Registration No. 333-72459
As filed with the Securities and Exchange Commission on May 4, 1999
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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Amendment No. 2
to
Form S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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CITICORP MORTGAGE SECURITIES, INC.
(Packager)
(Issuer in respect of the Certificates)
(Exact name of registrant as specified in its charter)
-----------------------
909 Third Avenue
New York, New York 10043
(212) 559-6727
Delaware 13-4300717
(State or other (Address, including (I.R.S. Employer
jurisdiction of zip code, and telephone Identification Number)
incorporation number, including area code,
or organization) of registrant's principal
executive offices)
------------------------
CITICORP
(Guarantor)
(Issuer in respect of the Guaranty)
(Exact name of registrant as specified in its charter)
------------------------
399 Park Avenue
New York, New York 10043
Delaware (212) 559-1000 06-1515595
(State or other (Address, including (I.R.S. Employer
jurisdiction of zip code, and telephone Identification Number)
incorporation number, including area code,
or organization) of registrant's principal
executive offices)
------------------------
STEPHANIE B. MUDICK
GENERAL COUNSEL--CORPORATE LAW
Citigroup Inc.
153 East 53rd Street
New York, New York 10043
(212) 793-7855
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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Approximate date of commencement of proposed sale to the public: From
time to time on or after the effective date of this Registration Statement.
If the only securities being registered on this form are to be
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, please check the following box.|X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering.|_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier registration statement for the same
offering.|_|
If delivery of the prospectus is expected to be made pursuant to
Rule 434, please check the following box.|_|
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
====================================================================================================================
Proposed Proposed
Maximum Maximum
Title of Securities Amount to Aggregate Aggregate Amount of
to be Registered be Registered Price Per Unit(2) Offering Price(2) Registration Fee
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<S> <C> <C> <C> <C>
Certificates
and Guaranties........................ $10,000,000,000(1) 100% $10,000,000,000 $2,780,000(3)
====================================================================================================================
</TABLE>
(1) $1,234,789,052 aggregate principal amount of Certificates and Guaranties
registered by the Registrants under Registration Statement No. 33-43167
referred to below are consolidated in this Registration Statement pursuant
to Rule 429. All registration fees in connection with such unsold amount
of Certificates and Guaranties have been previously paid by the
Registrants under the foregoing Registration Statement. Accordingly, the
total amount registered under the Registration Statement as so
consolidated as of the date of this filing is $11,234,789,052.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) Previously paid.
The Registrants hereby amend this Registration Statement on such date
or dates as may be necessary to delay its effective date until the Registrants
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 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
In accordance with Rule 429 under the Securities Act of 1933, the
Prospectus included herein also relates to Citicorp Mortgage Securities, Inc.'s
and Citicorp's Registration Statement on Form S-3 File No. 33-43167.
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains a REMIC Pass-Through
Certificates Prospectus and Supplement relating to public offerings from time to
time by Citicorp Mortgage Securities, Inc. of pass-through certificates,
together with certain separate pages of a REMIC Pass-Through Certificates
Supplement (the "MBIA Supplement") to be used in connection with offers and
sales of pass-through certificates where credit support is provided in the form
of a financial guaranty insurance policy issued by MBIA Insurance Corporation
and a REMIC Pass-Through Certificates Supplement (the "FSA Supplement") to be
used in connection with offers and sales of pass-through certificates where
credit support is provided in the form of a financial guaranty insurance policy
issued by Financial Security Assurance Inc. The REMIC Pass-Through Certificates
Supplement and Prospectus follows immediately after this Explanatory Note.
Following the Prospectus are the alternate pages of the MBIA Supplement and the
FSA Supplement. All other pages of the REMIC Pass-Through Certificates
Prospectus and Supplement are also to be used for the MBIA Supplement and the
FSA Supplement.
<PAGE>
[date] supplement to
[date] core prospectus
Citicorp Mortgage Securities, Inc.
909 Third Avenue
New York, NY 10043
(212) 559-6727
$[...] (approximate)
REMIC Pass-Through Certificates
Series [...]
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consisting of approximately
o $[...], in 11 subclasses, of
senior class A Certificates
o $[...] of
senior subordinated class M Certificates
o $[...], in 2 subclasses, of
subordinated class B Certificates
The purchase price for the offered Certificates will be set by the underwriter
or negotiated by the purchaser and the underwriter. Total proceeds to the Trust
will be approximately $[...], plus accrued interest from [May 1, 1999] to the
closing date.
Citicorp Mortgage Securities does not intend to list the Certificates on a
national securities exchange or the Nasdaq Stock Market.
You should read "General risk factors," beginning on
page [...] of the attached core prospectus, and "Series risk
factors," beginning on page S-[...] of this supplement,
before you purchase any Certificates.
Underwritten by
[Underwriter]
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The Certificates are not insured or guaranteed by the Federal
Deposit Insurance Corporation or any other governmental
agency.
Neither the Securities and Exchange Commission nor any state
securities commission has approved the Certificates or
determined that this prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
<PAGE>
CONTENTS
SUPPLEMENT
Summary S-5
Core prospectus and supplement S-5
Series overview - the Certificates S-5
Series overview - the mortgage loans at the cut-off date S-7
Detailed information S-9
Series risk factors S-9
Limited credit enhancement S-9
Geographic concentration S-9
Subordination S-10
Ratio Stripping S-10
Subordination S-12
Distribution priorities S-12
Protection against losses and shortfalls S-12
Losses and shortfalls that are not covered by subordination S-12
Maintenance of subordination S-13
Distributions of interest S-14
Interest shortfalls S-14
Distributions of principal S-15
Scheduled and unscheduled principal payments on mortgage loans S-15
Principal distributions to class A-11 S-15
Principal distributions to target-rate classes S-15
Priorities in class A principal distributions S-16
Class A-1 (TAC) target balances S-19
Special rules for class A-10 S-20
Clean-up call S-20
Losses S-21
Realized losses S-21
Loss allocations S-21
Recoveries S-22
Sensitivity of Certificates to prepayment S-22
The prepayment model S-22
Weighted average lives S-23
Yield to maturity S-27
Sensitivity of the class A-3 and A-11 Certificates S-27
Yields on offered class B Certificates S-28
Voting Rights S-29
Additional ERISA considerations S-29
Legal investment S-30
Federal income tax consequences S-30
Plan of distribution S-31
Experts S-32
Legal opinions S-32
Incorporation of documents by reference S-32
CORE PROSPECTUS
Summary 3
The Certificates 3
Different classes of Certificates 3
REMIC election 4
Trusts of Certificates 4
General risk factors 4
Limited liquidity 4
Limited assets 4
Uncertainty of yields 4
Legal investment 5
Restrictions on transfer 5
Year 2000 5
<PAGE>
Distributions on the Certificates 5
Scheduled payments on mortgage loans 5
Property of the Trust; the cut-off date 6
Distribution of scheduled payments 6
Calculation of interest; effective rate 6
Adequacy of scheduled payments 7
Delinquencies and their effect; advances 7
Prepayments on mortgage loans 8
Delay in distribution of prepayments 8
Effect of prepayments 8
Types of prepayment 9
Foreclosures and their effect 10
Subordination 10
Method of distribution 11
Distribution reports 11
Delinquency, foreclosure and loss experience 11
Loss and delinquency considerations 11
Delinquency and foreclosure experience on affiliated originators' serviced
portfolio 12
Delinquency, foreclosure and loss experience on affiliated originators'
securitized portfolio 12
Delinquency, foreclosure and loss experience of third-party originators 13
The mortgage loans 13
Warranties by CMSI 14
Adjustable rate mortgages, buydown loans and agency certificates 14
Fixed rate mortgage loans 14
The mortgaged properties 15
Loan-to-value ratios 15
Primary mortgage insurance 15
Second mortgages 15
Defective mortgage loans 16
Repurchase or substitution 16
Insurance and other credit support 16
Homeowners' policies 16
Hazard insurance 17
Fidelity bond and errors and omissions policy 17
Other insurance 17
Other credit support 17
Mortgage documents 18
Assignments to Trustee 18
Recording of assignments 18
CMSI and its affiliates 18
Citicorp 18
Citicorp Mortgage Securities, Inc. 18
Citibank, N.A. 19
Citicorp Mortgage, Inc. 19
Citibank, Federal Savings Bank 19
Third-party originators 19
Mortgage loan underwriting 19
Procedures of affiliated originators 19
Lending guidelines 20
Leasehold loans 21
Refinancings 21 Appraisals 21
Lien records; title insurance 21
Mortgage loans purchased from third-party originators 21
Underwriting standards of third-party originators 22
Servicing 22
The servicer; delegation 22
Resignation and removal 22
Collection procedures for affiliated mortgage loans 22
Enforcement of due-on-sale clauses 22
Real estate taxes and assessments 23
Primary mortgage insurance 23
Realizing on defaulted mortgage loans 23
Fees 23
CMSI's liability 24
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Default by CMSI 24
Events of default 24
Actions on event of default 24
The Trustee 24
The Trustee's duties; limitation of liability 25
The pooling agreement 25
Legal action by CMSI 25
Legal action by Certificate holders 25
Liability of CMSI and Citicorp; indemnification 26
Amendments 26
Compliance reports 26
List of registered holders 26
No annual meeting 27
Successors 27
Termination of Trust 27
Book-entry and physical Certificates 27
Physical Certificates 28
ERISA considerations 28
"Plan asset" regulations 28
Class exemption 29
Trusts of Certificates 29
Underwriters' exemptions 29
Other prohibitions 30
Investor's responsibility 30
Legal investment considerations 30
SMMEA 30
State overrides of SMMEA 30
Federal depository institutions 30
Investor responsibility 31
Taxation of Certificate holders 31
Taxation of Certificates - general 32
Accrual method 32
Original issue discount 32
Calculation of OID 32
De minimis OID 33
OID on retail class Certificates 34
Acquisition premium 34
OID on variable rate Certificates 34
Market discount 35
Premium 36
Losses 36
Election to treat interest under the constant yield method 37
Sale or exchange of Certificates 37
Special types of holders 38
Foreign investors 38
Backup withholding 39
Reporting requirements 39
Taxation of the Trust 39
REMIC qualification 39
Taxes that may be imposed on the REMIC 39
Legal aspects of mortgage loans 40
Mortgages and deeds of trust 40
Foreclosure 41
Cooperatives 43
Rights of redemption 45
Anti-deficiency laws and other limitations on lenders 45
Due-on-sale clauses 48
Other limitations on foreclosure 49
Applicability of usury laws 49
Environmental considerations 49
Use of proceeds 51
Plan of distribution 51
Additional information 52
SEC filings 52
Mortgage loan information 52
Index of defined terms 54
APPENDIX
<PAGE>
Summary
Core prospectus and supplement
This document consists of an attached core prospectus and this supplement. You
should read the core prospectus before reading this supplement, and you should
read this entire supplement before you purchase any Certificates. At the end of
this prospectus, there is an index of defined terms used in this prospectus.
Series overview - the Certificates
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Principal balance Class percent- Offered by
at cut-off date, age(1) at cut-off Interest this prospec-
Class +/- up to 5% date rate tus Subordinated to Book-
entry?
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<S> <C> <C> <C> <C> <C> <C>
A-1 $[...] [...]% [...]% Yes Not subordinated Yes
A-2 $[...] [...]% [...]% Yes Not subordinated Yes
A-3 $[...] [...]% 0% (PO Yes Not subordinated Yes
class)
A-4 $[...] [...]% [...]% Yes Not subordinated Yes
A-5 $[...] [...]% [...]% Yes Not subordinated Yes
A-6 $[...] [...]% [...]% Yes Not subordinated Yes
A-7 $[...] [...]% [...]% Yes Not subordinated Yes
A-8 $[...] [...]% [...]% Yes Not subordinated Yes
A-9 $[...] [...]% [...]% Yes Not subordinated Yes
A-10 $[...] [...]% [...]% Yes Not subordinated Yes
A-11 $[...] [...]% 0% (PO Yes Not subordinated Yes
class)
A-IO N/A N/A (2) No Not subordinated No
M $[...] [...]% [...]% Yes class A No
B-1 $[...] [...]% [...]% Yes class A, M, No
B-2 $[...] [...]% [...]% Yes class A, M, B-1 No
B-3 $[...] [...]% [...]% No class A, M, B-1, B-2 No
B-4 $[...] [...]% [...]% No class A, M, B-1, B-2, No
B-3
B-5 $[...] [...]% [...]% No class A, M, B-1, B-2, No
B-3, B-4
Residual N/A N/A N/A No N/A No
</TABLE>
(1) The class percentage is the ratio of (a) the principal balance of the class
to (b) the aggregate principal balance of all regular classes, expressed as a
percentage.
(2) The class A-IO Certificates are interest-only Certificates and are entitled
to interest accrued on the premium mortgage loans in excess of the target
interest rate, as described in "Ratio stripping" below. The class A-IO
Certificates are of a type sometimes referred to in the market as "WAC IO"
certificates.
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Trustee [Name]
[address]
[telephone number]
Paying agent, transfer [the Trustee]
agent and certificate
registrar
Relative size of classes Class Principal balance of class as
percentage of principal balance
of all Certificates at cut-off
date
A [...]% to [...]%
M [...]% to [...]%
B [...]% to [...]%
B-1 [...]% to [...]%
B-2 [...]% to [...]%
Ratings The offered Certificates will not be sold unless
[Rating Agency 1] ([rating agency 1]) and [Rating
Agency 2] ([rating agency 2]) rate the offered
Certificates as follows:
Classes A-3 and A-11 AAAr by [rating agency 1] and
AAA by [rating agency 2]
All other class A AAA by [rating agency 1] and
Certificates [rating agency 2]
Class M AA by [rating agency 2]
Class B-1 A by [rating agency 2]
Class B-2 BBB by [rating agency 2]
The "r" symbol in the [rating agency 1] ratings of
the class A-3 and A-11 Certificates means that
[rating agency 1] believes these Certificates may
experience high volatility or high variability in
expected returns due to non-credit risks.
S-4
<PAGE>
You should evaluate these ratings independently from
similar ratings on other types of securities. A
rating is not a recommendation to buy, sell or hold
securities. [rating agency 1] or [rating agency 2]
may revise or withdraw a rating at any time.
Denominations $1,000 and any whole dollar amount above $1,000
Distribution days 25th day of each month, beginning [June 25, 1999]
Last distribution day [May 25, 2029]
Clean-up call Permitted when principal balance of mortgage loans is
below 5% of principal balance on cut-off date
Loss limits Special hazard: $[...] (or [...]% of the initial
(approximate) aggregate principal balance)
Bankruptcy: $[...] ([...]%)
Fraud: $[...] ([...]%)
Prepayment rate assumed [...]% of prepayment model
in structuring Series
"Mortgage related All offered class A and class M Certificates, but not
securities" under SMMEA classes B-1 or B-2.
Record date For a distribution day, the close of business on the
last business day of the calendar month preceding
that distribution day
Closing date [May 25, 1999]
Conditions to closing The Certificates offered by this prospectus will not
be sold unless the Certificates in classes B-3, B-4
and B-5 (none of which are offered by this
prospectus) are sold on the closing date.
[Underwriter]([Underwriter]) has agreed to purchase
these Certificates on the closing date, subject to
the satisfaction of customary closing conditions.
Series overview - the mortgage loans at the cut-off date
Cut-off date [May 1, 1999]
Number of mortgage loans [number]
Types of mortgage loans Fixed rate one- to four-family residential, of which
o at least [...]% of mortgaged properties will be
one-family dwellings,
o no more than [...]% of mortgaged properties will
be condominiums, townhouses, rowhouses or
cooperative apartments,
o no more than [...]% of mortgaged properties will
be investment properties, and
S-5
<PAGE>
o at least [...]% of mortgaged properties determined
by CMSI to be primary residences of borrowers.
(Percentages are of total principal balance of
mortgage loans.)
Geographic concentration No more than
o [...]% of mortgaged properties are in [State],
o 10% of mortgaged properties are in any other
state, and
o [5]% of mortgaged properties are in any one ZIP
code.
(Percentages are of total principal balance of
mortgage loans.)
Scheduled principal $[...],+/-up to 5%
balance on cut-off date
Range of principal at least [...]% of mortgage loans will have a
balances principal balance less than $[250,000],
o at least [...]% will have a principal balance less
than $[500,000], and
o no mortgage loan will have a principal balance
greater than $[... million].
(Percentages are of total principal balance of
mortgage loans.)
Loan-to-value ratios At origination,
o no more than [...]% had an LTV greater than 80%,
o no more than [...]% had an LTV greater than 90%,
o none had an LTV greater than 95% and
o weighted average LTV no more than [...]%.
(Percentages are of total principal balance of
mortgage loans.)
Range of interest rates [...]% to [...]% per annum
on mortgage loans (before
deduction of servicing
fees)
Weighted average [...]% to [...]% per annum
mortgage interest rate
(before deduction of
servicing fees)
Servicing fee 0.25% per annum
Range of maturities 15 to 30 years
Latest scheduled [May 1, 2029]
maturity
Weighted average term to [...] to [360] months
maturity
Premium mortgage loans - Scheduled principal balance: $[...] (approximate)
ie, loans with net loan Weighted average interest rate: [...]% per annum
rate (interest rate less (approximate)
servicing fee) of Weighted average remaining term to maturity: [...]
[6.25]% or more) months (approximate)
Discount mortgage loans Scheduled principal balance: $[...] (approximate)
(ie, loans with net loan Weighted average interest rate: [...]% per annum
rate less than [6.25]%) (approximate)
Weighted average remaining term to maturity: [...]
months (approximate)
Originators [Citicorp Mortgage, Citi FSB, Citibank]
S-6
<PAGE>
Originated from [date] through [date]
Underwriting policies o At least [...]% of mortgage loans were originated
using loan underwriting policies that require,
among other things, proof of income and liquid
assets and telephone verification of employment,
or are refinanced mortgage loans originated using
alternative or streamlined underwriting policies.
No more than [...]% will be refinanced mortgage
loans originated using alternative or streamlined
underwriting policies.
Detailed information
The mortgage loans actually included in the Trust may differ from the preceding
description, but the differences will not be material. Within 15 days after the
closing date, CMSI will file a Form 8-K with the SEC containing detailed
information on the mortgage loans actually in the Trust and other matters,
including
o years of origination,
o types of dwellings,
o principal balances,
o loan-to-value ratios at origination,
o mortgage interest rates,
o geographical distribution by state.
o the special hazard, fraud and bankruptcy loss limits,
o the aggregate initial principal balances of the class A, class M and
class B certificates, and
o the subordination levels for classes A, M, B-1, B-2, B-3 and B-4.
Series risk factors
You should consider the following risk factors for this Series, as well as the
general risk factors for the Certificates discussed in the core prospectus,
before you purchase any Certificates.
Limited credit enhancement
Credit enhancement for the senior classes of Certificates is provided by the
subordination of other classes of Certificates. The amount of credit enhancement
for any class of Certificates will, however, be limited and will decrease over
the life of the transaction due to reductions of the principal balances of the
subordinated classes through distributions of principal and allocation of
principal losses to them. Also, special hazard, fraud and bankruptcy losses will
only be allocated to the subordinated classes up to specific dollar limits; once
these limits are reached, such losses will be allocated proportionally among all
classes.
Geographic concentration
Approximately [...]% of the total initial principal balance of the mortgage
loans in this Series are mortgage loans secured by mortgaged properties located
in [California]. No other state contains mortgaged property securing more than
10% of the initial scheduled principal balance of the mortgage loans.
[In recent years, California has experienced significant declines in housing
prices. Weaker economic conditions and housing markets may result in a higher
rate of delinquencies and defaults by homeowners and in less proceeds being
realized upon liquidations of defaulted mortgage loans. Concentration of
mortgage loans in California may present risks greater than those generally
present for similar mortgage-backed securities.]
[California has also experienced natural disasters such as earthquakes, fires
and floods. These disasters may adversely affect property values generally in
the region, and may result in physical damage to mortgaged properties located in
California. Any direct damage to a mortgaged property caused by such disasters,
and any deterioration in housing prices or in economic conditions in California,
may reduce the ability of homeowners to make sched-
S-7
<PAGE>
uled monthly payments on their mortgage loans. This in turn may increase the
likelihood and magnitude of delinquencies and losses on mortgage loans.]
Losses on mortgage loans may adversely affect the yield to maturity on your
Certificates, especially if your Certificates are subordinated. In addition,
delinquencies on mortgage loans may increase the likelihood of foreclosures and
prepayments, which in turn may have an adverse effect on the yield to maturity
of your Certificates.
Subordination
Classes M and B are subordinated. Consequently, shortfalls in payments received
on the mortgage loans will result in shortfalls in distributions to the
subordinated classes, in the following order of priority:
o Class M is subordinated to class A. Class M will therefore not receive
a distribution of interest or principal on a distribution day until class A has
received full distributions on that day.
o Class B-1 is subordinated to classes A and M. Class B-1 will therefore
not receive a distribution of interest or principal on a distribution day until
classes A and M have received full distributions on that day.
o Class B-2 is subordinated to classes A, M and B-1. Class B-2 will
therefore not receive a distribution of interest or principal on a distribution
day until classes A, M and B-1 have received full distributions on that day.
If a principal loss is allocated to a class, it reduces (by the amount of the
loss) the principal balance that can ultimately be distributed to that class.
Principal losses realized on mortgage loans are generally allocated to the most
subordinated class until its principal balance is reduced to zero, then to the
next most subordinated class until its principal balance is reduced to zero, and
so on through the subordinated classes. As a result, the ultimate distribution
to holders of the class M and the offered class B Certificates of their
principal balances depends upon the timing and the level of losses realized on
the mortgage loans and other shortfalls in payments on the mortgage loans.
Although some realized losses on mortgage loans may initially be allocated to
class A-11, these losses are likely ultimately to be allocated to the
subordinated classes as well. This is because class A-11 will generally be
reimbursed for principal losses out of amounts of principal otherwise
distributable to classes B and M.
See "Subordination" below.
Ratio Stripping
This Series uses a structuring technique known as "ratio stripping." Ratio
stripping converts a pool of mortgage loans with varying interest rates into
three hypothetical pools:
o a pool with a single fixed target interest rate,
o a pool of principal-only mortgage loans (ie, loans with a zero
o interest rate), and a pool of interest-only mortgage loans.
This structure is achieved by dividing the loans into one group of premium
loans with net loan rates equal to or greater than the target rate, which for
this Series is [6.25]%, and one group of discount loans with net loan rates less
than the target rate. (The net loan rate is the interest rate on the mortgage
loan, reduced by the servicing fee.) Then:
o For each premium loan, the interest rate in excess of the target rate
is "stripped off" from the loan and considered as a separate "interest-only"
mortgage loan. For example, a premium loan with a 6.75% net loan rate - 0.5%
greater than the target rate - and a principal balance of $100,000 will be
divided into a target-rate loan with a 6.25% net loan rate and a $100,000
principal balance and an interest-only (or IO) loan with a $100,000 "notional"
principal amount and a 0.5% net loan rate. The IO loan will distribute 0.5% per
annum on its notional principal balance, but will never distribute any
principal.
o For each discount loan, a portion of the principal of the loan is
stripped off and applied to create a principal-only (or PO) loan. This
stripping-off of
S-8
<PAGE>
principal is done to make the effective yield on the remaining loan equal the
target rate. For example, suppose a discount loan has a 5% net loan rate and a
$100,000 principal balance. Such a loan would be split into a target-rate loan
with an $80,000 principal balance (5% of $100,000 being the same as 6.25% of
$80,000) and a $20,000 PO loan. The PO loan will make scheduled distributions of
principal equal to 20% of the scheduled principal payments on the original
discount loan (before stripping), but will not distribute any interest.
In general, the principal amount of the target-rate loan can be calculated by
solving the equation: (principal of discount loan X interest rate on discount
loan) = (principal of target-rate loan X target rate).
The principal amount of the PO loan is then found by subtracting the principal
amount of the target-rate loan from the principal amount of the discount loan.
o Finally, the target-rate loans are grouped into a target-rate strip,
the PO loans are grouped into a PO strip, and the IO loans are grouped into an
IO strip.
Subject to the qualifications described below in this supplement,
o payments received on the PO strip will be directed to a PO class - for
this Series, class A-11,
o payments received on the IO strip will be directed to an IO class - for this
Series, class A-IO, and
o payments received on the target-rate strip will be directed to the remaining
classes, the majority of
which have interest rates equal to the target rate.
