes and assessments
not yet due and payable;
(ii) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date of recording
acceptable to mortgage lending institutions generally and specifically referred
to in the lender's title insurance policy delivered to the originator of the
Mortgage Loan and (A) referred to or otherwise considered in the appraisal made
for the originator of the Mortgage Loan or (B) which do not materially adversely
affect the appraised value of the mortgaged property set forth in such
appraisal;
(iii) other matters to which like properties are commonly
subject which do not materially interfere with the benefits of the security
intended to be provided by the mortgage or the use, enjoyment, value or
marketability of the related mortgaged property; and
(iv) in the case of a second lien mortgage, a valid first lien
mortgage.
Any security agreement, chattel mortgage or equivalent document related to and
delivered in connection with the Mortgage Loan establishes and creates a valid,
subsisting and enforceable first or second lien and first or second priority
security interest on the property described therein and Customer has full right
to pledge and assign the same to Lehman or its designee (including the
Custodian). In the case of a Cooperative Loan, there is a first or second
priority security interest in the stock allocated to the related cooperative
unit and proprietary lease appurtenant thereto
(k) Validity of Mortgage Documents,. The mortgage note and the mortgage
are genuine, and each is the legal, valid and binding obligation of the maker
thereof enforceable in accordance with its terms. All parties to the mortgage
note and the mortgage had legal capacity to enter into the Mortgage Loan and to
execute and deliver the mortgage note and the mortgage, and the mortgage note
and the mortgage have been duly and properly executed by such parties;
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(l) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan
have been fully disbursed and there is no requirement for future advances
thereunder, and any and all requirements as to completion of any on-site or
off-site improvement and as to disbursements of any escrow funds therefor have
been or will be complied with in all material respects. All costs, fees and
expenses incurred in making or closing the Mortgage Loan and recording of the
mortgage were paid, and the mortgagor is not entitled to any refund of any
material amounts paid or due under the mortgage note or mortgage;
(m) Doing Business. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (i) in
material compliance with any and all applicable licensing requirements of the
laws of the state wherein the mortgaged property is located, and (ii) organized
under the laws of such state, or (iii) qualified to do business in such state,
or (iv) federal savings and loan associations or national banks having principal
offices in such state, or (v) not doing business in such state;
(n) LTV. PMI Policy. Except for Mortgage Loans that are self-insured,
each Mortgage Loan which has a LTV of more than 80% is and will be insured as to
payment defaults by a policy of primary mortgage guaranty insurance issued by a
generally accepted insurance carrier (a 'PMI Policy'). If applicable, all
provisions of such PMI Policy have been or are being complied with, such policy
is in full force and effect, and all premiums due thereunder have been paid. Any
Mortgage Loan subject to a PMI Policy obligates the mortgagor thereunder to
maintain the PMI Policy and to pay all premiums and charges in connection
therewith. The mortgage interest rate for the Mortgage Loan as set forth on the
Mortgage Loan Schedule is net of any such insurance premium;
(o) Title Insurance. The Mortgage Loan is covered by either (i) an
attorney's opinion of title and abstract of title the form and substance of
which is acceptable to mortgage lending institutions making mortgage loans in
the area where the mortgaged property is located or (ii) an ALTA lender's title
insurance policy or other generally accepted form of policy of insurance, issued
by a title insurer and qualified to do business in the jurisdiction where the
mortgaged property is located, insuring Customer, its successors and assigns, as
to the first or second priority lien of the mortgage (as applicable) in the
amount of the original principal amount of the Mortgage Loan, subject only to
the exceptions contained in clauses (i), (ii) and (iii) of paragraph (j) above
and, with respect to adjustable rate Mortgage Loans, against any loss by reason
of the invalidity or unenforceability of the lien resulting from the provisions
of the mortgage providing for adjustment to the mortgage interest rate and
monthly payment. Customer or its servicer or borrower is the sole insured of
such lender's title insurance policy, and such lender's title insurance policy
is in full force and effect in all material respects and will be in force and
effect in all material
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respects upon the consummation of the transactions contemplated by this
Agreement. No material claims have been made under such lender's title insurance
policy, and no prior holder of the mortgage, including Customer, has done, by
act or omission, anything which would materially impair the coverage of such
lender's title insurance policy;
(p) No Mechanics' Liens. There are no mechanics' or similar liens or
claims in a material amount which have been filed for work, labor or material
(and no rights are outstanding that under the law could give rise to such liens)
affecting the mortgaged property which are or may be liens prior to or equal or
coordinate with, the lien of the Mortgage;
(q) Location of Improvements; No Encroachments. All improvements which
were considered in determining the appraised value of the mortgaged property lay
wholly within the boundaries and building restriction lines of the mortgaged
property and no improvements on adjoining properties materially encroach upon
the mortgaged property. No improvement located on or being part of the mortgaged
property is in material violation of any applicable zoning law or regulation;
(r) Origination; Payment Terms. The documents, instruments and
agreements submitted for loan underwriting were not falsified and contain no
materially untrue statement of material fact or omit to state a material fact
required to be stated therein or necessary to make the information and
statements therein not misleading. With respect to adjustable rate Mortgage
Loans, the mortgage interest rate is adjusted on each interest rate adjustment
date to equal the index plus the gross margin, rounded up or down to the nearest
1/8%, subject to the mortgage interest rate cap. With respect to fixed rate
Mortgage Loans, the mortgage note is payable each month in equal monthly
installments of principal and interest. With respect to adjustable rate Mortgage
Loans, installments of interest are subject to change due to the adjustments to
the mortgage interest rate on each interest rate adjustment date, with interest
calculated and payable in arrears, sufficient to amortize the Mortgage Loan
fully by the stated maturity date, over an original term of not more than thirty
years from commencement of amortization.
