<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 6, 1995
REGISTRATION NO. 33-56547
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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)
------------------------
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<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. [ ]
------------------------
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 JANUARY 6, 1995
PROSPECTUS
6,000,000 SHARES
[LOGO]
COMMON STOCK
- ----------------------------------------------------------
All of the shares of Common Stock offered hereby are being sold by CWM
Mortgage Holdings, Inc. (the 'Company').
The Common Stock of the Company is traded on the New York Stock Exchange
under the symbol 'CWM.' On January 5, 1995, the last reported sale price for the
Common Stock of the Company on the New York Stock Exchange was $8 7/8 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 the Company 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) COMPANY(2)
<S> <C> <C> <C>
Per Share................................. $ $ $
Total(3).................................. $ $ $
</TABLE>
(1) The Company 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 the Company estimated to be $425,000.
(3) The Company has granted the several Underwriters an option to purchase up to
an additional 900,000 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 Company 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 January , 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
THE COMPANY 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
The Company 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 the Company 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. The Company's
Common Stock is listed on the New York Stock Exchange and reports, proxy
statements and other information concerning the Company 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 the Company 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 the
Company 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 the Company with the
Commission pursuant to the Exchange Act, are hereby incorporated by reference,
except as superseded or modified herein:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 as amended by Form 10-K/A dated January 6, 1995;
_____
2. The Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994;
_____3. The Company's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, as amended by Form 10-Q/A dated November 17, 1994;
_____4. The Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1994, as amended by Form 10-Q/A dated January 6, 1995; and
_____5. The description of the Company's Common Stock contained in the
Company'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.
The Company 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. The Company'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.) (the 'Company'), 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.
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 $4.5 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
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
3
<PAGE>
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.
Unless the context otherwise requires, references to the 'Company' mean CWM
Mortgage Holdings, Inc. ('CWM') and each of the entities that is consolidated
with CWM for financial reporting purposes. The Company's mortgage conduit
operations are conducted through INMC, a taxable corporation that is
consolidated with CWM for financial reporting purposes, but that is not
consolidated for income tax purposes. 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................. 6,000,000 Shares
Shares to be Outstanding After the
Offering................................... 38,256,156 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. Neither the Company nor INMC will engage in any financial futures
transaction unless the Company, INMC 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 the Company to
distribute to its shareholders substantially all of its net earnings. As a
result, such provisions restrict the Company'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
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<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
The Company's Certificate of Incorporation and Bylaws prohibit concentrated
ownership of the Company 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 the Company's stockholders to receive
a control premium for their shares, since the Company's Certificate of
Incorporation prohibits ownership of more than 9.8% of the Company's outstanding
shares of Common Stock by any one person or group. Although the Company's
directors do not anticipate that the Company will repurchase or otherwise reduce
the number of outstanding shares of the Company's Common Stock (except in the
event of mandatory purchases of Excess Shares, as defined herein), investors
seeking to acquire substantial holdings in the Company 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 the Company's capital stock
is reduced.
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<PAGE>
The Company'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
the Company'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 the Company 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 the Company will continue to satisfy such requirements. If in any tax year
the Company should not qualify as a real estate investment trust, it would be
taxed as a corporation, and distributions to the Company's stockholders would
not be deductible by the Company in computing its taxable income. In that event,
the Company would not be eligible again to elect real estate investment trust
status until the fifth taxable year that begins after the year for which the
Company'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 the Company 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 the Company, to maintain the level of the Company's distributions
to its stockholders. See 'Certain Federal Income Tax Considerations.'
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 the Company, 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 the Company for the nine months ended September 30, 1994 are not
necessarily indicative of the operating results to be expected for the entire
year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------- ------------------------------------------------------------
1994 1993 1993 1992 1991 1990 1989
---------- ---------- ---------- -------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED EARNINGS STATEMENT DATA:
Interest income
Mortgage loans held for sale.... $ 45,509 $ 15,880 $ 29,072 $ -- $ -- $ -- $ --
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........ 2,385 674 674 37,378 41,771 38,889 47,734
Master servicing, net........... 4,415 244 (4,518) -- -- -- --
Other........................... 3,885 435 1,942 -- -- -- --
---------- ---------- ---------- -------- ---------- ---------- ----------
Total interest income...... 79,214 50,934 68,855 106,070 148,634 162,013 185,481
Interest expense
Reverse repurchase agreements
and other borrowings.......... 36,849 7,223 14,341 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..... 58,456 50,632 69,299 107,511 135,395 149,511 173,589
---------- ---------- ---------- -------- ---------- ---------- ----------
Net interest income (expense)........ 20,758 302 (444) (1,441) 13,239 12,502 11,892
Gain on sale of mortgage loans and
securities......................... 7,782 4,613 9,305 9,031 735 -- --
Gains on sale of servicing........... 5,834 -- -- -- -- -- --
Salaries, general, and administrative
expenses........................... (11,374) (2,182) (4,192) (1,606) (1,485) (1,538) (1,595)
Management fees to affiliate......... (702) (315) (400) (997) (1,622) (1,451) (1,652)
Provision for income taxes........... (3,237) (1,682) (1,789) -- -- -- --
---------- ---------- ---------- -------- ---------- ---------- ----------
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......... $ 599,845 $ 587,204 $ 872,490 $ -- $ -- $ -- $ --
Mortgage loans held for investment... 307,566 -- -- -- -- -- --
Total assets......................... 1,482,205 1,188,977 1,440,153 714,225 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......... 991,630 498,401 806,757 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.............. $4,493,605 $1,886,107 $3,451,119 -- -- -- --
Master servicing portfolio........... 6,275,445 952,180 2,094,152 -- -- -- --
</TABLE>
12
<PAGE>
THE COMPANY
The Company was incorporated in the State of Maryland on July 16, 1985 and
reincorporated in the State of Delaware on March 6, 1987. The Company has
elected to be taxed as a real estate investment trust under the Code. As a
result of this election, the Company will not, with certain limited exceptions,
be taxed at the corporate level on the net earnings distributed to the Company's
stockholders.
The principal executive offices of the Company are located at 35 North Lake
Avenue, Pasadena, California 91101-1857, and its telephone number is (800)
669-2300.
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, INMC 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. 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 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
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<PAGE>
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.
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.'
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<PAGE>
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 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
15
<PAGE>
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 $4.5 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.'
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)
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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 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
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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.
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
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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>
<CAPTION>
Outstanding principal balance........................................................... $6.3 billion
<S> <C>
Master servicing fees receivable........................................................ $146 million
Gross weighted average coupon........................................................... 7.279%
Weighted average maturity............................................................... 319 months
Weighted average master servicing fee................................................... 0.508%
Percentage of fixed-rate loans.......................................................... 77.15%
</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 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.
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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 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
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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, neither the Company nor INMC will engage in any
financial futures transaction unless the Company, INMC 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 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.'
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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 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.
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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 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.
23
<PAGE>
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 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.
24
<PAGE>
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 investment. See 'Risk Factors -- Changes in
Interest Rates' and ' -- Risks Relating to Retention of Mortgage-Backed
Securities and Issuance of CMOs.'
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
25
<PAGE>
credit are subject to the prior approval of a credit committee comprised of
senior officers and Directors of the Company. 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 the Company. 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 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. The Company 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 the Company. As of
September 30, 1994, the Company had no outstanding borrowings under this
agreement, and no drawings were made by the Company pursuant to this agreement
during the first nine months of 1994.
The Company 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. The Company 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, the Company signed a master
26
<PAGE>
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 the
Company. 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. The Company 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, the Company 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 the Company's 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 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 the Company, CAMC is
entitled to receive a base management fee of 1/8 of 1% per annum of the mortgage
conduit's average invested assets (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 the Company's warehouse lending
facilities. Incentive compensation will also be paid to CAMC if the Company'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 the Company'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 the Company
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 the Company, 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 the Company. 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
27
<PAGE>
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
The Company 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 the Company. In addition, a number of Directors and
officers of the Company 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 the Company owns all of the
preferred stock and a 99% economic interest in INMC.
With a view toward protecting the interests of the Company's stockholders,
the Certificate of Incorporation and the Bylaws of the Company 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, the Company 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, the Company 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, the Company's
assets included approximately $246 million of fixed-rate non-conforming mortgage
loans and Agency Securities (including cash held in
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<PAGE>
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 the Company'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, the Company sold substantially all of its Agency
ARMs to recognize the increased market values of these assets and to provide
capital for the Company's new operating plan. These sales helped to offset the
negative effects of lower interest rates and higher prepayment rates on the
performance of the Company's CMO portfolio. Regardless of the level of interest
rates or prepayments, the Company anticipates no significant earnings from this
CMO portfolio. Any continued negative performance of this CMO portfolio will
continue to adversely impact the earnings of the Company 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.'
29
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Common Stock offered
hereby are estimated to be $ ($ if the Underwriters' over-allotment
option is exercised in full). The Company 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, the Company 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 the Company, 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 the Company 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 the Company 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
</TABLE>
On January 5, 1995, the last reported sale price for the Common Stock was
$8 7/8 per share. As of November 18, 1994, the Company's 32,256,156 outstanding
shares of Common Stock were held by approximately 1,768 stockholders of record.
The Company 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, the Company 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 the Company at the discretion of the Board of
Directors. In determining the Company's dividend policy on an ongoing basis, the
Board of Directors will take into account, among other factors, results of
operations, the Company's cash flow requirements, the occurrence of any
extraordinary transactions during the quarter in question and the Company's
overall business plans and prospects.
In 1993, the Company declared dividends in excess of its taxable income.
1993 was a transition period during which the Company was in the process of
implementing a new business strategy. See
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<PAGE>
'Business -- Historical Operations.' Because the Company believed that its new
business strategy would generate additional taxable income within a relatively
short period, the Company elected to maintain dividend payments at the minimum
level of taxable income it anticipated would be achieved by such new business
plan. In 1994, the Company declared dividends equal to its taxable income.
DIVIDEND REINVESTMENT PLAN
The Company 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 the Company, 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....................................... $ 991,152 $ 991,152
Collateralized mortgage obligations................................. 214,112 214,112
--------------- ---------------
Total borrowings.......................................... 1,205,264 1,205,264
--------------- ---------------
Shareholders' equity
Common Stock, par value $.01; authorized -- 60,000,000 shares;
outstanding -- 32,256,156 shares(1), 38,256,156 shares, as
adjusted..................................................... 323
Additional paid-in capital.......................................... 257,815
Net unrealized gain on available-for-sale mortgage securities....... 166 166
Cumulative earnings................................................. 91,367 91,367
Cumulative distributions to shareholders............................ (93,404) (93,404)
--------------- ---------------
Total shareholders' equity................................ 256,267
--------------- ---------------
Total capitalization...................................... $ 1,461,531 $
--------------- ---------------
--------------- ---------------
</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 the Company. 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............ 32 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 the Company 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 the Company 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 the Company 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 the Company 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 the Company 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
32
<PAGE>
board and 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 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 the Company, President and Chief Executive Officer of INMC and
Chairman and CEO of ILC. Mr. Perry has been with the Company since January 1993
and has direct responsibility for the management of the Company 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 the Company 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 the Company 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 the Company and Executive Vice President, Chief Accounting Officer of
each of the Company'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 the Company 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 the Company and Executive Vice President of Sales and Marketing for each of
the Company'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 the Company 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 the Company,
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 the Company 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 the Company,
EVP-Construction Lending of ILC and President and Chief Executive Officer of
CLCA, a division of WLC. From 1977 until joining the Company 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 the Company and Executive Vice President, General Counsel and
Secretary for each of the Company's subsidiaries. Prior to joining the Company
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
33
<PAGE>
corporate areas, and represented a number of major warehouse lenders and other
financial institutions in the mortgage banking industry. 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 the
Company. 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 the Company, 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 the Company. 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 the Company 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 the Company and
each of its subsidiaries. He is responsible for financing the various products
offered by the Company and managing overall liquidity. Prior to joining the
Company 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, the Company 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.
(footnotes continued on next page)
34
<PAGE>
(footnotes continued from previous page)
(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 the Company's Common
Stock, which represents 3.4% of such class as of such date.
DESCRIPTION OF COMMON STOCK
The authorized capital stock of the Company 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 the Company upon liquidation. Each share of Common
Stock is entitled to one vote and will be fully paid and non-assessable by the
Company upon issuance. Shares of the Common Stock of the Company have no
preference, conversion, exchange, preemptive or cumulative voting rights. The
authorized capital stock of the Company may be increased and altered from time
to time as permitted by Delaware law.
Meetings of the stockholders of the Company 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 the Company 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 the Company 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 the Company'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
the Company. 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
35
<PAGE>
purchased shall be paid, at the option of the Company, in cash or in the form of
an unsecured, subordinated promissory note of the Company 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 the Company of the purchase
price therefor, each as specified in the Company'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.
Under the Certificate of Incorporation any acquisition of shares of the
Company that would result in the disqualification of the Company 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 the
Company, and in any event upon demand by the Board of Directors, a stockholder
is required to file with the Company 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 the Company setting forth the number of shares already owned by the
transferee and any related person.
Restrictions on Ownership. The Company'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 the Company'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 the
Company'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 the Company 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
the Company. Prospective stockholders should also note that no rulings have been
obtained by the Company from the IRS concerning any of the matters discussed
below, and no assurance can be given that the IRS will not take contrary
positions.
GENERAL CONSIDERATIONS
The Company has elected to be taxed as a real estate investment trust under
the Code and intends to continue to do so. Brown & Wood, counsel to the Company,
has given the Company its opinion to the effect that, based on existing law and
certain representations made to it by the Company, and subject to the
limitations and qualifications set forth in the opinion given to the Company and
as set forth below, (i) the Company operated in a manner which qualified it as a
real estate investment trust under the Code since its inception and (ii) the
organization and contemplated method of operation of the Company are such as to
enable it to continue to so qualify in this and subsequent years, provided
36
<PAGE>
the various tests for qualification as a real estate investment trust relating
to its income, assets, distributions, ownership and certain administrative
matters are satisfied in those years. However, there are aspects of the
Company's method of operation which have not been considered by the courts or
the IRS, and there can be no assurance that the courts or the IRS will agree
with this opinion. In addition, qualification as a real estate investment trust
depends on future transactions and events which cannot be known at this time.
Accordingly, Brown & Wood is unable to opine whether the Company will in fact
continue to qualify as a real estate investment trust under the Code.
If the requirements for qualification as a real estate investment trust
under the Code are satisfied, the Company generally will not be subject to
federal corporate income tax with respect to income which it distributes to
stockholders. Any subsidiary of the Company that has been wholly owned by the
Company during the subsidiary's entire existence (a 'qualified real estate
investment trust subsidiary') will not be treated as a corporation separate from
the Company for federal income tax purposes. Thus, any assets, liabilities,
income, deductions or credits of such a subsidiary will be attributed to the
Company. However, the Company can be taxed on undistributed earnings on income
from certain sources or activities (e.g., active business income earned from
foreclosure property). In addition, INMC, which operates the Company's mortgage
conduit operations and is included in the Company's consolidated GAAP financial
statements, is not a qualified real estate investment trust subsidiary.
Consequently, INMC is subject to applicable federal and state income taxes. The
Company will include in income amounts earned by INMC only upon payment to the
Company by dividend of after-tax earnings of INMC.
The Company may be taxable on the portion of any excess inclusion income
allocable to any stockholder which is a 'disqualified organization' within the
meaning of Section 860E(e)(5) of the Code, which generally includes governmental
entities and other tax-exempt persons not subject to the tax on unrelated
business taxable income ('UBTI'). However, the Company's Certificate of
Incorporation and Bylaws provide that disqualified organizations are ineligible
to hold the Company's shares.
The Company's election to be treated as a real estate investment trust will
be terminated automatically if the Company fails to meet the requirements of the
Real Estate Investment Trust Provisions of the Code. Although the Company
believes it has operated and intends to continue to operate in such a manner as
to qualify as a real estate investment trust, no assurance can be given that the
Company will in fact continue to so qualify. If the Company fails to qualify as
a real estate investment trust in any taxable year, it would be subject to
federal corporate income tax (including any alternative minimum tax) on its
taxable income at regular corporate rates, and distributions to its stockholders
would not be deductible by the Company. In that event, the Company would not be
eligible again to elect real estate investment trust status until the fifth
taxable year which begins after the year for which the Company's election was
terminated unless certain relief provisions apply. The Company may also
voluntarily revoke its election, although it has no intention of doing so, in
which event the Company would be prohibited, without exception, from electing
real estate investment trust status for the year to which the revocation relates
and the following four taxable years.
Distributions to stockholders of the Company with respect to any year in
which the Company fails to qualify would not be deductible by the Company nor
would they be required to be made. In such event, to the extent of current and
accumulated earnings and profits, any distributions to stockholders would be
taxable as ordinary income and, subject to certain limitations in the Code,
eligible for the dividends-received deduction for corporations. Failure to
qualify would reduce the amount of after-tax earnings available for distribution
to stockholders and could result in the Company 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 the Company, to maintain the level of the Company's distributions
to its stockholders.
SPECIAL CONSIDERATIONS -- TAX-EXEMPT AND CERTAIN OTHER INVESTORS
For CMOs issued by the Company 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
37
<PAGE>
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, the Company 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.
The Company 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 the Company from a REMIC
residual interest may be excess inclusion income. If the Company 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 THE COMPANY
Assuming that the Company 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 the Company's current or accumulated earnings and profits
will be dividends taxable as ordinary income, generally in the year paid.
However, any dividend declared by the Company 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 the Company and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. Stockholders
will not be entitled to dividends-received deductions with respect to any
dividends paid by the Company. Distributions in excess of the Company'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 from the disposition of shares, to the extent they exceed such
basis. Stockholders may not include on their own returns any of the Company's
ordinary or capital losses.
Dividends paid by the Company 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. The Company expects that tax-exempt
investors will be required to treat a portion of their dividends as UBTI,
because the Company expects that a portion of its income will be treated as
excess inclusion income. Because an investment in the Company 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 the Company 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.