Those classes of Certificates that receive interest and principal
distributions from the target-rate strip -classes M and B, and all class A
subclasses except the A-11 and A-IO subclasses - will be the target-rate
classes.
o If there is a prepayment on a discount loan, the prepayment is divided
between the target-rate loan and the PO loan in proportion to their principal
balances. Thus, a $10,000 prepayment on the $100,000 discount loan described
above would result in an $8,000 prepayment of the target-rate loan and a $2,000
prepayment of the PO loan. These prepayments on the target-rate and PO loans
will reduce the target-rate strip by the same $8,000 and the PO strip by the
same $2,000.
Prepayments on premium loans work a bit differently: the full prepayment is
applied both to reduce the principal balance of the target-rate loan and to
reduce the notional principal balance of the IO loan. For example, for the
$100,000 premium loan described above, a $10,000 prepayment will reduce both the
principal balance of the target-rate loan and the notional principal balance of
the IO loan to $90,000. The $10,000 prepayment on the premium loan would be
distributed solely to the target-rate classes.
Principal losses are handled similarly. A $10,000 principal loss on the
$100,000 discount loan described above would reduce the principal balance of the
target-rate loan (and the target-rate strip) by $8,000 and the principal balance
of the PO loan (and the PO strip) by $2,000. A $10,000 principal loss on the
premium loan described above will reduce both the principal balance of the
target-rate loan and the notional principal balance of the IO loan by $10,000
(and similarly for the strips of which the target-rate and IO loans are a part).
The target rate, IO and PO strips are groups of hypothetical mortgage loans,
not real mortgage loans. The obligations of a homeowner with a premium or
discount loan are not affected in any way by ratio stripping. Principal and
interest payments received on premium loans will not be segregated from
principal and interest payments received on discount loans, nor will funds to be
directed to target-rate classes be kept separately from funds to be directed to
other classes. Rather, the strips are ways of understanding how mortgage loan
payments are allocated among the different classes of the Series.
You should note that class A-3, while a PO class, has not been created by
ratio stripping and will receive principal distributions from the target-rate
strip, not the PO strip.
S-9
<PAGE>
Subordination
Distribution priorities
On each distribution day, cash in the Trust that is available for distribution
will be distributed in the following order of priority:
1 accrued interest on class A (including any past due interest),
2 principal on class A,
3 reimbursement to class A-11 of any principal losses allocated to it,
4 accrued interest on class M (including any past due interest),
5 principal on class M,
6 accrued interest on class B-1 (including any past due interest),
7 principal on class B-1,
8 accrued interest on class B-2 (including any past due interest),
9 principal on class B-2 and
10 accrued interest (including any past due interest) and principal on the
remaining class B subclasses, sequentially to classes B-3, B-4 and B-5.
Reimbursement to class A-11 under clause 3 above will only be made out of
amounts that would otherwise have been distributed as principal on classes B and
M on that distribution day.
Protection against losses and shortfalls
Subordination protects the senior classes against losses and shortfalls in
receipts of interest and principal on the mortgage loans caused by
o delinquent monthly payments that are not covered by an advance and
o mortgage loans that have gone into default where the proceeds of insurance,
foreclosure sales and any other receipts do not cover the principal balance plus
accrued interest on the loans.
An interest loss or shortfall will result in an equal shortfall in the
distribution received by the most subordinated class. The general principle is
that a senior class (other than class A-11) will not experience any shortfalls
in required distributions so long as there is a more subordinated class
outstanding. However, once the principal amounts of classes M and B are reduced
to zero, all credit enhancement from subordination will be gone.
The date on which this occurs is the subordination depletion date.
Losses and shortfalls that are not covered by subordination
There are four exceptions to the general principle that a senior class (other
than class A-11) will not experience any shortfalls so long as a more
subordinated class is outstanding:
1 The benefits of subordination will not cover delinquencies and losses
resulting from certain extraordinary events, including
o hostile or warlike action in time of peace or war,
o the use of any weapon of war that employs atomic fission or radioactive force
whether in time of peace or war, and
o insurrection, rebellion, revolution, civil war or any usurped power or action
taken by a governmental authority to prevent such occurrences (but not including
peacetime looting or rioting).
2 Class A-11 will not have the same senior status as the other class A
subclasses. Instead, principal losses to class A-11 will be reimbursed out of
principal that otherwise would have been distributed to classes M and B.
Reimbursement will be made by the most subordinated class until there is no more
principal to be distributed to it, then by the next most subordinated class
until there is no more principal to be distributed to it, and so on.
3 If a borrower prepays any principal during a month and does not also pay a
full month's accrued interest on the amount of the prepayment, there will be a
prepayment interest shortfall. If there is a prepayment interest shortfall on a
distribution day, CMSI will apply up to one-half of the servicing fee it would
be entitled to retain out of the scheduled principal and interest payments on
the mortgage loans due on the first day of the month (but not more than the
servicing fee it actually receives for the calendar month before the
determination day) to reduce the shortfall. To the extent a net shortfall
remains, it will be allocated over all interest-bearing classes (including class
A-IO) in proportion to interest accrued.
4 Losses on mortgage loans include
o special hazard losses - that is, direct physical loss or damage from a
cause that is not an extraordinary
S-10
<PAGE>
event referred to in the first exception to subordination listed above and is
not covered by (1) a homeowner's, fire, flood or extended coverage insurance
policy required by the mortgage loan or (2) hazard insurance on the mortgaged
property that CMSI is required to maintain,
o bankruptcy losses attributable to the actions of a bankruptcy court,
including a reduction of the principal balance or interest rate on a mortgage
loan or an extension of its maturity.
o fraud losses resulting from fraud committed by the borrower in obtaining the
mortgage loan.
Special hazard, bankruptcy and fraud losses are only covered by subordination
up to dollar limits specified by the rating agencies for each type of loss. Once
the limit for one of these types of losses is exceeded, that portion of the loss
allocable to the target-rate strip will be allocated among the target-rate
classes (and, to the extent of principal losses, will reduce the notional amount
of class A-IO).
o if it is a loss of interest, in proportion to their accrued interest, and
o if it is a loss of principal, in proportion to their principal balance.
The initial limits for special hazard, bankruptcy and fraud losses are
approximately:
o Special hazard: $[...] (or [...]% of the initial aggregate principal
balance)
o Bankruptcy: $[...] ([...]%)
o Fraud: $[...] ([...]%)
Thereafter, the limit for each type of loss will be reduced by any losses of
that type, except that:
o The special hazard loss limit can not be greater than the amount on the
preceding anniversary of the cut-off date of the greater of (1) 1% (or, if
greater than 1%, the highest percentage of mortgage loans by principal balance
in any California ZIP code) of the scheduled principal balance of the mortgage
loans and (2) twice the largest scheduled principal balance of any mortgage
loan.
o After the first anniversary of the cut-off date, the bankruptcy loss limit
will be (1) the bankruptcy loss limit on the business day preceding the most
recent anniversary of the cut-off date minus (2) the aggregate amount of
bankruptcy losses since that anniversary.
o From the second through the fifth anniversary of the cut-off date, the fraud
loss limit will be (1) the lesser of (a) the fraud loss limit on the most recent
anniversary of the cut-off date and (b) 0.50% of the pool balance on the most
recent anniversary of the cut-off date minus (2) the aggregate amount of fraud
losses since that anniversary. After the fifth anniversary of the cut-off date,
the fraud loss limit will be zero.
o The bankruptcy loss limit and the related coverage levels described above may
be reduced or modified upon written confirmation from [rating agency 1] and
[rating agency 2] that the reduction or modification will not adversely affect
the then-current ratings assigned to the Certificates by [rating agency 1] and
[rating agency 2].
Maintenance of subordination
Credit enhancement is provided to the Certificates through subordination. The
distribution priorities described under "Distribution priorities" above reflect
this subordination.
The degree of credit enhancement enjoyed by a class due to subordination may
be measured by that class's subordination level. A class's subordination level
is sum of the class percentages of all classes that are subordinated to that
class. On the closing date, the following classes will have the following
approximate subordination levels:
Class A: [...]% ($[...])
Class M: [...]% ($[...])
Class B-1: [...]% ($[...])
Class B-2: [...]% ($[...])
Thus, those classes subordinate to class A will have an aggregate principal
balance on the closing date that is approximately [...]% of the aggregate
principal balance of all regular classes.
To preserve class A's subordination level, for five years after the first
distribution day, all principal prepayments and other unscheduled receipts on
the mortgage loans will be distributed solely to class A. This disproportionate
allocation of prepayment principal and other receipts will result in a faster
reduction of class A's principal balance than would have
S-11
<PAGE>
occurred if these distributions were made proportionately. As a result, class
A's class percentage will decrease, and the aggregate class percentage of those
classes that are subordinated to class A (ie, class A's subordination level)
will increase. After five years, the percentage of prepayment principal and
other receipts distributed to class A will gradually decline for a further five
years to a proportionate share.
Classes M, B-1 and B-2 are also entitled to maintain a degree of credit
enhancement by subordination throughout the life of the transaction:
o If on a distribution day, class M's subordination level is less than it was
on the closing date, then class B will not receive a principal distribution on
that distribution day, such distribution instead being added to the principal
distribution to class M.
o If class M's subordination level on the distribution day is at least equal to
what it was on the closing date, but class B-1's subordination level is lower
than it was on the closing date, then classes B-2 through B-5 will not receive a
principal distribution on that distribution day, such distribution instead being
added to the principal distribution to classes M and B-1 in proportion to their
principal balances.
o Finally, if class M's and class B-1's subordination levels on the
distribution day are at least equal to what they were on the closing date, but
class B-2's subordination level is lower than it was on the closing date, then
classes B-3 through B-5 will not receive a principal distribution on that
distribution day, such distribution instead being added to the principal
distribution to classes M, B-1 and B-2 in proportion to their principal
balances.
Distributions of interest
Interest will be distributed on the principal balance or notional principal
balance of each class at the interest rate for the class shown in "Series
overview - The Certificates" above, subject to
o the distribution priorities described in "Subordination," above,
o the class's proportionate share of (1) any prepayment interest shortfalls
that are not recovered from CMSI's servicing fees and (2) the interest portion
of any special hazard, bankruptcy and fraud losses that exceed the limits for
such losses, and
o the availability of sufficient cash.
Interest shortfalls
In the unlikely event that on a distribution day before the subordination
depletion date, there is not enough available cash to distribute all accrued
interest on the class A Certificates, interest will be distributed to the class
A subclasses in proportion to their accrued interest for the preceding calendar
month.
Any shortfall in accrued interest distributed to a class will be carried
forward to the next distribution day, subject to the conditions for interest
distributions described above.
On each distribution day, available cash for interest distributions to a
class will first be used to distribute accrued interest for the preceding month
to the class, and any remaining available cash will then be used to distribute
any interest shortfalls that have been carried forward. Distribution of interest
shortfalls to class A will be allocated among the subclasses in proportion to
the amount of interest shortfalls carried forward.
No interest will accrue on any unpaid interest shortfalls.
S-12
<PAGE>
Distributions of principal
Scheduled and unscheduled principal payments on mortgage loans
Principal received on mortgage loans is either scheduled principal or
unscheduled principal.
Scheduled principal for a mortgage loan on a distribution day consists of:
o the scheduled payment of principal due on the mortgage loan (including a
defaulted mortgage loan, other than a loan for which the related mortgaged
property has been acquired by the Trust) on the first day of the month in which
the distribution day occurs, minus
o if the dollar limit for bankruptcy losses has been exceeded, any reduction in
the homeowner's scheduled principal payments due to bankruptcy proceedings.
Unscheduled principal for a mortgage loan on a distribution day is the sum
of:
o all principal prepayments received by CMSI in the calendar month preceding
the distribution day,
o the principal balance of the mortgage loan if CMSI repurchased the loan
during the calendar month preceding the distribution day, as described in the
core prospectus under "Defective mortgage loans - Repurchase or substitution,"
and
o the net liquidation proceeds on the mortgage loan if it became a liquidated
loan during the calendar month preceding the distribution day, less the
principal portion of any unreimbursed advances previously made by CMSI or the
Trustee on the loan and the portion of the net liquidation proceeds allocable to
interest.
The scheduled principal balance of a mortgage loan on a distribution day is
the loan's actual principal balance, except that we assume the homeowner
o has made the scheduled principal payment for that calendar month and
o has not made an unscheduled principal payment in that month or made a
scheduled principal payment for a later month.
Principal distributions to class A-11
Class A-11 will be entitled to receive on each distribution day a principal
distribution equal to the scheduled and unscheduled principal payments on the
hypothetical mortgage loans in the PO strip. If there is not enough money
available to make a full principal distribution to class A-11 on a distribution
day, or if class A-11 realizes a principal loss on a hypothetical mortgage loan
in the PO strip that is covered by subordination, the class A-11 Certificates
will be reimbursed on that day for the amount of the shortfall and/or loss and
any shortfall or loss from a prior distribution day that is covered by
subordination and has not been reimbursed. Reimbursement will be made from
principal that would otherwise be distributed to classes M and B on that
distribution day, beginning with the principal that would be distributed to the
most subordinated class. Once there is no more principal available for
reimbursement from that class, reimbursement will be made from the next most
subordinated class, and so on until the shortfall or loss has been reimbursed or
there is no more principal distributable on that day to the class M and B
Certificates.
Principal distributions to target-rate classes
The target-rate classes (that is, classes M and B, and the class A subclasses
other than classes A-11 and A-IO) will receive an aggregate principal
distribution on each distribution day equal to the scheduled and unscheduled
principal payments on the target-rate strip for that distribution day. The
distributions will be allocated, subject to subordination and priorities, as
follows:
o the target-rate classes will each receive a percentage of the scheduled
principal distributions proportionate to their principal balances. On the first
distribution day, the class A target-rate subclasses are expected to receive
distributions of between [...]% and [...]% of scheduled principal payments on
the target-rate strip. The distribution to class A will be allocated among the
class A target-rate subclasses according to the priorities described in the next
section.
o Until the fifth anniversary of the first distribution day, the class A
target-rate subclasses will be entitled to receive principal distributions equal
to 100% of all unscheduled principal on the target-rate strip. From the fifth
anniversary of the first distribution day, class A target-rate subclasses will
be entitled to receive principal distributions equal to the percentage
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<PAGE>
set forth below (the class A prepayment percentage) of all unscheduled principal
on the target-rate strip. Any remaining unscheduled principal will be
distributed to the M and B classes in proportion to their principal balances.
Period (dates inclusive) Class A prepayment percentage
- --------------------------------------------------------------------------------
[June 2004-May 2005] Class A (target-rate) percentage plus [70]% of the
class A subordination level*
[June 2005-May 2006] Class A (target-rate) percentage plus [60]% of the
class A subordination level*
[June 2006-May 2007] Class A (target-rate) percentage plus [40]% of the
class A subordination level*
[June 2007-May 2008] Class A (target-rate) percentage plus [20]% of the
class A subordination level*
June 2008 and after Class A (target-rate) percentage
*For these purposes, class A percentage and subordination level are calculated
solely by reference to the target-rate classes.
However, the class A prepayment percentage will be 100% for any distribution day
on which the ratio of the principal balance of the class A target-rate
subclasses to all target-rate classes is greater than it was on the closing
date.
In addition, no reduction of the class A prepayment percentage as described
in the preceding table will occur on a distribution day unless:
o on the first distribution day to which a reduction applies, either (1) the
scheduled principal balance of mortgage loans delinquent 60 days or more
(including, for this purpose, mortgage loans in foreclosure and real estate
owned by the Trust as a result of homeowner default) averaged over the last six
months, is less than 50% of the sum of the class M principal balance and the
class B principal balance averaged over the last six months, or (2) the
scheduled principal balance of such delinquent mortgage loans averaged over that
period, is less than 2% of the scheduled principal balance of all mortgage loans
averaged over that period, and
o cumulative realized losses on the mortgage loans are less than:
(a) for distribution days in [June 2004 through May 2005], 30% of the
aggregate initial principal balance of class M and class B (the original
subordinated amount),
(b) for distribution days in [June 2005 through May 2006], 35% of the
original subordinated amount,
(c) for distribution days in [June 2006 through May 2007], 40% of the
original subordinated amount,
(d) for distribution days in [June 2007 through May 2008], 45% of the
original subordinated amount, and
(e) for distribution days in [June 2008] and afterwards, 50% of the original
subordinated amount.
Principal distributed to a class A subclass will be distributed
proportionately among holders of Certificates of the subclass.
Priorities in class A principal distributions
On each distribution day before the subordination depletion date, principal
distributions to the class A target-rate subclasses will be allocated first to
class A-10 according to the special rules set out in "Special rules for class
A-10" below. Of the remaining principal
o approximately [44.226355070864]% will be distributed to class A-9 until its
principal balance is reduced to zero, and
o approximately [55.773644929136]% will be distributed in the following order
of priority:
first, to class A-10 according to the rules described in "Special rules for
class A-10" below,
next, to class A-1 (the targeted amortization class, or TAC class) until its
principal balance is reduced to its target balance for the distribution day, as
shown in "Class A-1 (TAC) target balances" below,
next, to class A-2 until its principal balance is reduced to zero,
next, to class A-1, without regard to target balance, until its principal
balance is reduced to zero, next, concurrently as follows:
S-14
<PAGE>
o approximately [10.714285930623]% to class A-3 until its principal balance
is reduced to zero,
o approximately [1.103929809246]% to class A-8 until its principal balance is
reduced to zero, and
o approximately [88.181784260131]% sequentially as follows:
1 to class A-4 until its principal balance is reduced to zero,
2 to class A-5 until its principal balance is reduced to zero, and
3 to classes A-6 and A-7, in proportion to their principal balances,
until their principal balances are reduced to zero.
finally, to class A-10 until its principal balance is reduced to zero.
The distribution priorities described above are shown in the accompanying
flow chart.
S-15
<PAGE>
[flow chart]
S-16
<PAGE>
Beginning on the subordination depletion date, cash available for principal
distributions to the class A target-rate subclasses will be distributed to these
classes in proportion to their principal balances.
Class A-1 (TAC) target balances
The target balances for class A-1 on each distribution day are shown in the
following table. The target balances were calculated assuming that:
o the mortgage loans and the Certificates conform to the structuring
assumptions described in "Sensitivity of Certificates to prepayment - Weighted
average lives" below, and
o the mortgage loans are prepaid at a constant rate equal to [...]% of the
prepayment model.
It is extremely unlikely that the mortgage loans will repay at a constant
percentage of the prepayment model. In addition, some or all of the other
assumptions used in preparing the table are unlikely to reflect actual
experience. If principal prepayments on the mortgage loans do not occur at a
constant rate of [...]% of the prepayment model, principal distributions to
class A-1 may reduce its aggregate principal balance to zero significantly
earlier or later than the distribution day specified in the table. See
"Sensitivity of Certificates to prepayment - Weighted average lives" below for a
further discussion of the effect of mortgage loan prepayments on the rate of
principal distributions and on the weighted average lives of the offered
Certificates.
Distribution day Target balance
June 25, 1999 $[...]
July 25, 1999 [...]
August 25, 1999 [...]
September 25, 1999 [...]
October 25, 1999 [...]
November 25, 1999 [...]
December 25, 1999 [...]
January 25, 2000 [...]
February 25, 2000 [...]
March 25, 2000 [...]
April 25, 2000 [...]
May 25, 2000 [...]
June 25, 2000 [...]
July 25, 2000 [...]
August 25, 2000 [...]
September 25, 2000 [...]
October 25, 2000 [...]
November 25, 2000 [...]
December 25, 2000 [...]
January 25, 2001 [...]
February 25, 2001 [...]
March 25, 2001 [...]
April 25, 2001 [...]
May 25, 2001 [...]
June 25, 2001 [...]
July 25, 2001 [...]
August 25, 2001 [...]
September 25, 2001 [...]
October 25, 2001 [...]
November 25, 2001 [...]
December 25, 2001 [...]
January 25, 2002 [...]
February 25, 2002 [...]
March 25, 2002 [...]
April 25, 2002 [...]
May 25, 2002 [...]
June 25, 2002 [...]
July 25, 2002 [...]
August 25, 2002 [...]
September 25, 2002 [...]
October 25, 2002 [...]
November 25, 2002 [...]
December 25, 2002 [...]
January 25, 2003 [...]
February 25, 2003 [...]
March 25, 2003 [...]
April 25, 2003 [...]
May 25, 2003 [...]
June 25, 2003 [...]
July 25, 2003 [...]
August 25, 2003 [...]
September 25, 2003 [...]
October 25, 2003 [...]
November 25, 2003 [...]
December 25, 2003 [...]
January 25, 2004 [...]
February 25, 2004 [...]
April 25, 2004 [...]
May 25, 2004 [...]
June 25, 2004 [...]
S-17
<PAGE>
July 25, 2004 [...]
August 25, 2004 [...]
September 25, 2004 [...]
October 25, 2004 [...]
November 25, 2004 [...]
December 25, 2004 [...]
January 25, 2005 [...]
February 25, 2005 [...]
March 25, 2005 [...]
April 25, 2005 [...]
May 25, 2005 [...]
June 25, 2005 [...]
July 25, 2005 [...]
August 25, 2005 [...]
September 25, 2005 [...]
October 25, 2005 [...]
November 25, 2005 [...]
December 25, 2005 [...]
January 25, 2006 [...]
February 25, 2006 [...]
March 25, 2006 [...]
April 25, 2006 [...]
May 25, 2006 [...]
June 25, 2006 [...]
July 25, 2006 [...]
August 25, 2006 [...]
September 25, 2006 [...]
October 25, 2006 [...]
November 25, 2006 [...]
December 25, 2006 [...]
January 25, 2007 [...]
February 25, 2007 [...]
March 25, 2007 [...]
April 25, 2007 [...]
May 25, 2007 [...]
June 25, 2007 [...]
July 25, 2007 [...]
August 25, 2007 [...]
September 25, 2007 [...]
October 25, 2007 [...]
November 25, 2007 [...]
December 25, 2007 [...]
January 25, 2008 [...]
February 25, 2008 [...]
March 25, 2008 [...]
April 25, 2008 [...]
May 25, 2008 [...]
June 25, 2008 [...]
July 25, 2008 [...]
August 25, 2008 and after $ 0.00
Special rules for class A-10
So long as any other class A subclass is outstanding, class A-10 will not
receive a principal distribution before [June 2004]. From [June 2004 through May
2008], class A-10 will be eligible to receive a percentage of its proportional
share of scheduled and unscheduled principal for the target-rate strip for that
distribution day, based on the proportion of class A-10's principal balance to
the aggregate principal balances of all target-rate classes, until its principal
balance is reduced to zero.
Distribution day Percentage
------------------------------------------------
[June 2004 through May 2005] [30]%
[June 2005 through May 2006] [40]%
[June 2006 through May 2007] [60]%
[June 2007 through May 2008] [80]%
[June 2008] and thereafter 100%
Class A-10's weighted average life will be longer, and could be significantly
longer, than if it always received principal distributions proportional to its
principal balance.
Clean-up call
CMSI may, at any time after the principal balance of the mortgage loans is less
than 5% of the initial scheduled principal balance, repurchase the mortgage
loans and any other property owned by the Trust. Certificate holders would then
receive a final distribution reducing the principal balance of their
Certificates to zero. The final distribution of principal on the Certificates
will be made according to the distribution priorities described above under
"Subordination - Distribution priorities" and "Distributions
S-18
<PAGE>
of principal." Some Certificates may not receive a distribution equal to their
principal balance plus accrued interest if CMSI's purchase price is based in
part on the fair market value of the Trust's property.
CMSI may transfer its right to repurchase the mortgage loans to a third
party.
Losses
Realized losses
If the net liquidation proceeds on a liquidated mortgage loan are less than
loan's principal balance plus accrued interest at the mortgage loan interest
rate through the last day of the month in which the loan was liquidated, the
difference will be a realized loss. Realized losses also include special hazard,
fraud and bankruptcy losses.
A mortgage loan becomes a liquidated loan if CMSI either
o determines that all recoverable liquidation and insurance proceeds have been
received or
o accepts payment for the release of the mortgage of less than the principal
balance of the loan after determining that liquidation expenses would exceed the
difference between the cash portion of the payment and the principal balance.