(s) Deeds of Trust. In the event the mortgage constitutes a deed of
trust, a trustee, duly qualified under applicable law to serve as such, has been
properly designated and currently so serves and is named in the mortgage, and no
material fees or expenses are or will become payable by Lehman to the trustee
under the deed of trust, except in connection with a trustee's sale after
default by the mortgagor;
(t) Acceptable Investment. Customer has no knowledge of any
circumstances or conditions with respect to the mortgage, the mortgaged
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property, the mortgagor or the mortgagor's credit standing that can reasonably
be expected to cause sophisticated private institutional investors to regard the
Mortgage Loan as an unacceptable investment, cause the Mortgage Loan to become
delinquent, or materially adversely affect the value or marketability of the
Mortgage Loan, except as may be caused by economic conditions;
(u) Due on Sale. With respect to any Mortgage Loan bearing a fixed rate
of interest, the Mortgage contains an enforceable provision for the acceleration
of the payment of the unpaid principal balance of the Mortgage Loan in the event
that the mortgaged property is sold or transferred without the prior written
consent of the mortgagee thereunder;
(v) No Contingent Interests. The Mortgage Loan does not have a shared
appreciation or other contingent interest feature;
(w) Consolidation of Future Advances. Any future advances made prior to
the date such Mortgage Loan was delivered to Custodian have been consolidated
with the outstanding principal amount secured by the mortgage, and the secured
principal amount, as consolidated, bears a single interest rate and single
repayment term. The lien of the mortgage securing the consolidated principal
amount is expressly insured as having first lien priority as reflected on a
title insurance policy or an endorsement to the policy insuring the mortgagee's
consolidated interest or by other title evidence acceptable to Lehman. The
consolidated principal amount does not exceed the amount specified on the
promissory note, as amended;
(x) Mortgaged Property Undamaged. To the best of Customer's knowledge,
there is no proceeding pending or threatened for the total or partial
condemnation of the mortgaged property, and the mortgaged property is undamaged
by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other
casualty so as to materially affect adversely the value of the mortgaged
property as security for the Mortgage Loan or the use for which the premises
were intended;
(y) Collection Practices; Escrow Deposits; Interest Rate Adjustments.
The origination and collection practices used with respect to the Mortgage Loan
have been in all respects in accordance with industry custom and practice, and
have been in all respects legal and proper. With respect to escrow deposits and
escrow payments, all such payments are in the possession of Customer or its
servicer and there exist no deficiencies in connection therewith for which
customary arrangements for repayment thereof have not been made. All escrow
payments have been collected in material compliance with state and federal law.
An escrow of funds is not prohibited by applicable law and has been established
in an amount sufficient to pay for every item that remains unpaid and has been
assessed but is not yet due and payable. No escrow deposits or escrow
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payments or other charges or payments due Customer or its servicer have been
capitalized under the Mortgage or the mortgage note. All mortgage interest rate
adjustments have been made in strict compliance with state and federal law and
the terms of the related mortgage note. Any interest required to be paid
pursuant to state and local law has been properly paid and credited; and
(z) Appraisal. The mortgage file contains an appraisal of the related
mortgaged property signed prior to the approval of the Mortgage Loan application
by a qualified appraiser who had no interest, direct or indirect in the
mortgaged property or in any loan made on the security thereof, and whose
compensation is not affected by the approval or disapproval of the Mortgage
Loan.