38
<PAGE>
BACKUP WITHHOLDING
The Company 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 the Company 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 the Company 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 the Company.
FOREIGN INVESTORS
The preceding discussion does not address the federal income tax
consequences to foreign investors of an investment in the Company. Foreign
investors in the Company should consult their own tax advisors concerning the
federal income tax consequences to them of a purchase of shares of the Company'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.' The Company believes that the
shares of Common Stock are 'publicly offered securities' under United States
Department of Labor regulation 29 C.F.R. SS2510.3-101. Accordingly, the Company
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'), the Company 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
39
<PAGE>
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.............................................................. 6,000,000
---------
---------
</TABLE>
The Representatives of the Underwriters have advised the Company 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.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date hereof, to purchase up to 900,000 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 6,000,000 shares of Common Stock initially
purchased by the Underwriters.
The Company 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 the Company, 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 the Company, and
that the Representatives shall have a right of first refusal to purchase any
such Common Stock or security convertible into Common Stock from CCI.
The Company 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 the
Company by Brown & Wood and for the Underwriters by Thacher Proffitt & Wood.
40
<PAGE>
EXPERTS
The consolidated financial statements and schedules of the Company and its
subsidiaries included in the Company'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, independent certified public accountants,
as set forth in their report, and have been so incorporated in reliance upon
such report and upon the authority of such firm as experts in accounting and
auditing.
41
<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............................................................................................. 19
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.................................................................................. 10
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......................................................................................... 39
Qualified Real Estate Investment Trust Subsidiary.......................................................... 37
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>
42
<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
The Company................................................................................................................. 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............................................................................................................... 39
Underwriting................................................................................................................ 39
Legal Matters............................................................................................................... 40
Experts..................................................................................................................... 41
Index of Certain Definitions................................................................................................ 42
</TABLE>
6,000,000 SHARES
[LOGO]
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
MERRILL LYNCH & CO.
ALEX. BROWN & SONS
INCORPORATED
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
JANUARY __, 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....................... $ 21,414
Printing and engraving............................................................ 75,000
Legal fees and expenses........................................................... 200,000
NASD filing fee................................................................... 6,710
Accounting fees and expenses...................................................... 15,000
Blue Sky qualifications and expenses (including legal fees)....................... 15,000
Listing fees...................................................................... 25,000
Miscellaneous..................................................................... 66,876
--------
Total................................................................... $425,000
--------
--------
</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 the Company provide, in
effect, that, to the extent and under the circumstances permitted by Section 145
of the General Corporation Law of Delaware, the Company 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 the Company. The Company maintains insurance
covering certain liabilities of the directors and officers of the Company. The
Company has also entered into contractual arrangements with its directors and
officers pursuant to which such persons may be entitled to indemnity from the
Company against certain liabilities arising from the discharge of their duties
in such capacities.
ITEM 16. EXHIBITS.
<TABLE>
<C> <S>
1.1** -- Form of Purchase Agreement.
4.1* -- Certificate of Incorporation for the Company (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 the Company (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 the Company'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>
<C> <S>
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.
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.
**_Filed herewith.
***_Previously filed.
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. 1 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 6th day of January 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. 1 to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------------------- -------------------
<C> <S> <C>
* Director, Chief Executive Officer January 6, 1995
......................................... and Chairman of the
(DAVID S. LOEB) Board of Directors
(Principal Executive Officer)
* Director, President and Vice January 6, 1995
......................................... Chairman of the Board
(ANGELO R. MOZILO) of Directors
/S/ MICHAEL W. PERRY Executive Vice President and January 6, 1995
......................................... Chief Operating Officer
(MICHAEL W. PERRY) (Principal Financial Officer)
/S/ CARMELLA L. GRAHN Senior Vice President and January 6, 1995
......................................... Chief Accounting Officer
(CARMELLA L. GRAHN) (Principal Accounting Officer)
* Director January 6, 1995
.........................................
(LYLE E. GRAMLEY)
* Director January 6, 1995
.........................................
(THOMAS J. KEARNS)
* Director January 6, 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
- ------- ---------------------------------------------------------------------------------------------- ----------
<C> <S> <C>
1.1** -- Form of Purchase Agreement.................................................................
4.1* -- Certificate of Incorporation for the Company (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 the Company (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 the Company'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..................................................................
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.
** Filed herewith.
*** Previously filed.
6,000,000 Shares
CWM MORTGAGE HOLDINGS, INC.
(a Delaware corporation)
Common Stock
(Par Value $.01 Per Share)
PURCHASE AGREEMENT
January , 1995
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
ALEX. BROWN & SONS INCORPORATED
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
as Representatives of the
several Underwriters
c/o MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1209
Dear Sirs:
CWM Mortgage Holdings, Inc., a Delaware corporation (the 'Company'),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ('Merrill Lynch'), Alex. Brown & Sons Incorporated ('Alex.
Brown'), Dean Witter Reynolds Inc. ('Dean Witter'), PaineWebber Incorporated
('PaineWebber'), Salomon Brothers Inc ('Salomon') and each of the other
Underwriters named in Schedule A hereto (collectively, the 'Underwriters', which
term shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch, Alex. Brown, Dean Witter,
PaineWebber and Salomon and are acting as representatives (in such capacity,
Merrill Lynch, Alex. Brown, Dean Witter, PaineWebber and Salomon shall
hereinafter be referred to as the 'Representatives'), with respect to the sale
by the Company and the purchase by the Underwriters, acting severally and not
jointly, of the respective numbers of shares of Common Stock, par value $.01 per
share, of the Company ('Common Stock') set forth in said Schedule A, and with
respect to the grant by the Company to the Underwriters, acting severally and
not
<PAGE>
-2-
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 900,000 additional shares of Common Stock to cover over-allotments, in
each case except as may otherwise be provided in the Pricing Agreement, as
hereinafter defined. The aforesaid 6,000,000 shares of Common Stock (the
'Initial Securities') and all or any part of the shares of Common Stock subject
to the option described in Section 2(b) hereof (the 'Option Securities') are
collectively hereinafter called the 'Securities'. Countrywide Asset Management
Corporation (the 'Manager') is responsible for the day-to-day operations of the
Company.
Prior to the purchase and public offering of the Securities by the several
Underwriters, the Company and the Representatives shall enter into an agreement
substantially in the form of Exhibit A hereto (the 'Pricing Agreement'). The
Pricing Agreement may take the form of an exchange of any standard form of
written telecommunication between the Company and the Representatives and shall
specify such applicable information as is indicated in Exhibit A hereto. The
offering of the Securities will be governed by this Agreement, as supplemented
by the Pricing Agreement. From and after the date of the execution and delivery
of the Pricing Agreement, this Agreement shall be deemed to incorporate the
Pricing Agreement.
The Company has filed with the Securities and Exchange Commission (the
'Commission') a registration statement on Form S-3 (No. 33-56547) and a related
preliminary prospectus for the registration of the Securities under the
Securities Act of 1933, as amended (the '1933 Act'), has filed such amendments
thereto, if any, and such amended preliminary prospectuses as may have been
required to the date hereof, and will file such additional amendments thereto
and such amended prospectuses as may hereafter be required. Such registration
statement (as amended, if applicable) and the prospectus constituting a part
thereof (including in each case all documents, if any, incorporated or deemed to
be incorporated by reference therein and the information, if any, deemed to be
part thereof pursuant to Rule 430A(b) of the rules and regulations of the
Commission under the 1933 Act (the '1933 Act Regulations')), as from time to
time amended or supplemented pursuant to the 1933 Act, the Securities Exchange
Act of 1934, as amended (the '1934 Act'), or otherwise, are hereinafter referred
to as the 'Registration Statement' and the 'Prospectus', respectively, except
that if any revised prospectus shall be provided to the Underwriters by the
Company for use in connection with the offering of the Securities which differs
from the Prospectus on file at the Commission at the time the Registration
Statement becomes effective (whether or not such revised prospectus is required
to be filed by the Company pursuant to Rule 424(b) of the 1933 Act Regulations),
the term 'Prospectus' shall refer to such revised prospectus from and after the
time it is first provided to the Underwriters for such use. All references in
this Agreement to financial statements and schedules and other information which
is 'contained,' 'included' or 'stated' in the Registration Statement or the
Prospectus (and all other references of like import) shall be deemed to mean and
include all such financial statements and schedules and other information which
is or is deemed to be incorporated by reference in the Registration Statement or
the Prospectus, as the case may be; and all references in this Agreement to
amendments or supplements to the Registration Statement or the Prospectus shall
be deemed to mean and include the filing of any document under the 1934 Act
which is or is deemed to be incorporated by reference in the Registration
Statement or the Prospectus, as the case may be.
<PAGE>
-3-
The Company understands that the Underwriters propose to make a public
offering of the Securities as soon as the Underwriters deem advisable after the
Registration Statement becomes effective and the Pricing Agreement has been
executed and delivered.
Section 1. Representations and Warranties.
(a) The Company represents and warrants to each Underwriter as of the date
hereof and as of the date of the Pricing Agreement (such latter date being
hereinafter referred to as the 'Representation Date') as follows:
(i) At the time the Registration Statement becomes effective and at
the Representation Date, the Registration Statement will comply in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. The Prospectus, at the
Representation Date (unless the term 'Prospectus' refers to a prospectus
which has been provided to the Underwriters by the Company for use in
connection with the offering of the Securities which differs from the
Prospectus on file at the Commission at the time the Registration Statement
becomes effective, in which case at the time it is first provided to the
Underwriters for such use) and at Closing Time referred to in Section 2(c)
hereof, will not include an untrue statement of a material fact or omit to
state a material fact necessary in order to make the statements therein, in
the light of the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or Prospectus made in reliance upon and in
conformity with information furnished to the Company in writing by any
Underwriter through the Representatives expressly for use in the
Registration Statement or Prospectus.
(ii) The documents incorporated or deemed to be incorporated by
reference into the Prospectus, at the time they were or hereafter are filed
with the Commission, complied and will comply in all material respects with
the requirements of the 1934 Act and the rules and regulations of the
Commission thereunder (the '1934 Act Regulations'), and, when read together
with the other information in the Prospectus, at the time the Registration
Statement becomes effective and at Closing Time, will not contain an untrue
statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, and any
documents hereafter filed deemed to be incorporated by reference into the
Prospectus will, when they are filed with the Commission, comply in all
material respects with the requirements of the 1934 Act and the 1934 Act
Regulations, and will not contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which
they were made, not misleading.
(iii) The accountants who certified the financial statements and
supporting schedules included in the Registration Statement are independent
public accountants as required by the 1933 Act and the 1933 Act
Regulations.
<PAGE>
-4-
(iv) The financial statements and notes thereto included in the
Registration Statement and the Prospectus present fairly the financial
position of the Company and its consolidated subsidiaries as at the dates
indicated and the results of their operations for the periods specified;
except as otherwise stated in the Registration Statement, said financial
statements have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis; and the supporting
schedules, if any, included in the Registration Statement present fairly
the information required to be stated therein.
(v) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, except as otherwise stated
therein, (A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business; (B) there have
been no transactions entered into by the Company or any of its
subsidiaries, other than those in the ordinary course of business, which
are material with respect to the Company and its subsidiaries considered as
one enterprise; and (C) except for regular quarterly dividends, there has
been no dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(vi) The Company has been duly incorporated and is validly existing as
a corporation in good standing under the laws of the State of Delaware with
corporate power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectus; and the Company is
duly qualified as a foreign corporation to transact business and is in good
standing in each jurisdiction in which such qualification is required,
whether by reason of the ownership or leasing of property or the conduct of
business, except where the failure to so qualify would not have a material
adverse effect on the condition, financial or otherwise, or the earnings,
business affairs or business prospects of the Company and its subsidiaries
considered as one enterprise.
(vii) Each subsidiary of the Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority to
own, lease and operate its properties and to conduct its business as
described in the Prospectus and is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure to
so qualify would not have a material adverse effect on the condition,
financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise;
and all of the issued and outstanding capital stock of each such subsidiary
has been duly authorized and validly issued, is fully paid and
non-assessable and is owned by the Company (except for the shares of common
stock of Independent National Mortgage Corporation ('INMC'), which shares
are owned by Countrywide Funding Corporation ('CFC')), directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge,
lien, encumbrance, claim or equity.
<PAGE>
-5-
(viii) The authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectus under 'Capitalization' (except
for subsequent issuances, if any, pursuant to reservations, agreements,
employee benefit plans, stock option plans or the exercise of convertible
securities referred to in the Prospectus); the shares of issued and
outstanding Common Stock have been duly authorized and validly issued and
are fully paid and non-assessable; the Securities have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement and,
when issued and delivered by the Company pursuant to this Agreement against
payment of the consideration set forth in the Pricing Agreement, will be
validly issued and fully paid and non-assessable; the Common Stock conforms
to all statements relating thereto contained in the Prospectus; and the
issuance of the Securities is not subject to preemptive or other similar
rights.
(ix) Neither the Company nor any of its subsidiaries is in violation
of its charter or by-laws. Neither the Company nor any of its subsidiaries
is in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any material contract,
indenture, mortgage, loan agreement, note, lease or other instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any of its subsidiaries is subject, which default would
reasonably be expected to materially and adversely affect the condition,
financial or otherwise, or the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise;
and the execution, delivery and performance of this Agreement and the
Pricing Agreement and the consummation of the transactions contemplated
herein and therein on the part of the Company have been duly authorized by
all necessary corporate action on the part of the Company and will not
conflict with or constitute a breach of, or default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any of its subsidiaries pursuant to, any
contract, indenture, mortgage, loan agreement, note, lease or other
instrument to which the Company or any of its subsidiaries is a party or by
which it or any of them may be bound, or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor will such
action result in any violation of the provisions of the charter or by-laws
of the Company or any applicable law, administrative regulation or
administrative or court decree.
(x) There is no action, suit or proceeding before or by any court or
governmental agency or body, domestic or foreign, now pending, or, to the
knowledge of the Company, threatened, against or affecting the Company or
any of its subsidiaries, which is required to be disclosed in the
Registration Statement (other than as disclosed therein), or which
reasonably would be expected to result in any material adverse change in
the condition, financial or otherwise, or in the earnings, business affairs
or business prospects of the Company and its subsidiaries considered as one
enterprise, or which reasonably would be expected to materially and
adversely affect the properties or assets thereof or which reasonably would
be expected to materially and adversely affect the consummation of this
Agreement; all pending legal or governmental proceedings to which the
Company or any of its subsidiaries is a party or of which any of their
respective property or assets is the subject which are not described in the
Registration Statement,
<PAGE>
-6-
including ordinary routine litigation incidental to the business, are,
considered in the aggregate, not material; and there are no contracts or
documents of the Company or any of its subsidiaries which are required to
be filed as exhibits to the Registration Statement by the 1933 Act or by
the 1933 Act Regulations which have not been so filed.
(xi) The Company and its subsidiaries own or possess, or can acquire
on reasonable terms, (i) the patents, patent rights, licenses, inventions,
copyrights, know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential information, systems or
procedures), relating to the computer software, programs, systems, routines
and procedures (collectively, the 'Software') currently employed by them in
connection with the business now operated by them to the extent necessary
for the utilization of such Software in such business, and (ii) the
trademarks, service marks and trade names presently employed by them in
connection with the business now operated by them (clauses (i) and (ii),
collectively, being referred to as 'patent and proprietary rights'), and
neither the Company nor any of its subsidiaries has received any notice or
is otherwise aware of any infringement of or conflict with asserted rights
of others with respect to any patent or proprietary rights, or of any facts
which would render any patent and proprietary rights invalid or inadequate
to protect the interest of the Company or any of its subsidiaries therein,
and which infringement or conflict (if the subject of any unfavorable
decision, ruling or finding) or invalidity or inadequacy, singly or in the
aggregate, would result in any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise.
(xii) No authorization, approval or consent of any court or
governmental authority or agency is necessary in connection with the
offering, issuance or sale of the Securities hereunder, except such as may
be required under the 1933 Act or the 1933 Act Regulations or state
securities laws.
(xiii) The Company and its subsidiaries possess such certificates,
authorization, licenses or permits issued by the appropriate state or
federal regulatory agencies or bodies necessary and material to conduct the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of proceedings relating to the
revocation or modification of any such certificate, authorization, license
or permit which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would reasonably be expected to
materially and adversely affect the condition, financial or otherwise, or
the earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise.
(xiv) The Company is qualified as a real estate investment trust under
Sections 856 through 860 of the Internal Revenue Code of 1986, as amended
(the 'Code') and the rules and regulations thereunder and will be so
qualified after consummation of the transactions contemplated by the
Registration Statement.
(xv) The Company is not required to be registered under the Investment
Company Act of 1940, as amended.
<PAGE>
-7-
(xvi) Each of the 1994 Amended and Extended Management Agreement,
dated as of May 15, 1994, as amended by the First Amendment to 1994 Amended
and Extended Management Agreement, dated October 1, 1994 (the 'Management
Agreement'), between the Company and the Manager, and the Amended and
Restated Credit Agreement, dated as of September 30, 1994 (the 'Loan
Agreement'), by and among the Company, INMC, Warehouse Lending Corporation
of America, Inc. and CFC, has been duly authorized, executed and delivered
by the Company and each constitutes a legally valid and binding obligation
of the Company, enforceable in accordance with its terms, except to the
extent that enforcement thereof may be limited by bankruptcy, insolvency or
other laws relating to or affecting enforcement of creditors' rights or by
general equity principles.
(xvii) The execution and delivery of the Management Agreement and the
Loan Agreement by the Company and the consummation of the transactions
contemplated therein did not (A) conflict with or constitute a material
breach of, or default under, or result in the creation or imposition of any
material lien, charge or encumbrance upon any property or assets of the
Company or any of its subsidiaries pursuant to any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries may be bound, or to which any of the property or assets of the
Company or any of its subsidiaries is subject, (B) result in any violation
of the provisions of the charter or by-laws of the Company or (C) result in
any violation of any applicable law, administrative regulation or
administrative or court decree, which violation reasonably would be
expected to materially and adversely affect the condition, financial or
otherwise, or the earnings, business affairs or business prospects of the
Company and its subsidiaries considered as one enterprise.