Liquidation proceeds are amounts received or property acquired by CMSI in
liquidating a defaulted mortgage loan. In calculating a liquidated loan loss,
net liquidation proceeds (after reimbursement to CMSI and the Trustee for
unreimbursed advances and liquidation expenses on the mortgage loan) are applied
first to accrued interest and then to the principal balance of the loan.
Loss allocations
Allocation to a class of part or all of the interest portion of a realized loss
on a mortgage loan will reduce interest payments to be received by the class.
Allocation to a class of part or all of the principal portion of a realized
loss on a mortgage loan will reduce the class's principal balance by the amount
of the loss allocated to the class. A principal loss can therefore not be
allocated to a class that exceeds the principal balance of the class.
Realized losses on hypothetical mortgage loans in the target-rate strip that
are covered by subordination will be allocated to the target-rate classes in
accordance with their subordination priorities. That is, losses will be
allocated first to class B-5 until its principal balance is reduced to zero,
then to class B-4 until its principal balance is reduced to zero, and so forth.
Realized losses that are not covered by subordination will be allocated among
the classes in accordance with their principal balances.
Example 1: Suppose the principal balance of class B-5 is $1,000 and of class
B-4 is also $1,000. Then a realized $1,500 loss on the target-rate strip that is
covered by subordination would be allocated to class B-5 until its principal
balance is reduced to zero. The remaining $500 of the loss would then be
allocated to the B-4 class, reducing its principal balance to $500.
Example 2: Same facts, except that the loss is a bankruptcy loss that exceeds
the limit for such losses. Since such a loss is not covered by subordination,
classes B-4 and B-5 will each be allocated their proportional share of the loss,
based on the principal balances of all the target-rate classes.
Losses allocated to a class will be allocated to the Certificates in the
class in proportion to their principal balances. Principal losses on the
target-rate strip that are allocated to class A will be further allocated to the
class A target-rate subclasses in proportion to their principal balances.
Realized principal losses on the PO strip will be allocated to class A-11.
However, if the loss is covered by subordination, it will be reimbursed by
classes B and M, as described in "Distributions of principal - Principal
distributions to class A-11" above.
A bankruptcy loss will not be allocated so long as CMSI has notified the
Trustee in writing that CMSI is diligently pursuing any remedies that may exist
in connection with the representations and warranties made regarding the related
mortgage loan and either
S-19
<PAGE>
o the mortgage loan is current on payments due or
o delinquent payments of principal and interest on the mortgage loan, premiums
on any applicable standard hazard insurance policy and any escrow payments for
the mortgage loan are being advanced on a current basis by CMSI,
in each case without giving effect to any reduction in monthly payments on the
loan due to bankruptcy proceedings.
Recoveries
Any recovery of principal on a mortgage loan that had previously been allocated
as a realized loss will be allocated to the classes, to the extent of the loss
on that loan allocated to the class, in order of seniority, beginning with the
most senior class.
Sensitivity of Certificates to prepayment
The prepayment model
As discussed in the core prospectus ("Distributions on the Certificates - Effect
of prepayments"), the rate at which mortgage loans are prepaid (including by
repurchase or foreclosure) affects a Certificate's
o weighted average life, and
o for mortgage loans purchased at a premium or a discount, yield to maturity.
Prepayments on mortgage loans are commonly measured by a prepayment model. A
prepayment model is a set of assumptions about the rate at which homeowners will
prepay their mortgage loans. "Prepayment" includes refinancings, liquidations
and repurchases by CMSI. The model used in this prospectus assumes that the
homeowners will prepay new mortgage loans at some multiple of
o 0.2% per annum of the principal balance of the mortgage loans in the first
month of the mortgage loans,
o an additional 0.2% per annum in each month thereafter (ie, 0.4% per annum in
the second month, 0.6% per annum in the third month) until the 30th month, and
o beginning in the 30th month and in each month thereafter, 6.0% per annum.
If homeowners prepaid their mortgages at exactly these rates, we would say
that they were prepaying at 100% of the prepayment model. Similarly, we would
say that homeowners were prepaying at 200% of the prepayment model if they
prepaid their loans twice as fast as 100% - that is, 0.4% per annum in the first
month, 0.8% per annum in the second month, and so forth. If homeowners never
made a prepayment, they would be said to prepay at 0% of the prepayment model.
There is no assurance that prepayment of the mortgage loans will conform to
any level of the prepayment model. The rate of principal payments on pools of
mortgage loans is influenced by a variety of economic, geographic, social and
other factors, including the level of mortgage interest rates and the rate at
which homeowners sell their homes, refinance their mortgage loans or default on
their mortgage loans. In general, if prevailing interest rates fall
significantly below the interest rates on the mortgage loans, the mortgage loans
are more likely prepay faster than if prevailing rates rise or remain level.
Conversely, if interest rates rise above the interest rates on the mortgage
loans, we would expect the rate of prepayment to decrease.
Other factors affecting prepayment of mortgage loans include changes in
homeowners' housing needs, job transfers, unemployment and homeowners' net
equity in the mortgaged properties. In addition, as homeowners move or default
on their mortgage loans, the houses are generally sold and the mortgage loans
prepaid, although some of the mortgage loans may be assumed by a new buyer.
Because the amount of principal payments on each class will depend on the
rate of repayment (including prepayments) of the mortgage loans, the date by
which the principal balance of any class is reduced to zero is likely to occur
earlier than the last scheduled distribution day of [May 25, 2029].
S-29
<PAGE>
The following tables of weighted average lives and yields to maturity have
been prepared using the following structuring assumptions:
o The mortgage loans, and the classes of Certificates, have the characteristics
set forth in "Summary Series overview," above, without regard to any variation
or approximation provided for in that section.
o Scheduled payments of principal and interest on the mortgage loans are
received in a timely manner.
o Each discount loan and premium loan has an original term to maturity of [360]
months and [...] months, respectively.
o Each discount loan has an interest rate equal to the initial weighted average
rate for all discount loans ([...]%, subject to changes in the mortgage loan
pool), and each premium loan has an interest rate equal to the initial weighted
average rate for all premium loans ([...]%, subject to changes in the mortgage
loan pool).
o CMSI does not make a clean-up call.
The prepayment model, the structuring assumptions and the other assumptions
described below are made for illustrative purposes only. It is highly unlikely
that the mortgage loans will prepay at a constant rate until maturity or that
all of the mortgage loans will prepay at the same time. The characteristics of
the actual mortgage loans are also likely to differ from the structuring and
other assumptions. As a result, the actual principal balances, weighted average
lives and pre-tax yields of the Certificates are likely to differ from those
shown in the tables in the following subsections of this "Sensitivity of
Certificates to prepayment" section, even if all of the mortgage loans prepay at
the indicated percentages of the prepayment model. You are urged to consult your
investment advisor and to make your investment decision based on your own
determination as to anticipated rates of prepayment under a variety of scenarios
and the suitability of a class of Certificates to your investment objectives.
Weighted average lives
Weighted average life refers to the average amount of time from the date a
Certificate is purchased until its principal balance is reduced to zero. The
weighted average life of each class shown in the following tables is determined
by (1) multiplying the amount of each distribution of principal by the number of
years from the closing to the related distribution day, (2) adding the results
and (3) dividing the sum by the initial principal balance of the class.
The sensitivity of class A-1 (the TAC class) to principal prepayments will
depend in part upon how long it takes before the principal balance of class A-2,
which supports the TAC class, is reduced to zero. Under certain relatively fast
prepayment scenarios, the TAC class may continue to be outstanding when the
class A-2 Certificates are no longer outstanding. Under these circumstances,
principal distributions will be allocated to the TAC class without regard to the
target balances, and will thus become more sensitive to prepayment rates.
Conversely, under certain relatively slow prepayment scenarios, principal
distributions allocated to the TAC class on a distribution day may not be
sufficient to reduce the principal balance to the target balance. In such cases,
the principal distributions on subsequent distribution days will be allocated to
the TAC class until its principal balance equals the scheduled target balance.
S-30
<PAGE>
<TABLE>
<CAPTION>
Principal balance as percent of initial principal balance
Percentage of prepayment model
Class A-1 Certificates Class A-2 Certificates Class A-3 Certificates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
distribution day 0% [...]% [...]% [...]% [...]% 0% [...]% [...]% [...]% [...]% 0% [...]% [...]% [...]% [...]%
Initial 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
[May] 25, 2000
[May] 25, 2001
[May] 25, 2002
[May] 25, 2003
[May] 25, 2004
[May] 25, 2005
[May] 25, 2006
[May] 25, 2007
[May] 25, 2008
[May] 25, 2009
[May] 25, 2010
[May] 25, 2011
[May] 25, 2012
[May] 25, 2013
[May] 25, 2014
[May] 25, 2015
[May] 25, 2016
[May] 25, 2017
[May] 25, 2018
[May] 25, 2019
[May] 25, 2020
[May] 25, 2021
[May] 25, 2022
[May] 25, 2023
[May] 25, 2024
[May] 25, 2025
[May] 25, 2026
[May] 25, 2027
[May] 25, 2028
[May] 25, 2029
Weighted Average
Life (Years)
- ----------------
</TABLE>
* Indicates that between zero and 0.5% of initial principal balance is
outstanding.
S-31
<PAGE>
<TABLE>
<CAPTION>
Principal balance as percent of initial principal balance
Percentage of prepayment model
Class A-4 Certificates Class A-5 Certificates Class A-6 Certificates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
distribution day 0% [...]% [...]% [...]% [...]% 0% [...]% [...]% [...]% [...]% 0% [...]% [...]% [...]% [...]%
Initial 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
[May] 25, 2000
[May] 25, 2001
[May] 25, 2002
[May] 25, 2003
[May] 25, 2004
[May] 25, 2005
[May] 25, 2006
[May] 25, 2007
[May] 25, 2008
[May] 25, 2009
[May] 25, 2010
[May] 25, 2011
[May] 25, 2012
[May] 25, 2013
[May] 25, 2014
[May] 25, 2015
[May] 25, 2016
[May] 25, 2017
[May] 25, 2018
[May] 25, 2019
[May] 25, 2020
[May] 25, 2021
[May] 25, 2022
[May] 25, 2023
[May] 25, 2024
[May] 25, 2025
[May] 25, 2026
[May] 25, 2027
[May] 25, 2028
[May] 25, 2029
Weighted Average
Life (Years)
- ----------------
</TABLE>
* Indicates that between zero and 0.5% of initial principal balance is
outstanding.
S-32
<PAGE>
<TABLE>
<CAPTION>
Principal balance as percent of initial principal balance
Percentage of prepayment model
Class A-7 Certificates Class A-8 Certificates Class A-9 Certificates
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
distribution day 0% [...]% [...]% [...]% [...]% 0% [...]% [...]% [...]% [...]% 0% [...]% [...]% [...]% [...]%
Initial 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100
[May] 25, 2000
[May] 25, 2001
[May] 25, 2002
[May] 25, 2003
[May] 25, 2004
[May] 25, 2005
[May] 25, 2006
[May] 25, 2007
[May] 25, 2008
[May] 25, 2009
[May] 25, 2010
[May] 25, 2011
[May] 25, 2012
[May] 25, 2013
[May] 25, 2014
[May] 25, 2015
[May] 25, 2016
[May] 25, 2017
[May] 25, 2018
[May] 25, 2019
[May] 25, 2020
[May] 25, 2021
[May] 25, 2022
[May] 25, 2023
[May] 25, 2024
[May] 25, 2025
[May] 25, 2026
[May] 25, 2027
[May] 25, 2028
[May] 25, 2029
Weighted Average
Life (Years)
- ----------------
</TABLE>
* Indicates that between zero and 0.5% of initial principal balance is
outstanding.
S-33
<PAGE>
Yield to maturity
If a Certificate is purchased at a discount from parity (as described below),
and the anticipated yield to maturity of the Certificate assumed faster
prepayments of the mortgage loans than are actually received, the actual yield
to maturity will generally be lower than anticipated. Conversely, if a
Certificate is purchased at a premium to parity, and the anticipated yield to
maturity of the Certificate assumed slower prepayments of the mortgage loans
than are actually received, the actual yield to maturity will generally be lower
than anticipated. Parity is the price at which a Certificate will yield its
coupon, after giving effect to any payment delay.
The timing of changes in the rate of prepayments on the mortgage loans may
significantly affect an investor's actual yield to maturity, even if the average
rate of principal payments is consistent with the investor's expectations. In
general, the earlier a prepayment is received, the greater the effect on the
investor's yield to maturity. As a result, higher (or lower) than anticipated
principal payments during the period immediately following the closing date will
not be offset by the same amount of lower (or higher) principal payments in a
subsequent period.
CMSI intends to file additional yield tables and other computational material
for some class A subclasses, the class M Certificates and the offered class B
subclasses with the SEC in a report on Form 8-K. See "Incorporation of documents
by reference" below. These tables and materials were prepared by the underwriter
at the request of some prospective investors, based on assumptions provided by,
and satisfying the special requirements of, the investors. These assumptions may
differ from the structuring assumptions and may not be relevant to or
appropriate for other investors.
Sensitivity of the class A-3 and A-11 Certificates
The following tables indicate sensitivity to various rates of prepayment on the
mortgage loans of the pre-tax yields to maturity on a corporate bond equivalent
basis of the class A-3 and A-11 Certificates. In addition to the structuring
assumptions described in "The prepayment model" above, we have assumed that
o the class A-3 Certificates will be issued at an aggregate purchase
price of approximately [...]% of their initial scheduled principal balance, and
o the class A-11 Certificates will be issued at an aggregate purchase price
of approximately [...]% of their initial scheduled principal balance.
You should note that the only prepayments that affect the class A-3
Certificates are prepayments on the hypothetical loans in the target-rate strip,
while the only prepayments that affect the class A-11 Certificate are
prepayments on the hypothetical loans in the PO strip. The hypothetical loans in
the PO strip are stripped from discount loans - that is, loans with net loan
rates lower than the target rate. These loans, and consequently the class A-11
Certificates, are likely to prepay more slowly than other loans in the Trust.
Pre-tax yields
Percentage of prepayment model
Class 0% [...]% [...]% [...]% [...]%
- --------------------------------------------------------------------------------
Class A-3 [...]% [...]% [...]% [...]% [...]%
Class A-11 [...]% [...]% [...]% [...]% [...]%
The pre-tax yields set forth in the preceding table (and in the tables below for
yields on offered class B Certificates) were calculated by
o determining the monthly discount rates that, when applied to the streams of
cash flows assumed to be paid on the Certificates, would make the discounted
present value of the assumed stream of cash flows equal an assumed purchase
price for each class A-3 Certificate of [...]%, and for each class A-11
Certificate of [...]%, of its initial principal balance, and
o converting the monthly rates to corporate bond equivalent rates.
S-34
<PAGE>
The calculation does not take into account the interest rates at which you
might reinvest distributions you receive on the class A-3 or A-11 Certificates.
Yields on offered class B Certificates
If the principal balances of the unoffered class B Certificates are reduced to
zero, the yields to maturity on the offered class B Certificates will become
extremely sensitive to the amount and timing of losses on the mortgage loans,
because the losses (other than losses that are not covered by subordination)
will be entirely allocated to class B-2 until its principal balance is reduced
to zero, and then to class B-1.
Defaults on the mortgage loans may be measured relative to a default standard
or model. The model used in the following tables, the standard default
assumption, or SDA, assumes constant default rates of
o 0.02% per annum of the principal balance in the first month of the mortgage
loans,
o an additional 0.02% per annum in each month from the second month until the
30th month,
o 0.60% per annum in each month from the 30th month through the 60th month,
o 0.0095% per annum less in each month from the 61st month through the 120th
month, and
o 0.03% per annum in each month after the 120th month.
Mortgage loans that conform to this assumption are said to be 100% SDA. A
default assumption of 50% SDA would assume default rates in each month that were
50% of the assumption, and similarly for 150% SDA and other assumptions. No
percentage SDA purports to be a historical description of default experience or
a prediction of the anticipated rate of default of any pool of mortgage loans.
The following yield tables have been prepared using the structuring
assumptions, except that we assumed that
o scheduled interest and principal payments on the mortgage loans are received
timely, except for mortgage loans on which defaults occur in accordance with the
indicated percentages of SDA,
o all defaulted loans are liquidated after exactly 12 months,
o there are realized losses of a percentage (referred to in the tables as the
"loss severity" percentage) of the principal balance at liquidation of
the liquidated mortgage loans,
o all realized losses are covered by subordination,
o the class A prepayment percentage is reduced only when permitted as described
above under "Distributions of principal - Principal distributions to
target-rate classes," and
o there are no interest shortfalls due to prepayments.
The pre-tax yields shown in the following tables were calculated in the same
manner as the pre-tax yields on the A-3 and A-11 Certificates, as described in
the preceding section. We assumed purchase prices of [...]% of the initial
principal balance plus accrued interest for the B-1 Certificates and [...]% of
the initial principal balance plus accrued interest for the B-2 Certificates.
Pre-tax yield to maturity of class B-1 Certificates
Percentage of prepayment model
[...]% Loss Severity [...]% Loss Severity
SDA Percentage [...]% [...]% [...]% [...]% [...]% [...]%
- -----------------------------------------------------------------------------
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
S-35
<PAGE>
Pre-tax yield to maturity of class B-2 Certificates
Percentage of prepayment model
[...]% Loss Severity [...]% Loss Severity
SDA Percentage [...]% [...]% [...]% [...]% [...]% [...]%
- -----------------------------------------------------------------------------
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
The following table shows aggregate realized losses on the Certificates under
each of the scenarios in the preceding tables, expressed as a percentage of the
initial principal balance:
Aggregate realized losses
Percentage of prepayment model
[...]% Loss Severity [...]% Loss Severity
SDA Percentage [...]% [...]% [...]% [...]% [...]% [...]%
- -----------------------------------------------------------------------------
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
[...]% [...]% [...]% [...]% [...]% [...]% [...]%
Investors should note that
o the loss severity percentage does not purport to be a historical description
of loss severity experience or a prediction of the anticipated loss severity of
any pool of mortgage loans, and
o even if subsequently cured, delinquencies may affect the timing of
distributions on the offered class B Certificates, because the entire amount of
the delinquencies would be borne by the offered class B subclasses in reverse
order of seniority before they would affect the class M and A Certificates.
Voting Rights
At all times,
o [98]% of the voting rights of Certificate holders will be allocated among the
class A (other than class A-IO), M and B Certificates in proportion to their
principal balances, and
o [2]% of such voting rights will be allocated to the class A-IO Certificates.
Additional ERISA considerations
The Department of Labor has granted the underwriter, [Underwriter], an
administrative exemption, Prohibited Transaction Exemption PTE [...] (the
[Underwriter] exemption), from some of ERISA's prohibited transaction rules and
some of the excise taxes imposed by the Internal Revenue Code for the initial
S-36
<PAGE>
purchase, the holding and the subsequent resale by ERISA plans of certificates
in pass-through trusts that meet the conditions and requirements of the
[Underwriter] exemption. The [Underwriter] exemption should apply to the
acquisition, holding, and resale of the offered class A Certificates by an ERISA
plan, provided that specified conditions are met, including
o the acquisition of the offered class A Certificates by an ERISA plan is on
terms (including the purchase price) that are at least as favorable to the ERISA
plan as they would be in an arm's-length transaction with an unrelated party,
o the offered class A Certificates acquired by the ERISA plan have received a
rating at the time of their acquisition that is in one of the three highest
generic rating categories from any of S&P, Fitch, Duff & Phelps Credit Rating
Co. or Moody's Investors Service, Inc.,
o the sum of all payments made to [Underwriter] for the distribution of the
offered class A Certificates is no more than reasonable compensation for
underwriting the certificates, and
o the sum of all payments made to and retained by CMSI is no more than
reasonable compensation for CMSI's services and reimbursement of its reasonable
expenses.
In addition, an ERISA plan investing in the offered class A Certificates must
be an "accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
SEC under the Securities Act of 1933.
The [Underwriter] exemption does not apply to the acquisition and holding of
offered senior Certificates by ERISA plans sponsored by CMSI, the underwriter,
the Trustee or any of their affiliates. Moreover, the exemption provides relief
from certain self-dealing/conflict of interest prohibited transactions only if,
among other requirements
o an ERISA plan's investment in each class A subclass does not exceed 25% of
that subclass at the time of the acquisition and
o immediately after the acquisition, no more than 25% of the assets of an ERISA
plan for which the person who has discretionary authority or renders advice are
invested in certificates representing an interest in a trust containing assets
sold or serviced by the same person.
A governmental plan as defined in Section 3(32) of ERISA is not subject to
ERISA or Internal Revenue Code section 4975. However, a governmental plan may be
subject to similar federal, state or local laws. A fiduciary of a governmental
plan should make its own determination as to the need for the availability of
any exemptive relief under such similar laws.
Neither the [Underwriter] exemption nor PTE 83-1 (discussed under "ERISA
considerations" in the core prospectus) applies to the acquisition or holding of
the class M Certificates or the offered class B Certificates, which are
subordinated to the class A Certificates.
Legal investment
The offered class A and class M Certificates will be "mortgage related
securities" for purposes of the Secondary Mortgage Market Enhancement Act of
1984 (SMMEA), so long as they are rated in one of the two highest rating
categories by at least one nationally recognized statistical rating
organization. The offered class B Certificates will not be "mortgage related
securities" under SMMEA.
Federal income tax consequences
An election will be made to treat the Trust as a REMIC. Each class of offered
Certificates will be designated as a regular interest in the REMIC. Offered
Certificates will be treated as debt instruments for US federal income tax
purposes.
The class [...] and class [...] Certificates will be issued with original
issue discount (OID) equal to the excess of their initial principal balances
over their issue prices. It is anticipated that
S-37
<PAGE>
o the class [...] Certificates will be issued with OID equal to the excess of
their initial principal balance (plus three days of accrued interest) over their
issue price (including accrued interest),
o the class [...], class [...], class [...], class [...], class [...],
class [...], class [...], class [...] and class [...] Certificates will be
issued at a premium, and
o the class [...], class [...] and class [...] Certificates will be issued with
de minimis OID.
The offered Certificates will be treated as
o "loans . . . secured by an interest in real property which is . . . residen-
tial real property" and "regular interests in a REMIC" for domestic building and
loan associations,
o "qualified mortgages" for another REMIC, and
o "permitted assets" for a financial asset securitization investment trust.
Plan of distribution
Subject to the terms and conditions of the underwriting agreement among
Citicorp, CMSI and the underwriter, [Underwriter], the underwriter, will
purchase the offered Certificates from CMSI upon issuance. The underwriter has
committed to purchase all the offered Certificates if any Certificates are
purchased. The underwriter will distribute the offered Certificates from time to
time in negotiated transactions or otherwise at varying prices to be determined
at the time of sale.
Proceeds to CMSI will be approximately [...]% of the aggregate initial
principal balance of the class A Certificates, approximately [...]% of the
aggregate initial principal balance of the class M Certificates and
approximately [...]% of the aggregate initial principal balance of the offered
class B Certificates, plus accrued interest at the rate of [...]% and before
deducting expenses payable by CMSI. [However, if the aggregate initial principal
balance of the class A Certificates is less than $[...], the aggregate proceeds
to CMSI (as a percentage of the aggregate initial principal balance of the class
A Certificates) will be adjusted upwards by not more than [0.001]% and if the
aggregate initial principal balance of the class A Certificates is greater than
$[...], the aggregate proceeds to CMSI (as a percentage of the aggregate initial
principal balance of the class A Certificates) will be adjusted downwards by not
more than [0.001]%.] In connection with the purchase and sale of the offered
Certificates, the underwriter may be deemed to have received compensation from
CMSI in the form of underwriting discounts.
Subject to the terms and conditions of the purchase agreement among Citicorp,
CMSI and [Purchaser], [Purchaser] will purchase the unoffered class B
Certificates upon issuance. [Purchaser] has committed to purchase all of the
unoffered class B Certificates if any offered Certificates are purchased.
[Purchaser] will offer the unoffered class B Certificates through one or more
negotiated transactions, as a private placement to a limited number of
institutional investors. The closing of the sale of the unoffered class B
Certificates is a condition to the closing of the sale of the offered
Certificates to the underwriter.