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APPENDIX B
SECOND MORTGAGE LOAN REPRESENTATIONS AND WARRANTIES
With respect to each Mortgage Loan secured by a second mortgage,
Customer represents and warrants:
a. Valid Second Lien. The Mortgage is a valid, subsisting and
enforceable second lien on the mortgaged property, including all buildings on
the mortgaged property and all installations and mechanical, electrical,
plumbing, heating and air conditioning systems located in or annexed to such
buildings, and all additions, alterations and replacements made at any time with
respect to the foregoing. The lien of the Mortgage is subject only to:
(1) the lien of the first mortgage on the mortgaged property;
(2) the lien of current real property taxes and assessments
not yet due and payable;
(3) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date of
recording acceptable to prudent mortgage lending institutions generally
and specifically referred to in the lender's title insurance policy
delivered to the originator of the Mortgage Loan and (a) referred to or
otherwise considered in the appraisal made for the originator of the
Mortgage Loan or (b) which do not materially adversely affect the
appraised value of the Mortgage Property set forth in such appraisal;
and
(4) other matters to which like properties are commonly
subject which do not materially interfere with the benefits of the
security intended to be provided by the mortgage or the use, enjoyment,
value or marketability of the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document related to and
delivered in connection with the Mortgage Loan establishes and creates a valid,
subsisting and enforceable second lien and second priority security interest on
the property described therein and the Seller has full right to sell and assign
the same, or the rights pledged to Seller therein, to Buyer. The Mortgaged
Property was not, as of the date of origination of the Mortgage Loan, subject to
a mortgage, deed of trust, deed to secure debt or other security instrument
creating a lien subordinate to the lien of the Mortgage;
b. Title Insurance. The Mortgage Loan is covered by either (i) an
attorney's opinion of title and abstract of title, the form and substance of
which is acceptable to prudent mortgage lending institutions making mortgage
loans in the area where the Mortgaged Property is located or (ii) an ALTA
lender's title
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insurance policy or other generally acceptable form of policy or
insurance acceptable to FNMA or FHLMC and each such title insurance policy is
issued by a title insurer acceptable to FNMA or FHLMC and qualified to do
business in the jurisdiction where the Mortgaged Property is located, insuring
the Customer, its successors and assigns, or its servicer, or the person which
has pledged said Mortgage Loan to Customer, as to the second priority lien of
the Mortgage in the original principal amount of the Mortgage Loan (or to the
extent a Mortgage Note provides for negative amortization, the maximum amount of
negative amortization in accordance with the Mortgage), subject only to the
exceptions otherwise contained herein, and in the case of an adjustable rate
Mortgage Loan, against any loss by reason of the invalidity or unenforceability
of the lien resulting from the provisions of the Mortgage providing for
adjustment to the Mortgage Note interest rate and the monthly payment therefor.
Where required by state law or regulation, the Mortgagor has been given the
opportunity to choose the carrier of the required mortgage title insurance. The
Customer, its successor and assigns, are the sole insureds of such lender's
title insurance policy, and such lender's title insurance policy is valid and
remains in full force and effect and will at all times be in force and effect.
No claims have been made under such lender's title insurance policy, and no
prior holder of the Mortgage, including the Customer, has done, by act or
omission, anything which would impair the coverage of such lender's title
insurance policy, including without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of any kind has been or will be
received, retains or realized by any attorney, firm or other Person or entity,
and no such unlawful items have been received, retained or realized by the
Customer;'
The lien of the Mortgage securing the consolidated principal amount is
expressly insured as having a second lien priority by a title insurance policy,
an endorsement to the policy insuring the mortgagee's consolidated interest or
by other title evidence acceptable to FNMA and FHLMC, and
(A) Each Mortgage Loan has a maximum amortization schedule and
original term of 30 years. No second Mortgage is a revolving home equity loan, a
home equity line of credit or a wrap around mortgage loan;
(B) To the best knowledge of Customer, the first lien mortgage
loan related thereto is in full force and effect, and there is no default,
breach, violation or event of acceleration existing under such first mortgage or
mortgage note, and no event which, with the passage of time or with notice and
the expiration of any grace or cure period, would constitute a default, breach,
violation or event of acceleration thereunder; and
(C) The first lien mortgage contains a provision which allows
the mortgagee under the second mortgage to cure any default under the first lien
mortgage or applicable state law otherwise provides such right.
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(D) Any future advances made prior to the date such Mortgage
Loan was delivered to Custodian have been consolidated with the outstanding
principal amount secured by the second mortgage and the secured principal
amount, as consolidated, has a single interest rate and single repayment term.