(xviii) This Agreement has been, and, at the Representation Date, the
Pricing Agreement will have been, duly executed and delivered by the
Company.
(xix) There are no persons with registration or other similar rights
to have any securities registered pursuant to the Registration Statement or
otherwise registered by the Company under the 1933 Act.
(xx) Neither the Company nor any affiliate (as defined in Section
517.021(1) of the Florida statutes) does business with the government of
Cuba or with any person or affiliate (as so defined) located in Cuba within
the meaning of Section 517.075 of the Florida statutes and the rules and
regulations thereunder (collectively, the 'Cuba Act').
(b) Any certificate signed by any officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed a
representation and warranty by the Company to each Underwriter as to the matters
covered thereby.
<PAGE>
-8-
Section 2. Sale and Delivery to Underwriters; Closing.
(a) On the basis of the representations and warranties herein contained and
subject to the terms and conditions herein set forth, the Company agrees to sell
to each Underwriter, severally and not jointly, and each Underwriter, severally
and not jointly, agrees to purchase from the Company, at the price per share set
forth in the Pricing Agreement, the number of Initial Securities set forth in
Schedule A opposite the name of such Underwriter (except as otherwise provided
in the Pricing Agreement), plus any additional number of Initial Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof.
(1) If the Company has elected not to rely upon Rule 430A under the
1933 Act Regulations, the initial public offering price and the purchase
price per share to be paid by the several Underwriters for the Securities
have each been determined and set forth in the Pricing Agreement, dated the
date hereof, and an amendment to the Registration Statement and the
Prospectus will be filed before the Registration Statement becomes
effective.
(2) If the Company has elected to rely upon Rule 430A under the 1933
Act Regulations, the purchase price per share to be paid by the several
Underwriters for the Securities shall be an amount equal to the initial
public offering price, less an amount per share to be determined by
agreement between the Representatives and the Company. The initial public
offering price per share of the Securities shall be a fixed price to be
determined by agreement between the Representatives and the Company. The
initial public offering price and the purchase price, when so determined,
shall be set forth in the Pricing Agreement. In the event that such prices
have not been agreed upon and the Pricing Agreement has not been executed
and delivered by all parties thereto by the close of business on the fourth
business day following the date of this Agreement, this Agreement shall
terminate forthwith, without liability of any party to any other party,
unless otherwise agreed upon by the Representatives and the Company.
(b) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the Underwriters, severally and not jointly, to
purchase up to an additional 900,000 shares of Common Stock at the price per
share set forth in the Pricing Agreement, The option hereby granted will expire
30 days after (i) the date the Registration Statement becomes effective, if the
Company has elected not to rely on Rule 430A under the 1933 Act Regulations, or
(ii) the Representation Date, if the Company has elected to rely upon Rule 430A
under the 1933 Act Regulations, and may be exercised in whole or in part from
time to time only for the purpose of covering over-allotments which may be made
in connection with the offering and distribution of the Initial Securities upon
notice by the Representatives to the Company setting forth the number of Option
Securities as to which the several Underwriters are then exercising the option
and the time and date of payment and delivery for such Option Securities. Any
such time and date of delivery (a 'Date of Delivery') shall be determined by the
Representatives, but shall not be later than seven full business days after the
exercise of said option, nor in any event prior to Closing Time, as hereinafter
defined, unless otherwise agreed upon by the Representatives and the Company. If
the option is exercised as to all or any portion of the
<PAGE>
-9-
Option Securities, each of the Underwriters, acting severally and not jointly,
will purchase that proportion of the total number of Option Securities then
being purchased which the number of Initial Securities set forth in Schedule A
opposite the name of such Underwriter bears to the total number of Initial
Securities (except as otherwise provided in the Pricing Agreement), subject in
each case to such adjustments as the Representatives in their discretion shall
make to eliminate any sales or purchases of fractional Securities.
(c) Payment of the purchase price for, and delivery of certificates for,
the Initial Securities shall be made at the office of Brown & Wood, One World
Trade Center, New York, New York 10048 or at such other place as shall be agreed
upon by the Representatives and the Company, at 9:00 A.M., New York time, on the
fifth business day (unless postponed in accordance with the provisions of
Section 10 hereof) following the date the Registration Statement becomes
effective (or, if the Company has elected to rely upon Rule 430A, the fifth
business day after execution of the Pricing Agreement), or such other time not
later than ten business days after such date as shall be agreed upon by the
Representatives and the Company (such time and date of payment and delivery
being herein called 'Closing Time'). In addition, in the event that any or all
of the Option Securities are purchased by the Underwriters, payment of the
purchase price for and delivery of certificates for such Option Securities shall
be made at the above-mentioned office of Brown & Wood, or at such other place as
shall be mutually agreed upon by the Representatives and the Company, on each
Date of Delivery as specified in the notice from the Representatives to the
Company.
Payment shall be made to the Company by certified or official bank check or
checks drawn in New York Clearing House funds or similar next day funds payable
to the order of the Company, against delivery to the Representatives for the
respective accounts of the Underwriters of certificates for the Securities to be
purchased by them. Certificates for the Initial Securities and the Option
Securities, if any, shall be in such denominations and registered in such names
as the Representatives may request in writing at least two business days before
Closing Time or the relevant Date of Delivery, as the case may be. It is
understood that each Underwriter other than Merrill Lynch has authorized Merrill
Lynch, for its account, to accept delivery of, receipt for, and make payment of
the purchase price for, the Initial Securities and the Option Securities, if
any, which it has agreed to purchase. Merrill Lynch, individually and not as
representative of the other Underwriters, may (but shall not be obligated to)
make payment of the purchase price for the Initial Securities and the Option
Securities, if any, to be purchased by any Underwriter whose check has not been
received by Closing Time or the relevant Date of Delivery, as the case may be,
but such payment shall not relieve such Underwriter from its obligations
hereunder. The certificates for the Initial Securities and the Option
Securities, if any, will be made available for examination and packaging by the
Underwriters not later than 10:00 A.M., New York time, on the last business day
prior to Closing Time or the relevant Date of Delivery, as the case may be, at
the offices of Chemical Bank, New York, New York.
<PAGE>
-10-
Section 3. Covenants of the Company.
(a) The Company covenants with each Underwriter as follows:
(i) The Company will notify the Representatives promptly, and confirm
the notice in writing, (i) of the effectiveness of the Registration
Statement and any amendment thereto (including any post-effective
amendment), (ii) of the receipt of any comments from the Commission, (iii)
of any request by the Commission for any amendment to the Registration
Statement or any amendment or supplement to the Prospectus or for
additional information, and (iv) of the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement or
the initiation or threatening of any proceedings for that purpose. The
Company will make every reasonable effort to prevent the issuance of any
stop order and, if any stop order is issued, to obtain the lifting thereof
at the earliest possible moment.
(ii) The Company will give the Representatives notice of its intention
to file or prepare any amendment to the Registration Statement (including
any post-effective amendment) or any amendment or supplement to the
Prospectus (including any revised prospectus which the Company proposes for
use by the Underwriters in connection with the offering of the Securities
which differs from the prospectus on file at the Commission at the time the
Registration Statement becomes effective, whether or not such revised
prospectus is required to be filed pursuant to Rule 424(b) of the 1933 Act
Regulations), whether pursuant to the 1933 Act, the 1934 Act or otherwise,
will furnish the Representatives with copies of any such amendment or
supplement a reasonable amount of time prior to such proposed filing or
use, as the case may be, and will not file any such amendment or supplement
or use any such prospectus to which the Representatives or counsel for the
Underwriters shall object.
(iii) The Company will deliver to the Representatives as many signed
copies of the Registration Statement as originally filed and of each
amendment thereto (including exhibits filed therewith or incorporated by
reference therein and documents incorporated or deemed to be incorporated
by reference therein) as the Representatives may reasonably request and
will also deliver to the Representatives a conformed copy of the
Registration Statement as originally filed and of each amendment thereto
(including documents incorporated or deemed to be incorporated by reference
therein but without exhibits) for each of the Underwriters.
(iv) The Company will furnish to each Underwriter, from time to time
during the period when the Prospectus is required to be delivered under the
1933 Act or the 1934 Act, such number of copies of the Prospectus (as
amended or supplemented) as such Underwriter may reasonably request for the
purposes contemplated by the 1933 Act or the 1934 Act or the respective
applicable rules and regulations of the Commission thereunder.
(v) If any event shall occur as a result of which it is necessary, in
the reasonable opinion of counsel for the Underwriters, to amend or
supplement the Prospectus in order to make the Prospectus not misleading in
the light of the
<PAGE>
-11-
circumstances existing at the time it is delivered to a purchaser, the
Company will forthwith amend or supplement the Prospectus (in form and
substance satisfactory to counsel for the Underwriters) so that, as so
amended or supplemented, the Prospectus will not include an untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
existing at the time it is delivered to a purchaser, not misleading, and
the Company will furnish to the Underwriters a reasonable number of copies
of such amendment or supplement.
(vi) The Company will endeavor, in cooperation with the Underwriters,
to qualify the Securities for offering and sale under the applicable
securities laws of such states and other jurisdictions of the United States
as the Representatives may designate; provided, however, that the Company
shall not be obligated to qualify as a foreign corporation in any
jurisdiction in which it is not so qualified or take any action that would
subject it to service of process in suits, other than those arising out of
the offering or sale of the Securities, in any jurisdiction where it is not
now so subject. In each jurisdiction in which the Securities have been so
qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of
the Registration Statement.
(vii) The Company will make generally available to its security
holders as soon as practicable, but not later than 90 days after the close
of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 of the 1933 Act Regulations) covering a
twelve-month period beginning not later than the first day of the Company's
fiscal quarter next following the 'effective date' (as defined in said Rule
158) of the Registration Statement.
(viii) The Company will use the net proceeds received by it from the
sale of the Securities in the manner specified in the Prospectus under 'Use
of Proceeds'.
(ix) If, at the time that the Registration Statement becomes
effective, any information shall have been omitted therefrom in reliance
upon Rule 430A of the 1933 Act Regulations, then immediately following the
execution of the Pricing Agreement, the Company will prepare, and file or
transmit for filing with the Commission in accordance with such Rule 430A
and Rule 424(b) of the 1933 Act Regulations, copies of an amended
Prospectus, or, if required by such Rule 430A, a post-effective amendment
to the Registration Statement (including an amended Prospectus), containing
all information so omitted.
(x) The Company will use its best efforts to effect the listing of the
Securities on the New York Stock Exchange.
(xi) The Company will not use the proceeds of the sale of the
Securities to be sold to the Underwriters by the Company in such a manner
as to be required to be registered under the Investment Company Act of
1940, as amended.
<PAGE>
-12-
(xii) During a period of 180 days from the date of the Pricing
Agreement, the Company 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 Common Stock or any
security convertible or exchangeable into or exercisable for Common Stock
(except for Common Stock or options issued pursuant to this Agreement or
pursuant to reservations, agreements, employee benefit plans, stock option
plans or the exercise of convertible securities referred to in Section
1(a)(viii) hereof).
(xiii) The Company, during the period when the Prospectus is required
to be delivered under the 1933 Act or the 1934 Act, will file all documents
required to be filed with the Commission pursuant to Sections 13, 14 or 15
of the 1934 Act within the time periods required by the 1934 Act and the
1934 Act Regulations.
(xiv) In accordance with the Cuba Act and without limitation to the
provisions of Sections 6 and 7 hereof, the Company agrees to indemnify and
hold harmless each Underwriter from and against any and all loss,
liability, claim, damage and expense whatsoever (including fees and
disbursements of counsel), as incurred, arising out of any violation by the
Company of the Cuba Act.
Section 4. Payment of Expenses. The Company will pay all expenses incident
to the performance of its obligations under this Agreement, including (i) the
printing and filing of the Registration Statement as originally filed and of
each amendment thereto; (ii) the printing of this Agreement and the Pricing
Agreement; (iii) the preparation, issuance and delivery of the certificates for
the Securities to the Underwriters; (iv) the fees and disbursements of the
Company's counsel and accountants; (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 3(a)(vi) hereof,
including filing fees and the fees and disbursements of the Company's counsel in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any Legal Investment Survey; (vi) the printing and delivery to the
Underwriters in quantities as hereinabove stated of copies of the Registration
Statement as originally filed and of each amendment thereto, of each preliminary
prospectus, and of the Prospectus and any amendments or supplements thereto;
(vii) the printing and delivery to the Underwriters of copies of the Blue Sky
Survey and any Legal Investment Survey; (viii) the fee of the National
Association of Securities Dealers, Inc.; and (ix) the fees and expenses incurred
in connection with the listing of the Securities on the New York Stock Exchange.
Except as provided in this Section 4, the Underwriters shall pay their own costs
and expenses, including, without limitation, the fees and expenses of their
counsel, any transfer taxes on the Securities which they may sell and the
expenses of advertising any offering of the Securities made by the Underwriters.
If this Agreement is terminated by the Representatives in accordance with
the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall
reimburse the Underwriters for all of their out-of-pocket expenses, including
the reasonable fees and disbursements of counsel for the Underwriters.
Section 5. Conditions of Underwriters' Obligations. The obligations of the
Underwriters hereunder are subject to the accuracy of the representations and
warranties of the
<PAGE>
-13-
Company herein contained, to the performance by the Company of its obligations
hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 P.M., New York time, on the date hereof, or with the consent of
the Representatives, at a later time and date, not later, however, than
5:30 P.M., New York time, on the first business day following the date
hereof, or at such later time and date as may be approved by a majority in
interest of the Underwriters; and at Closing Time no stop order suspending
the effectiveness of the Registration Statement shall have been issued
under the 1933 Act or proceedings therefor initiated or threatened by the
Commission. If the Company has elected to rely upon Rule 430A of the 1933
Act Regulations, the price of the Securities and any price-related
information previously omitted from the effective Registration Statement
pursuant to such Rule 430A shall have been transmitted to the Commission
for filing pursuant to Rule 424(b) of the 1933 Act Regulations within the
prescribed time period, and prior to Closing Time the Company shall have
provided evidence satisfactory to the Representatives of such timely
filings, or a post-effective amendment providing such information shall
have been promptly filed and declared effective in accordance with the
requirements of Rule 430A of the 1933 Act Regulations.
(b) At Closing Time the Representatives shall have received:
(1) The favorable opinion, dated as of Closing Time, of Brown &
Wood, counsel for the Company, in form and substance satisfactory to
counsel for the Underwriters, to the effect that:
(i) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Delaware.
(ii) The Company has corporate power and corporate authority
to own, lease and operate its properties and to conduct its
business as described in the Registration Statement.
(iii) The Securities have been duly authorized for issuance
and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company pursuant to this Agreement
against payment of the consideration set forth in the Pricing
Agreement, will be validly issued and fully paid and
non-assessable.
(iv) The issuance of the Securities is not subject to
preemptive or other similar rights arising by operation of law.
(v) This Agreement and the Pricing Agreement have each been
duly authorized, executed and delivered by the Company.
(vi) The Registration Statement is effective under the 1933
Act and, to the best of their knowledge and information, no stop
order
<PAGE>
-14-
suspending the effectiveness of the Registration Statement has
been issued under the 1933 Act or proceedings therefor initiated
or threatened by the Commission.
(vii) At the time the Registration Statement became
effective and at the Representation Date, the Registration
Statement (except for financial statements and schedules and
other financial or statistical data included or incorporated by
reference therein, as to which no opinion need be rendered)
appeared on its face to comply in all material respects with the
requirements as to form for registration statements on Form S-3
under the 1933 Act and the 1933 Act Regulations.
(viii) The Common Stock conforms to the description thereof
contained in the Prospectus, and the form of certificate used to
evidence the Common Stock is in due and proper form and complies
with all applicable statutory requirements.
(ix) The information in the Prospectus under 'Description of
Common Stock' to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by them and is correct. Such
counsel shall confirm their opinion set forth in the Prospectus
under 'Certain Federal Income Tax Considerations.'
(x) No authorization, approval, consent or order of any
court or governmental authority or agency is required in
connection with the sale of the Securities to the Underwriters,
except such as may be required under the 1933 Act or the 1933 Act
Regulations or state securities laws.
(xi) The Company is not required to be registered under the
Investment Company Act of 1940, as amended.
(xii) Each document filed pursuant to the 1934 Act, as
subsequently amended, and incorporated by reference in the
Prospectus appeared on its face to comply in all material
respects with the applicable requirements as to form for reports
on Form 10-K, Form 10-Q and Form 8-K, as the case may be, under
the 1934 Act and the 1934 Act Regulations in effect at the date
of the filing of the last amendment thereto, except that such
counsel need express no opinion concerning the financial
statements and other financial and statistical information
contained or incorporated by reference therein or excluded
therefrom.
(2) The favorable opinion, dated as of Closing Time, of Thacher
Proffitt & Wood, counsel for the Underwriters, with respect to the
matters set forth in paragraph (i) and in paragraphs (iii) to (viii),
inclusive, of subsection (b)(1) of this Section.
<PAGE>
-15-
(3) The favorable opinion, dated as of Closing Time, of Richard
H. Wohl, Esq., counsel for the Company and the Manager, in form and
substance satisfactory to counsel for the Underwriters, to the effect
that:
(i) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under
'Capitalization' (except for subsequent issuances, if any,
pursuant to reservations, agreements, employee benefit plans,
stock options or the exercise of convertible securities referred
to in the Prospectus), and the shares of issued and outstanding
Common Stock have been duly authorized and validly issued and are
fully paid and non-assessable.
(ii) To the best of such counsel's knowledge, the Company is
duly qualified as a foreign corporation to transact business and
is in good standing in each jurisdiction in which such
qualification is required, except where the failure to be so
qualified would not have a material adverse effect on the
financial condition or results of operations of the Company and
its subsidiaries considered as one enterprise.