The Underwriting Agreement provides that CMSI and Citicorp will indemnify the
underwriter against certain civil liabilities under the Securities Act of 1933
or contribute to payments the underwriter may be required to make under that
Act.
In connection with this offering, the underwriter may over-allot or effect
transactions that stabilize or maintain the market price of the offered
Certificates at a level above that which might otherwise prevail in the open
market. Such stabilizing, if commenced, may be discontinued at any time.
S-38
<PAGE>
Experts
The consolidated financial statements of Citicorp and subsidiaries included in
Citicorp's Annual Report on Form 10-K for 1998 have been incorporated by
reference in reliance upon the report in such Form 10-K of KPMG LLP, independent
certified public accountants, and upon the authority of that firm as experts in
accounting and auditing.
Legal opinions
Legal opinions will be delivered for CMSI and Citicorp by Marla A. Berman, as an
Associate General Counsel - Corporate Law of Citigroup, and for the underwriter
by [underwriter's counsel]. Rona Daniels, Vice President and Tax Counsel for
Asset Securitization of Citibank, will deliver an opinion on federal income tax
matters for CMSI. Ms. Berman and Ms. Daniels each owns or has the right to
acquire less than 0.01% of the outstanding common stock of Citigroup.
[Underwriter's counsel] will deliver an opinion on ERISA matters for CMSI.
Incorporation of documents by reference
The following documents filed with the SEC by CMSI under the Securities Exchange
Act of 1934 are incorporated by reference in this prospectus as of their filing
dates:
o Current Report on Form 8-K dated [...], filed pursuant to Section 13, and
o all reports subsequently filed pursuant to sections 13(a), 13(c) or 15(d)
prior to the termination of the offering of the Certificates.
S-39
<PAGE>
Core prospectus
May 4, 1999
Citicorp Mortgage Securities, Inc.
909 Third Avenue
New York, NY 10043
(212) 559-6727
REMIC Pass-Through Certificates
- --------------------------------------------------------------------------------
Holders of Certificates will have an interest in a Trust whose as-
sets consist principally of mortgage loans, or interests in mort-
gage loans, on one- to four-family residences or cooperative
apartments. Each Certificate will entitle its holder to a portion of
distributions of principal and interest payments that the Trust
receives on the mortgage loans or mortgage loan interest, as de-
scribed in this prospectus.
You should read "General risk factors," beginning
on page [...] of this core prospectus, and any "Series
risk factors" section in the attached supplement,
before you purchase any Certificates.
----------------------------------------------------------------
The Certificates are not insured or guaranteed by the
Federal Deposit Insurance Corporation or any other
governmental agency.
Neither the Securities and Exchange Commission nor any
state securities commission has approved the Certificates or
determined that this prospectus is accurate or complete.
Any representation to the contrary is a criminal offense.
<PAGE>
How to read this prospectus
This prospectus consists of this core prospectus and the preceding supplement.
This core prospectus gives general background information that applies to all
Series of Certificates. The preceding supplement gives specific information
about the particular Series of Certificates offered by this prospectus. You
should carefully read the entire prospectus before investing.
The supplement may update or modify information in this core prospectus;
whenever information in the supplement contradicts any information in this core
prospectus, you should rely on the information in the supplement.
In deciding whether to purchase Certificates, you should rely solely on the
information in this prospectus. We have not authorized anyone to give you
different information about the Certificates.
You will find a detailed table of contents for this prospectus immediately
following the cover page of the supplement and an index of all terms defined in
this prospectus at the end of this core prospectus.
5
<PAGE>
Summary
The Certificates Citicorp Mortgage Securities, Inc. (CMSI) will set up a Trust
that will purchase a pool of mortgage loans from CMSI. The Trustee for the Trust
is identified in the supplement. The Trustee is not affiliated with CMSI.
Each mortgage loan will be secured, usually by a first-priority mortgage on a
one- to four-family residential property. Some mortgage loans may be loans on
cooperative apartments, which will be secured by a first-priority lien on shares
in a cooperative apartment corporation and the related lease or occupancy
agreement. Other mortgage loans may be secured by leases of residential
property. The supplement describes the specific properties of the mortgage
loans.
The mortgage loans in the Trust may be either
o affiliated mortgage loans originated by CMSI or its affiliates or purchased
from third parties and serviced by CMSI or its affiliates, or
o third-party mortgage loans originated by third parties and sold to CMSI on a
"servicing retained" basis - that is, where a third-party continues to service
the loan.
The Trust will sell Certificates evidencing interests in one pool of mortgage
loans. The Certificates offered by the Trust will comprise a single Series of
Certificates. A Certificate holder will own, through the Trust, a portion of the
payments on the mortgage loans received by the Trust and other property held by
the Trust. Payments received by the Trust will, after deduction of servicing and
other costs, be distributed to the Certificate holders.
The Trust will receive scheduled payments of principal and interest on the
mortgage loans, prepayments of principal, proceeds of foreclosure proceedings on
the mortgaged properties securing the mortgage loans and payments of hazard or
other insurance on the mortgaged properties or mortgage loans. The Trust may
also receive other payments described in this prospectus. Other property of the
Trust may include mortgaged properties acquired by foreclosure, reserve funds or
other credit support, and insurance policies. The Trust's expenses will include
fees paid to CMSI and/or others for servicing the mortgage loans, expenses of
foreclosure proceedings, and other expenses.
Different classes of Certificates
A Series of Certificates will usually consist of several classes of
Certificates. Some classes of Certificates may not be offered publicly but may
be sold privately (including sales to CMSI or an affiliated company). Only
Certificates rated as investment grade by a nationally recognized rating agency
will be offered to the public.
Holders of Certificates in different classes will be entitled to different
distributions out of payments received by the Trust. For example,
o Different classes may not receive interest at the same rate on their
principal balances. Some principal-only, or PO, classes may receive no interest
at all.
o Some classes may receive interest but not principal. Such interest-only (or
IO) classes will receive interest on a "notional" balance, but will not receive
distributions of any part of their notional balance.
o Some accrual classes may not receive interest distributions for a specified
period, with the deferred interest being added to the class's principal balance.
o Some classes may not receive distributions of some or all of their principal
for a stated time or until a stated event (such as reduction to zero of the
principal balance of another class ). As a result, some classes will have their
principal balances reduced faster than other classes.
o Some classes may be subordinated to other more senior classes. If there are
delinquencies or losses on the mortgage loans so that the Trust does not have
enough money to distribute the accrued interest and principal to all the
classes, the subordinated classes as a group will absorb a disproportionately
large amount of these shortfalls or losses.
A class of Certificates may be divided into subclasses. The supplement
describes each class of Certificates in the Series.
REMIC election
The Trust will elect to be treated as a "real estate mortgage investment
conduit" (or REMIC) under US federal tax laws. The Trust may be comprised of
multiple REMICs. A REMIC is not subject to US federal corporate tax, so payments
of principal and in-
6
<PAGE>
terest received by the Trust can be distributed to Certificate holders without
deduction for those taxes.
Trusts of Certificates
The Trust may contain in addition to, or instead of, mortgage loans,
mortgage-backed securities issued by the Government National Mortgage
Association (popularly known as Ginnie Mae), the Federal Home Loan Mortgage
Corporation (popularly known as Freddie Mac), Fannie Mae (formerly Federal
National Mortgage Association) (collectively, agency certificates) or by other
REMICs. Principal and interest received on agency certificates or REMIC
securities will be distributed to Certificate holders in much the same way as
principal and interest payments received on mortgage loans.
General risk factors
You should consider the following general risk factors, and any risk factors
described in the supplement that are specific to the Series, before you purchase
any Certificates.
Limited liquidity
The liquidity of the Certificates may be limited.
o A secondary market for a class of Certificates may not develop or, if it
does, it may not provide you with liquidity of investment or continue for the
life of the Certificates,
o While CMSI anticipates that the underwriter will establish a secondary
market for the Certificates, the underwriter will not have to do so or to
continue doing so for any period of time.
o CMSI does not intend to list any Certificates on a securities exchange or
automated quotation system.
Limited assets
The Trust's assets are generally limited to mortgage loans. If payments and
recoveries on the mortgage loans are insufficient to make all distributions of
interest and principal on the Certificates, there may be no other assets
available to make up the deficiency.
CMSI may advance its own funds to cover delinquent scheduled payments of
principal or interest on the mortgage loans it services, but is not obligated to
do so. CMSI intends to make advances to the extent it determines that the funds
advanced will be reimbursed to it from future payments and collections on the
related mortgage loans. If CMSI fails to make an advance, the Trustee, acting in
its individual capacity and not as Trustee, will make an advance to cover
delinquencies, but only to the extent it believes its advances will be
reimbursed from future payments and collections on the related mortgage loans.
Other servicers and master servicers of third-party mortgage loans must
advance their own funds to cover delinquent scheduled payments of principal and
interest on the loans they service, but only to the extent they determine that
the funds advanced will be reimbursed from future payments and collections on
the related mortgage loans.
To the extent that CMSI, other servicers and master servicers and the Trustee
do not make advances, the only source of cash for distributions on the
Certificates will be cash received on the mortgage loans.
Uncertainty of yields
The yield to maturity of each class of Certificates will be sensitive, in
varying degrees, to
o the rate of principal prepayments and other unscheduled receipts on the
mortgage loans,
o the allocation of prepayments and unscheduled receipts among the classes of
Certificates,
o the amount, timing and cause of losses and payment shortfalls on the mortgage
loans,
o the allocation of losses and distribution shortfalls among the classes of
Certificates and
o any difference between the purchase price of a Certificate and its principal
balance at the time of purchase.
If you purchase a Certificate at a discount, a slower than anticipated rate
of prepayment will result in an actual yield lower than the anticipated yield.
If you purchase a Certificate at a premium, a faster than anticipated rate of
prepayment will result in an actual yield lower than the anticipated yield. If
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losses or distribution shortfalls are allocated to your Certificates, your
actual yield will be adversely affected. You should therefore understand the
terms and conditions of any Certificates in which you are considering an
investment and the priorities for principal and interest distributions and
allocations of losses and shortfalls before you make an investment. See
"Distributions of principal," "Losses" and "Sensitivity of Certificates to
prepayment" below.
Legal investment
Institutions whose investment activities are subject to legal investment laws
and regulations or to regulatory review may be subject to restrictions on
investment in subordinated classes of Certificates. CMSI cannot represent that
any class of subordinated Certificates will be a legal investment for you. You
should consult your counsel on whether any subordinated class of Certificates is
a legal investments for you.
Restrictions on transfer
The purchase and holding of subordinated classes of Certificates by or on behalf
of an employee benefit plan subject to the Employee Retirement Security Act of
1974 (ERISA) may result in prohibited transactions under erisa, the Internal
Revenue Code or similar law. These laws may restrict the number and types of
investors that can buy subordinated classes of Certificates and could therefore
adversely affect the liquidity of these Certificates.
The Trust will not register or recognize a transfer of Certificates of a
subordinated class unless the transferee satisfies the conditions set forth in
"ERISA considerations - Class exemptions" below.
Year 2000
The transition from the year 1999 to the year 2000 may disrupt the ability of
computerized systems to process information. The collection and posting of
payments on the mortgage loans, the servicing of the mortgage loans and the
distributions on the Certificates depend upon computer systems of Citicorp
Mortgage, Inc. (which will service affiliated mortgage loans as CMSI's delegate)
and its subservicers, any servicers or master servicers for third-party loans,
the Trustee and, for book-entry Certificates, the Depository Trust Company
(DTC).
Citicorp Mortgage has modified its computer systems and expects to be year
2000 ready. Citicorp Mortgage is also assessing the year 2000 readiness of key
vendors and subservicers. The Trustee has advised Citicorp Mortgage that it has
implemented measures to modify and validate its critical computer systems for
year 2000 readiness. DTC has informed its participants that it is implementing a
program so that DTC's systems for timely distributions, book-entry deliveries
and settlement of trades will continue to function appropriately in 2000.
The failure of any of the above parties, or their key vendors and
subcontractors, to be year 2000 ready could result in incorrect or inadequate
servicing of mortgage loans and delayed or incorrect distributions to
Certificate holders.
Distributions on the Certificates
Scheduled payments on mortgage loans
Each mortgage loan will have a scheduled payment that is due on the first day of
each month. The scheduled payment will consist of
o interest on the unpaid principal amount (the principal balance) of the
mortgage loan for the preceding month, and
o a specified part of the principal balance. Scheduled payments may also
include payments for real estate taxes or other assessments and property
insurance. The homeowner usually has a grace period in which he or she can make
the payment without having to pay additional interest or a late payment charge.
(In this prospectus, we often refer to the borrower under a mortgage loan as the
homeowner, even though he or she may be a tenant or a cooperative apartment
shareholder.)
Property of the Trust; the cut-off date
The principal balance of each mortgage loan in the Trust will be determined as
of the first day of the month in which the Certificates are issued (the cut-off
date). Prepayments of principal received on or before the cut-off date will not
be property of the Trust. Nor will scheduled payments of principal and interest
for months ending before the cut-off date, even if
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the homeowners make the payments on or after the cut-off date.
Example: A Trust issues Certificates on January 15. Then January 1 is the
cut-off date. Principal prepayments received on or before January 1 are not
property of the Trust, nor are scheduled payments of principal and interest due
on January 1, no matter when they are received. Principal prepayments received
after January 1 are property of the Trust as are scheduled payments due on
February 1 or later, even if the scheduled payments were received before the
cut-off date.
Distribution of scheduled payments
CMSI, as paying agent for the Trust, will distribute principal and interest on
the Certificates at regular intervals. For most Series of Certificates,
distributions will be made monthly, but distributions can be made quarterly,
semi-annually or at other intervals, but not less often than annually. In this
core prospectus, unless otherwise stated, it will be assumed that distributions
are monthly.
On the 18th day of each month (the determination day), CMSI will determine
how much of the scheduled principal and interest payments due on the first day
of that month has been received by the persons administering and servicing the
mortgage loans (the servicers) and forwarded to the Trust. After deduction of
the servicers' fees, these funds will be distributed on the 25th day of the
month (the distribution day) to the Certificate holders as principal and
interest on the Certificates. (If the 18th day of the month is not a business
day, the determination day will be the next business day after the 18th;
similarly for the distribution day.)
Interest will be paid on each class of Certificates at the rate stated for
the class in the supplement. The interest rate for a class of Certificates may
differ from the average interest rate on the mortgage loans or the rate on any
particular mortgage loan. Principal will be distributed to the various classes
of Certificates in accordance with the priorities stated in the supplement.
In addition to those regular classes of Certificates that have a principal
balance and/or an interest rate, there will be a single residual class of
Certificates that will have no interest rate and may have no principal balance.
The residual class will receive in each month only part or all of any amounts
that were available for distribution but that exceeded the distributions to be
made to the regular classes.
Calculation of interest; effective rate
Monthly distributions of interest on those Certificates having a fixed rate of
interest are calculated on the basis of a 360-day year of twelve 30-day months.
This means that
o interest for a calendar month will be calculated by multiplying the
principal balance by 1/12 of the annual interest rate for the Certificate,
regardless of the number of days in the month, and
o interest for a part of a calendar month will be calculated by multiplying
the principal balance by the annual interest rate for the Certificate times
a fraction that is the number of days in the month for which interest is
owed over 360.
Calculation of interest for any Certificates bearing a variable or floating rate
of interest are described in the supplement.
Interest accrued on mortgage loans during a calendar month will be due from
the homeowner on the first day of the following month, along with the scheduled
principal payment due on that first day, but will not be distributed to
Certificate holders until the distribution day. These payments of principal and
interest will not accrue interest from the first day of the month to the
distribution day. For example, interest accrued during January on the principal
balances of the mortgage loans, and the scheduled payments of principal, will be
due from the homeowners on February 1 but will not earn interest from February 1
to the February 25 distribution day. This delay in the Certificate holder's
receipt of principal and interest for a period during which no additional
interest accrues means that the effective interest rate on a Certificate will be
lower than its stated interest rate.
Adequacy of scheduled payments
The Certificates in each Series will usually be structured so that the aggregate
principal balances of the mortgage loans in the Trust at the cut-off date
(without regard to principal prepayments received on or before the cut-off date
or scheduled payments due on or before the cut-off date) will equal the
aggregate principal balances of the Certificates. Moreover, the aggregate
principal balance of the Certificates on each distribution day after the
distribution has been made will equal the aggregate scheduled principal balance
of the mortgage loans.
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The scheduled principal balance of a mortgage loan on a distribution day will
equal its actual principal balance, except that it is assumed that
o no prepayments (whole or partial) have been made during that month, and
o the homeowner has made all scheduled payments of principal and interest that
have become due, and has not made a scheduled payment that is not yet due.
If each homeowner were to make all of his or her scheduled monthly payments
of principal and interest before the determination day for the month, and never
prepay any principal (see below), the Trust would have sufficient funds (1) to
distribute interest to all the classes of Certificates at their interest rates
on each distribution day and (2) to distribute the last installment of the
aggregate principal balance of the Certificates by no later than the
distribution day following the last scheduled payment of principal and interest
on any mortgage loan. While it is extremely unlikely that no homeowner will be
late or otherwise default on a mortgage loan payment, or that no homeowner will
make a principal prepayment, understanding the adequacy of the scheduled
payments on the mortgage loans to provide funds for full distributions on the
Certificates will help you understand the effects of the Trust's receipt of
payments that are larger or smaller than scheduled.
If the Trust does not have enough money on a distribution day to distribute
all the principal and interest required to be distributed to a particular class,
available funds will first be used to distribute current interest, then past due
interest and lastly principal to the class. Money available for distribution may
be applied to principal or interest on a class without regard to whether it was
received as principal or interest on a mortgage loan. Thus, cash received by the
Trust as principal payments on mortgage loans may be distributed to Certificate
holders as interest, and vice-versa. Principal and interest will be distributed
to the Certificates within a single class in proportion to the principal
balances of the Certificates.
You should note that when we say that the Trust does not have enough money on
a distribution day to distribute all required principal and interest, we mean
only that the Trust has not received enough money that is available for
distribution on the distribution day. For instance, a scheduled payment that the
Trust receives after the determination day is not available to be distributed on
the following distribution day. Also, as described below, prepayments will not
be available for distribution until a later distribution day, and escrowed or
other funds held by the Trust or a servicer for a special purpose (such as the
payment of real estate taxes on the mortgaged properties) will not be available
for distribution at all.
Delinquencies and their effect; advances
Homeowners from time to time delay making scheduled payments of principal and
interest until after the determination day for the month. Even a small number of
delinquent payments could mean that the Trust will not have enough money
available to make full distribution of principal and interest to all the
Certificates on the distribution day.
If the Trust does not have enough money on a distribution day to distribute
full interest and principal to all classes of Certificates, it could use money
received as principal payments on mortgage loans to pay interest to Certificate
holders. If the Trust were to do so, it would have to allocate a principal loss
to some classes of Certificates. A loss allocation would be required to keep the
aggregate scheduled principal balance of the mortgage loans the same as the
aggregate principal balance of the Certificates.
To avoid a loss allocation to a class of Certificates,
o the Trust may advance prepayments received in the month of the distribution
day to cover shortfalls, and
o if such prepayments are not adequate to enable the Trust to make a full
distribution, CMSI, any third-party servicers and the Trustee may advance
money to the Trust to enable it to make full distributions on the
Certificates.
If the Trust uses prepayments received in the month of the distribution day to
cover shortfalls on that distribution day, the Trust will reimburse itself out
of payments received for the following month.
While not required to do so, CMSI may make a voluntary advance to the Trust
of a delinquent payment on an affiliated mortgage loan, and a third-party
servicer may make a voluntary advance of a delinquent payment on a third-party
mortgage loan. A delinquent payment, and the advance, may be for principal,
interest, taxes or insurance premiums.
CMSI intends to make a voluntary advance for a delinquent payment on an
affiliated mortgage loan if it believes the advance will be recoverable from
future payments and proceeds on the loan. The Trust will reimburse CMSI or a
third-party servicer for a
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voluntary advance, without interest, out of later payments received on the
mortgage loan for which the advance was made, or if CMSI determines that the
advance will not be recoverable from payments on that mortgage loan, from
payments on other mortgage loans.
If on a distribution day, the scheduled payments due in that month that have
actually been received from homeowners, prepayments received in that month and
voluntary advances made by CMSI and any third-party servicers are less than the
scheduled payments due in that month from homeowners, the Trustee will advance
the difference to the Trust, but only up to an amount the Trustee determines
will be recoverable from future payments, proceeds or recoveries on the mortgage
loans. The Trustee will make separate determinations and advances for the
affiliated mortgage loans and for the third-party mortgage loans. In determining
whether to make, and in making, an advance, the Trustee will be acting in its
individual capacity, and not as a trustee. Advances by the Trustee on affiliated
mortgage loans will be reimbursed from future payments on affiliated mortgage
loans received by the Trust, and similarly for advances on third-party mortgage
loans.
Prepayments on mortgage loans
A homeowner may prepay part or all of his or her mortgage loan at any time. That
is, a homeowner can pay more principal than he or she is scheduled to pay. The
homeowner can include this additional payment with the scheduled payment of
principal and interest, or can pay it at some other time. A homeowner will
usually not incur an additional prepayment charge for prepaying a mortgage loan.
A mortgage loan may also be prepaid in other circumstances, described in "Types
of prepayment" below.
CMSI anticipates that a significant number of mortgage loans will be prepaid
in whole or in part. Homeowner mobility, economic conditions, enforceability of
due-on-sale clauses, mortgage market interest rates and the availability of
mortgage funds will all influence the level of prepayments.
Delay in distribution of prepayments
Prepayments received by the servicers in a calendar month will generally not be
distributed as principal to Certificate holders until the distribution day in
the following month. For example, if $1,000 of prepayments are received in
March, the Trust will distribute these prepayments to the Certificate holders on
the April 25 distribution day. Accordingly, if a homeowner on March 1 makes the
scheduled payment due on that date, and simultaneously makes a full or partial
prepayment, the homeowner's scheduled payment will be distributed on the March
25 distribution day but the prepayment will not be available for distribution
until the April 25 distribution day.
(Prepayments received in a month may be advanced by the Trust to cover
shortfalls on a distribution day in that month, as described in "Delinquencies
and their effect; advances" above.)
Effect of prepayments
Prepayments can have a number of effects on the Certificates:
o Prepayments increase the speed at which the principal balance of the
Certificates will be distributed. Principal distributions that are faster or
slower than anticipated can profoundly affect the return, or yield, on a
Certificate. Consider for example a Series consisting of just two classes - an
interest-only (IO) class and a principal-only (PO) class. (This is an unlikely
structure for a Series, but one in which the effect of prepayments can be
clearly seen.) If prepayments on the mortgage loans are greater than
anticipated, the PO class will be paid off faster, and the IO class will receive
less interest, than anticipated. In the extremely unlikely event that all the
mortgage loans are completely prepaid in the first month, the PO class will be
paid off on the first distribution day, greatly increasing its rate of return,
while the IO class will receive only one distribution of interest. Conversely,
if prepayments are less than anticipated, the IO class would benefit, but the PO
class would see its yield reduced.
Generally speaking, if the price of a Certificate is greater than its
principal balance (which is always true for an IO class, since it has no
principal balance), greater than anticipated prepayments will reduce the rate of
return while lesser than anticipated prepayments will increase the rate of
return. The opposite generally holds where the price of a Certificate is less
than its principal balance: greater than anticipated prepayments will increase
the rate of return and lesser than anticipated prepayments will reduce the rate
of return. The extent to which greater or lesser prepayments will affect the
rate of return on a class of Certificates depends on the particular properties
of the class. The supplement describes the extent to
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which certain classes of the Series could be affected by changes in the rate of
prepayment, based on a set of assumptions (called a prepayment model) described
in the supplement.
o Prepayments can increase or decrease the average interest rate on the
mortgage loans. For example, if (ignoring servicing fees) half of the mortgage
loans (by principal balance) in a pool have an interest rate of 6%, and half
have an interest rate of 8%, the average interest rate for the pool will be 7%.
Suppose the Certificates all carry an interest rate of 7%. If the mortgage loans
with an 8% rate prepay faster than the mortgage loans with a 6% rate, then,
other things being equal, the weighted average interest rate on the mortgage
loans will fall below 7%, so that interest received on the mortgage loans may be
less than the interest required to be distributed on the Certificates. (This
problem is often solved by the structuring technique of "ratio stripping,"
which, if used, is described in the supplement.)