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APPENDIX C
REPRESENTATIONS AND WARRANTIES FOR COOPERATIVE LOANS
With respect to each Mortgage Loan secured by shares of
cooperative property ('Cooperative Loan') Customer represents and warrants:
a. the Cooperative Unit is secured by a valid, subsisting,
enforceable and perfected first lien on the corporation stock, shares or
membership certificate. The lien of the Pledge Agreement is subject only to the
Cooperative Corporation's lien against such corporation stock, shares or
membership certificate for unpaid assessments of the Cooperative Corporation to
the extent required by applicable law and allowed by FNMA under the FNMA Selling
Guide. Any security agreement, chattel mortgage or equivalent document related
to and delivered in connection with the Cooperative Loan establishes and creates
a valid, subsisting and enforceable first lien and priority security interest in
the Proprietary Lease of the property described therein and the Seller has full
right to sell and assign the same, or the pledge of the security interest
therein, to the Purchaser. The Cooperative Unit was not, as of the date of
origination of the Cooperative Loan, subject to a mortgage, deed of trust, deed
to secure debt or other security instrument creating a lien subordinate to the
lien of the Pledge Agreement;
b. the related Cooperative Project's documents conform with
the requirements of the program guidelines set forth in the 'Independent
National Mortgage Corporation Seller/Servicer Guide' (the 'Guide') and the
Cooperative Unit meets the Guide eligibility requirements and the
representations and warranties required by the Guide with respect to such
Cooperative Project have been made and remain true and correct in all respects;
c. The Seller has delivered to Lehman or its designee each of
the following documents (collectively, the 'Cooperative Loan Documents'): (i)
the Cooperative Loan Note, duly endorsed in accordance with the endorsement
requirements for Mortgage Notes set forth in this Agreement, (ii) the Pledge
Agreement, accompanied by an Assignment of Pledge Agreement, in recordable form,
(iii) the corporation stock, shares or membership certificate accompanied by a
stock power which authorizes the lender to transfer shares in the event of a
default under the Cooperative Loan Documents, (iv) the proprietary lease or
occupancy agreement, accompanied by an assignment in blank of such proprietary
lease, (v) a recognition agreement executed by the Cooperative Corporation,
which requires the Cooperative Corporation to recognize the rights of the lender
and its successors in interest and assigns, under the Cooperative Loan,
accompanied by an assignment of such recognition agreement in blank, (vi) UCC-1
financing statements with recording information thereon from the appropriate
state and county recording offices if necessary to perfect the security interest
of the Cooperative Loan under the Uniform Commercial Code in the state in which
the Cooperative Project is located, accompanied by UCC-3 financing statements
executed in blank for recordation of the change in the secured
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party thereunder and (vii) any guarantees, if applicable. The Cooperative Loan
Documents are assignable in blank to Lehman and its successors and assigns.
The following terms used in these representations and
warranties shall have the respective meanings assigned to them below:
Cooperative Corporation: The cooperative apartment corporation
that holds legal title to a Cooperative Project and grants occupancy rights to
units therein to stockholders through Proprietary Leases or similar
arrangements.
Cooperative Loan: A Mortgage Loan that is secured by a first
lien on and a perfected security interest in Cooperative Shares and the related
Proprietary Lease granting exclusive rights to occupy the related Cooperative
Unit in the building owned by the related Cooperative Corporation.
Cooperative Project: All real property owned by a Cooperative
Corporation including the land, separate dwelling units and all common elements.
Cooperative Shares: The shares of stock issued by a
Cooperative Corporation and allocated to a Cooperative Unit and represented b a
stock certificate.
Cooperative Unit: Means a specific unit in a Cooperative
Project.
Pledge Agreement: The specific security agreement or pledge
agreement creating a security interest on and pledge of the Cooperative Shares
and the appurtenant Proprietary Lease securing a Cooperative Loan.
Proprietary Lease: A lease on (or occupancy agreement with
respect to) a Cooperative Unit evidencing the possessory interest of the owner
of the Cooperative Shares or the Company in such Cooperative Unit.
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EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 28, 1994, except for note A, as to
which the date is January 28, 1995, accompanying the consolidated financial
statements and schedules of CWM Mortgage Holdings, Inc. (formerly Countrywide
Mortgage Investments, Inc.) and Subsidiaries and our report dated January 28,
1995 accompanying the financial statements of Independent National Mortgage
Corporation (formerly Countrywide Mortgage Conduit, Inc.), both appearing in the
Annual Report of CWM Mortgage Holdings, Inc. on Form 10-K for the year ended
December 31, 1993, as amended, which are incorporated by reference in this
Registration Statement. We consent to the incorporation by reference in the
Registration Statement of the aforementioned reports and to the use of our name
as it appears under the caption 'Experts.'
GRANT THORNTON LLP
Los Angeles, California
February 1, 1995