(iii) Each subsidiary of the Company is a corporation duly
organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation, has corporate power and
authority to own, lease and operate its properties and to conduct
its business as described in the Registration Statement and, to
the best of such counsel's knowledge, is duly qualified as a
foreign corporation to transact business and is in good standing
in each jurisdiction in which such qualification is required,
except where the failure to be so qualified would not have a
material adverse effect on the financial condition or results of
operations of the Company and its subsidiaries considered as one
enterprise.
(iv) All of the issued and outstanding capital stock of each
such subsidiary has been duly authorized and validly issued, is
fully paid and non-assessable and, to the best of such counsel's
knowledge, is owned by the Company (except for the shares of
common stock of INMC, which are owned by CFC), directly or
through subsidiaries, free and clear of any perfected security
interest under Article 9 of the California Uniform Commercial
Code.
(v) To the best of such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other
than those disclosed therein.
(vi) To the best of such counsel's knowledge, there are no
contracts, indentures, mortgages, loan agreements, notes, leases
or other instruments required to be described or referred to in
the Registration Statement or to be filed as exhibits thereto
other than those described or
<PAGE>
-16-
referred to therein or filed or incorporated by reference as
exhibits thereto and the descriptions thereof or references
thereto are correct in all material respects.
(vii) The execution, delivery and performance of this
Agreement and the Pricing Agreement and the consummation of the
transactions contemplated herein and therein and compliance by
the Company with its obligations hereunder and thereunder will
not conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company or any of
its subsidiaries pursuant to, any contract, indenture, mortgage,
loan agreement, note, lease or other instrument to which the
Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or
assets of the Company or any of its subsidiaries is subject, nor
will such action result in any violation of the provisions of the
charter or by-laws of the Company, or any applicable law,
administrative regulation or administrative or court decree.
(viii) Each of the Management Agreement and the Loan
Agreement has been duly authorized, executed and delivered by the
Company and each constitutes a legally valid and binding
obligation of the Company enforceable against the Company in
accordance with its terms, except as limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
the rights of creditors generally and except that the
enforceability thereof is subject to the effect of general
principles of equity, including without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and the
possible unavailability of specific performance, regardless of
whether considered in a proceeding in equity or at law.
(ix) The execution and delivery of the Management Agreement
and the Loan Agreement by the Company and the consummation of the
transactions contemplated therein did not, to the best of such
counsel's knowledge, (A) conflict with or constitute a material
breach of, or default under, or result in the creation or
imposition of any material lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries
pursuant to any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which the Company
or any of its subsidiaries in a party or by which it or any of
them may be bound or to which any of the property or assets of
the Company or any of its subsidiaries is subject, (B) result in
any violation of the provisions of the charter or by-laws of the
Company or (C) result in any violation of any applicable law,
administrative regulation or administrative or court decree,
which violation would reasonably be expected to have a material
adverse effect on the financial condition or results of
operations of the Company and its subsidiaries considered as one
enterprise.
<PAGE>
-17-
(x) The Manager has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
State of Delaware.
(xi) The Management Agreement has been duly authorized,
executed and delivered by the Manager and constitutes a legally
valid and binding obligation of the Manager, enforceable in
accordance with its terms, except as limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting
the rights of creditors generally and except that the
enforceability thereof is subject to the effect of general
principles of equity, including without limitation, concepts of
materiality, reasonableness, good faith and fair dealing, and the
possible unavailability of specific performance, regardless of
whether considered in a proceeding in equity or at law.
(xii) The execution and delivery of the Management Agreement
and the consummation of the transactions contemplated herein or
therein will not, to the best of such counsel's knowledge, (A)
conflict with or constitute a material breach of, or default
under, or result in the creation or imposition of any material
lien, charge or encumbrance upon any property or assets of the
Manager or any of its subsidiaries pursuant to any material
contract, indenture, mortgage, loan agreement, note, lease or
other instrument to which the Manager or any of its subsidiaries
is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Manager or any of its
subsidiaries is subject, (B) result in any violation of the
provisions of the charter or by-laws of the Manager or (C) result
in any violation of any applicable law, administrative regulation
or administrative or court decree, which violation would
reasonably be expected to have a material adverse effect on the
financial condition or results of operations of the Manager.
(xiii) To the best of his knowledge, there are no persons
with currently exercisable registration or other similar rights
to have any securities registered as part of the Registration
Statement or otherwise registered by the Company under the 1933
Act.
(4) The favorable opinion, dated as of Closing Time, of Sandor E.
Samuels, Esq., counsel for CFC, in form and substance satisfactory to
counsel for the Underwriters, to the effect that:
(i) CFC has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
New York.
(ii) The Loan Agreement has been duly authorized, executed
and delivered by CFC, and constitutes a legally valid and binding
obligation of CFC, enforceable in accordance with its terms,
except as
<PAGE>
-18-
limited by bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting the rights of creditors generally and
except that the enforceability thereof is subject to the effect
of general principles of equity, including without limitation,
concepts of materiality, reasonableness, good faith and fair
dealing, and the possible unavailability of specific performance,
regardless of whether considered in a proceeding in equity or at
law.
(iii) The execution and delivery of the Loan Agreement and
the consummation of the transactions contemplated herein or
therein will not, to the best of such counsel's knowledge,
conflict with or constitute a breach of, or default under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of CFC or any of its
subsidiaries pursuant to any contract, indenture, mortgage, loan
agreement, note, lease or other instrument to which CFC or any of
its subsidiaries is a party or by which it or any of them may be
bound, or to which any of the property or assets of CFC or any of
its subsidiaries is subject, nor will such action result in any
violation of the provisions of the charter or by laws of CFC or,
to the best of such counsel's knowledge, any applicable law,
administrative regulation or administrative or court decree.
In giving their opinions required by subsections (b)(l), (b)(2), (b)(3) and
(b)(4), respectively, of this Section, Brown & Wood, Thacher Proffitt & Wood,
Richard H. Wohl, Esq. and Sandor E. Samuels, Esq. shall each additionally state
that nothing has come to their attention that would lead them to believe that
the Registration Statement (except for financial statements and schedules and
other financial or statistical data included or incorporated by reference
therein, as to which counsel need make no statement), at the time it became
effective, contained an untrue statement of a material fact or omitted to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus (except for financial
statements and schedules and other financial or statistical data included or
incorporated by reference therein, as to which counsel need make no statement),
at the Representation Date (unless the term 'Prospectus' refers to a prospectus
which has been provided to the Underwriters by the Company for use in connection
with the offering of the Securities which differs from the Prospectus on file at
the Commission at the Representation Date, in which case at the time it is first
provided to the Underwriters for such use) or at Closing Time, included or
includes an untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided, however,
that such statement by Richard H. Wohl, Esq. shall be limited to information
relating to the Manager and such statement by Sandor E. Samuels, Esq. shall be
limited to information relating to CFC.
(c) At Closing Time there shall not have been, since the date hereof or
since the respective dates as of which information is given in the Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company and its
subsidiaries considered as one enterprise, whether or not arising in the
ordinary course of business, and the Representatives shall have received a
<PAGE>
-19-
certificate of the President or a Vice President of the Company and of the chief
financial or chief accounting officer of the Company, in their capacities as
such, dated as of Closing Time, to the effect that (i) there has been no such
material adverse change; (ii) the representations and warranties of the Company
in Section 1(a) hereof are true and correct with the same force and effect as
though expressly made at and as of Closing Time; (iii) the Company has complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied at or prior to Closing Time; and (iv) no stop order suspending the
effectiveness of the Registration Statement has been issued and no proceedings
for that purpose have been initiated or, to the best of their knowledge,
threatened by the Commission. As used in this Section 5(c), the term
'Prospectus' means the Prospectus in the form first used to confirm sales of the
Securities.
(d) At the time of the execution of this Agreement, the Representatives
shall have received from Grant Thornton a letter dated such date, in form and
substance satisfactory to the Representatives, to the effect that (i) they are
independent public accountants with respect to the Company and its subsidiaries
within the meaning of the 1933 Act and the 1933 Act Regulations; (ii) it is
their opinion that the financial statements and supporting schedules included in
the Registration Statement or incorporated by reference therein and covered by
their opinions therein comply as to form in all material respects with the
applicable accounting requirements of the 1933 Act and the 1933 Act Regulations;
(iii) based upon limited procedures set forth in detail in such letter, nothing
has come to their attention which causes them to believe that (A) the unaudited
financial statements of the Company and its subsidiaries included in the
Registration Statement do not comply as to form in all material respects with
the applicable accounting requirements of the 1933 Act and the 1933 Act
Regulations or are not presented in conformity with generally accepted
accounting principles applied on a basis substantially consistent with that
of the audited financial statements included in the Registration Statement,
(B) at a specified date not more than five days prior to the date of this
Agreement, there has been any change in the capital stock of the Company or any
increase in the collateralized mortgage obligations or reverse repurchase
agreements of the Company and its subsidiaries or any decrease in
consolidated net assets as compared with the amounts shown in the September 30,
1994 balance sheet included in the Registration Statement or (C) during the
period from October 1, 1994 to a specified date not more than five days prior
to the date of this Agreement, there were any decreases, as compared with the
corresponding period in the preceding year, in consolidated net revenues, net
income or net income per share of the Company and its subsidiaries,
except in all instances for changes, increases or decreases which the
Registration Statement and the Prospectus disclose have occurred or may
occur; and (iv) in addition to the audits referred to in their opinions and
the limited procedures referred to in clause (iii) above, they have carried out
certain specified procedures, not constituting an audit, with respect to certain
amounts, percentages and financial information which are included in the
Registration Statement and Prospectus and which are specified by the
Representatives, and have found such amounts, percentages and financial
information to be in agreement with the relevant accounting, financial and other
records of the Company and its subsidiaries identified in such letter.
<PAGE>
-20-
(e) At Closing Time the Representatives shall have received from Grant
Thornton a letter, dated as of Closing Time, to the effect that they reaffirm
the statements made in the letter furnished pursuant to subsection (d) of this
Section, except that the 'specified date' referred to shall be a date not more
than five days prior to Closing Time.
(f) At the time of the execution of this Agreement, the Representatives
shall have received a signed letter from Countrywide Credit Industries, Inc.
('CCI') to the effect that during a period of 180 days from the date of the
Pricing Agreement, CCI will not, without providing 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 Common Stock or any
securities convertible into Common Stock of the Company and that for a period of
30 days after the date of any such notice the Representatives shall have an
irrevocable and first option, but not the obligation, to purchase from CCI any
such Common Stock or security that is the subject of such notice. Any such
option shall be exercisable on the proposed date of disposition of the Common
Stock or security that is the subject of such notice, and the exercise price
therefor shall be the then-prevailing market price of such Common Stock or
security.
(g) At Closing Time, the Securities shall have been approved for listing on
the New York Stock Exchange subject to official notice of issuance.
(h) At Closing Time and each Date of Delivery, if any, counsel for the
Underwriters shall have been furnished with such documents and opinions as they
may reasonably require for the purpose of enabling them to pass upon the
issuance and sale of the Securities as herein contemplated and related
proceedings, or in order to evidence the accuracy of any of the representations
or warranties, or the fulfillment of any of the conditions, herein contained;
and all proceedings taken by the Company in connection with the issuance and
sale of the Securities as herein contemplated shall be reasonably satisfactory
in form and substance to the Representatives and counsel for the Underwriters.
(i) In the event the Underwriters exercise their option provided in Section
2(b) hereof to purchase all or any portion of the Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company hereunder shall be true
and correct as of each Date of Delivery, and the Representatives shall have
received:
(i) A certificate, dated such Date of Delivery, of the President or a
Vice President of the Company and the chief financial or chief accounting
officer of the Company, in their capacities as such, confirming that the
certificate delivered at Closing Time pursuant to Section 5(c) hereof
remains true as of such Date of Delivery.
(ii) The favorable opinion of Brown & Wood, counsel for the Company,
in form and substance satisfactory to counsel for the Underwriters, dated
such Date of Delivery, relating to the Option Securities and otherwise to
the same effect as the opinion required by Section 5(b)(1) hereof.
<PAGE>
-21-
(iii) The favorable opinion of Thacher Proffitt & Wood, counsel for
the Underwriters, dated such Date of Delivery, relating to the Option
Securities and otherwise to the same effect as the opinion required by
Section 5(b)(2) hereof.
(iv) The favorable opinion of Richard H. Wohl, Esq., counsel for the
Company, dated such Date of Delivery, relating to the Option Securities and
otherwise to the same effect as the opinion required by Section 5(b)(3)
hereof.
(v) The favorable opinion of Sandor E. Samuels, Esq., counsel for CFC
and the Manager, dated such Date of Delivery, relating to the Option
Securities and otherwise to the same effect as the opinion required by
Section 5(b)(4) hereof.
(vi) A letter from Grant Thornton, in form and substance satisfactory
to the Representatives and dated such Date of Delivery, substantially the
same in scope and substance as the letter furnished to the Representatives
pursuant to Section 5(e) hereof, except that the 'specified date' in the
letter furnished pursuant to this Section 5(i)(vi) shall be a date not more
than five days prior to such Date of Delivery.
If any condition specified in this Section shall not have been fulfilled
when and as required to be fulfilled, this Agreement may be terminated by the
Representatives by notice to the Company at any time at or prior to Closing
Time, and such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof.
Section 6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of Section
15 of the 1933 Act as follows:
(i) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(or any amendment thereto), including the information deemed to be part of
the Registration Statement pursuant to Rule 430A(b) of the 1933 Act
Regulations, if applicable, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading or arising out of any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto) or
the omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense
whatsoever, as incurred, to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by any
governmental agency
<PAGE>
-22-
or body, commenced or threatened, or of any claim whatsoever based upon any
such untrue statement or omission, or any such alleged untrue statement or
omission, if such settlement is effected with the prior written consent of
the Company; and
(iii) against any and all expense whatsoever, as incurred (including,
subject to Section 6(c) hereof, the fees and disbursements of counsel
chosen by the Representatives) reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or threatened, or
any claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representatives expressly for use in the Registration
Statement (or any amendment thereto) or any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto).
The foregoing indemnity with respect to any untrue statement contained in
or omission from a preliminary prospectus shall not inure to the benefit of the
Underwriters (or any person controlling such Underwriters) from whom the person
asserting any such loss, liability, claim, damage or expense purchased any of
the Securities which are the subject thereof if the Company shall sustain the
burden of proving that such person was not sent or given a copy of the
Prospectus (or the Prospectus as amended or supplemented) at or prior to the
written confirmation of the sale of such Securities to such person, and the
untrue statement contained in or omitted from such preliminary prospectus was
corrected in the Prospectus (or the Prospectus as amended or supplemented).
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act against any and all loss, liability, claim, damage
and expense described in the indemnity contained in subsection (a) of this
Section, as incurred, but only with respect to untrue statements or omissions,
or alleged untrue statements or omissions, made in the Registration Statement
(or any amendment thereto) or any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) in reliance upon and in conformity with
written information furnished to the Company by such Underwriter through the
Representatives expressly for use in the Registration Statement (or any
amendment thereto) or such preliminary prospectus or the Prospectus (or any
amendment or supplement thereto).
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced against it in
respect of which indemnity may be sought hereunder, but failure to so notify an
indemnifying party shall not relieve such indemnifying party from any liability
which it may have otherwise than on account of this indemnity agreement. An
indemnifying party may participate at its own expense in the
<PAGE>
-23-
defense of any such action. If it so elects within a reasonable time after
receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume the defense of such
action with counsel chosen by it and approved by the indemnified parties
defendant in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
which are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action.
In no event shall the indemnifying parties be liable for fees and expenses of
more than one counsel (in addition to any local counsel) separate from their own
counsel for all indemnified parties in connection with any one action or
separate but similar or related actions in the same jurisdiction arising out of
the same general allegations or circumstances.
Section 7. Contribution. In order to provide for just and equitable
contribution in circumstances in which the indemnity agreement provided for in
Section 6 hereof is for any reason held to be unenforceable by the indemnified
parties although applicable in accordance with its terms, the Company and the
Underwriters shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by said indemnity agreement
incurred by the Company and one or more of the Underwriters, as incurred, in
such proportions that the Underwriters are responsible for that portion
represented by the percentage that the underwriting discount appearing on the
cover page of the Prospectus bears to the initial public offering price
appearing thereon and the Company is responsible for the balance; provided,
however, that no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section, each person, if any, who controls an Underwriter within the
meaning of Section 15 of the 1933 Act shall have the same rights to contribution
as such Underwriter, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act shall have
the same rights to contribution as the Company.
Section 8. Representations, Warranties and Agreements to Survive Delivery.
All representations, warranties and agreements contained in this Agreement and
the Pricing Agreement, or contained in certificates of officers of the Company
submitted pursuant hereto, shall remain operative and in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter or
controlling person, or by or on behalf of the Company, and shall survive
delivery of the Securities to the Underwriters.
Section 9. Termination of Agreement.
(a) The Representatives may terminate this Agreement, by notice to the
Company, at any time at or prior to Closing Time (i) if there has been, since
the date of this Agreement or since the respective dates as of which information
is given in the Prospectus, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, (ii) if there has
occurred any material adverse change in the financial markets in the United
States or elsewhere or any outbreak of
<PAGE>
-24-
hostilities or escalation thereof or other calamity or crisis, the effect of
which is such as to make it, in the judgment of the Representatives,
impracticable to market the Securities or to enforce contracts for the sale of
the Securities, (iii) if trading in the Common Stock has been suspended by the
Commission, or if trading generally on either the American Stock Exchange or the
New York Stock Exchange has been suspended, or minimum or maximum prices for
trading have been fixed, or maximum ranges for prices for securities have been
required, by either of said Exchanges or by order of the Commission or any other
governmental authority, or (iv) if a banking moratorium has been declared by
either federal, New York or California authorities. As used in this Section
9(a), the term 'Prospectus' means the Prospectus in the form first used to
confirm sales of the Securities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party except as
provided in Section 4 hereof.