Mortgages with higher interest rates have historically prepaid faster than
mortgages with lower rates. The result is that if a pool contains mortgage loans
with significantly different interest rates, the higher interest rate mortgage
loans can be expected to pay off faster, with the result that the weighted
average interest rate on the mortgage loans would decline.
o When a homeowner makes a prepayment, he or she will often not pay any
interest on the prepayment. Since the Trust does not distribute this prepayment
until the following month, the prepayment amount will usually earn less interest
than the mortgage loan rate or the interest rate on any class of Certificates.
Example: a homeowner prepays $1,000 on January 10, and pays no interest with
this prepayment. The homeowner's February 1 scheduled payment also does not
include any interest on the $1,000 prepayment. The $1,000 prepayment will be
distributed to the Certificate holders on the February 25 distribution day. The
Trust will also be required to distribute interest on the $1,000 for the entire
month of January - interest that was not paid by the homeowner. The prepayment
may have been reinvested for the Trust at short-term rates, but the interest
earned at these short-term rates will probably be less than one month's interest
at the mortgage loan rate.
If there are a substantial number of prepayments in a month, the drop in
interest payments by the homeowners for that month could result in a shortfall
of funds available to distribute principal and interest on the Certificates on
the distribution day. However, CMSI and the other servicers will have to make up
for at least part of such prepayment interest shortfalls out of their servicing
fees, as described in the supplement.
Types of prepayment
In addition to voluntary prepayments by a homeowner, there are other
circumstances in which part or all of a mortgage loan may be prepaid.
o The homeowner may refinance the mortgage loan by prepaying the mortgage
loan in full and taking out a new mortgage loan, or the homeowner and the lender
may agree to modify the terms of the mortgage loan as an alternative to
refinancing. Refinanced or modified mortgage loans will be treated as fully
prepaid and removed from the Trust. Originators affiliated with CMSI are
permitted to refinance or modify mortgage loans and may offer homeowners special
refinancing or modification incentives.
o CMSI permits participation in "prepayment programs" offered by unaffiliated
service agencies in which homeowners generally make 26 bi-weekly payments during
a calendar year. Each payment equals one-half of the homeowner's scheduled
monthly payment, with the result that the homeowner makes payments in a calendar
year equal to 13 scheduled monthly payments, rather than 12. The extra amount is
applied as a prepayment of the mortgage loan.
o Most fixed rate mortgage loans permit the servicer to demand payment of the
entire principal balance of the loan upon a sale of the mortgaged property (a
due-on-sale clause) rather than allowing the purchaser to assume the mortgage
loan. CMSI will generally exercise a due-on-sale clause if (1) for a fixed rate
mortgage loan, CMSI believes the clause is legally enforceable, and (2) for an
adjustable-rate mortgage loan, the assumption will impair the Trust's security.
o If a mortgaged property is damaged by fire or other hazard insured under a
hazard insurance policy (described below), insurance payments received by the
Trust may be used to reduce the principal balance of the mortgage loan. (They
may also be used to restore the property, which would not be a prepayment.)
o If the mortgage loan is foreclosed (described below), the foreclosure
proceeds, less the expenses of
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foreclosure and accrued interest, will be used to reduce the principal balance
of the mortgage loan.
o When the aggregate principal balance of all the mortgage loans in a
Series is reduced to less than a stated percentage (usually 5%) of the original
principal balance of the mortgage loans in the Series, CMSI or the holders of
the residual Certificate may purchase all the mortgage loans for their principal
balances plus accrued interest. Such a purchase would, in effect, simultaneously
prepay all the mortgage loans. This type of prepayment is called a clean-up
call.
o CMSI will make various warranties about the mortgage loans to the
Trust. If a mortgage loan does not conform to these warranties, CMSI may have to
repurchase the loan. See "Defective mortgage loans" below.
Foreclosures and their effect
After a mortgage loan has become seriously delinquent, CMSI may take steps to
foreclose. Foreclosure involves seizure and sale of the mortgaged property. The
proceeds of the sale are used first to pay CMSI's expenses of foreclosure and
advances, then to pay accrued interest, and lastly to pay the principal balance
of the mortgage loan. The foreclosure process and some alternatives to
foreclosure are described below in "Servicing - Realizing on defaulted mortgage
loans."
If the net proceeds of foreclosure are insufficient to pay all accrued
interest and the full principal balance of the mortgage loan, the shortfall, or
loss, will be allocated to the Certificates as described in the supplement. When
a loss is allocated to a Certificate, it permanently reduces the principal
balance of the Certificate and may also reduce an interest distribution.
Mortgage loan originators take certain precautions to reduce the risk of
foreclosure and of foreclosure losses. These primarily involve checking the
creditworthiness of potential homeowners and the value of the mortgaged
property. The mortgage loan underwriting policies of the affiliated originators
are described below under "Mortgage loan underwriting."
Certificate holders may also be protected against losses by various types of
insurance and credit support, including the subordination of some classes of
Certificates.
Subordination
Subordination involves the disproportionate allocation of losses and
distribution shortfalls among Certificates. Subordination thus protects more
senior classes of Certificates against losses and distribution shortfalls at the
expense of more subordinated classes.
As a simple example, suppose that a Series consists of two classes of
Certificates, A and B, which are alike in all respects except that all losses
and shortfalls will be allocated to the subordinated B class until the principal
balance of the B class is reduced, by principal distribution or allocation of
principal losses, to zero.
A more realistic example would involve several levels of subordination. There
might be a senior class A, a subordinated class B, and a middle "mezzanine" or
"senior subordinated" class M. In this structure, all losses would be allocated
to class B as long as it is outstanding (ie, until its principal balance is
reduced to zero). Losses would then be allocated to class M until its principal
balance is reduced to zero. Class M is thus subordinated to class A but senior
to class B. A Series may be structured with even more levels of subordination.
Subordination protects against distribution shortfalls as well as losses. If
on a distribution day, the Trust does not have enough money available to
distribute the required principal and interest to all the Certificates,
subordinated classes may not receive full distribution of principal and
interest.
Cash available for distribution is generally distributed in order of
seniority - that is, first to the most senior class, then to the next most
senior class, and so on until a full distribution has been made or the available
cash is exhausted. Losses are generally allocated in order of subordination -
that is, first to the most subordinated class until its principal balance is
reduced to zero, then to the next most subordinated class until its principal
balance is reduced to zero, and so on until the loss has been fully allocated.
Distribution shortfalls are also generally allocated in order of subordination,
but only up to the amount to have been distributed to the class on that
distribution day.
Subordination can be limited in amount or time (eg, a class is subordinated
only for five years) or to certain types and amounts of losses (eg, a
subordinated class is allocated a specific type of losses up to a fixed dollar
limit). Losses that are not covered by subordination are allocated among all the
classes pro-
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portionately. The supplement describes the subordinated classes and the precise
limits of the subordination.
Once principal or interest is distributed to Certificates in a subordinated
class, the distributions do not have to be refunded even if, on a later
distribution day, full distributions can not be made to a more senior class.
Method of distribution
The Trustee will generally make distributions by wire transfer (if it receives
appropriate instructions) to registered holders of Certificates with an initial
principal balance (or notional balance) of $1 million.
Distribution reports
On each distribution day, the Trustee will send a report to each person who is a
registered holder of a Certificate on the related record day. Beneficial owners
of Certificates may obtain copies of these reports free of charge from the
Trustee upon request to the address or telephone number given in the supplement.
The report will include information for each class and subclass on
o the amounts of interest and principal distributed on the Certificates in the
class, and the aggregate amounts of principal and interest for all classes,
o the amount of any losses allocated to the Certificates, by class,
o for accrual Certificates, the accrued interest that has been added to the
Certificate's principal balance,
o the principal balances of the Certificates in the class, and the aggregate
principal balances for all classes, both before and after the distribution,
o the aggregate payments received on the mortgage loans from the second day of
the preceding month through the first day of the current month, and the
aggregate principal balance of the mortgage loans after giving effect to the
payments,
o the number and aggregate principal balances of mortgage loans delinquent 30
days and 60 or more days,
o the book value of any real estate acquired by the Trust through foreclosure
or otherwise,
o the amount remaining under any form of credit support,
o CMSI's servicing compensation since the preceding report, and
o other customary information that CMSI believes Certificate holders need to
prepare their tax returns.
CMSI will provide Certificate holders that are federally insured savings and
loan associations, on request, reports and access to information and
documentation on the mortgage loans sufficient to permit the associations to
comply with applicable regulations of the Office of Thrift Supervision.
The Trustee or CMSI will file with the IRS and state and local taxing
authorities, and make available to Certificate holders, information as required
by federal or other tax law.
Delinquency, foreclosure and loss experience
Loss and delinquency considerations
The following tables show the recent delinquency, foreclosure and loss
experience of CMSI and originators affiliated with CMSI (affiliated
originators). The loans represented in the tables include fixed and adjustable
interest rate loans (ARMs), including buydown loans, loans with stated
maturities of 10 to 30 years and other types of mortgage loans. Potential
investors should realize that the loan portfolios on which these tables are
based may not be representative of the mortgage loans in the Trust described in
the supplement. There may be important differences in, for example, the types of
loans, their maturities and the geographic location of the mortgaged properties.
Also, prevailing national or local economic conditions or real estate values may
have been quite different at the times the loans were originated. Accordingly,
the future delinquency, foreclosure and loss experience on the mortgage loans
described in the supplement is likely to diverge, and may sharply diverge, from
the historical experience of the mortgage loans shown in the following tables.
Delinquency and foreclosure experience on affiliated originators' serviced
portfolio The following table shows delinquency and foreclosure experience on
one- to four-family conventional residential first mortgage loans (including
coopera-
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tive apartment loans) originated or acquired by affiliated originators and
serviced by Citicorp Mortgage, Inc., an affiliate of CMSI. The table also
includes mortgage loans serviced by Citicorp Mortgage that have been sold to
Fannie Mae or Freddie Mac. The table does not include loans purchased strictly
for servicing revenue or loans originated by the Florida branches of Citibank,
Federal Savings Bank (CITI FSB), an affiliate of CMSI, prior to their
acquisition by Citicorp in January 1984. Since June 20, 1997, Citicorp Mortgage
has transferred the servicing of 803 delinquent loans and loans in foreclosure
totaling $106.0 million.
<PAGE>
<TABLE>
<CAPTION>
Delinquency and foreclosure experience on serviced portfolio
December 31, 1996 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
Principal Principal Principal
balance balance balance
Number ($ millions) Number ($ millions) Number ($ millions)
------ ------------ ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
309,754 $ 34,084.8 303,896 $ 35,955.8 310,628 $41,115.1
Loans
Days past due
30-59 10,487 $ 1,014.9 9,368 $ 906.9 7,466 $ 766.9
60-89 2,444 $ 253.1 1,947 $ 194.3 1,603 $ 160.1
90 or more 3,291 $ 371.8 2,646 $ 286.1 2,074 $ 226.8
Delinquent loans 16,222 $ 1,639.8 13,961 $ 1,387.3 11,143 $ 1,153.8
Ratio of delin- 5.24% 4.81% 4.59% 3.86% 3.59% 2.81%
quent loans to all
loans
Foreclosures 5,822 $ 696.0 3,539 $ 406.3 2,726 $ 293.7
begun
Ratio of foreclo- 1.88% 2.04% 1.16% 1.13% 0.88% 0.71%
sures begun to all
loans
</TABLE>
Delinquency, foreclosure and loss experience on affiliated originators'
securitized portfolio The following two tables show the delinquency, foreclosure
and loss experience on one- to four-family conventional residential first
mortgage loans (including cooperative apartment loans) originated or acquired by
affiliated originators and serviced by Citicorp Mortgage that were later
securitized (ie, mortgage loans assembled into pools for which ownership
interests were sold in public offerings registered under the federal securities
laws).
<TABLE>
<CAPTION>
Delinquency and foreclosure experience on securitized portfolio
December 31, 1996 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
Principal Principal Principal
balance balance balance
Number ($ millions) Number ($ millions) Number ($ millions)
------ ----------- ------ ------------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
40,489 $5,503.2 37,050 $ 5,738.4 34,350 $ 7,056.0
Loans
Days past due
30-59 1,339 $ 151.6 1,073 $ 126.0 715 $ 93.9
60-89 321 $ 40.3 237 $ 26.7 152 $ 21.2
90 or more 411 $ 58.7 313 $ 45.8 200 $ 28.7
Delinquent loans 2,071 $ 250.6 1,623 $ 198.5 1,067 $ 143.8
Ratio of delin- 5.11% 4.55% 4.38% 3.46% 3.11% 2.04%
quent loans
to all loans
Foreclosures 993 $ 146.6 653 $ 90.5 392 $ 53.7
begun
Ratio of 2.45% 2.66% 1.76% 1.58% 1.14% 0.76%
foreclo-
sures begun to all
loans
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Loss experience on securitized portfolio
Cumulative net losses
Aggregage principal as percentage of aggre-
Cumulative net losses balance of securities gate principal balance
($ millions)(1) ($ millions)(2) of securities
--------------- --------------- -------------
<S> <C> <C> <C>
December 31, 1996 $ 413.8 $ 25,857.4 1.60%
December 31, 1997 $ 469.8 $ 27,214.6 1.73%
December 31, 1998 $ 501.2 $ 31,040.7 1.61%
- -------------------
(1) Calculated without giving effect to any credit enhancement.
(2) Issued securities that have had at least one distribution day.
</TABLE>
Delinquency, foreclosure and loss experience of third-party originators
The supplement describes the delinquency, foreclosure and loss experience of any
third-party originator who has originated more than 10% (by principal balance on
the cut-off date) of the mortgage loans in the Trust.
The mortgage loans
Each mortgage loan will generally
o have a principal balance of less than $2.5 million at the cut-off date and
an original maturity of 10 to 30 years, and
o have monthly payments due on the first day of each month.
The mortgage loan pool may contain cooperative apartment loans. The
"homeowner" of a cooperative apartment owns shares issued by the private
non-profit housing corporation that owns the apartment building and has a
proprietary lease or occupancy agreement that gives the homeowner the exclusive
right to occupy a designated apartment in the building. In a cooperative
apartment loan, the homeowner's shares and lease or occupancy agreement are the
collateral for the loan.
Each mortgage loan will be selected by CMSI from mortgage loans originated or
acquired by originators in the ordinary course of their businesses. The
originators will often be affiliates of CMSI. A portion of the interest
component of a mortgage loan may be retained by the originator and not
transferred to the Trust.
The interest rate, the principal balance, the maturity date, the homeowner's
identity, the principal amortization schedule or other terms of a mortgage loan
may have been modified before the Trust bought the mortgage loan. If a mortgage
loan has been so modified, the terms "original," "originated" or "origination"
when applied to the mortgage loan mean
o if only the interest rate has been changed (and, as a result, the monthly
payment), the original date of the extension of credit under the mortgage loan,
but with the modified interest rate and monthly payment, and
o for other changes, the mortgage loan as modified at the effective date of the
modification.
Warranties by CMSI
CMSI will warrant to the Trustee that on the closing date
o the mortgage loans conform in all material respects with their descriptions
in this prospectus and the schedule of mortgage loans CMSI delivered to the
Trustee (including maximum loan-to-value ratios and primary mortgage insurance
coverage, as described below),
o at the cut-off date, no mortgage loan was 30 days or more past due or had
been 30 days or more past due more than once in the preceding 12 months, there
are no delinquent tax or assessment liens against the mortgaged properties,
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<PAGE>
o each mortgaged property is free of material damage and in good repair,
o each mortgage loan (other than a cooperative apartment loan) had at its
origination a lender's title and insurance policy or binder (or other customary
assurance of title), which remains in force,
o any mechanics' lien or claim for work, labor or material on a mortgaged
property is subordinate to the mortgage (except for liens or claims covered by
title insurance),
o CMSI had good title to each mortgage loan immediately before its transfer to
the Trust, and has taken all necessary steps to confer good title on the
Trustee,
o each mortgage is a valid first lien on the mortgaged property, subject only
to (1) liens for current real property taxes and assessments, (2) covenants,
conditions and restrictions, rights of way, easements and other matters of
public record as of the recording of the mortgage that are generally acceptable
to mortgage lending institutions or specifically reflected in the appraisal of
the mortgaged property at origination and (3) other matters to which similar
properties are commonly subject that do not materially interfere with the
benefits of the mortgage, and
o each mortgage loan complied at origination in all material respects
with applicable state and federal laws, including usury, equal credit
opportunity and disclosure laws.
Adjustable rate mortgages, buydown loans and agency certificates
The mortgage loans in a Trust will, on the closing date, generally consist
entirely of fixed rate mortgage loans or entirely of ARMs. Most Trusts sponsored
by CMSI in the past few years have consisted of fixed rate loans. Accordingly,
most of the description of the mortgage loans in this core prospectus will
assume that the mortgage loans are fixed rate loans held directly by the Trust
and that they are not "buy-down loans." An appendix to this prospectus describes
the characteristics of ARMs, buy-down loans and agency certificates. If a Series
does not contain a material amount of ARMs, buy-down loans or agency
certificates, the appendix may be omitted.
Fixed rate mortgage loans
A fixed rate mortgage loan may be
o a fully amortizing mortgage loan with level monthly payments of principal and
interest,
o a balloon mortgage loan that amortizes over a fixed number of years but has a
shorter term to maturity, so that the entire remaining principal balance of the
loan is due at maturity, or
o a fully amortizing graduated-payment mortgage loan that has lower periodic
payments, or payments of interest only, during the early years of the loan,
followed by payments of principal and interest that increase periodically until
the loan is repaid or for a specified number of years, after which level
periodic payments begin.
No fixed rate mortgage loan will have "negative amortization" - ie, scheduled
payments will not be less than accrued interest at the mortgage loan interest
rate.
A fixed rate mortgage loan may have originally been an ARM that was
converted, at the homeowner's option, into a fixed rate fully amortizing
mortgage loan providing for level monthly payments over a term not exceeding its
remaining term to maturity. Such a mortgage loan was subject at origination to
the same underwriting guidelines as a comparable ARM and is not underwritten
again at conversion. The fixed interest rate for the converted mortgage loan may
be higher than the interest rate at origination or the adjustable interest rate
that would otherwise be payable currently, which could reduce the homeowner's
capacity to repay the loan.
The mortgaged properties
The mortgaged properties will usually be detached homes, attached homes (ie,
one- to four-family units with a common wall), units located in condominiums or
planned unit developments, or interests in cooperative apartments. The mortgaged
properties will be located in the 50 United States, the District of Columbia or
Puerto Rico.
The mortgaged properties may include investment properties and vacation and
second homes. However, CMSI anticipates that most mortgaged properties will be
the homeowner's primary residence. CMSI will determine whether a mortgaged
property is a homeowner's primary residence based solely on either
o the homeowner's representation at origination that he or she will use the
property for at least six months every year or that the homeowner intends to use
the property as a primary residence, or
o the mortgaged property being the homeowner's mailing address in the
originator's records.
17
<PAGE>
The determination of whether a mortgaged property is a primary residence is
not reexamined if the mortgage loan is assumed by a new homeowner after
origination.
Loan-to-value ratios
Each mortgage loan will usually have an original principal balance that is not
more than 95% of the value of the mortgaged property (a 95% loan-to-value
ratio). For these purposes, "value" is the lesser of the sale price of the
property or the appraised value at origination, and the "principal balance"
includes any part of an origination fee that is financed. The financed portion
of the origination fee will always be less than 5% of the loan amount. (The
loan-to-value ratio of mortgage loans originated or acquired by the California
and Florida branches of Citi FSB may be reduced by a new appraisal delivered
after origination.)
The Affiliated originators offer a program under which borrowers may reduce or
eliminate their down payment by pledging additional collateral, usually in the
form of marketable securities. The principal balance of the mortgage loan will
be increased by a fraction of the amount of the additional collateral; the
fraction varies with the type of collateral. Under this program, the loan-to-
value ratio may exceed 95%, but will not exceed 100%.
Primary mortgage insurance
Affiliated mortgage loans that have original loan-to-value ratios greater than
80% will be covered by primary mortgage insurance. This insurance will remain
in effect until the loan-to-value ratio is reduced to 80% through principal
payments by the homeowner. Primary mortgage insurance will cover losses from a
homeowner's default of from 12% to 30% of the principal balance of the mortgage
loan.
Prior to 1986, the affiliated originators did not generally make one- to
four-family mortgage loans with loan-to-value ratios above 80% without primary
mortgage insurance coverage. From 1986 through January 1993, affiliated
originators originated mortgage loans with loan-to-value ratios from 80% to 90%
without obtaining primary mortgage insurance. Since February 1993, it has been
the policy of each affiliated originator not to make one- to four-family
mortgage loans with loan-to-value ratios above 80% without obtaining primary
mortgage insurance.
Affiliated originators offer corporate relocation programs to employees of
approved corporations. These programs permit single family real estate loans
with loan-to-value ratios above 80% without requiring primary mortgage
insurance. For these loans, however, the corporate employer generally guarantees
the excess of the mortgage loan over the 80% loan-to-value amount. Some other
corporate relocation programs permit the corporate employer to provide
subordinate financing at the origination of the first priority mortgage loan by
an affiliated originator.
In nine states, homeowners can cancel their primary mortgage insurance (and
thus save the cost of premiums for the insurance) once the loan-to-value ratio
of their mortgage falls below a specified percentage. The states are California,
Connecticut, Illinois, Maryland, Massachusetts, Minnesota, New York, Texas and
Washington.
Second mortgages
A mortgaged property may be encumbered by a subordinated (or second) mortgage
loan. Subordinated loans are not included in loan-to-value calculations.
The subordinated mortgage loan may have been originated by an affiliated
originator, either at the origination of the mortgage loan or later. It is the
policy of the affiliated originators to provide a subordinated loan in
connection with the origination of a first priority mortgage loan only if the
combined amount of the loans would result in a loan-to-value ratio of 90% or
less. Primary mortgage insurance is generally not required for these loans.
Defective mortgage loans
Repurchase or substitution
The Trustee will review the mortgage loan documents (see "Mortgage documents"
below) within 90 days of receipt. If the Trustee discover that a document
evidencing a mortgage loan or necessary to the effectiveness of the mortgage is
missing or materially defective, CMSI must, within 180 days (90 days for defects
that could affect the Trust's REMIC status) cure the defect or repurchase the
mortgage loan.
If CMSI or the Trustee discovers at any time that a warranty that CMSI gave
to the Trustee on a mortgage loan is false to an extent that materially and
adversely affects the Certificates, then CMSI will have 60 days to cure the
false warranty or repurchase the mortgage loan.
The repurchase price for a mortgage loan will be
18
<PAGE>
o the sum of the loan's principal balance and accrued unpaid interest (after
deduction of servicing fees) to the first day of the month following repurchase,
minus
o any unreimbursed payments under guaranties or other credit support or
voluntary advances on the loan.
Repurchase of a mortgage loan will not diminish the amount available under
any credit support. During the first two years following the closing date, CMSI
may, within the periods required for a repurchase, substitute another mortgage
loan instead of repurchasing a mortgage loan. A substituted mortgage loan must
o be current in payments,
o have a principal balance that is not less than the aggregate principal
balance of the loans for which it is substituted (except that CMSI may make up
any difference in the principal balances with a cash payment to be distributed
to Certificate holders),
o have an interest rate that is not less than the highest interest rate of the
loans for which it is substituted,
o have an original term to maturity equal to that of the loans for which it is
substituted
o have a maturity date that is no later than, and not more than one year
earlier than, any of the loans for which it is substituted, and
o be suitable for a REMIC.
CMSI will indemnify the Trust for any losses not reimbursed by the repurchase
or substitution. If CMSI does not cure a defect in a mortgage loan, the
Trustee's and the Certificate holders' only remedy is to require CMSI to
repurchase the mortgage loan or substitute another satisfactory mortgage loan.
Insurance and other credit support
Homeowners' policies
Most mortgaged properties will be covered by homeowners' insurance policies
that, in addition to the standard form of fire and extended coverage, provide
coverage for certain other risks. These homeowners' policies typically contain a
"coinsurance" clause that, in effect, requires the buildings on the mortgaged
property to be insured for at least a specified percentage (generally 80% to
90%) of their full replacement value. If coverage is less than the specified
percentage, the insurer's liability for a partial loss will not exceed the
proportion of the loss that the amount of insurance bears to the specified
percentage of the full replacement cost of the buildings.
Example: If a residence is only insured for 60% of its value, and sustains
$10,000 of damage covered by the homeowners' policy, the insurer will only pay
$6,000 - ie, 60% of the loss.
Since the amount of hazard insurance required to be maintained on the
buildings may decline, and since residential properties generally have
historically appreciated in value over time, coinsurance may cause hazard
insurance proceeds to be less than needed to restore fully the damaged property.
Part or all of this shortfall may be covered, however, by any credit support.
Hazard insurance
Mortgaged properties will generally be covered by hazard insurance against fire
and certain other hazards that may not be fully covered by homeowners' policies.
The amount of hazard insurance coverage will depend on the relationship
between the principal balance of the mortgage loan and the maximum insurable
value of the buildings on the mortgaged property. (Maximum insurable value is
established by the insurer.)
o If the principal balance is greater than the maximum insurable value,
coverage will be limited to the maximum insurable value.
o If the principal balance is between 80% and 100% of maximum insurable value,
coverage will equal the principal balance.
o If the principal balance is less than 80% of maximum insurable value,
coverage will be 80% of the maximum insurable value.
CMSI may maintain a blanket policy insuring all the mortgage loans against
hazard losses rather than maintaining separate policies on each mortgaged
property. If the blanket policy contains a deductible clause, cmsi will pay the
Trust the deductible for each hazard loss.
19
<PAGE>
The standard form of fire and extended coverage policy generally covers
damage caused by fire, lightning, explosion, smoke, windstorm and hail, riot,
strike and civil commotion. The policy typically does not cover damage from war,
revolution, governmental actions, floods and other water-related causes, earth
movement (including earthquakes, landslides and mud flows), nuclear reactions,
wet or dry rot, vermin, rodents, insects or domestic animals, theft and, in some
cases, vandalism. However, flood insurance will be maintained for mortgaged
properties located in federally designated special flood hazard zones.
The hazard insurance policies for the mortgaged properties will be
underwritten by different insurers and therefore will not contain identical
terms and conditions. The preceding paragraph therefore merely indicates certain
kinds of insured and uninsured risks and is not intended to be all-inclusive.
While hazard insurance, and flood insurance if applicable, will be required
for cooperative apartment buildings, no hazard or flood insurance will be
required for individual cooperative apartments.
If a homeowner defaults on his or her payment obligations on a mortgage loan,
the Certificate holders will bear all risk of loss resulting from hazard losses
not covered by hazard insurance or other credit support.
Fidelity bond and errors and omissions policy
CMSI will maintain a fidelity bond and an errors and omissions policy or their
equivalent. These cover losses from an officer's or employee's misappropriation
of funds or errors and omissions in failing to maintain insurance, subject to
limitations as to amount of coverage, deductible amounts, conditions, exclusions
and exceptions. The policies will conform to Fannie Mae and Freddie Mac
requirements.
Other insurance
The Trust may obtain the following additional insurance coverage:
o Primary mortgage insurance may be supplemented by pool insurance. Pool
insurance covers certain losses from homeowner defaults that are not covered by
primary mortgage insurance.
o Since hazard insurance policies do not cover all possible causes of physical
damage to mortgage properties, the Trust may obtain special hazard insurance
against some additional hazards.
o Some losses from homeowner bankruptcies may be covered under a mortgagor
bankruptcy bond.
The supplement describes any additional insurance maintained for the Series.
Other credit support
Additional credit support for a Series may be provided by a guaranty, letter of
credit, financial guaranty insurance policy or one or more reserve funds, which
may be issued or provided by an affiliate of CMSI or by a third party. The
supplement describes any additional credit support.
Mortgage documents
Assignments to Trustee
On the closing date, CMSI will assign the mortgage loans to the Trust, together
with any principal and interest on the mortgage loans that belong to the Trust.
In addition, CMSI will deliver to the Trust for each mortgage loan, other
than a cooperative apartment or leasehold loan,
o the endorsed mortgage note,
o any assumption, modification, buydown or conversion to fixed interest rate
agreement,
o any certificate of primary mortgage insurance, and
o the original recorded mortgage (or, temporarily, copies if recorded documents
cannot be immediately delivered due to recording delays).
For a cooperative apartment loan, CMSI will deliver to the Trust
o the endorsed promissory note evidencing the loan,
o the original security agreement,
o the proprietary lease or occupancy agreement,
o the recognition agreement,
o a signed financing statement (if required at origination),
o and the stock certificate with signed stock powers.
20
<PAGE>
Recording of assignments
CMSI will deliver a mortgage assignment in recordable form or a blanket
assignment, which will not be in recordable form, together with a power of
attorney empowering the Trustee to act for the originator in preparing,
executing, delivering and recording in the Trust's name any instruments for
assigning or recording the mortgages.
CMSI does not expect to record assignments of the mortgage loans to the Trust
after the issuance of the Certificates. Recording is not necessary to make the
assignment to the Trust effective between the Trustee and the originator or
CMSI. However, so long as the Trust is not the mortgagee of record, the Trustee
might not be able to enforce the mortgage directly, but may have to act
indirectly through the record holder of the mortgage (who will be the originator
or an affiliate of the originator). In addition, if any of the originators or
CMSI were to sell, assign, satisfy or discharge a mortgage loan before the
recording of its assignment to the Trust, the other party to the sale,
assignment, satisfaction or discharge might have rights superior to the Trust's.
If the originator or CMSI acted without authority, it would be liable to the
Trust or the Certificate holders. If the originator or CMSI became bankrupt
before the assignment to the Trust was recorded, creditors of the originator or
CMSI might have rights in the mortgage loan superior to the Trust's.
CMSI and its affiliates
Citicorp
Citicorp, a Delaware corporation, is a holding company whose principal
subsidiary is Citibank, N.A. CMSI, Citicorp Mortgage and Citi FSB are all wholly
owned subsidiaries of Citicorp. Citicorp is itself a wholly owned subsidiary of
Citigroup Inc., a publicly-owned Delaware corporation. Citicorp's principal
offices are at 399 Park Avenue, New York, New York 10043, telephone (212)
559-1000.
Through its subsidiaries and affiliates, Citicorp is a multinational
financial services organization serving the financial needs of businesses,
governments, financial institutions and individuals in the United States and
throughout the world.
Citicorp Mortgage Securities, Inc.
CMSI was incorporated in Delaware in 1987. It is not expected that CMSI will
have any business operations other than offering mortgage-backed securities and
related activities. CMSI's principal offices are at 909 Third Avenue, New York,
New York 10043, telephone (212) 559-6727.
Citibank, N.A.
Citibank is a commercial bank offering a wide range of banking services to its
customers in the New York City metropolitan area and around the world.
Citibank's domestic deposits are insured by the Federal Deposit Insurance
Corporation (the FDIC). Citibank has been an active one- to four-family
residential real estate mortgage lender since 1960. Citibank has also been an
active cooperative apartment lender. Except for its issuance of mortgage
pass-through certificates, Citibank has not engaged in any significant servicing
activities on behalf of unaffiliated persons for conventional residential
mortgage or cooperative apartment loans. Citibank's residential mortgage lending
is conducted in New York City and four surrounding counties (Westchester,
Nassau, Suffolk and Rockland).
Citibank's principal offices are at 399 Park Avenue, New York, New York
10043, telephone (212) 559-1000.
Citicorp Mortgage, Inc.
Citicorp Mortgage was incorporated in Delaware in 1979 and began making mortgage
loans in 1980. Citicorp Mortgage derives income primarily from interest on
mortgages that it owns, secondary mortgage market sales, mortgage loan servicing
fees and mortgage origination fees and charges.
Citicorp Mortgage has been approved as a mortgagee and seller/servicer by the
Federal Housing Administration, the Veterans Administration, Fannie Mae, Ginnie
Mae and Freddie Mac. Citicorp Mortgage's origination operations are subject to
operational guidelines and regulations of, as well as audits by, some of these
agencies.
Citicorp Mortgage's principal offices are at 750 Washington Blvd., Stamford,
Connecticut 06091, telephone (800) 285-3000.
21
<PAGE>
Citibank, Federal Savings Bank
Citi FSB is a federal savings bank based in San Francisco, California. It became
a wholly owned subsidiary of Citicorp in 1982. From 1990 to 1993, Citicorp
Savings of Illinois, Citicorp Savings of Washington, D.C. and Citicorp Savings
of Florida, all wholly owned subsidiaries of Citicorp, were merged into Citi
FSB. In 1993, Citi FSB acquired the branches of Citibank (Maryland), N.A., and
in 1994 it acquired the branches of Citibank (Florida), N.A.
Citi FSB has been an active one- to four-family residential mortgage lender
since 1983. Citi FSB's deposits are insured by the FDIC.
Citibank Service Corporation, an affiliate of Citi FSB, acts as trustee for
substantially all deeds of trust for mortgaged property located in California
that secure mortgage loans originated or acquired by Citi FSB. A trustee under a
California deed of trust forecloses on the mortgaged property upon notice from
the beneficiary of a delinquency and executes full and partial reconveyances of
the mortgaged property at the beneficiary's direction.
Citi FSB's principal offices are at 1 Sansome Street, San Francisco,
California 94104, telephone (415) 627-6000.
Third-party originators
The supplement identifies any originators of third party loans with an aggregate
principal balance greater than 10% of the aggregate principal balance of all the
mortgage loans in the Trust. Each third party originator will generally be a
savings and loan association, savings bank, commercial bank, credit union,
insurance company or a mortgagee approved by the Secretary of Housing and Urban
Development.
Third party originators must be experienced in originating mortgage loans of
the types in the pool in accordance with accepted practices and prudent
guidelines.
Mortgage loan underwriting
Mortgage loan underwriting assesses a prospective borrower's ability to repay,
and the adequacy of the property as collateral for, a requested loan.
Procedures of affiliated originators
Each affiliated originator's real estate lending process for one- to four-family
residential mortgage loans follows a standard procedure, established to comply
with federal and state laws and regulations. For some residential mortgage
loans, the affiliated originators have contracted with or delegated the
underwriting process to unaffiliated third parties.
Since January 1995, each affiliated originator has used a credit scoring
system as part of its underwriting process. The credit scoring system assesses a
prospective borrower's ability to repay a mortgage loan based upon predetermined
mortgage loan characteristics and credit risk factors. Prospective borrowers
remain subject to verification of employment, income, assets and credit history,
as described below. All credit scored loans are rated "strong," "satisfactory"
or "inconclusive." Mortgage loans rated strong or satisfactory that do not
exceed specified risk limits do not undergo the full loan underwriting process
described below. This "streamlined" underwriting process is restricted to loans
secured by single family dwellings, other than investor properties, with a
principal amount not exceeding $700,000. These loans are subject to verification
of property value as described in "Appraisals" below. All other mortgage loans
are underwritten in accordance with the affiliated originators' normal
underwriting policies.
Initially, a prospective borrower must fill out an application that gives
information about the prospective borrower, the property to be financed and the
type of loan desired. The prospective borrower must also provide
o a current balance sheet and a statement of income and expenses,
o proof of income, such as a paycheck stub or W-2 form (except for certain
self-employed prospective borrowers),
o proof of liquid assets (required since April 1991), telephone verification of
employment (required since April 1991), which may be verified by a third party
national employment verification service, and
o a credit report that summarizes the prospective borrower's credit history
with local merchants and lenders and any record of bankruptcy.
Since July 1993, facsimile copies of some verification documents (such as
bank statements and verification of employment) have been accepted in lieu of
originals.
From February 1991 until May 1997, affiliated originators would obtain at
least two credit reports
22
<PAGE>
(which could be in the form of a merged credit bureau report) on a prospective
borrower. Since May 1997, affiliated originators have obtained the single most
comprehensive readily available credit bureau report on the prospective
borrower.
Self-employed prospective borrowers must submit their federal income tax
returns for the most recent two years and a separate statement of income and
expenses.
If a proposed mortgage loan's loan-to-value ratio does not exceed 65% (before
December 1992, 80%), self-employed prospective borrowers may be excused from
providing financial statements, federal income tax returns or proof of income.
During 1990 and 1991 the affiliated originators implemented telephone
verification of employment. Certain high net worth prospective borrowers with
ongoing banking relationships with Citibank's private banking group may be
exempted from employment verification.
Lending guidelines
Once the employment verification and credit reports are received, the affiliated
originator decides
o whether the prospective borrower has enough monthly income to meet monthly
obligations on the proposed loan and related expenses
o as well as the prospective borrower's other financial obligations and monthly
living expenses, and since April 1991, whether the prospective borrower has
enough liquid assets to acquire the mortgaged property and make the initial
monthly mortgage payments, taking into account, among other things, proceeds
from the sale of a prior residence. This decision may be made from evidence such
as a contract for sale of a prior residence and bank statements supplied by the
prospective borrower.
Each affiliated originator has established as normal lending guidelines that
the mortgage payments, plus applicable real property taxes and any condominium
or homeowner association common charges and hazard insurance, should not exceed
33% (34% for ARMs) of the borrower's gross income, or that all monthly payments,
including those mentioned above and other fixed obligations, such as car
payments (together, the debt burden), should not exceed 38% of gross income.
However, in the case of higher loan-to-value loans, these percentages are
reduced to 28% and 36%. Since May 1997, loans that meet the affiliated
originator's minimum credit score and delinquency requirements may have debt
burden ratios up to 45% (40% in the case of higher loan-to-value loans) and, for
some corporate relocation loans, 50%. Where two individuals co-sign the mortgage
note or documents, the income and debt of both are included in the computation.
For mortgage loans originated by the California branches of Citi FSB before
June 1991, the actual mortgage payments may be higher due to a higher mortgage
rate at the time the loan documents were prepared, but the mortgage rate
generally does not exceed the anticipated rate used in the analysis by more than
one percent.
Often, other credit considerations may cause a loan underwriter to depart
from the guidelines, and a loan underwriter may require additional information
or verification to compensate for the departure.
Leasehold loans
Leasehold loans are approved in accordance with the affiliated originator's
standard underwriting criteria. An ALTA leasehold title insurance policy is
required, which
o contains no exceptions for any adjustable features of the lease and
o assures that the mortgage is not subordinated to any lien or encumbrance
other than the land lease.
The term of the land lease must extend at least ten years beyond the
scheduled maturity of the mortgage loan and must give the originator the right
to receive notice of and to cure any default by the borrower. The leasehold must
be assignable or transferable if it is subjected to the mortgage lien.
(California branches of CITI FSB may require a consent to assignment of lease
and/or subordination agreement be obtained and recorded.) Payments due pursuant
to the land lease are taken into account in debt ratio calculations.
Refinancings
Since May 1997, affiliated originators have not required income or asset
verification for their current homeowners seeking to refinance their mortgage
loans if the refinancing meets the originator's minimum seasoning, payment
history and credit score requirements. For other homeowners seeking to refinance
their mortgage loans, affiliated originators do not require asset verification
and allow a debt burden ratio of up to 45% for loans that meet
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the affiliated originator's minimum seasoning, payment history and credit score
requirements. For ARMs, the calculation of debt burden is based on the initial
mortgage rate, even though the initial rate may be lower than the rate that
would generally apply under the terms of the ARM.
Appraisals
The affiliated originators require the value of the mortgaged property, together
with any other collateral, to support the principal balance of the mortgage
loan, with enough excess value to protect against minor declines in real estate
values.
Each affiliated originator requires an appraisal of each property to be
financed. Two appraisals are required in the normal underwriting process if the
loan amount is greater than $700,000. The appraisal is conducted by an
independent fee appraiser. The appraiser personally visits the property and
estimates its market value on the basis of comparable properties. Since April
1997, each affiliated originator accepts, in lieu of originals, electronic
appraisals without photographs from appraisers who utilize approved appraisal
software packages.
The independent appraisers do not receive any compensation dependent upon
either the amount of the loan or its consummation. In normal practice, the
affiliated originator's judgment of the appraisal determines the maximum amount
of the mortgage loan.
Where an affiliated mortgage loan is refinanced, a current appraisal of the
property may be omitted if the principal balance of the mortgage loan is only
increased by an amount that is used to pay off junior liens on the property plus
the homeowner's out-of-pocket costs for the refinancing. A current appraisal may
also be omitted for modification of the interest rate on an existing mortgage
loan.
Lien records; title insurance Each affiliated originator obtains at origination
a search of the recorded liens on the property being financed. Title insurance,
or an attorney's opinion of title in jurisdictions where the practice is
acceptable, is required for all mortgage loans, except that for cooperative
apartment loans, an affiliated originator will not require title insurance or a
title search of the cooperative apartment building.
Mortgage loans purchased from third-party originators
The affiliated originators purchase mortgage loans originated by third parties.
These mortgage loans, other than those acquired in a bulk purchase, are reviewed
for compliance with the affiliated originator's underwriting criteria, and the
affiliated originator may reject loans that fail to conform to its criteria. For
mortgage loans acquired in a bulk purchase of more than $15 million from a
financially sound mortgage loan originator, the affiliated originator will
review the selling originator's underwriting policies and procedures for
compliance with the affiliated originator's or Fannie Mae / Freddie Mac
underwriting standards and will credit score each loan. The affiliated
originator will also conduct a limited mortgage loan file review.
Underwriting standards of third-party originators
The underwriting policies and guidelines of third party originators may differ
from those of the affiliated originators. In purchasing third party loans,
Citicorp Mortgage will review a sample of the loans to determine whether they
generally conform to Citicorp Mortgage's underwriting standards. Citicorp
Mortgage will fully or partly credit score or re-underwrite the third party
loans to determine whether the original underwriting process adequately assessed
the borrower's ability to repay and the adequacy of the property as collateral,
based on Citicorp Mortgage's underwriting standards.
Servicing
The servicer; delegation
CMSI will be responsible for administering and servicing the mortgage loans.
CMSI will act as servicer for affiliated mortgage loans and as master servicer
for third-party mortgage loans.
CMSI may delegate or subcontract servicing or master servicing duties to
affiliated or non-affiliated qualified corporations. CMSI will delegate its
servicing duties for affiliated mortgage loans to Citicorp Mortgage, Inc., a
CMSI affiliate. Citicorp Mortgage may further delegate its servicing duties.
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CMSI will delegate its master servicing duties for third-party mortgage loans
to an unaffiliated master servicer named in the supplement. The master servicer
will delegate the primary servicing duties on the third-party mortgage loans to
the third-party originators.
CMSI will in all cases remain ultimately responsible for servicing both the
affiliated and the third party mortgage loans. References to the servicer and
the master servicer in this prospectus will refer to CMSI, acting by itself or
through delegated or subcontracted subservicers or master servicers. References
to actions taken by CMSI after the issuance of the Certificates will refer to
CMSI acting in its capacity as servicer and/or master servicer, usually through
other persons to whom it has delegated servicing and/or master servicing duties.
Resignation and removal
CMSI may only resign as servicer/master servicer if
o it receives a legal opinion that remaining as servicer would be illegal or
o the Trustee and 2/3 of the registered holders of Certificates (by principal
balance) consent to the resignation.
A resignation will become effective when the Trustee or a successor servicer
assumes CMSI's servicing obligations. The Trustee may remove CMSI as servicer/
master servicer only if CMSI does not, within 60 days after notice from the
Trustee, remedy a failure to perform its servicing duties.
The remainder of this "Servicing" section will describe servicing procedures
for affiliated mortgage loans.
Collection procedures for affiliated mortgage loans
CMSI will make reasonable efforts to collect all payments on affiliated mortgage
loans, following collection procedures it believes advisable. CMSI may
o waive any prepayment charge and
o arrange with a homeowner a schedule for eliminating delinquencies within 180
days, provided that the scheduling will not affect any primary mortgage
insurance coverage. Credit support payments will continue to be governed by the
original payment schedule on the mortgage loan, not the new schedule for
eliminating deficiencies.
Enforcement of due-on-sale clauses
If a homeowner transfers a mortgaged property to a new homeowner, and the
mortgage loan includes a due-on-sale clause, CMSI will usually accelerate the
maturity of the mortgage loan. If CMSI reasonably believes it will not be able
to enforce the due-on-sale clause, and if any primary mortgage insurance
coverage will not be affected, CMSI will enter into an assumption agreement with
the new homeowner making him or her liable under the mortgage loan. The original
homeowner will also, if local law permits, remain secondarily liable under the
agreement (except for mortgage loans originated by Citi FSB). The mortgage rate
on the mortgage loan will not be decreased under the agreement. The interest
rate may be increased, however, under the terms of the mortgage loan. CMSI will
retain as additional servicing compensation any fees it receives for entering
into the assumption agreement.
Real estate taxes and assessments
CMSI will deposit all homeowner payments of taxes, assessments or comparable
items in a special servicing ACCOUNT. CMSI will use the servicing account only
to pay taxes, assessments and comparable items on the mortgaged properties, to
reimburse CMSI for any costs incurred in paying taxes and assessments or for
otherwise preserving or protecting the value of the mortgages, to refund to the
homeowner any overages, and to pay any required interest to homeowners on
balances in the servicing account.
Primary mortgage insurance
CMSI will present claims and take reasonable steps to recover on defaulted
mortgage loans under any primary mortgage insurance policy.
CMSI will exercise its best reasonable efforts to maintain primary mortgage
insurance for as long as required. CMSI will pay premiums for primary mortgage
insurance on a timely basis if the homeowner does not make the payments, and
will be reimbursed by the Trust for such payments.
CMSI may replace primary mortgage insurance by substantially equivalent
insurance if
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o each rating agency that initially rated the Series advises CMSI that the
replacement will not adversely affect the current rating of the Series, or
o the rating agencies rate the claims-paying ability of the substitute primary
mortgage insurance company no lower than the Series.
Realizing on defaulted mortgage loans
Regardless of whether recovery under primary mortgage insurance or other credit
support is available, CMSI will follow those normal practices and procedures it
believes advisable to realize on a defaulted mortgage loan. However, CMSI need
not spend its own money to foreclose on a loan or to restore a damaged property
unless it decides that the expenditure will increase the net proceeds of
liquidation, after reimbursement to CMSI for the expenditure.
Certificate holders will realize a loss to the extent that
o liquidation proceeds and payments under credit support for a mortgaged
property are less than
o the principal balance and accrued interest on the mortgage loan plus CMSI's
unreimbursed expenses and advances.
If a mortgage loan goes into default, a provider of credit support may have
to purchase the liquidated loan. To avoid draws under credit support, CMSI may
pay the purchase price of the loan on behalf of the credit support provider. The
ultimate net recovery on the loan will be used to replenish the credit support
up to the amount of the unreimbursed payments under the credit support for the
loan, and any excess will be retained by Citicorp, for a guaranty it issued, or
by CMSI. Although Certificate holders will have no right to the excess proceeds,
the reduction in an issuer's obligations under credit support will have been
fully restored.
Credit support providers do not have to purchase a defaulted mortgage loan or
cover delinquencies if the remaining obligations under the credit support are
less than the purchase price of the mortgage loan.
If CMSI does not foreclose on a defaulted mortgage loan, CMSI may accept less
than the principal balance and accrued interest of the mortgage loan on a sale
or a retention by the homeowner of the mortgaged property. If cmsi does
foreclose on a defaulted mortgage loan, CMSI may sell the property, negotiate
with the homeowner for a deed in lieu of foreclosure or, if a deficiency
judgment is available, foreclose on the property and pursue a deficiency against
the homeowner. CMSI does not have to pursue a deficiency judgment on a mortgage
loan, even if legally permitted.
Fees
The Trust will pay CMSI a servicing fee that is generally a fixed annual
percentage of the principal balance of each mortgage loan. Alternatively, the
servicing fee may be based on the excess of the mortgage interest rate over a
specified rate. In addition, CMSI will keep all prepayment and late payment
charges, assumption fees and similar charges as additional servicing
compensation. In CMSI's experience, this additional servicing compensation has
been negligible.
CMSI will pay
o the subservicer's fees,
o the Trustee's and independent accountants fees and expenses,
o expenses for distributing reports to Certificate holders, and
o fees and expenses for realizing on defaulted mortgage loans.