Section 10. Default by One or More of the Underwriters. If one or more of
the Underwriters shall fail at Closing Time to purchase the Initial Securities
which it or they are obligated to purchase under this Agreement and the Pricing
Agreement (the 'Defaulted Securities'), the Representatives shall have the
right, but not the obligation, within 24 hours thereafter, to make arrangements
for one or more of the non-defaulting Underwriters, or any other underwriters,
to purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Representatives shall not have completed such arrangements within such
24-hour period, then the Company shall be entitled to an additional 24 hours
within which to make arrangements for one or more substitute underwriters, who
shall be reasonably satisfactory to the Representatives, to purchase all, but
not less than all, of the Defaulted Securities; if, however, the Company shall
not have completed such arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of the
number of Initial Securities, the non-defaulting Underwriters shall be
obligated, severally and not jointly, to purchase the full amount thereof
in the proportions that their respective underwriting obligations hereunder
bear to the underwriting obligations of all non-defaulting Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of
Initial Securities, this Agreement shall terminate without liability on the
part of any non-defaulting Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement, either the Representatives or the Company shall have the right
to postpone Closing Time for a period not exceeding seven days in order to
effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements.
Section 11. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the
Underwriters shall be directed to the Representatives
<PAGE>
25
c/o Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Merrill Lynch World Headquarters, North Tower, World Financial Center, New York,
New York 10281-1201, attention of Steven J. Goulart; notices to the Company
shall be directed to 35 North Lake Avenue, Pasadena, California 91109-7137,
attention of Michael W. Perry.
Section 12. Parties. This Agreement and the Pricing Agreement shall each
inure to the benefit of and be binding upon the Underwriters, the Company and
their respective successors. Nothing expressed or mentioned in this Agreement or
the Pricing Agreement is intended or shall be construed to give any person, firm
or corporation, other than the Underwriters, the Company and their respective
successors and the controlling persons and officers and directors referred to in
Sections 6 and 7 hereof and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or the
Pricing Agreement or any provision herein or therein contained. This Agreement
and the Pricing Agreement and all conditions and provisions hereof and thereof
are intended to be for the sole and exclusive benefit of the Underwriters, the
Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities from
any Underwriter shall be deemed to be a successor by reason merely of such
purchase.
Section 13. Governing Law and Time. This Agreement and the Pricing
Agreement shall be governed by and construed in accordance with the laws of the
State of New York applicable to agreements made and to be performed in said
State. Except as otherwise set forth herein, specified times of day refer to New
York time.
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and us in accordance with its terms.
Very truly yours,
CWM MORTGAGE HOLDINGS, INC.
By:
---------------------------------------
Title: Executive Vice President and
Chief Operating Officer
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By:___________________________________
Investment Banking Group
ALEX. BROWN & SONS INCORPORATED
By:___________________________________
Title:
DEAN WITTER REYNOLDS INC.
By:___________________________________
Title:
PAINEWEBBER INCORPORATED
By:___________________________________
Title:
SALOMON BROTHERS INC
By:___________________________________
Title:
For themselves and as Representatives of the
other Underwriters named in Schedule A hereto.
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Initial
Underwriter Securities
- ----------- ---------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .....................................................
Alex. Brown & Sons Incorporated ...............................................
Dean Witter Reynolds Inc ......................................................
PaineWebber Incorporated ......................................................
Salomon Brothers Inc ..........................................................
Total .................................................................6,000,000
----------
</TABLE>
i
<PAGE>
EXHIBIT A
__________ Shares
CWM MORTGAGE HOLDINGS, INC.
(a Delaware corporation)
Common Stock
(Par Value $.01 Per Share)
PRICING AGREEMENT
January , 1995
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
ALEX. BROWN & SONS INCORPORATED
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
SALOMON BROTHERS INC
As Representatives of the several
Underwriters named in the within-
mentioned Purchase Agreement
c/o MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10281-1209
Dear Sirs:
Reference is made to the Purchase Agreement, dated January __, 1995 (the
'Purchase Agreement'), relating to the purchase by the several Underwriters
named in Schedule A thereto, for whom Merrill Lynch & Co., 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') of the above shares of Common
Stock (the 'Securities'), of CWM Mortgage Holdings, Inc. (the 'Company').
Pursuant to Section 2 of the Purchase Agreement, the Company agrees with
each Underwriter as follows:
1. The initial public offering price per share for the Securities,
determined as provided in said Section 2, shall be $_____.
2. The purchase price per share for the Securities to be paid by the
several Underwriters shall be $__ being an amount equal to the initial
public offering price set forth above less $__ per share; provided that the
purchase price per share for any Option Securities (as defined in the
Purchase Agreement) purchased upon exercise of the over-allotment option
described in Section 2(b) of the Purchase Agreement shall be reduced by an
amount per share equal to any dividends declared by the Company and payable
on the Initial Securities (as defined in the Purchase Agreement) but not
payable on the Option Securities.
A-1
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to the Company a counterpart hereof, whereupon this
instrument, along with all counterparts, will become a binding agreement between
the Underwriters and us in accordance with its terms.
Very truly yours,
CWM MORTGAGE HOLDINGS, INC.
By:________________________________
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
By:___________________________________
Investment Banking Group
ALEX. BROWN & SONS INCORPORATED
By:___________________________________
Title:
DEAN WITTER REYNOLDS INC.
By:___________________________________
Title:
PAINEWEBBER INCORPORATED
By:___________________________________
Title:
SALOMON BROTHERS INC
By:___________________________________
Title:
For themselves and as Representatives of the
other Underwriters named in the Purchase Agreement.
A-2
<PAGE>
Exhibit 5.1
January 6, 1995
CWM Mortgage Holdings, Inc.
35 North Lake Avenue
Pasadena, California 91101
Gentlemen:
We have acted as counsel to CWM Mortgage Holdings, Inc., a
Delaware corporation (the 'Company'), in connection with the public offering
(the 'Offering') by the Company of up to 6,900,000 shares (the 'Shares') of the
Company's Common Stock, par value $.01 per share (the 'Common Stock').
This opinion is delivered in accordance with the requirements
of Item 601(b)(5) of Regulation S-K under the Securities Act of 1933, as amended
(the 'Securities Act').
In connection with this opinion, we have examined and are
familiar with originals or copies, certified or otherwise identified to our
satisfaction, of (i) the Registration Statement on Form S-3, File No. 33-56547,
relating to the Shares, filed with the Securities and Exchange Commission (the
'Commission') under the Securities Act on November 22, 1994 (as such
Registration Statement may be subsequently amended and together with all
exhibits thereto, the 'Registration Statement'), (ii) the Certificate of
Incorporation of the Company as currently in effect, (iii) the By-laws of the
Company as currently in effect, (iv) a specimen of the certificate to be used to
represent the Common Stock, and (v) resolutions of the Board of Directors of the
Company relating to the issuance of the Shares and the filing of the
Registration Statement. We have also examined originals or copies, certified or
otherwise identified to our satisfaction, of such records of the Company and
such agreements, certificates of public officials, certificates of officers or
representatives
<PAGE>
of the Company and others, and such other documents, certificates and records,
as we have deemed necessary or appropriate as a basis for the opinions set forth
herein.
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents, of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. As to any facts material
to the opinion expressed herein, we have relied upon oral or written statements
and representations of officers and other representatives of the Company and
others.
Based upon and subject to the foregoing, we are of the opinion
that, when delivered to and paid for by the Underwriters in accordance with the
Underwriting Agreement and Pricing Agreement to be entered into by the Company
and the Underwriters (substantially in the form set forth in Exhibit 1.1 to the
Registration Statement), the Shares will be validly issued, fully paid and
nonassessable.
We hereby consent to the filing of this opinion with the
Commission as Exhibit 5.1 to the Registration Statement. We also consent to the
reference to our Firm under the heading 'Legal Matters' in the Registration
Statement. In giving such consent, we do not thereby admit that we are in the
category of persons whose consent is required under Section 7 of the Securities
Act.
Very truly yours,
/s/ BROWN & WOOD
2
<PAGE>
Exhibit 8.1
January 6, 1995
CWM Mortgage Holdings, Inc.
35 North Lake Road
Pasadena, California 91101
Dear Sirs:
We have acted as counsel to CWM Mortgage Holdings, Inc., a
Delaware corporation (the 'Company'), in connection with the public offering
(the 'Offering') by the Company of up to 6,900,000 shares (the 'Shares') of the
Company's Common Stock, par value $.01 per share (the 'Common Stock').
This opinion is delivered in accordance with the requirements
of Item 601(b)(8) of Regulation S-K under the Securities Act of 1933, as amended
(the 'Securities Act').
In connection with this opinion, we have examined and are
familiar with originals or copies, certified or otherwise identified to our
satisfaction, of (i) the Registration Statement on Form S-3, File No. 33-56547,
relating to the Shares, filed with the Securities and Exchange Commission (the
'Commission') under the Securities Act on November 22, 1994 (as such
Registration Statement may be subsequently amended and together with all
exhibits thereto, the 'Registration Statement'), (ii) the Certificate of
Incorporation of the Company as currently in effect, and (iii) the By-laws of
the Company as currently in effect. We have also examined originals or copies,
certified or otherwise identified to our satisfaction, of such records of the
Company and such agreements, certificates of public officials, certificates of
officers or representatives of the Company and others, and such other documents,
certificates and records, as we have deemed necessary or appropriate as a basis
for the opinions set forth herein.
<PAGE>
In our examination, we have assumed the legal capacity of all
natural persons, the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity to original documents, of
all documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents.
This opinion is based on various assumptions, and is
conditioned upon certain representations made by the Company as to factual
matters set forth in the discussion of 'Federal Income Tax Considerations' in
the Registration Statement. In addition, this opinion is based upon certain
factual representations of the Company concerning its business and properties.
Based on such facts, assumptions and representations, it is
our opinion that:
(1) Commencing with the Company's taxable year ending December
31, 1985, the Company has been organized in conformity with the requirements for
qualification as a real estate investment trust, 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 Internal Revenue Code of 1986, as
amended (the 'Code').
(2) The information in the Registration Statement under the
caption 'Federal Income Tax Considerations,' to the extent that it constitutes
matters of law, summaries of legal matters, or legal conclusions, has been
reviewed by us and is accurate in all material respects.
No opinion is expressed as to any matter not discussed herein.
This opinion is based on various statutory provisions,
regulations promulgated thereunder and interpretations thereof by the Internal
Revenue Service and the courts having jurisdiction over such matters, all of
which are subject to change either prospectively or retroactively. Also, any
variation or difference in the facts from those set forth in the Company's
representations may effect the conclusions stated herein. Moreover, the
Company's qualification and taxation as a real estate investment trust depends
upon the Company's ability to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Code, the results of which will not be received by Brown
& Wood. Accordingly, no assurance can be given that the actual results of the
Company's operation for any one taxable year will satisfy such requirements.
We hereby consent to the filing of this opinion with the
Commission as Exhibit 8.1 to the Registration Statement. We also consent to the
reference to our Firm under the heading
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<PAGE>
'Legal Matters' in the Registration Statement. In giving such consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act.
Very truly yours,
/s/ BROWN & WOOD
3
<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)
WET INK AND INTERIM FUNDING FACILITY
CONFORMING AND NONCONFORMING MORTGAGE LOANS
Dated: December 9, 1994
CWM Mortgage Holdings, Inc.
35 North Lake Avenue
Pasadena, CA 91101
Independent National Mortgage Corporation
35 North Lake Avenue
Pasadena, CA 91101
Independent Lending Corporation
35 North Lake Avenue
Pasadena, CA 91101
Ladies and Gentlemen:
Lehman Commercial Paper Inc. ('Lehman') is pleased to advise you of the
availability of a loan facility (this 'Facility') for the purpose of financing
the origination by you of first and second lien Mortgage Loans on the terms set
forth in this letter. Capitalized terms not defined herein shall have the
respective meanings given such terms in the Pledge Agreement, dated the date
hereof, between you and Lehman (the 'Pledge Agreement').
1. THE ADVANCES.
Provided that all conditions precedent contained herein have been satisfied and
no Event of Default has occurred and is continuing, Lehman agrees to make
advances (each an 'Advance' and collectively the 'Advances') to you in an
aggregate principal amount not to exceed at any one time outstanding the amount
of the Promissory Note (the 'Maximum Credit'), for the purpose of funding the
origination, purchase or financing by you of Mortgage Loans based on your
delivery to a third party acting as our agent and bailee of the Required
Documents. Up to (a) $ * of such Maximum Credit may be utilized to fund
Wet Funding Transactions (b) $ * of such Maximum Credit can be utilized
to fund Co-Op Loans and (c) $ * of such Maximum Credit can be utilized
to fund second lien Mortgage Loans. Unless otherwise extended or terminated
earlier due to an Event of Default, Lehman's obligations shall be terminated on
the second anniversary of the date hereof (the 'Termination Date'), whereupon
Lehman shall have no further obligations to make Advances.
<PAGE>
All Advances made by Lehman hereunder shall be evidenced by the Promissory Note.
Although the Promissory Note shall be dated the date of issue, interest in
respect thereof shall be payable only for the periods during which the Advances
evidenced thereby are outstanding, and although the stated amount of the
Promissory Note shall be equal to the Maximum Credit, the Promissory Note shall
be enforceable only to the extent of the unpaid aggregate principal amount of
the Advances then outstanding plus any other amounts due thereunder. Within the
limits of the Maximum Credit and in accordance with the terms and conditions
contained herein and in the Relevant Agreements, you may borrow and prepay.
Lehman shall note and endorse on its internal records each Advance and payment
thereon.
2. QUOTED RATES
Lehman shall maintain a funding rate not to exceed (a) * basis points over the
offered LIBOR rate of comparable maturity for Advances collateralized by
Mortgage Loans not eligible or intended to secure or underlie an Agency Security
but which meet certain specified representations and warranties and are subject
to Purchase Commitments ('Interim Transactions'), provided, however, on any such
day that total Advances under the Agreements exceed $ * million but do not
exceed $ * million, the funding rate shall not exceed * basis points over the
offered LIBOR rate of comparable maturity; and (b) * basis points over the
offered LIBOR Rate of comparable maturity for Advances collateralized by
Mortgage Loans, the Required Documents for which have not yet been delivered to
a custodian ('Wet Funding Transactions'). For any Advance creating an aggregate
outstanding balance exceeding $ * million, the funding rate shall be as quoted
by Lehman.
3. MAKING THE ADVANCES.
Prior to 1:00 P.M. (Eastern Standard Time) on the Business Day of the
origination, purchase or financing of each requested Mortgage Loan closing, you
will contact Lehman by telephone to request an Advance and to establish the
relevant funding rates ('Quoted Rates'), as described above, to be paid by you
in respect of such Advance during the relevant period. You will then fax to
Lehman a notice setting forth such Quoted Rates, the principal amount of the
Mortgage Loans, and the wire transfer details (each, a 'Notice of Borrowing')
along with a list of Mortgage Loans to be financed with the name of the
mortgagor and the location of the property to be mortgaged. On each Advance
Date, Lehman will wire into a DDA Account sufficient funds to cover the
requested Mortgage Loan originations, purchases and financings upon the
satisfaction of the conditions precedent to such Advance set forth in Section 9
hereof. Promptly thereafter, Lehman will send to you a written confirmation of
such Advance (each, a 'Confirmation'), and acceptance by you of the related
proceeds shall constitute your agreement to the terms hereof. If more than one
2
<PAGE>
Advance is requested to be made on any date, each such Advance shall be notified
to us on a separate Notice of Borrowing.
4. PAYMENT OF PRINCIPAL AND INTEREST.
You shall repay, and shall pay interest on, each Advance in accordance with the
terms hereof and of the Promissory Note, it being understood that upon each
disbursement of funds as set forth in Section 3 above you shall have effected a
borrowing from Lehman hereunder and shall be indebted to Lehman for the
principal amount thereof, plus interest thereon as set forth below, in
accordance with the terms hereof and of the Promissory Note. You shall be
allowed to prepay Advances, provided that for any 'term transaction' prepaid
prior to the stated Maturity Date, you shall reimburse Lehman for any reasonable
costs incurred by Lehman in connection with such prepayment.
5. PROCEDURES FOR PAYMENTS.
You shall repay each Advance made to you, and the interest thereon, in United
States Dollars and in same day funds, not later than 6:00 P.M. (New York City
time) on the maturity date (the 'Maturity Date'), specified in the related
Notice of Borrowing which Maturity Date may be for 'term' or 'overnight'
transactions and in no event shall be no later than the Termination Date, unless
demanded earlier upon an Event of Default which is not cured within any
applicable cure period.
6. COMMITMENT FEE.
You shall pay Lehman a Commitment Fee of $ * upon acceptance of this
Facility which fee shall be waived for the second year of the Facility.
7. REPRESENTATIONS AND WARRANTIES.
You hereby represent and warrant as follows that as of the date hereof, as of
the date of each Notice of Borrowing and as of each Advance Date:
(a) You are a corporation duly organized, validly existing and in good
standing under the laws of your jurisdiction of incorporation and your principal
place of business, and you are substantially in compliance with applicable law.
(b) Independent National Mortgage Corporation is a HUD-approved
Seller/Servicer.
(c) Your execution, delivery and performance of the Relevant Agreements
are within your charter and corporate powers, have been duly authorized by all
necessary corporate action and do not contravene (i) your charter or bylaws or
(ii) any regulation, law or contractual restriction binding on
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<PAGE>
or affecting you or your property, violation of which would have a material
adverse effect on you or your property.
(d) Other than the necessary filings with the Agencies regarding the
Collateral (to the extent the Collateral includes Agency Mortgage Loans), no
authorization or approval or other action by, and no notice to or filing with,
any governmental authority or regulatory body is required for your due
execution, delivery and performance of the Relevant Agreements.
(e) The Relevant Agreements are your legal, valid and binding
obligations enforceable against you by Lehman in accordance with their
respective terms.