CMSI will be reimbursed for certain expenses in liquidating a defaulted
mortgage loan (including expenditures for the preservation, protection or
restoration of the mortgaged property, as well as legal fees, appraisal costs,
etc) out of payments by the homeowner, credit support or from foreclosure
proceedings before those payments are distributed to Certificate holders. CMSI
may retain this reimbursement even if the remaining funds are inadequate to
distribute to Certificate holders the full principal balance and accrued
interest on the mortgage loan.
CMSI's liability
CMSI, as servicer and/or master servicer, will not be liable to Certificate
holders except for its willful misfeasance, bad faith or gross negligence in the
performance of its servicing duties.
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Default by CMSI
Events of default
The following are events of default:
o CMSI, if it is the paying agent, fails to distribute to the registered
Certificate holders the full amount of a required distribution or, if it is not
the paying agent, fails to pay over to the paying agent for distribution to the
registered Certificate holders the full amount of a required distribution, and
does not remedy its failure (1) within 10 business days of receiving notice of
the failure if the failure was due to an error in calculating the required
payment or distribution or (2) within three business days of receiving notice of
the failure if the failure was due to any other cause.
o CMSI fails to (1) repurchase a mortgage loan as required or (2) observe or
perform any other obligation that materially affects the rights of Certificate
holders, and does not remedy the failure for 60 days after either the Trustee
notifies CMSI, or the registered holders of 2/3 of the principal balance of the
Certificates notify CMSI and the Trustee, of the failure.
o Certain events indicate CMSI's insolvency, reorganization or inability to pay
its obligations.
Actions on event of default
As long as an event of default remains unremedied, the Trustee or the registered
holders of 2/3 of the principal balance of the Certificates may have the Trustee
take over CMSI's responsibilities, duties and liabilities under similar
compensation arrangements. CMSI will be paid for its prior services
notwithstanding the termination of its activities as servicer and/or master
servicer. Termination of CMSI as servicer and/or master servicer will not affect
the obligations of any credit support provider.
If the Trustee is unwilling or unable to act as servicer or master servicer,
it may appoint, or ask a court to appoint, a housing and home finance
institution with a net worth of at least $5 million to be a successor servicer
or master servicer for a servicing compensation no greater than CMSI's servicing
compensation.
The Trustee
The Trustee is named in the supplement. The Trustee may appoint agents
(including CMSI and its affiliates) to perform any of its responsibilities, but
the Trustee will continue to be responsible for its duties and obligations.
To meet legal requirements of certain local jurisdictions, CMSI and the
Trustee may jointly appoint co-trustees or separate trustees for some or all of
the mortgage loans. Each separate trustee or co-trustee will have all of the
Trustee's rights and obligations, which they will exercise solely at the
Trustee's direction.
The Trustee may have normal banking relationships with CMSI or any
originator, or any of their affiliates.
The Trustee may resign at any time. The Trustee may be removed by the
registered holders of 50% of the principal balance of the Certificates and 50%
of the residual Certificates. The Trustee may also be removed by CMSI if
o the Trustee ceases to be eligible to serve as Trustee under the pooling
agreement,
o the Trustee is insolvent,
o the Trustee breaches a duty that materially and adversely affects the
Certificate holders, or
o through the Trustee's performance or non-performance of certain actions, or
because of a downgrade of the Trustee's credit rating, the rating assigned to
the Certificates would be lowered.
If the Trustee resigns or is removed, the resignation or removal will not be
effective until CMSI appoints a successor Trustee.
The Trustee's duties; limitation of liability
If no event of default has occurred, the Trustee need only perform those duties
specifically required of it under the pooling agreement. However, the Trustee
must examine the various certificates, reports or other instruments required to
be furnished to it to determine if they conform to the requirements of the
pooling agreement.
The Trustee is not responsible for CMSI's deposit to or withdrawal from the
Trust of any funds, the validity or sufficiency of the pooling agreement, the
Certificates or any mortgage loan or related docu-
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ment, and is not accountable for the use or application by CMSI of funds paid to
it on the mortgage loans.
The Trustee will not be liable for any losses incurred as a result of the
Trust's failure to qualify as a remic, termination of its REMIC status or any
"prohibited transaction" for a REMIC, unless the losses were caused by the
Trustee's negligence, bad faith or failure to perform its duties.
The pooling agreement
The Certificates of each Series are governed by a separate pooling and servicing
agreement (the pooling agreement) between CMSI and the Trustee, which provides
for the transfer of the mortgage loans to the Trust, the issuance of the
Certificates, repurchase or substitution of mortgage loans by CMSI, the
collection of payments on the mortgage loans and other servicing activities, the
distributions to the Certificate holders, and otherwise sets forth the specific
rights and obligations of CMSI and the Trustee.
The Trustee will send a copy of the pooling agreement (without exhibits) to
any registered holder or beneficial owner of a Certificate upon written request.
The pooling agreement also contains the following provisions:
Legal action by CMSI
Neither CMSI nor Citicorp, if Citicorp has issued a guaranty, will have to
appear in, prosecute or defend any legal action that is not incidental to CMSI's
servicing responsibilities and that it believes may cause it expense or
liability. CMSI may, however, take any legal action it believes desirable to
enforce the pooling agreement or to protect its own rights or the rights of the
Trustee or the Certificate holders under the pooling agreement. The Trust will
pay, or reimburse CMSI or Citicorp for, the expenses of the action and any
resulting liability out of Trust assets.
Legal action by Certificate holders
A registered Certificate holder can not institute a legal proceeding to enforce
the pooling agreement unless
o the holder gives the Trustee written notice of default and
o the registered holders of 2/3 of the principal balances of the Certificates
request the Trustee in writing to institute the proceeding and offer the Trustee
reasonable indemnity, and the Trustee for 60 days neglects or refuses to
institute proceedings.
However, the Trustee is not required to exercise its powers, investigate matters
arising, or institute, conduct or defend a litigation under the pooling
agreement at a registered Certificate holder's request unless the holder offers
the Trustee reasonable security or indemnity against expenses and liabilities.
Liability of CMSI and Citicorp; indemnification
Neither CMSI nor Citicorp, if Citicorp has issued a guaranty, nor any of their
directors, officers, employees or agents, will be liable to the Trust or the
Certificate holders for taking or not taking any action, or for their errors in
judgment, except for liability caused by their willful misfeasance, bad faith or
gross negligence in the performance of their duties, or reckless disregard of
their obligations and duties, under the pooling agreement.
The Trust will indemnify CMSI and Citicorp, if Citicorp has issued a
guaranty, and their directors, officers, employees or agents, out of Trust
assets against any loss, liability or expense they incur in connection with any
legal proceedings, other than loss, liability or expense caused by their willful
misfeasance, bad faith or gross negligence in the performance of their duties,
or reckless disregard of their obligations, under the pooling agreement.
Amendments
CMSI, the issuers of credit support and the Trustee may together amend the
pooling agreement and any credit support without the registered Certificate
holders' consent
o to cure ambiguities,
o to resolve inconsistencies,
o to make other changes consistent with the pooling agreement or credit
support, including replacing the credit support in whole or part by other forms
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of credit support described in this prospectus,
o to comply with federal tax law, including amendments to maintain the Trust
as a REMIC, or
o to establish a "qualified reserve fund" for a REMIC.
CMSI, the issuers of credit support and the Trustee may also amend the
pooling agreement and any credit support without registered Certificate holder
consent if CMSI delivers an opinion of counsel acceptable to the Trustee that
the amendment will not materially adversely affect the Certificate holders.
CMSI and the Trustee may also amend the pooling agreement and any form of
credit support in any respect with the consent of the registered holders of 2/3
of the principal balances of the Certificates affected by the amendment, except
that
o if the amendment affects any class of Certificates differently in any
material respect than the other classes, the registered holders of 2/3 of the
principal balances of the Certificates in the differently affected class must
consent to the amendment, and
o the amendment may not (1) decrease or delay the collections on mortgage loans
or the distributions to a registered Certificate holder without the holder's
consent or (2) reduce the percentage of principal balances of Certificates whose
registered holders must consent to an amendment without the consent of the
registered holders of all Certificates of each affected class.
Compliance reports
Beginning three months after the closing date, a firm of independent public
accountants selected by CMSI will provide a compliance report to the Trustee by
March 31 of each year for affiliated mortgage loans and by September 30 of each
year for third-party loans on the servicing of the affiliated or third-party
mortgage loans.
Beginning three months after the closing date, an officer of CMSI will
deliver a certificate to the Trustee and to any registered holder of more than
50% of the Certificates by March 31 of each year for affiliated mortgage loans
and by September 30 of each year for third-party loans stating that CMSI has
fulfilled its servicing obligations throughout the preceding calendar year or
describing each default in the performance of these obligations.
Certificate holders may obtain copies of these reports or certificates by
written request to the Trustee.
List of registered holders
Unless the Trustee is also the certificate registrar, CMSI will provide the
Trustee within 15 days after receipt of the Trustee's written request the names
and addresses of all registered Certificate holders as of the most recent record
date. Upon written request of three or more registered Certificate holders, for
purposes of communicating with other registered Certificate holders about their
rights under the pooling agreement, the Trustee will give the requesting
Certificate holders access during business hours to the most recent list of
registered Certificate holders held by the Trustee. If the list is more than 90
days old on the date of the request, the Trustee will promptly request a current
list from CMSI and will give the requesting Certificate holders access to the
new list promptly after receipt.
No annual meeting
There will not be any annual or other meetings of Certificate holders.
Successors
A corporation
o that is a successor to CMSI due to a merger or consolidation, or that
otherwise succeeds to the business of CMSI, or
o any entity that is more than 50% owned by Citicorp that assumes CMSI's
obligations, will be CMSI's successor under the pooling agreement. The
assumption will not, however, release CMSI from any obligation under the pooling
agreement.
Termination of Trust
The Trust will terminate upon the distribution to the registered Certificate
holders of all amounts required to be distributed to them. The Trust can not,
however, continue for more than 21 years after the death of the last survivor of
the descendants of a certain person specified in the pooling agreement living at
the date of the pooling agreement.
CMSI will direct the Trustee to notify each registered Certificate holder in
writing in advance of the termination of the Trust. Registered holders must
surrender their Certificates in order to receive their
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final distribution. Interest will not accrue on the Certificates after the date
specified in the notice for return of the Certificates
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Book-entry and physical Certificates
Most classes of Certificates offered to the public will be book-entry
securities. That is, a single certificate for each of these classes will be
registered in the name of The Depository Trust Company, a securities depository
(DTC). DTC will thus be the only registered holder of these Certificates. Other
people will hold their Certificates in these classes indirectly through
securities intermediaries - banks, brokerage houses and other institutions that
maintain securities accounts for their customers. The securities depository will
maintain accounts showing the Certificate holdings of its participants (all of
whom will be securities intermediaries), and these securities intermediaries
will in turn maintain accounts showing the Certificate holdings of their
customers (some of whom may themselves be securities intermediaries holding
Certificates for their customers). Thus, each holder of a book-entry Certificate
will hold that Certificate through a hierarchy of intermediaries, with DTC at
the "top" and the holder's own securities intermediary at the "bottom." A person
holding a book-entry Certificate for its own account through a securities
intermediary will be the beneficial owner of the Certificate.
The Certificates of each holder of a book-entry security other than DTC will
be evidenced solely by entries on the books of the holder's securities
intermediary. A holder of a book-entry Certificate will not be able to obtain a
physical (paper) certificate evidencing the holder's ownership of the
Certificate. The book-entry system for holding Certificates through accounts
with a hierarchy of securities intermediaries leading up to a securities
depository is the system through which most publicly traded common stock is held
in the United States.
In this prospectus, references to "Certificate holders" of book-entry
securities will generally mean the beneficial owners of Certificates. However,
for book-entry Certificates, references to actions taken by Certificate holders
will mean actions taken by DTC upon instructions from its participants, and
references to payments and notices of redemption to Certificate holders will
mean payments and notices of redemption to DTC as the registered holder of the
Certificates for distribution to participants in accordance with DTC's
procedures.
Beneficial owners of book-entry Certificates should realize that, unless
otherwise stated in this prospectus, the Trust will make all distributions on
their Certificates to DTC, and will send all required reports and notices solely
to DTC. Similarly, the Trustee will accept notices and directions solely from
the registered holders of Certificates, which for book-entry Certificates will
mean DTC. DTC and the securities intermediaries are generally required by law to
deposit the distributions in the appropriate customers' accounts and to transmit
notices and directions from the Trust to their customers and from their
customers to the Trust through the chain of intermediaries. However, beneficial
owners of book-entry Certificates may find it somewhat more difficult to pledge
their Certificates because of the lack of a physical certificate, and may
experience delays in receiving distributions on their Certificates, since
distributions will be initially made to DTC and must then travel down the
hierarchy of intermediaries to the beneficial owner's own account with its
securities intermediary.
Neither the Trustee, CMSI nor any of their affiliates will be responsible for
any action or failure to act of a securities depository or securities
intermediary, including any action or inaction involving a securities
depository's or securities intermediary's
o distributions to its participants or customers,
o transmission of notices, directions and other communications to or from
beneficial owners of Certificates, or
o record keeping
and will not be liable to beneficial owners of Certificates for any such action
or failure to act. Nor will the Trustee, CMSI or any of their affiliates have
any obligation to beneficial owners to monitor, supervise or review any actions
or procedures of a securities depository or securities intermediary.
DTC is a limited purpose trust company organized under the laws of the State
of New York, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code and a "clearing
agency" registered under section 17A of the Securities Exchange Act of 1934.
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Physical Certificates
Physical Certificates will be transferable and exchangeable at the offices of
the Trustee. No service charge will be imposed for any registration of transfer
or exchange, but the Trustee may require a payment sufficient to cover any tax
or other governmental charge incurred.
Beneficial owners of book-entry Certificates will receive physical
Certificates representing their ownership interests only if
o CMSI advises the Trustee in writing that DTC is no longer willing or able to
discharge properly its responsibilities as depository for the book-entry
Certificates and CMSI is unable to locate a qualified successor,
o CMSI, at its option, elects to terminate the book-entry system, or
after CMSI's resignation or dismissal as servicer under the pooling agreement,
beneficial owners of at least 51% of each outstanding class of book-entry
Certificates advise the Trustee, through the securities depository, in writing
that continuation of the book-entry system is no longer in the beneficial
owners' best interest.
The Trustee will notify all beneficial owners, through DTC, of the availability
of physical Certificates.
ERISA considerations
The Employee Retirement Income Security Act of 1974 (ERISA) prohibits some
transactions between those employee benefit plans to which it applies (ERISA
plans) and persons who have specified relationships to the ERISA plan. (For
purposes of this discussion, an individual retirement account established under
the Internal Revenue Code (an IRA) will be an ERISA plan.)
"Plan asset" regulations
If an ERISA plan purchases Certificates, the underlying assets of the Trust -
for example, mortgage loans - might be considered assets of the ERISA plan, or
"plan assets." As a consequence, the plan's fiduciary might be considered to
have delegated asset management responsibility to the Trustee. In such
circumstances, some operation of the Trust might be considered prohibited
transactions under ERISA.
ERISA does not define "plan assets." However, regulations under ERISA state
conditions under which an ERISA plan, in acquiring an "equity interest" in an
entity (eg, a Certificate in a Trust) would be considered to acquire the
underlying assets of the entity (such as the mortgage loans). These underlying
assets would therefore become "plan assets." Because of the factual nature of
the regulations, CMSI cannot predict whether the Trust's assets would be "plan
assets." For example, the regulations state that the underlying assets of an
entity are not "plan assets" as long as less than 25% of the value of each class
of equity interest is held by ERISA plans, iras, and employee benefit plans not
subject to ERISA.
Class exemption
U.S. Department of Labor Prohibited Transaction Class Exemption 83-1 for certain
transactions involving mortgage pool investment trusts (PTE 83-1) exempts the
acquisition and holding of certain residential mortgage pool pass-through
interests by ERISA plans from ERISA's prohibited transaction provisions. PTE
83-1 sets forth "general conditions" and "specific conditions" to its
applicability. CMSI believes that the general conditions would be met for the
purchase and holding of senior classes of Certificates in a Trust that holds
mortgage loans other than cooperative apartment loans. PTE 83-1 might not apply,
however, to the purchase and holding of
o senior classes of Certificates in a Trust that holds cooperative apartment
loans,
o senior classes of Certificates of a PO or IO class,
o subordinated classes of Certificates or
o residual Certificates.
Accordingly, CMSI will not permit the registration of a transfer of a
Certificate of a subordinated or residual class unless the transferee
o executes a representation letter satisfactory to the Trustee stating
that (1) it is not, and is not acting on behalf of an ERISA plan or using an
ERISA plan's assets to effect the purchase or (2) if it is an insurance company,
the source of funds used to purchase subordinated Certificates is an "insurance
company
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general account" (as defined in Prohibited Transaction Class Exemption 95-60
("PTE 95-60")), and there is no ERISA plan for which the general account's
reserves and liabilities for the contract(s) held by or on behalf of the plan
and all other ERISA plans maintained by the same employer (or an affiliate as
defined in PTE 95-60) or by the same employee organization, exceed 10% of the
total of all reserves and liabilities of the general account (as determined
under PTE 95-60) at the date of acquisition or
o delivers (1) an opinion of counsel satisfactory to the Trustee and CMSI that
the purchase or holding of the Certificate by or on behalf of the plan will not
result in the assets of the Trust being deemed to be "plan assets" and subject
to the prohibited transaction provisions of ERISA and the Internal Revenue Code
or any similar law and will not subject CMSI (or its designee) or the Trustee to
any obligation in addition to those undertaken in the pooling agreement and (2)
such other opinions of counsel, officers' certificates and agreements as the
Trustee and CMSI may require in connection with the transfer.
Trusts of Certificates
It is not clear whether PTE 83-1 applies to senior class Certificates in a Trust
that itself holds interests in a REMIC or similar entity.
The regulations state that plan assets do not include the mortgages
underlying an agency certificate. Accordingly, even if Certificates in a Trust
were owned largely or entirely by ERISA plans, the mortgages underlying agency
certificates held by the Trust would not be plan assets. Accordingly, if CMSI
sponsors a Series where the Trust holds interests in a REMIC or similar entity,
and if no other ERISA prohibited transaction exemption appears applicable, CMSI
intends to include no such interests in a REMIC except agency certificates or
other interests that would meet the general conditions of PTE 83-1 if purchased
directly by an ERISA plan. CMSI further intends to structure the offering of the
Series and the operations of the Trust and to take other actions that are
reasonable and appropriate to reduce the risk of an ERISA prohibited
transactions should PTE 83-1 be held inapplicable to the acquisition and holding
of such certificates.
Underwriters' exemptions
Most underwriters of mortgage-backed securities have obtained ERISA prohibited
transaction exemptions that are in some respects broader than PTE 83-1. These
exemptions only apply to mortgage-backed securities that are sold in offerings
for which the underwriter is the sole or a managing underwriter, or a selling or
placement agent. The supplement describes any such exemption.
Other prohibitions
An ERISA plan may not purchase Certificates with assets of the ERISA plan if an
affiliate of CMSI (such as Citibank or Salomon Smith Barney Inc.) or of the
Trustee either
o has discretion to invest such assets,
o has authority or responsibility to give, or regularly gives, investment
advice for such assets for a fee and pursuant to an agreement or understanding
that the advice will serve as a primary basis for investment decisions for the
assets and that such advice will be based on the particular investment needs of
the ERISA plan, or
o is an employer maintaining or contributing to the ERISA plan. By agreeing to
acquire a Certificate for an ERISA plan, an ERISA plan fiduciary represents and
warrants to the underwriter and to CMSI that the assets of the ERISA plan used
in the purchase are not come described in the preceding sentence.
Investor's responsibility
Due to the complexity of the ERISA rules and the severity of the penalties
imposed upon persons involved in prohibited transactions, it is important that
potential ERISA plan investors consult with their counsel regarding the
consequences under ERISA of their acquisition and ownership of Certificates.
Employee benefit plans that are not subject to ERISA may be subject to
similar federal, state, or local laws. Fiduciaries of such plans should make
their own determinations of the need for and availability of exemptive relief
under any such laws.
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Legal investment considerations
SMMEA
The senior classes of Certificates will generally be, and the subordinated
classes of Certificates and the residual Certificates may be, "mortgage related
securities" under the Secondary Mortgage Market Enhancement Act of 1984 (SMMEA).
The supplement states which classes of Certificates are mortgage related
securities.
Mortgage related securities under SMMEA are legal investments for an entity
created or existing under state or federal law whose authorized investments are
subject to state regulation to the same extent that obligations issued or
guaranteed by the United States or any of its agencies or instrumentalities are
legal investments for the entity.
A Certificate will be a SMMEA mortgage related security so long as
o it is rated in one of the two highest rating categories by at least one
nationally recognized statistical rating organization and
o it is part of a Series of Certificates in a Trust consisting of mortgage
loans originated by the types of originators specified in SMMEA.
State overrides of SMMEA
SMMEA permitted states that acted before October 3, 1991 to override some of its
provisions. Some states have overridden parts of SMMEA and limited the ability
of some entities (in particular, insurance companies) to invest in "mortgage
related securities," usually by requiring the investors to rely solely upon
existing state law rather than SMMEA. Investors governed by the laws of these
states may be limited in their ability to invest in Certificates.
Federal depository institutions
SMMEA also permits
o federal savings and loan associations and federal savings banks to invest in,
sell or otherwise deal in mortgage related securities without limit,
o federal credit unions to invest in mortgage related securities, and
o national banks to purchase mortgage related securities for their own account
without regard to the limitations generally applicable to investment securities,
subject in each case to regulations of their federal regulators.
In this connection,
o the Comptroller of the Currency has authorized national banks to purchase and
sell mortgage related securities for their own account, without limitation as to
a percentage of the bank's capital and surplus (but subject to compliance with
general standards of "safety and soundness" and retention of credit
information),
o the National Credit Union Administration has authorized federal credit
unions to invest in mortgage related securities (other than stripped mortgage
related securities, residual interests in mortgage related securities and
commercial mortgage related securities) under limited circumstances, and
o the Office of Thrift Supervision has issued guidelines for thrift
institutions to follow in managing interest rate risk in purchasing investment
securities.
Investor responsibility
Depository institutions considering an investment in the Certificates should
also review the "Supervisory policy statement on investment securities and
end-user derivatives activities" of the Federal Financial Institutions
Examination Council, which has been adopted by the Federal Reserve Board, the
FDIC, the Comptroller of the Currency, the Office of Thrift Supervision and the
National Credit Union Administration. The policy statement sets forth guidelines
that depository institutions must follow in managing risks (including market,
credit, liquidity, operational (transaction), and legal risks) applicable to all
securities (including mortgage pass-through securities and mortgage-derivative
products) used for investment purposes.
Institutions whose investment activities are subject to regulation by federal
or state authorities should review rules, policies and guidelines of these
authorities before purchasing any Certificates, as some Certificates (in
particular, Certificates that are entitled solely or disproportionately to
distributions of principal or interest) may be considered unsuitable
investments, or may otherwise be re-
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stricted, under such rules, policies or guidelines (in some instances
irrespective of SMMEA).
The foregoing does not consider the applicability of statutes, rules,
regulations, orders, guidelines or agreements generally governing investments
made by particular investors, including "prudent investor" provisions,
percentage-of-assets limits and provisions that restrict or prohibit investment
in securities that are not "interest-bearing" or "income-paying" or are issued
in book-entry form.
Except for the status of some Certificates as "mortgage related securities,"
no representation is made as to the proper characterization of any Certificates
for legal investment purposes, financial institution regulatory purposes, or
other purposes, or as to the ability of particular investors to purchase
Certificates under legal investment restrictions. The uncertainties described
above (and any unfavorable future determinations concerning legal investment or
financial institution regulatory characteristics of the Certificates) may
adversely affect the liquidity of the Certificates.
Accordingly, investors whose investment activities are subject to legal
investment laws and regulations, regulatory capital requirements or review by
regulatory authorities should consult with their own legal advisors in
determining whether and to what extent the Certificates of any class will be
legal investments or be subject to investment, capital or other restrictions,
and whether SMMEA has been overridden in any jurisdiction relevant to the
investor.