(f) The available balance sheets, statements of income and changes in
financial condition of you and your consolidated subsidiaries as of your most
recently completed fiscal year and quarter, fairly present your financial
condition and results of operations for the period then ended and are in
accordance with generally accepted accounting principles consistently applied,
and copies of such statements, together with the most recent opinion with
respect to such statements of an independent public accounting firm, have been
provided to Lehman, and since such date there has been no material adverse
change in such financial condition or results of operations.
(g) There is no pending or threatened action or proceeding affecting
you or any of your affiliates before any court, governmental agency or
arbitrator, which, if adversely decided, would materially adversely affect the
financial condition or operations of you.
(h) You are duly licensed, qualified and in good standing in every
state where you are required to so qualify and/or obtain licenses, except where
the failure to so qualify would not have a material adverse effect on the
Company's business.
(i) The Relevant Agreements are not entered into in contemplation of
insolvency or with intent to hinder, delay or defraud any of your creditors.
8. COVENANTS.
You hereby covenant as follows:
a. At any time any Advance is made or shall be outstanding, the
Collateral Value of the items of Collateral contained in the Borrowing Base
shall be equal to or greater than the aggregate dollar amount of Advances then
outstanding with the following percentages, as applicable (each, an 'Advance
Rate'), to be used to determine Collateral Value:
4
<PAGE>
<TABLE>
<CAPTION>
Wet Ink Interim
<S> <C>
* % * %
</TABLE>
Notwithstanding the foregoing, (i) Lehman and Customer may agree upon
such other Advance Rates for purposes of determining Collateral Value, (ii) the
Advance Rate with respect to any Mortgage Loans in the Facility for more than
120 days shall be * % and (iii) the Advance Rate with respect to any Second Lien
Mortgage Loans (as defined inthe Pledge Agreement) shall be * %. Lehman shall
mark to market the position in accordance with the definition of Market Value
contained in the Pledge Agreement and to the extent that a deficiency in
Collateral Value exists, Customer shall cure any such deficiency by delivering
and pledging additional Collateral or securities reasonably acceptable to Lehman
or prepaying such Advance without penalty or fee other than as provided in
Section 4 hereof.
b.
(i) You shall cause to be delivered to Lehman within 90 days
after the last day of each fiscal year your audited consolidated statements of
income and statements of changes in cash flow for such year and balance sheets
as of the end of such year (including therein as supplemental information,
consolidating statements of income and statements of changes in cash flow and
balance sheets as of the end of such year) in each case presented fairly in
accordance with GAAP contained in your annual 10-K filing with the SEC and,
accompanied, in all cases, by a report unqualified as to scope of a firm of
independent certified public accountants acceptable to Lehman;
(ii) You shall cause to be delivered to Lehman within 60 days
after the last day of each of the first three fiscal quarters in any fiscal year
your consolidated and consolidating statements of income and statements of
changes in cash flow for such quarter and balance sheets of the end of such
quarter presented fairly in accordance with GAAP contained in your quarterly
10-Q filing with the SEC accompanied in each case by (i) a certificate of your
chief financial officer or treasurer stating that such financial statements are
presented fairly in accordance with GAAP and (ii) an officer's certificate from
the chief financial officer or the treasurer certifying that there does not
exist an Event of Default.
9. CONDITIONS.
(a) Initial Advance. As conditions precedent to the making of the
initial Advance, Lehman shall have received on or before the day of such Advance
the following, each dated the date of the Relevant Agreements, in form and
substance satisfactory to Lehman and duly executed by you:
5
<PAGE>
(i) The Wet Ink and Interim Funding Documents;
(ii) Evidence that all other actions necessary or, in the
reasonable opinion of Lehman, desirable to perfect and protect the security
interest created by the Pledge Agreement have been taken;
(iii) A certified copy of your corporate resolution approving
the Wet Ink and Interim Funding Documents and borrowings thereunder (either
specifically or by general resolution approving borrowings of the type described
in the Wet Ink and Interim Funding Documents), and all documents evidencing
other necessary corporate action or governmental approvals as may be required in
connection with the Wet Ink and Interim Funding Documents;
(iv) A certificate of your corporate secretary certifying the
names, true signatures and titles of your officers duly authorized to request
Advances and sign the Wet Ink and Interim Funding Documents and the other
documents to be delivered thereunder; and
(v) A favorable opinion of your corporate counsel as to such
matters as Lehman may reasonably request.
(b) Each Advance. As conditions precedent to making each Advance,
including the initial Advance:
(i) Lehman shall have received on or before the related
Advance Date, in form and substance satisfactory to Lehman and duly executed:
(A) a Notice of Borrowing (and the account or
accounts to which such funds are to be wired);
(B) such other documents as Lehman may reasonably
request.
(ii) For each Mortgage Loan originated or purchased by the
Customer through funds provided by Lehman, the Custodian shall have received on
or before each Advance Date:
(A) a Mortgage Note (as defined in the Custody
Agreement);
(B) an Assignment of Mortgage (as defined in the
Custody Agreement); and
6
<PAGE>
(C) A Collateral Submission Summary (as defined in
the Custody Agreement;
(iii) For each Mortgage Loan originated or financed by
Customer through funds provided by Lehman, the Customer will deliver to the
Custodian, within five (5) Business Days of each Advance Date, the Wet Ink
Required Documents related to such Advance;
(iv) Within six (6) Business Days of each Advance Date, Lehman
shall have received from the Custodian a signed Collateral Submission Summary
with respect to such Advance.
10. PARTIES ENTITLED TO RELY.
Neither party shall incur liability to the other in acting upon any request or
other communication which such party believes in good faith to have been given
or made by a person authorized to act on that party's behalf, whether or not
such person is listed on the certificate delivered either pursuant to Section
9(a)(iv) or otherwise.
11. TERMINATION.
This Facility shall remain in effect until the Termination Date (if not
terminated earlier due to an Event of Default which occurs and is continuing.)
The parties may agree to extend the term of the Facility on mutually
satisfactory terms and conditions. Any request by you to extend the term of this
Facility must be given in writing to Lehman six (6) months prior to the
then-current Termination Date and Lehman shall notify you of its decision
whether or not to so extend the Facility by a date four (4) months prior to the
then-current Termination Date. Any request for extension received by Lehman
after six (6) months prior to the then-current Termination Date will be
considered by Lehman in is sole discretion. Your obligation to indemnify Lehman
pursuant to this Facility shall survive any termination hereof.
12. ASSIGNMENT; AMENDMENTS, ETC.
The Relevant Agreements are not assignable. Lehman may from time to time sell
participations in its interests hereunder so long as you bear no additional
costs or expenses as a result thereof and Lehman remains solely responsible for
all its obligations hereunder and you are entitled to deal solely with Lehman
and not such participant. No amendment or waiver of any provision of this
Facility or the Promissory Note nor consent to any departure by you therefrom,
shall in any event be effective unless the same shall be in writing and signed
by Lehman, and then such amendment, waiver or consent shall be effective only in
the specific instance and for the specific purpose for which given. The Wet Ink
and
7
<PAGE>
Interim Funding Documents supersede all previous letters of intent and other
agreements between the parties that deal with the same subject matter.
13. COMPENSATION.
You shall compensate and indemnify Lehman for all reasonable losses, costs,
expenses and liabilities which Lehman may sustain (i) if any repayment of any
Advance is not made on the Maturity Date, or (ii) following and during the
continuance of an Event of Default in connection with the protection of Lehman's
rights under or the enforcement of the Relevant Agreements or any other
instrument or document delivered in connection therewith.
14. 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.
15. GOVERNING LAW; CONSENT TO JURISDICTION.
This letter shall be construed in accordance with, and governed by, the law of
the State of New York, without giving effect to the conflict of law principles
thereof. You waive trial by jury. You hereby irrevocably consent 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, arising out
of or relating to the Relevant Agreements in any action or proceeding. You
hereby submit to, and waive any objection you 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 the Relevant Agreements.
8
<PAGE>
If the terms of this Facility are satisfactory to you, please indicate your
agreement and acceptance thereof by signing this letter and returning it to us
whereupon this Facility shall become an agreement between us as of the date of
this Facility.
Very truly yours,
LEHMAN COMMERCIAL PAPER INC.
By: _______________________________
Title:_____________________________
Agreed and Accepted:
CWM MORTGAGE HOLDINGS, INC.
By:__________________________________
Printed Name:________________________
Title:_______________________________
Telephone:___________________________
Facsimile:___________________________
INDEPENDENT NATIONAL MORTGAGE CORPORATION
By:__________________________________
Printed Name:________________________
Title:_______________________________
Telephone:___________________________
Facsimile:___________________________
INDEPENDENT LENDING CORPORATION
By:__________________________________
Printed Name:________________________
Title:_______________________________
Telephone:___________________________
Facsimile:___________________________
9
<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
$ * 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;
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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
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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:________________________
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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:
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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:________________________
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(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.
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'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 *
*
*
*
'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.
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'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;
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<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,
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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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<PAGE>
(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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WET INK AND INTERIM FUNDING PROGRAM
TRI-PARTY CUSTODY AGREEMENT
* * * * * * * * * * * * * * * * * * * * * * * * * * * * * *
BY AND AMONG
CWM MORTGAGE HOLDINGS, INC.
INDEPENDENT NATIONAL MORTGAGE CORPORATION
and
INDEPENDENT LENDING CORPORATION
('Customer')
AND
LEHMAN COMMERCIAL PAPER INC.
('Lehman')
AND
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
('Custodian')
DATED: December 9, 1994
<PAGE>
This CUSTODY AGREEMENT is made and entered into as of the date written on the
cover by and among Customer, Custodian and Lehman.
WHEREAS, Lehman has agreed to extend credit to Customer evidenced by a
Promissory Note dated as of the date on the cover page (the 'Promissory Note')
of Customer;
WHEREAS, Customer has or shall hereafter grant to Lehman a security interest in
certain collateral as security for the due and punctual payment of sums due from
Customer to Lehman;
WHEREAS, Customer intends to deliver certain items of such collateral to
Custodian and Custodian is willing to hold such collateral in custody for the
benefit of, and as agent for Lehman, in order to perfect the security interest
in such collateral of Lehman. Except for the Custodian's obligations to take
possession of such collateral as described herein, the Custodian shall not be
responsible for the validity and perfection of such security interest; and
WHEREAS, the parties to this Agreement desire to set forth the terms and
conditions under which Custodian will hold such collateral;
NOW, THEREFORE, the parties to this Agreement hereby agree as follows:
1. APPOINTMENT OF CUSTODIAN.
Lehman hereby appoints Custodian, and Custodian hereby accepts its appointment,
to act as the agent of Lehman, and its participants (although Custodian shall
solely deal with Lehman), for the purpose of taking custody of such present and
future collateral and proceeds or substitutions thereof. With respect to each
Mortgage Loan described in a Collateral Submission Summary, Custodian's
appointment as Lehman's agent shall terminate upon (i) settlement of purchase of
such Mortgage Loan by any bona fide purchaser ('Nonagency Purchaser') reasonably
acceptable to Lehman and set forth on Schedule II attached hereto, as such
schedule may be amended from time to time, (ii) payment in full of all
outstanding Advances together with interest thereon or (iii) any release in
accordance with Section 8 hereof.
2. DEPOSIT OF COLLATERAL.
Customer shall deposit with Custodian, and Custodian agrees to hold as agent for
Lehman and its participants, such collateral as may have been, or may in the
future be, so deposited hereunder. Custodian shall maintain such collateral so
deposited in separate records and files.
<PAGE>
3. INTERIM REQUIRED DOCUMENTS.
For each Mortgage Loan, Customer shall deposit with Custodian the following
documents (the 'Interim Required Documents'), and/or all such other documents as
Lehman may require from time to time for the purchase by a Nonagency Purchaser
of the related Mortgage Loans, as the case may be, duly authorized and
completed:
(a) the original note endorsed in blank, and without recourse;
(b) an assignment of mortgage (or, in the case of Cooperative Loans, an
assignment of security interest) with assignee in blank but otherwise in
recordable form, but not recorded, and all interim assignments (copies of which
may be provided until originals are available), if any ('Assignment of
Mortgage');
(c) a Collateral Submission Summary, along with a schedule of
mortgages; and
(d) at the request of Lehman, all such other documents as Lehman may
reasonably require from time to time for the purchase of Mortgage Loans by a
Nonagency Purchaser, provided that the Custodian is advised of such documents.
4. WET INK FUNDING REQUIRED DOCUMENTS.
For each Mortgage Loan intended to be originated or financed by Customer through
funds provided by Lehman, Customer shall deposit, or cause to be deposited, with
Custodian the following required documents (the 'Wet Ink Required Documents'),
duly authorized and completed:
(a) On or prior to each date on which Lehman advances funds to Customer
(each such date, an 'Advance Date'), a schedule identifying each such Mortgage
Loan;
(b) Within five (5) Business Days after the Advance Date:
(i) the original note endorsed 'Pay to the order of
_______________' without recourse and signed in the name of the originator by an
officer of the originator ('Mortgage Note');
(ii) an Assignment of Mortgage; and
(iii) a Collateral Submission Summary;
(c) at the request of Lehman, all such other documents as Lehman may
reasonably require from time to time for the purchase of Mortgage Loans by
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a Nonagency Purchaser, provided that the custodian is advised of such documents.
5. SETTLEMENT ACCOUNTS; POSITION REPORTS.
(a) All proceeds from the sale of designated Mortgage Loans to an
Agency or to a Nonagency Purchaser will either be sent directly to Lehman or to
a demand deposit account (the 'Settlement Account') for and on behalf of Lehman
(to the extent of its interest therein). Customer grants Lehman a continuing
lien and first priority security interest in all cash and other proceeds
contained in the Settlement Account to the extent of the Obligations.
(b) Upon the reasonable request of Lehman, with respect to the
Settlement Account, Customer will submit to Custodian and Lehman a Position and
Settlement report substantially in the form of Exhibit C hereto (the 'P&S
Report').
6. CERTIFICATION OF DOCUMENTATION.
Custodian, upon receipt of all of the Interim or Wet Ink Required Documents, as
the case may be (collectively, the 'Required Documents'), shall review such
Required Documents, to verify whether all are complete, whether each such
document purporting to be an original appears on its face to be so, and whether
each such document purporting to be a certified photocopy or conformed copy
appears on its face to be a true copy of its original. Custodian shall promptly
notify Customer and Lehman of any documents which are missing, deficient or
patently inconsistent. Customer shall promptly deposit such missing documents
with Custodian or complete or correct the documents. When the Required Documents
have been received in full and correct form, Custodian will: (i) promptly
deliver a signed Collateral Submission Summary to Lehman; and (ii) upon request
of Lehman, deliver copies of the Required Documents to Lehman. In making such
verification, the Custodian may rely conclusively on the Collateral Submission
Summary, the Required Documents (and the documents constituting the Custodian's
mortgage file), and the Custodian shall have no obligation to independently
verify the correctness of the Customer's certification on such Collateral
Submission Summary or the effectiveness, sufficiency, validity, enforceability,
collectability, recordability, or adequacy of such Collateral Submission
Summary, Required Documents (and the documents constituting the Custodians
mortgage file). Any submission of Required Documents to a Nonagency Purchaser
pursuant to (ii)(a) above shall be accompanied by a completed Bailee's Letter
signed by the Custodian in the form of Exhibit B hereto.
7. FURTHER OBLIGATIONS OF CUSTODIAN.
Custodian shall promptly notify Lehman if (i) Customer fails to pay any amount
due to Custodian under this Agreement or otherwise, and such failure results
in Custodian's accelerating the payment of any amount owed to Custodian by
Customer, or (ii) Custodian has
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<PAGE>
actual knowledge that any mortgage, pledge, lien, security interest or other
charge or encumbrance (other than for the benefit of Lehman) has been placed on
any account maintained by Customer with Custodian or on the Required Documents.
Custodian shall notify Lehman of all Mortgage Loans remaining in the Borrowing
Base for more than 120 consecutive days. Such Mortgage Loans shall have an
Advance Rate of 95% and to the extent such Mortgage Loans exceed 40% of the
Maximum Credit shall have a Collateral Value of zero.
Custodian shall use reasonable care in accordance with the standards it
customarily uses for its other clients engaged in similar transactions and shall
hold the Required Documents in its fire rated storage vault under its exclusive
custody and control, in accordance with customary standards for such custody,
and shall maintain a fidelity bond plus document hazard insurance in a
sufficient amount or be otherwise adequately self-insured to cover any and all
transactions contemplated by this Agreement.
Custodian hereby represents and warrants to each party that Custodian is not
controlled by, under common control with or otherwise affiliated with Customer,
and covenants and agrees with Lehman that in the event any such affiliation
occurs, Custodian shall promptly notify Lehman thereof.
Custodian, Customer and Lehman hereby represent and warrant to each party that
this Agreement has been duly authorized, executed and delivered by each party
and constitutes the legal, valid and binding obligation of each party
enforceable in accordance with its terms.
8. RELEASE OF REQUIRED DOCUMENTS.
(a) Customer may from time to time request Custodian in writing to
permit the withdrawal of certain Required Documents for the purpose of
correction of errors therein or for permanent withdrawal, which request and
withdrawal shall be made as follows. Any such requests to withdraw Required
Documents for permanent withdrawal shall only be made to the extent that after
such contemplated withdrawal, the Collateral Value of Mortgage Loans in the
Borrowing Base equals or exceeds the aggregate dollar amount of all outstanding
Advances as specified in Section 2.2 of the Pledge Agreement and Section 8(a) of
the Facility provided that Lehman, and not Custodian, shall be responsible for
monitoring Collateral Value. Notwithstanding the foregoing, Custodian may permit
the withdrawal of ten Mortgage Loans per pool at any time for the purpose of
correcting such Mortgage Loans without the written consent of Lehman. If more
than twenty Mortgage Loans for a particular pool have been and remain released
for correction at any time, any additional request for release in connection
with such pool will require the consent of Lehman, which consent shall not be
unreasonably withheld. Promptly upon completion of the
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<PAGE>
correction of any such released Required Document and, in any event within 15
days, Customer shall return such documents to Custodian. Any request for release
by Customer shall be in the form of the Request and Receipt form attached hereto
as Exhibit D or such other form as may be mutually agreed upon. Custodian shall
execute an acknowledgment of release of such Required Documents, shall return
one original to Customer, shall forward one original to Lehman, and shall retain
one original. Promptly upon completion of any such correction, Customer shall
return such Required Documents to Custodian.
(b) In the event Customer desires to sell Mortgage Loans directly to an
Agency or to a Nonagency Purchaser, or to request shipment of the Required
Documents on behalf of a borrower to an Agency or to a Nonagency Purchaser, and
written notice of such desire is provided to the Custodian, Custodian shall
complete the endorsements and forward the Required Documents as instructed by
Customer to effect such sale to the respective Agency or Nonagency Purchaser;
provided, however, that any Required Documents that are unacceptable to the
Agency or Nonagency Purchaser shall be returned directly to Custodian and held
by Custodian for Lehman in accordance with this Custody Agreement. Any
submission of Mortgage Loans to an Agency or Nonagency Purchaser shall be
accompanied by a Bailee Letter signed by the Custodian (i) in the form of
Exhibit B-1 hereto in the case of Mortgage Loans which are owned by Customer,
and (ii) in the form of Exhibit B-2 hereto in the case of Mortgage Loans which
are pledged to Customer (and such pledge has been assigned by Customer to
Lehman).
The Custodian shall have no duty to monitor the delivery to it
of such documents other than to note receipt of such on the Collateral
Submission Summary, as applicable.
9. RIGHT TO INSPECT.
Upon reasonable prior written notice to the Custodian, Custodian shall permit
(i) inspection at all reasonable times during regular business hours by Customer
or Lehman (or by their respective agents, attorneys, or auditors when requested
by Customer or Lehman) of the Required Documents and the records of Custodian
relating to this Agreement and (ii) Customer or Lehman (or by their respective
agents, attorneys, or auditors when requested by Lehman or Customer, as
applicable, to make copies of the Required Documents and the records of
Custodian relating to this Agreement.
10. DELIVERY OF REQUIRED DOCUMENTS TO LEHMAN.
If an Event of Default has occurred and is continuing, or upon resignation or
termination of Custodian or other reasonable request, Custodian shall promptly
deliver to Lehman or its designee any or all Required Documents and other items
of collateral in Custodian's custody upon Lehman's written request. Lehman shall
provide Customer with a copy of any such notice delivered to
5
<PAGE>
Custodian. Written instructions as to the method of shipment and shipper(s) the
Custodian is directed to utilize in connection with the transmission of Required
Documents in the performance of the Custodian's duties hereunder shall be
delivered by Lehman to the Custodian prior to any shipment of any Required
Documents pursuant to the request of Lehman hereunder. Lehman will arrange for
the provision of such services at its sole cost and expense (or, at the
Custodian's option, reimburse the Custodian for all costs and expenses incurred
by the Custodian consistent with such instructions) and will maintain such
insurance against loss or damage to the Required Documents as Lehman deems
appropriate.
11. CUSTODIAN FEES.
It is understood that Custodian, or its successor, will charge such reasonable
fees for its services under this Agreement as are set forth in a separate
agreement between Custodian and Customer, the payment of which, together with
Custodian's reasonable expenses in connection herewith, shall be solely the
obligation of Customer.
12. TERMINATION.
Custodian may terminate its obligations under this Agreement upon 30 days prior
written notice to Customer and Lehman. In the event of such termination,
Customer shall appoint a successor custodian, subject to approval by Lehman, and
Custodian shall promptly transfer to the successor custodian, as directed, all
Required Documents and other items of collateral being held by Custodian under
this Agreement. If, however, a successor custodian is not appointed by the
Customer or Lehman within sixty (60) days, all duties and obligations of the
Custodian shall cease and terminate. The Custodian's sole responsibility
thereafter shall be to safely maintain all of the Custodian's mortgage files and
to deliver the same to a successor custodian; provided, however, if the Customer
and Lehman have not appointed a successor custodian within thirty (30) days
after the expiration of the aforementioned 60 day period, Custodian shall
deliver such documents to Lehman. Lehman and Customer may terminate Custodian's
appointment hereunder upon fifteen (15) days prior notice to Custodian. If
Lehman and Customer have not appointed a successor Custodian within thirty (30)
days thereafter, Custodian shall deliver all Required Documents to Lehman.
13. REPRESENTATION BY CUSTOMER.
Customer hereby represents and warrants to Lehman that:
(a) the Collateral Value of all Mortgage Loans remaining in the
Borrowing Base for more than 120 consecutive days does not exceed 40% of the
Maximum Credit; and
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<PAGE>
(b) In the case of originations by Customer, all other documents and
requirements to create an enforceable first lien mortgage on the related real
estate property have been completed and duly executed.
14. NOTICES.
All written communications hereunder shall be mailed, telecopied or delivered,
if to Customer or to Custodian at its address as indicated on Schedule I, and if
to Lehman, at its address at 3 World Financial Center, 9th Floor, New York, NY
10285-0900 or Telecopy: (212) 528-9284, Attention: Central Funding Department,
or as to each party, at such other address as shall be designated by such party
in a written notice to the other party. All such notices and communications
shall be effective when delivered to the party to which such notice is to be
given.
15. CONCERNING THE CUSTODIAN.
Custodian shall not be liable for any action or omission to act hereunder except
for its own gross negligence or willful misconduct. In no event shall Custodian
have any responsibility to ascertain or take action with respect to the Required
Documents and other items of collateral, except as expressly provided herein.
The Custodian may act in reliance upon any written communication of Customer and
Lehman concerning the delivery of the Required Documents and other items of
collateral pursuant to this Agreement reasonably believed by Custodian to be
genuine and signed by the proper party. Custodian does not assume and shall have
no responsibility for, and makes no representation as to, monitoring the value
of the Required Documents and other items of collateral. In no event shall the
Custodian or its directors, officers, agents and employees be held liable for
any special, indirect, punitive or consequential damages resulting from any
action taken or omitted to be taken by it or them hereunder or in connection
herewith even if advised of the possibility of such damages.
16. REPRESENTATIONS BY CUSTODIAN.
Custodian hereby represents and warrants that it will not assert any lien, claim
or adverse interest against the collateral. However, the Custodian makes no
representations as to the title, or as to the validity or adequacy of the
security afforded thereby or hereby (except as to Custodian's authority to enter
into this Agreement), and Custodian shall incur no liability or responsibility
in respect of any such matters.
17. DUTIES OF CUSTODIAN.
Custodian shall have no duties or responsibilities except those that are
specifically set forth herein and no duties or obligations shall be implied in
this Agreement against Custodian. Custodian shall be under no responsibility or
duty with respect to the disposition of any Required Documents while such
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<PAGE>
Required Documents are not in its possession. If Custodian shall request
instructions from Lehman with respect to any act, action or failure to act in
connection with this Agreement, Custodian shall be entitled to refrain from
taking such action and continue to refrain from acting unless and until
Custodian shall have received written instructions from Lehman without incurring
any liability therefor to Lehman, Customer or any other person.
If the Custodian shall at any time receive conflicting instructions from Lehman
and the Customer with respect to Custodian's mortgage files and the conflict
between such instructions cannot be resolved by reference to the terms of this
Custody Agreement, Custodian shall be entitled to rely in good faith on the
instructions of Lehman. In the absence of bad faith, gross negligence or willful
misconduct on the part of the Custodian, the Custodian may conclusively rely, as
to the truth of the statements and the correctness of the opinions expressed
therein, upon any request, instructions, certificate, opinion or other document
furnished to the Custodian, reasonably believed by the Custodian to be genuine
and to have been signed or presented by the proper party or parties and
conforming to the requirements of this Custody Agreement. The Custodian may rely
upon the validity of documents delivered to it, without investigation as to
their authenticity or legal effectiveness. The Custodian shall not be
responsible to Lehman or any other party for recitals, statements or warranties
or representations of the Customer contained herein, or in any document or be
bound to ascertain or inquire as to the performance or observance of any of the
terms of this Custody Agreement or any other agreement on the part of any party,
except as may otherwise be specifically set forth herein. No provision of this
Custody Agreement shall require the Custodian to expend or risk its own funds or
otherwise incur financial liability in the performance of its duties under this
Custody Agreement if it shall have the reasonable grounds for believing that
repayment of such funds or adequate indemnity is not reasonably assured to it.
The Custodian may consult with counsel with regard to legal questions arising
out of or in connection with this Agreement and the advice or opinion of such
counsel shall be full and complete authorization and protection in respect of
any action taken, omitted or suffered by the Custodian in good faith in
accordance therewith.
Lehman hereby authorizes and directs Custodian to [complete and] sign on behalf
of Lehman each of the Required Documents referred to in Sections 3 and 4 hereof.
Without limiting the generality of the foregoing, Custodian may rely upon and
shall be protected in acting in good faith upon any notice or other
communication received by it and which it reasonably believes to be genuine and
duly authorized with respect to all matters pertaining to this Agreement and its
duties hereunder; provided, however, that nothing set forth in this Section
shall relieve Custodian of its obligations set forth in Section 6 of this
Agreement.
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18. INDEMNIFICATION.
Customer agrees to reimburse, indemnify and hold harmless Custodian, its
directors, officers, employees, or agents from and against any and all
liability, loss, cost and expense, including reasonable fees and expenses of
counsel, arising from or connected with Custodian's execution and performance of
this Agreement, including but not limited to the claims of any third parties,
including Lehman, except in the case of loss, liability or expense resulting
from gross negligence or willful misconduct on the part of Custodian. To the
extent Custodian is not reimbursed, indemnified or held harmless by Customer,
Lehman will reimburse, indemnify and hold harmless Custodian, its directors,
officers, employees and agents for liability, loss or expense arising from any
action or refraining from action in accordance with instructions given to
Custodian by Lehman, and Customer shall reimburse Lehman for any sums so
expended by Lehman. The foregoing indemnification shall survive any termination
of this Custody Agreement.
19. AUTHORIZATIONS.
Each of the persons whose signatures and titles appear on Schedule I (an
'Authorized Representative') is authorized, acting singly, to act for Customer,
Lehman, or Custodian, as the case may be, under this Agreement. The specimen
signature for each such Authorized Representative of the Company, the Custodian
and Lehman initially authorized hereunder is set forth on Schedule I. From time
to time, the Customer, the Custodian and Lehman may, by delivering to the other
a revised schedule, change the information previously given, but each of the
parties hereto shall be entitled to rely conclusively on the then current
schedule until receipt of a superseding schedule. The Custodian may rely, and
shall be protected in acting or refraining to act, upon any written instruction,
notice, order, request, direction, certificate, opinion or other instrument or
document believed by the Custodian to be genuine and to have been signed or
presented by an Authorized Representative in the case of the Customer and
Lehman, and by the proper party or parties in all other cases.
20. AMENDMENTS, ETC.
No amendment or waiver of any provision of this 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 (provided that Lehman may modify
the Required Documents set forth in Sections 3 and 4 hereof by giving notice of
such modification to Customer and Custodian, which notice is not objected to
within three (3) business days after being given and provided that such
modification is consistent with industry practice), and then such amendment,
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given. This Custody Agreement constitutes the entire
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agreement and understanding of the parties with respect to the matters and
transactions contemplated by this Custody Agreement and supersedes any prior
agreement and understandings with respect to those matters and transactions. The
provisions of this Custody Agreement set forth the exclusive duties of the
Custodian and no implied duties shall be read into this Custody Agreement
against the Custodian.
21. SEVERABILITY.
If any provision of this Agreement is declared invalid by any court of competent
jurisdiction, such invalidity shall not affect any other provision, and this
Agreement shall be enforced to the fullest extent permitted by law.
22. BINDING EFFECT; GOVERNING LAW.
This Agreement shall be binding and inure to the benefit of the parties hereto,
provided, however, that no party may assign this Agreement or any of its rights
or obligations hereunder except with the prior written consent of the other
parties. 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 law
principles thereof. The parties hereto waive trial by jury.
23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at the closing, and (c)
certificates and other information previously or hereafter furnished, may be
reproduced by any photographic, photostatic, microfilm, micro-card, miniature
photographic or other similar process. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
24. QUALIFICATION.
Nothing in this Agreement shall be deemed to impose upon the Custodian any duty
to qualify to do business in any jurisdiction other than the State of
California.
25. TAX REPORTS.
The Custodian is not responsible for preparing or filing any reports or returns
relating to federal, state or local income taxes with respect to this Agreement,
other than for the Custodian's compensation or for reimbursement of expenses.
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26. FORCE MAJEURE.
The Custodian shall not be responsible for delays or failures in performance
resulting from acts beyond its control. Such acts shall include but not be
limited to acts of God, strikes, lockouts, riots, acts or war or terrorism,
epidemics, nationalization, expropriation, currency restrictions, governmental
regulations superimposed after the fact, fire, communication line failures,
computer viruses, power failures, earthquakes or other disasters.
27. Exhibit E and its annexes shall govern the use of Custodian's CTS System
(as defined therein).
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IN WITNESS WHEREOF, the parties have signed this Agreement as of the date and
year first above written.
CWM MORTGAGE HOLDINGS, INC.
By:___________________________________
Title:__________________________________
INDEPENDENT NATIONAL MORTGAGE CORPORATION
By:___________________________________
Title:__________________________________
INDEPENDENT LENDING CORPORATION
By:___________________________________
Title:__________________________________
Custodian:
STATE STREET BANK AND TRUST COMPANY OF CALIFORNIA, N.A.
By:____________________________________
Printed Name:___________________________
Title:__________________________________
Lehman: LEHMAN COMMERCIAL PAPER INC.
By:______________________________
Title:______________________________
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SCHEDULE I
CUSTOMER NOTICES
Name:________________________________
Address:______________________________
______________________________
Title:__________________________________
Telephone:_____________________________
Facsimile:______________________________
CUSTOMER AUTHORIZATIONS
Any person whose signature and title appears below is authorized, acting singly,
to act for Customer under this Agreement:
_________________________ __________________________
Title: _________________________ __________________________
CUSTODIAN NOTICES
Name: Janet Lee, Mortgage Custody Dept.
Address: 725 South Figueroa Street, Suite 3100
Los Angeles, CA 90017
Title: Assistant Vice President
Telephone: (213) 362-7424
Facsimile: (213) 362-7431
CUSTODIAN AUTHORIZATIONS
Any person whose signature and title appears below is authorized, acting singly,
to act for Custodian, or for Custodian as Agent for Lehman, under this
Agreement:
_________________________ __________________________
Title: _________________________ __________________________
LEHMAN AUTHORIZATIONS
Any person whose signature and title appears below is authorized, acting singly,
to act for Lehman under this Agreement:
_________________________ __________________________
Title: _________________________ __________________________
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EXHIBIT A
Collateral Submission Summary No. ___
Lehman Commercial Paper Inc.
1 Battery Park Plaza, 2nd Floor ________________________________
New York, New York 10004 ________________________________
Attn: Clearance/Pipeline Funding Attn:____________________________
Facsimile (212) 528-5841 Facsimile:________________________
Reference is made to the Tri-Party Custody Agreement dated November __, 1994
(the 'Custody Agreement') among the undersigned ('Customer'), ('Custodian'),
State Street Bank and Trust Company of California, N.A. and Lehman Commercial
Paper Inc. ('Lehman'). Capitalized terms not defined herein have the respective
meanings assigned thereto in the Tri-Party Custody Agreement.
CERTIFICATION OF CUSTOMER. In consideration of Lehman making advances to finance
the securitization or cash purchase period for the mortgage loans having an
aggregate face value of $ and more fully described in Schedule I attached
hereto, the undersigned duly authorized officer of Customer states that:
(a) the Required Documents with respect to such Mortgage Loans have been, or are
hereby submitted, or will be submitted within five business days, to Custodian
pursuant to the Custody Agreement;
(b) all other documents related to such Mortgage Loans (including but not
limited to mortgages, insurance policies, loan applications and appraisals) have
been or will be created and held by Customer in trust for Lehman; and
(c) all documents related to such Mortgage Loans being withdrawn hereunder shall
be held in trust by Customer for Lehman, and Customer will not attempt to pledge
or otherwise hypothecate such mortgage loans to any other party until the
Advance to which the mortgage loans are related has been paid in full by
Customer.
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A security interest in such Mortgage Loans has been granted by Customer to
Lehman, or a security interest granted to Customer in such Mortgage Loans has
been assigned to Lehman. At the request of Lehman, all such other related
documents will be delivered to Custodian or Lehman and may be inspected or
verified at any time by such parties.
_________________________ Date:__________________________
By: _________________________ Title:__________________________
Certification of Custodian.
Custodian hereby acknowledges that it has examined and holds as agent for Lehman
the Required Documents referred to above as delivered to it pursuant to the
Custody Agreement. The Custodian makes no representations as to (i) the
validity, legality, enforceability or genuineness of any of the documents
contained in each Custodian's Mortgage File or any of the Mortgage Loans
identified on the Mortgage Loan Schedule, or (ii) the collectability,
insurability, effectiveness or suitability of such Mortgage Loans.
_________________________ Date:__________________________
By: _________________________ Title:__________________________
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EXHIBIT B-1
Sample Bailee Letter
Date: _________, 199__
[PURCHASER]
Gentlemen:
Attached please find those Mortgage Loans listed separately on the attached
schedule, which Mortgage Loans are owned by _______________ ('Borrower') and are
being delivered to you for purchase.The Mortgage Loans comprise a portion of the
collateral (as the term 'Collateral' and capitalized terms not otherwise defined
hereunder are defined in) the Tri-Party Custody Agreement (the 'Agreement'),
dated as of November __, 1994, (and as it may hereafter be amended by and among
Borrower, State Street Bank and Trust Company of California, N.A. as Custodian
('Custodian') and Lehman Commercial Paper Inc., as lender ('Lehman'). Each of
the Mortgage Loans is subject to a security interest in favor of Lehman, which
security interest shall be automatically released upon Lehman's receipt of the
full amount of the purchase price of such Mortgage Loan (as set forth on the
schedule attached hereto) by wire transfer to the following account maintained
with Lehman:
Citibank NYC/40615659 ABA 021000089
For Further Credit to Lehman Commercial Paper Inc.
Reference: Pipeline Funding/____________________
Pending your purchase of each Mortgage Loan and until payment therefor is
received, the aforesaid security interest therein will remain in full force and
effect, and you shall hold possession of such Collateral and the documentation
evidencing same as custodian, agent and bailee for Lehman. In the event any
Mortgage Loan is unacceptable for purchase, return the rejected item directly to
the undersigned at the address set forth below. In no event shall any Mortgage
Loan be returned or sales proceeds remitted to the Borrower. The Mortgage Loan
must be so returned or sales proceeds remitted in full no later than forty-five
(45) days from the date hereof. If you are unable to comply with the above
instructions, please so advise the undersigned immediately.
NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS LETTER, YOU
CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE ON BEHALF OF THE LENDER ON THE
TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED REQUESTS THAT YOU ACKNOWLEDGE
RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND THIS LETTER BY SIGNING AND RETURNING
THE ENCLOSED COPY OF THIS LETTER TO THE UNDERSIGNED AT THE FOLLOWING ADDRESS:
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State Street Bank and Trust Company of California, N.A.
725 South Figueroa Street
Los Angeles, California 90017
Attn: Mortgage Custody Department
HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT.
Sincerely, State Street Bank and Trust Company of California, N.A., as custodian
for Lehman and its assigns
By:___________________________________
Name:________________________________
Title:__________________________________
IRREVOCABLY ACKNOWLEDGED AND AGREED TO: Schedule # ________
[PURCHASER]
By:___________________________________
Name:________________________________
Title:__________________________________
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EXHIBIT B-2
Bailee Letter (ILC Mortgage Loans)
Date:_____________________
[Approved Investor/Repo Lender]
_____________________
_____________________
Re: [Name of Borrower]:
Sale of Mortgage Loans
Attached please find those Mortgage Loans listed separately on the
attached schedule, which mortgage Loans are owned by ___________ (the
'Borrower') and are being delivered to you for purchase.
The Mortgage Loans comprise a portion of the collateral under (and as
the term 'Collateral' and capitalized terms not otherwise defined herein are
defined in) that certain Master Revolving Loan and Security Agreement (the
'Agreement') dated as of _______________, 19___ by and between the Borrower and
Lender, as such Agreement may be amended or extended from time to time.
Accordingly, each of the Mortgage Loans is subject to a security interest in
favor of Lender. Lender's security interest in such Mortgage Loans has in turn
been assigned by Lender to Lehman Commercial Paper Inc. ('Secured Party')
pursuant to that certain Pledge Agreement dated as of November ___, 1994 between
Lender and Secured Party.
Lender's security interest shall be automatically released, and the
concurrent assignment of such security interest to Secured Party shall be
automatically terminated, upon your remittance of the full amount of the
purchase price of such Mortgage Loan (as set forth on the schedule attached
hereto) by wire transfer to the following account of the Borrower:
WIRE INSTRUCTIONS TO SETTLEMENT ACCOUNT:
Wire transfer
Receiving Bank:________________________ ABA#:_________________
Credit Acct.#_________
City and State:________________________
Credit Account Name:___________________
Advise:________________________________
Phone:_________________________________ Ref:__________________
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Pending your purchase of each mortgage Loan and until payment
therefor is received, Lender's security interest therein, and Lender's
assignment thereof to Secured Party, will remain in full force and effect, and
you shall hold possession of such Collateral and the documentation evidencing
same as custodian, agent and bailee for and on behalf of Lender and its
assignee, the Secured Party. In the event any Mortgage Loan is unacceptable for
purchase, return the rejected item directly to the custodian acting for Lender
and Secured Party at the address set forth below. In no event shall any Mortgage
Loan be returned or sales proceeds remitted to the Borrower. In no event shall
the endorsement in blank on the promissory note underlying any Mortgage Loan be
completed until sales proceeds have been remitted to the Settlement Account. The
Mortgage Loan must be so returned or sales proceeds remitted in full no later
than fifteen (15) days from the date hereof. If you are unable to comply with
the above instructions, please advise the undersigned immediately.
NOTE: BY ACCEPTING THE MORTGAGE LOANS DELIVERED TO YOU WITH THIS
LETTER, YOU CONSENT TO BE THE CUSTODIAN, AGENT AND BAILEE FOR LENDER AND ITS
ASSIGNEE ON THE TERMS DESCRIBED IN THIS LETTER. THE UNDERSIGNED REQUESTS THAT
YOU ACKNOWLEDGE RECEIPT OF THE ENCLOSED MORTGAGE LOANS AND THIS LETTER BY
SIGNING AND RETURNING THE ENCLOSED COPY OF THIS LETTER TO THE UNDERSIGNED;
HOWEVER, YOUR FAILURE TO DO SO DOES NOT NULLIFY SUCH CONSENT.
Sincerely,
INDEPENDENT LENDING CORPORATION
By:___________________________________
Title:________________________
Address: 35 North Lake Avenue, 7th Flr.
Pasadena, CA 91101
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Lender's and Secured Party's custodian:
[Name of Custodian]
________________________
________________________
________________________
Attn:____________________
The undersigned Borrower agrees to and acknowledges the terms
of this letter and, notwithstanding any contrary understanding with or
instructions to you, the addressee of this letter, the Borrower instructs you to
act according to the instructions set forth in this letter. These instructions
cannot be altered except by written instructions executed by Lender or the
Secured Party.
________________________, a
________________________
By:___________________________
Name:_________________________
Title:________________________
ACKNOWLEDGMENT OF RECEIPT
[Approved Investor or Repo Lender]
By: ______________________________
Name:_________________________
Title:________________________
Date:__________________________________
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EXHIBIT C
RE: POSITION and SETTLEMENT REPORT
TO: _____________ PHONE:_____________ FAX:_______________
LEHMAN
RICH VISCO/
FRANK GILHOOL PHONE: 212-640-6358 FAX: 212-528-9284
DATE:________________
Custodian Mortgage Loan Balances
(Face Value)
Loan balance yesterday $__________
Add: New loans $__________
Loan balance before repayments $__________
Loan balance @ 95/98% $__________
(Max Advance)
Lehman Advances
Advance balance yesterday $_________
(Net)
Add: Overnight accrued interest $_________
Add: New advances today $_________
Today's advance (A.M.) $_________
Payments From Agencies
(Face Value)
Loan balance before repayments $_________
Today's payments $_________
Loan balance after repayments $_________
Loan balance @ 95/98% $_________
(Max Advance)
Funds received from agencies $_________
Transfer to customer today $_________
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Wire to Lehman today $_________
Today's advance (A.M.) $_________
= ____% of face value
Today's balance (NET) $_________
________________________ By:___________________
Mortgage Loans verified at ____________ By:___________________
Wire Authorized by Lehman Pipeline Funding By:___________________
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EXHIBIT D
Request and Receipt
To: ______________________ Request #__________
Re: Custody Agreement among Lehman Commercial Paper Inc. ('Lehman'),
('Customer') and State Street Bank and Trust Company of California, N.A.,
('Custodian') dated November __, 1994 (the 'Custody Agreement')
In connection with the Mortgage Loans held by you as Custodian for Lehman,
Customer hereby requests and acknowledges receipt of the Required Documents for
the Mortgage Loan described below, for the reason indicated.
Mortgagor's Name, Address and Zip Code:
______________________________________________
Mortgage Loan Number:_________________________
Reason for Requesting Documents (circle one)
1. Mortgage Loan paid in full
2. Mortgage Loan being permanently withdrawn from the Collateral (Customer
hereby certifies that the Advance related to such Mortgage Loan has been repaid
in full and/or the Collateral Value of the Collateral in the Borrowing Base
equals or exceeds the aggregate dollar amount of all outstanding Advances)
3. Mortgage Loan liquidated by _________________ (Customer hereby certifies that
the Advance related to such Mortgage Loan has been repaid in full and/or the
Collateral Value of the Collateral in the Borrowing Base equals or exceeds the
aggregate dollar amount of all outstanding Advances)
4. Mortgage Loan in Foreclosure
5. Document correction (explain)
6. Other (explain)
If the terms of this letter are satisfactory to you, please indicate your
agreement and acceptance thereof by signing this letter and returning it to us
whereupon this letter shall become an agreement between us as of the date of
this letter.
Very truly yours,
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Customer:_____________________
By:__________________________
Title:_________________________
Agreed and Accepted:
Lehman Commercial Paper Inc.
By:___________________________
Printed Name:__________________
Title:_________________________
Agreed and Accepted:
Custodian: State Street Bank and Trust Company of California, N.A.
By:___________________________
Printed Name:__________________
Title:_________________________
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EXHIBIT E
DATA ACCESS.
a. The Custodian has issued to Lehman and the Customer a data access
security system or procedure in order that Lehman and the Customer may have
access to the CTS. The 'CTS' shall mean the Custodian's Collateral Tracking
System, which is subject to the terms and conditions set forth below and made a
part hereof, as such terms and conditions may be changed, modified or
supplemented by the Custodian from time to time by written notice to Lehman and
the Customer (collectively, the 'CTS Security Procedures'). With respect to the
CTS (and any other data and functions to which Lehman or the Customer is
provided access by the Custodian) Lehman and the Customer each hereby agrees:
(i) To access data and functions only in accordance with the Data
Access Operating Procedures [to be delivered to Lehman and Customer by
Custodian] and made a part hereof and to regard and preserve as confidential all
information obtained with respect to the issuance to Lehman and the Customer of
a data access security system or procedure;
(ii) To access data and functions solely for its own internal use and
benefit;
(iii) To discontinue use of the data access security system or
procedure at any time for security reasons upon notice from the Custodian;
(iv) Upon request, to cause Lehman's or the Customer's internal
auditors to verify to the Custodian that data access is restricted to authorized
employees; and
(v) To designate a duly authorized individual to serve as the Data
Security Administrator by executing and delivering to the Custodian a Data
Security Administrator Designation form (the 'Data Security Administrator
Designation Form') in the form annexed hereto as Annex 2 and hereby made a part
hereof.
The Custodian makes no representation or warranty with respect to and
shall have no liability for the accuracy or completeness of any data or
information appearing in CTS other than data which is input by the Custodian and
which sets forth information furnished by the Custodian. The Custodian has no
obligation or duty to verify or otherwise investigate the accuracy of any data
input by any party other than the Custodian (other than the Custodian's
responsibility for examination and certification of documents pursuant to
Section 6 of this Agreement and the applicable review procedures). Without
limiting the foregoing, Lehman acknowledges that certain data will be input into
the CTS directly by the Customer, or directly from computer disc or magnetic
tape prepared and furnished by the Customer, without verification or
investigation by the Custodian, and the Custodian shall have no responsibility
or liability for the accuracy or truthfulness of such information. The Custodian
is entitled to rely upon, among other things, the truthfulness and accuracy of
any information from
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the Customer, and any notice from Lehman, and to the extent the Custodian enters
data in the CTS from or in reliance upon the truthfulness or accuracy of any
such documents or notices received by it from another party, it shall have no
responsibility or liability therefor.
Each of Lehman and the Customer further acknowledges that the Custodian
shall have no liability for inaccurate information which results from its
examination of Mortgage Loans and which is input by the Custodian into the CTS,
if such inaccuracy in examination was not due to the Custodian's own gross
negligence or willful misconduct in failing to observe or perform its duties
under the Agreement and pursuant to the review procedures.
Each of Lehman and the Customer further agrees that it shall not
modify, enhance or otherwise create derivative works based upon the CTS, and
each agrees that it shall not reverse engineer, decompile or otherwise attempt
to secure the source code for all or any part of the CTS.
These CTS Security Procedures may be amended, modified or otherwise
changed (including the addition of other terms and conditions) from time to time
at the option of the Custodian, by written notice to each of Lehman and the
Customer in advance of the effective date of any such amendment, modification or
change.
b. The Custodian's liability to any party to this Agreement, whether
arising out of contract, strict liability in tort, or any other cause of action
under this agreement, for its provision of the CTS shall be limited to the
amount paid by such party for the preceding 24 months for access to or use of
such services. No action, regardless of form, arising out of Custodian's
provision of the CTS may be brought against the Custodian more than two years
after the party bringing such action has knowledge that the cause of action has
arisen.
c. NO OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE, ARE MADE BY THE CUSTODIAN WITH REGARD TO CTS. IN NO EVENT
WILL THE CUSTODIAN BE LIABLE TO ANY PARTY FOR ANY CONSEQUENTIAL OR INCIDENTAL
DAMAGES WHICH MAY ARISE FROM THE CUSTOMER'S ACCESS TO THE CTS OR USE OF
INFORMATION OBTAINED THEREBY.
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ANNEX 1
PROTECTION OF EQUIPMENT AND INFORMATION
The databases, computer programs, screen formats, screen designs,
report formats, interactive design techniques, and other information furnished
to Lehman or the Customer by the Custodian as part of the services constitute
copyrighted, trade secret or proprietary information of substantial value to the
Custodian. Except for information that has already been disclosed by the
parties, or that is in the public domain, such databases, programs and other
information are collectively referred to below as 'Proprietary Information'.
Lehman and the Customer each agrees that it shall treat all Proprietary
Information as proprietary to the Custodian and that it shall not divulge any
Proprietary Information to any person or organization except as is expressly
permitted hereunder. Proprietary Information is furnished 'as is' without
warranty. Without limiting the foregoing, Lehman and the Customer each agrees
for itself and its employees and agents:
(1) to use such programs and databases (i) solely on the Custodian's
Computers, (ii) solely from terminals at Lehman's or the Customer's locations
designated by Lehman or the Customer on the Appendix attached to the Data
Security Administrator Designation Form delivered to the Custodian by Lehman or
the Customer and (iii) solely in accordance with the Custodian's applicable user
documentation;
(2) to refrain from copying or duplicating in any way (other than in
the normal course of performing processing on the Custodian's computers) any
part of any Proprietary Information, and to return any Proprietary Information
upon termination of this Agreement;
(3) to refrain from obtaining unauthorized access to any programs, data
or other information to which Lehman or the Customer is not entitled, and if
such access is accidentally obtained, to respect and safeguard the same as
Proprietary Information;
(4) to refrain from causing or allowing information transmitted from
the Custodian's computer to Lehman's or the Customer's terminal to be
transmitted to another computer, terminal or other device for other than
Lehman's or the Customer's own use, except upon prior approval of the Custodian;
(5) that Lehman and the Customer each shall have access to only those
authorized transactions as come within the scope and coverage of the Custodian
Agreement to which this Exhibit is attached;
(6) to honor all reasonable written requests made by the Custodian to
protect at the Custodian's expense the rights of the Custodian in Proprietary
Information at common law, under the Federal copyright statute and under other
Federal and state statutes;
(7) to designate a duly authorized individual to serve as the Data
Security Administrator in accordance with the Designation Form annexed hereto;
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(8) to request a unique user ID for each separate user. The request
must be made in writing to Custodian's data security manager;
(9) to request immediate deactivation of a user ID or deletion of
access when no longer needed or when Lehman or the Customer believes security
has been violated;
(10) to limit knowledge of user IDs to only authorized individuals;
(11) to not disclose passwords directly or indirectly to anyone,
including other employees of Lehman or the Customer;
(12) to not store user IDs or passwords in any computer file, as part
of an 'automatic logon' procedure;
(13) to select unique passwords which cannot be easily guessed;
(14) to change the password every 30 days, or when Lehman or the
Customer, as the case may be, believes the password might have become known to
others, or when Lehman or the Customer suspects a possible security violation;
and
(15) to not recycle or reuse passwords.
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ANNEX 2
DATA SECURITY ADMINISTRATOR DESIGNATION FORM
Date:_____________, 199__
State Street Bank and Trust
Company of California, N.A. ('State Street')
725 South Figueroa Street, Suite 3100
Los Angeles, California 90017
Gentlemen;
As__________________ (title of officer or other authorized official) of
_____________ (Name of Company), I hereby certify that the following individual
has been duly authorized by the Board of Directors or other governing body of
the Company (or designated by an official of the Company who has been duly
authorized by said Board of Directors or other governing body to make such
designation), to serve as the Data Security Administrator, as such term is
defined in the Data Access Operating Procedures:
________________________________________________ ________________________
NAME SIGNATURE
It is understood and agreed that the above-named individual is the authorized
recipient on behalf of the Company of (1) all documents and correspondence
assigning, confirming or otherwise containing company and user identification
codes, passwords, mnemonics, testkeys, encryption keys and other security
devices, and (2) all other notices, documents and correspondence from State
Street respecting the data access security system, including, without
limitation, any changes or supplements to the Data Access Operating Procedures.
Attached hereto as Appendix A is a list of the sole location designated by the
Company at which terminals will be located which will access State Street's
Collateral Tracking System [more than one location listed on Appendix A will
require the consent of State Street].
IN WITNESS WHEREOF, I have executed this document and affixed the seal of the
Company on this _____ day of _____________, 199__.
__________________________________
(SIGNATURE OF OFFICER OR OTHER
AUTHORIZED OFFICIAL)
__________________________________
(TITLE)
__________________________________
(SIGNATURE OF OTHER OFFICER OR
OTHER AUTHORIZED OFFICIAL)*
__________________________________
(TITLE)
* In case the first signing officer is a Data Security Administrator, this
form must be signed by a second officer.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 28, 1994, accompanying the
consolidated financial statements and schedules of CWM Mortgage Holdings, Inc.
(formerly Countrywide Mortgage Investments, Inc.) and Subsidiaries appearing in
the Annual Report 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 report and to the use of our name as it appears under the caption
'Experts.'
GRANT THORNTON
Los Angeles, California
January 6, 1995