Taxation of Certificate holders
The following taxation sections discuss in general terms the anticipated
material federal income tax consequences to Certificate holders of the purchase,
ownership and disposition of Certificates representing regular interests in the
REMIC. The Trust will consist of one or more REMICs. The discussion does not
address all federal income tax consequences that may be applicable to particular
categories of investors, some of whom may be subject to special rules. Moreover,
the discussion is based on statutes, regulations and other authorities that are
subject to change or differing interpretations, and any change or interpretation
could apply retroactively. Investors should consult their own tax advisors in
determining the federal, state, local and other tax consequences to them of the
purchase, ownership and disposition of Certificates. In this tax discussion,
references to the "Certificate holder" or "holder" generally mean the beneficial
owner of a Certificate. Unless otherwise stated, all section references are to
the Internal Revenue Code.
Taxation of Certificates - general
Certificates will generally be taxed as if they were newly originated debt
instruments. In particular, interest, original issue discount (discussed below)
and market discount (discussed below) on a Certificate will be ordinary income
to the holder, and distributions of principal on a Certificate will be a return
of capital to the extent of the holder's basis in the Certificate.
Accrual method
Each Certificate holder must use the accrual method of accounting for
Certificates, regardless of the method of accounting it otherwise uses.
Original issue discount
All accrual Certificates will be issued with original issue discount (or OID),
and others classes of Certificates may be issued with OID. OID for a debt
instrument generally refers to the amount by which the instrument's original
issue price is less than its stated redemption price at maturity.
Holders of Certificates issued with OID must generally include the OID in
ordinary income for federal income tax purposes as it accrues, in accordance
with a constant yield method that takes into account the compounding of
interest. This generally means that a Certificate holder will pay tax on accrued
OID before the holder receives the related cash distribution.
The Internal Revenue Code and implementing regulations for OID (the OID
rules) do not adequately address some issues relevant to securities that, like
the Certificates, may be prepaid. To the extent the OID rules do not address an
issue, CMSI, in calculating OID, will generally apply the methodology described
in the Conference Committee Report to the
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Internal Revenue Code of 1986 Act (the Conference Committee Report). Investors
should realize, however, that the Internal Revenue Service (the IRS) may take a
different position on the issue. Moreover, the OID rules include an anti-abuse
rule that allows the IRS to depart from the OID rules to ensure a reasonable tax
result.
CMSI will calculate the accrued OID and will report the OID to registered
holders and beneficial owners of Certificates as described in "- Reporting
requirements" below.
Calculation of OID
A Certificate will generally be treated as a single debt instrument on which
the principal is payable in installments for purposes of determining the OID
includible in a Certificate holder's income. (There is an exception for retail
class Certificates, discussed below.)
Unless the OID is de minimis (described below), a Certificate holder must
generally include in gross income for a taxable year the sum of the "daily
portions" of accrued OID for each day on which it holds the Certificate during
an accrual period, including the date of purchase but excluding the date of
disposition. CMSI will treat the monthly period ending on the day before each
distribution day as the accrual period.
Determining the daily portions of OID depends on determining (1) the amount
of OID and (2) when principal is payable on the instrument, which together
determine the rate at which OID accrues. As discussed below, principal on the
Certificates is assumed to be paid at the prepayment rate assumed in structuring
the Series.
Amount of OID. The amount of OID on a Certificate is the excess of its
"stated redemption price at maturity" over its "issue price."
The issue price of a Certificates is generally the first price at which a
substantial amount of Certificates of the same class are sold to the public
(excluding bond houses, brokers and underwriters). Although unclear under the
OID rules, CMSI intends to treat the issue price of Certificates of a class for
which there is no substantial sale as of the issue date or that are retained by
CMSI as the fair market value of the Certificate on the issue date.
The issue price of a Certificate also includes any amount the initial
Certificate holder pays for accrued interest for a period prior to the issue
date of the Certificate, unless the holder elects on its federal income tax
return to exclude that amount from the issue price and to recover it on the
first distribution day.
The stated redemption price at maturity of a Certificate always includes its
principal balance at the cut-off date. The stated redemption price at maturity
may also include distributions of interest unless the distributions are of
"qualified stated interest." Under the OID rules, qualified stated interest
generally means interest payable at a single fixed rate or at a "qualified
variable rate" (described below), provided that the interest distributions are
unconditionally distributable at intervals of one year or less during the entire
term of the Certificate. Because there is no penalty or default remedy for
nonpayment of interest on a Certificate, it is possible that no interest on any
class of Certificates will be treated as qualified stated interest. However,
except as provided in the next paragraph, because the underlying mortgage loans
provide for remedies in the event of default, CMSI intends to treat interest on
Certificates as qualified stated interest.
Distributions on the following types of Certificates will not be qualified
stated interest:
o Certificates in an accrual class,
o Certificates for which interest distributions may be deferred and added to
the principal balance, or
o Certificates in an interest-only class or a class on which interest is
substantially disproportionate to its principal amount (a so-called
"super-premium" class)
Accordingly, the stated redemption price at maturity of these Certificates will
include both their initial principal balance and all other distributions on the
Certificates. Also, if the interval between the issue date and the first
distribution day on a Certificate is shorter than the interval between
subsequent distribution days, the interest attributable to the additional days
will be included in the stated redemption price at maturity.
Any deferred interest (as defined in the supplement) that accrues on a class
of Certificates will constitute income to the holders of those Certificates
prior to the receipt of cash distributions of deferred interest. Under the OID
rules, all interest payments on Certificates that may have deferred interest
must be treated as non-qualified stated interest payments and included in the
stated redemp-
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tion price at maturity of the Certificates in computing OID.
Rate of accrual. The OID accruing in a full accrual period on a Certificate
is generally the increase in the present value of the Certificate over the
period, adjusted for distributions that are not qualified stated interest. This
amount would be the excess of
o the sum of (1) the "present value of the remaining distributions" to be made
on the Certificate as of the end of that accrual period and (2) the
distributions made on the Certificate during the accrual period that are
included in the Certificate's stated redemption price at maturity, over
o the "adjusted issue price" of the Certificate at the beginning of the accrual
period. For these purposes, the adjusted issue price of a Certificate at the
beginning of an accrual period is its issue price, increased by the aggregate
amount of OID accrued in all prior accrual periods and reduced by any
distributions included in the Certificate's stated redemption price at maturity
that were made in those prior periods.
Based on the Conference Committee Report, the present value of the remaining
distributions is calculated using the original yield to maturity of the
Certificate as the discount rate and the schedule of payments on the Certificate
at the prepayment rate assumed in structuring the Series (which is stated in the
supplement), adjusted for events, including actual prepayments, that occur
before the end of the accrual period.
The OID accruing during an accrual period is then divided by the number of
days in the period to determine the daily portion of OID for each day in the
period. For an initial accrual period that is shorter than a full accrual
period, the daily portions of OID must be determined according to an appropriate
allocation under any reasonable method.
Under the method described above, the daily portions of OID will generally
increase if prepayments on the mortgage loans exceed the prepayment rate assumed
in structuring the Series, and will generally decrease (but not below zero for
any period) if prepayments on the mortgage loans are slower than the assumed
prepayment rate. However, for some classes of Certificates, an increase or
decrease in prepayments on the mortgage loans can result in a change in the
priority of principal payments for that class that could increase or decrease
the daily portions of OID for those Certificates.
De minimis OID.
OID on a Certificate will be considered to be zero if the OID is less than 0.25%
of the Certificate's stated redemption price at maturity multiplied by the
weighted average maturity of the Certificate. For this purpose, weighted average
maturity is the sum of the amounts determined by multiplying (1) the number of
full years (ie, rounding down partial years) from the issue date until each
scheduled distribution of principal or OID by (2) the ratio of the amount of the
distribution to the total stated redemption price at maturity. The schedule of
distributions should be determined in accordance with the prepayment rate
assumed in structuring the Series.
Certificate holders must generally report de minimis OID pro rata as
distributions of stated redemption price at maturity are received. Such income
will be capital gain if the Certificate is held as a capital asset. However,
Certificates holders may elect to accrue all de minimis OID, as well as market
discount and market premium, under the constant yield method. See "- Election to
treat interest under the constant yield method" below.
OID on retail class Certificates
For Certificates on which principal distributions are made in a single
installment upon the request of a Certificate holder or by random lot (retail
class Certificates), CMSI intends to determine the yield to maturity based on
the anticipated payment characteristics of the class as a whole under the
prepayment rate assumed in structuring the Series. In general, OID accruing on a
retail class Certificate in a full accrual period would be its allocable share
of the OID for the entire class, as determined above. However, if there is a
distribution in reduction of all or part of the principal balance of a retail
class Certificate
o the remaining unaccrued OID allocable to the Certificate (or part) will
accrue at the time of the distribution, and
o the accrual of OID allocable to each remaining Certificate of the
class (or the principal balance of a retail class Certificate after a principal
distribution has been received) will be adjusted by reducing the present value
of the remaining payments on the class and the adjusted issue price of the class
by the principal distributed.
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CMSI believes that this treatment of retail class Certificates is consistent
with the "pro rata prepayment" rules of the OID rules, but with the rate of
accrual of OID determined based on the prepayment rate assumed in structuring
the Series.
Acquisition premium
A purchaser of a Certificate at a price greater than its adjusted issue price
but less than its stated redemption price at maturity will be required to
include in gross income the daily portions of OID on the Certificate, reduced
pro rata by a fraction, the numerator of which is the excess of its purchase
price over the adjusted issue price and the denominator of which is the excess
of the remaining stated redemption price at maturity over the adjusted issue
price. Alternatively, the purchaser may elect to treat the acquisition premium
under the constant yield method, as described in "- Election to treat interest
under the constant yield method" below.
OID on variable rate Certificates
Certificates may provide for interest based on a variable rate (variable rate
Certificates). Under the OID rules, interest is generally treated as payable at
a variable rate if
o the issue price does not exceed the original principal balance by more than a
specified amount and the interest compounds or is payable at
o least annually at current values of (1) one or more "qualified floating
rates," (2) a single fixed rate and one or more qualified floating rates, (3) a
single "objective rate," or (4) a single fixed rate and a single objective rate
that is a "qualified inverse floating rate."
A floating rate is a qualified floating rate if variations in the rate can
reasonably be expected to measure contemporaneous variations in the cost of
newly borrowed funds, where the rate is subject to a multiple that is greater
than 0.65 but not greater than 1.35. The rate may also be increased or decreased
by a fixed spread or subject to a fixed cap or floor, or a cap or floor that is
not reasonably expected as of the issue date to affect the yield of the
instrument significantly.
An objective rate is a rate (other than a qualified floating rate) that is
determined using a single fixed formula and that is based on objective financial
or economic information that is not within the control, or unique to the
circumstances, of the issuer or a related party.
A qualified inverse floating rate is a rate equal to a fixed rate minus a
qualified floating rate that inversely reflects contemporaneous variations in
the cost of newly borrowed funds. (An inverse floating rate that is not a
qualified inverse floating rate may nevertheless be an objective rate.)
OID for a Certificate bearing a variable rate of interest will accrue in the
manner described above under "Original issue discount," with the yield to
maturity and future distributions on the Certificate generally determined by
assuming that interest will be payable for the life of the Certificate based on
its initial rate (or, if different, the value of the applicable variable rate on
the pricing date). CMSI intends to treat variable interest as qualified stated
interest, other than variable interest on an interest-only or super-premium
class, which will be treated as non-qualified stated interest includible in the
stated redemption price at maturity. OID reported for an accrual period will be
adjusted for subsequent changes in the interest rate.
Although unclear under the OID rules, CMSI intends to treat Certificates
bearing an interest rate that is a weighted average of the net interest rates on
mortgage loans having fixed or adjustable rates as having qualified stated
interest. For ARMs, the applicable index used to compute interest on the
mortgage loans in effect on the pricing date (or possibly the issue date) will
be deemed to be in effect beginning with the period in which the first weighted
average adjustment date occurring after the issue date occurs. Adjustments will
be made in each accrual period either increasing or decreasing the amount of OID
reportable to reflect the actual interest rate on the Certificates.
Under the REMIC regulations, a Certificate bearing
o a variable rate under the OID rules that is tied to current values of a
variable rate (or the highest, lowest or average of two or more variable rates,
including a rate based on the average cost of funds of one or more financial
institutions), or a positive or negative multiple of such a rate (plus or minus
a specified number of basis points) or that represents a weighted average of
rates on some or all of the mortgage loans that bear either a fixed rate or a
variable rate, including such a rate that is subject to one or more caps or
floors, or
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o one or more such variable rates for one or more periods, and a different
variable rate or fixed rate for other periods,
qualifies as a regular interest in a REMIC. For OID reporting purposes, CMSI
intends to treat Certificates that qualify as regular interests under this rule
in the same manner as obligations bearing a variable rate.
A class of Certificates may not have a variable rate under the preceding
rules - for example, if the class bears different rates at different times so
that it is considered significantly "front-loaded" or "back-loaded" within the
meaning of the OID rules. Such a class might be considered to bear "contingent
interest" under the OID rules. The OID rules for the treatment of contingent
interest do not by their terms apply to Certificates. However, if final
regulations dealing with contingent interest on Certificates apply the same
principles as the OID rules, the regulations may lead to different timing of
income inclusion than would be the case under the OID rules. Furthermore,
application of such principles could lead to the characterization of gain on the
sale of contingent interest Certificates as ordinary income.
Market discount
A purchaser of a Certificate may also be subject to the "market discount" rules
of sections 1276 through 1278. Under these sections and the principles applied
by the OID rules for OID, market discount is the amount by which the purchaser's
original basis in the Certificate is exceeded (1) by the then-current principal
amount of the Certificate, or (2) for a Certificate having OID, by the adjusted
issue price of the Certificate at the time of purchase.
The purchaser will generally have to recognize ordinary income to the extent
of accrued market discount on the Certificate as distributions includible in the
stated redemption price at maturity are received, in an amount not exceeding the
distribution. Market discount would accrue in a manner to be provided in
Treasury regulations and should take into account the prepayment rate assumed in
structuring the Series. The Conference Committee Report provides that until
regulations are issued, market discount would accrue either (1) on the basis of
a constant interest rate or (2) in the ratio of stated interest allocable to the
relevant period to the sum of the interest for the period plus the remaining
interest as of the end of the period, or in the case of a Certificate issued
with OID, in the ratio of OID accrued for the relevant period to the sum of the
OID accrued for the period plus the remaining OID as of the end of the period.
The purchaser will also generally be required to treat a portion of any gain
on a sale or exchange of the Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the preceding
methods, less any accrued market discount previously reported as ordinary income
as partial distributions in reduction of the stated redemption price at maturity
were received.
The purchaser also will be required to defer deduction of a portion of the
interest expense attributable to any indebtedness incurred or continued to
purchase or carry the Certificate. The deferred portion of the interest expense
would not exceed the accrued market discount on the Certificate for the taxable
year. Such deferred interest expense is, in general, allowed as a deduction not
later than the year in which the related market discount income is recognized or
the Certificate is disposed of.
As an alternative to the inclusion of market discount in income on the
preceding basis, a holder may elect to include market discount in income
currently as it accrues on all market discount instruments acquired by the
holder in that taxable year or later, in which case the interest deferral rule
will not apply. See "- Election to treat interest under the constant yield
method" below regarding an alternative manner in which the election may be made.
By analogy to the OID rules, market discount for a Certificate will be
considered to be zero if the market discount is less than 0.25% of the remaining
stated redemption price at maturity of the Certificate multiplied by the
weighted average maturity of the Certificate (determined as described above
under "- Original issue discount") remaining after the date of purchase. It
appears that de minimis market discount would be reported in a manner similar to
de minimis OID. See "- De minimis OID" above. Treasury regulations implementing
the market discount rules have not yet been issued. Investors should consult
Revenue Procedure 92-67 concerning the elections to include market discount in
income currently and to accrue market discount on the basis of the constant
yield method.
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Premium
A Certificate purchased at a cost greater than its remaining stated redemption
price at maturity generally is considered to be purchased at a premium. If a
holder holds such Certificate as a "capital asset" within the meaning of section
1221, the holder may elect under section 171 to amortize the premium under the
constant yield method. Such election will apply to all debt obligations acquired
at a premium by the holder of a Certificate held in that taxable year or
thereafter, unless revoked with the permission of the IRS. Final Treasury
regulations issued under section 171 do not by their terms apply to prepayable
debt instruments such as the Certificates. However, the Conference Committee
Report indicates a Congressional intent to apply the rules for the accrual of
market discount on installment obligations in amortizing bond premium under
section 171 on installment obligations such as the Certificates. (It is unclear,
however, whether the alternatives to the constant yield method described above
under "--Market discount" are available.) Amortizable bond premium will be
treated as an offset to interest income on a Certificate, rather than a separate
deduction item. See "--Election to treat interest under the constant yield
method" below regarding an alternative manner in which the section 171 election
may be deemed to be made.
Losses
Certificate holders must report income on the Certificates on the accrual method
of accounting, without giving effect to delays or reductions in distributions
attributable to defaults or delinquencies on the mortgage loans, except to the
extent it can be established that the losses are uncollectible. Accordingly, the
holder of a Certificate, particularly a subordinated Certificate, may have
income or may incur a diminution in cash flow as a result of a default or
delinquency, but may not be able to take a deduction (subject to the discussion
below) for the corresponding loss until a subsequent taxable year. In this
regard, investors are cautioned that while they may generally cease to accrue
interest income if it reasonably appears that the interest will be
uncollectible, the IRS may take the position that OID must continue to accrue in
spite of its uncollectibility until the debt instrument is disposed of in a
taxable transaction or becomes worthless in accordance with the rules of section
166.
Under section 166, it appears that
o a Certificate holder that is a corporation or that holds the Certificate in
connection with a trade or business should generally be allowed to deduct as
an ordinary loss, and
o other Certificate holders should generally be allowed to deduct as a short
term capital loss any loss of principal sustained during the taxable year on
account of the Certificate's becoming wholly or partially worthless.
Although the matter is not free from doubt, such non-corporate holders should
be allowed a bad debt deduction at the time a loss is allocated to the
Certificate to reflect losses resulting from any liquidated mortgage loans. The
IRS, however, could take the position that non-corporate holders will be allowed
a bad debt deduction to reflect such losses only after all the mortgage loans
remaining in the Trust have been liquidated or the Certificate has been retired.
The IRS could also assert that losses on the Certificates are deductible on some
other method that may defer such deductions for all holders, such as reducing
future cash flow for purposes of computing OID. This may create "negative" OID,
which would be deductible only against future positive OID or otherwise upon
termination of the Certificate.
While losses attributable to interest previously reported as income should be
deductible as ordinary losses by both corporate and non-corporate holders, the
IRS may take the position that losses attributable to accrued OID may only be
deducted as short-term capital losses by non-corporate holders not engaged in a
trade or business. Special loss rules are applicable to banks and thrift
institutions, including rules regarding reserves for bad debts.
Election to treat interest under the constant yield method
A Certificate holder may elect to treat all interest that accrues on the
instrument using the "constant yield method," with none of the interest being
treated as qualified stated interest. In applying the constant yield method, (1)
"interest" includes stated interest, OID, de minimis OID, market discount and de
minimis market discount, as adjusted by any amortizable bond premium or
acquisition premium and (2) the debt instrument is treated as if the instrument
were issued on the holder's acquisition date in the amount of the holder's
adjusted basis
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immediately after acquisition. It is unclear whether, for this purpose, the
prepayment rate assumed in structuring the Series would continue to apply or if
a new prepayment assumption as of the date of the holder's acquisition would
apply.
A holder generally may make such an election on an instrument by instrument
basis or for a class or group of debt instruments. However, if the holder makes
such an election with respect to a debt instrument with amortizable bond premium
or with market discount, the holder is deemed to have made elections to amortize
bond premium or to report market discount income currently as it accrues under
the constant yield method, respectively, for all premium bonds held or market
discount bonds acquired by the holder in the same taxable year or thereafter.
The election is made on the holder's federal income tax return for the year in
which the debt instrument is acquired and is irrevocable except with the
approval of the IRS.
Sale or exchange of Certificates
If a holder sells or exchanges a Certificate, the holder will recognize gain or
loss equal to any difference between the amount received and the holder's
adjusted basis in the Certificate. The adjusted basis of a Certificate will
generally equal the cost of the Certificate to the seller, increased by any OID
or market discount previously included in the seller's gross income for the
Certificate, and reduced by principal distributions on the Certificate
previously received by the seller, by any amortized premium and by any
deductible losses.
Except as described in "- Market discount," above, and except as provided in
the following paragraph, gain or loss on the sale or exchange of a Certificate
realized by an investor who holds the Certificate as a capital asset (within the
meaning of section 1221) will be capital gain or loss and will be long-term or
short-term depending on whether the Certificate has been held for more than one
year.
Gain on the sale or exchange of a Certificate will be treated as ordinary
income
o if the Certificate is held as part of a "conversion transaction" as defined
in section 1258(c), up to the amount of interest that would have accrued on the
holder's net investment in the conversion transaction at 120% of the appropriate
applicable federal rate under section 1274(d) in effect at the time the holder
entered into the transaction, minus any amount previously treated as ordinary
income with respect to any prior disposition of property that was held as a part
of such transaction,
o for a non-corporate taxpayer, to the extent the taxpayer has made an election
under section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or
o to the extent that the gain does not exceed the excess, if any, of (1) the
amount that would have been includible in the gross income of the holder if its
yield on the Certificate were 110% of the applicable federal rate as of the date
of purchase, over (2) the amount of income actually includible in the gross
income of the holder for the Certificate. In addition, gain or loss recognized
on the sale of a Certificate by certain banks or thrift institutions will be
treated as ordinary income or loss pursuant to section 582(c).
Special types of holders
CMSI anticipates that Certificates held by
o a domestic building and loan association will be a "regular interest in a
REMIC" under section 7701(a)(19)(C)(xi) in the same proportion that the assets
of the REMIC would be treated as "loans . . . secured by an interest in real
property which is . . . residential real property" under section
7701(a)(19)(C)(v) or as other assets described in section 7701(a)(19)(C),
o a real estate investment trust will be "real estate assets" under section
856(c)(4)(A), and interest on the Certificates will be "interest on obligations
secured by mortgages on real property or on interests in real property" under
section 856(c)(3)(B),
in their entirety. Treasury regulations require that information be furnished
annually to beneficial owners of Certificates, and filed annually with the IRS,
concerning the percentage of the REMIC's assets meeting the qualified asset
tests that justify such characterization of these Certificates. This information
is furnished in the same manner as described below under "Reporting
requirements."
If the assets of the REMIC include buydown mortgage loans, the percentage of
those assets constituting "loans . . . secured by an interest in real property"
under section 7701(a)(19)(C)(v) might be reduced by the amount of any related
buydown subsidy accounts.
Certificates held by
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o a regulated investment company will not be "Government securities" under
section 851(b)(3)(A)(i), and
o certain financial institutions will be "evidence of indebtedness" under
section 582(c)(1).
Foreign investors
A non-U.S. person is a person that is not
o a citizen or resident of the United States,
o a corporation, partnership (with exceptions in Treasury regulations) or other
entity created or organized in or under the laws of the United States or a
political subdivision,
o an estate subject to United States federal income tax regardless of the
source of its income, or
o a trust, if a court within the United States is able to exercise primary
supervision over the administration of the trust, and one or more U.S. persons
have the authority to control all substantial decisions of the trust.
Interest, including OID, distributable to Certificate holders who are
non-U.S. persons will be considered "portfolio interest" and, therefore,
generally will not be subject to 30% United States withholding tax if the
non-U.S. person
o is not a "10% shareholder" under section 871(h)(3)(B) or a "controlled
foreign corporation" under section 881(c)(3)(C) and
o provides the Trustee, or the person who would otherwise be required to
withhold tax from distributions under section 1441 or 1442, with an appropriate
certification, signed under penalties of perjury, identifying the beneficial
owner and stating, among other things, that the beneficial owner of the
Certificate is a non-U.S.
person.
If such certification, or any other required certification, is not provided,
30% withholding will apply unless reduced or eliminated pursuant to an
applicable tax treaty or unless the interest is effectively connected with the
conduct of a trade or business within the United States by the non-U.S. person.
In the latter case, the non-U.S. person will be subject to United States federal
income tax at regular rates.
The IRS recently issued final regulations (the "New Regulations") which would
provide alternative methods of satisfying the certification requirement
described above. The New Regulations are effective January 1, 2000, although
valid withholding certificates that are held on December 31, 1999, remain valid
until the earlier of December 31, 2000 or the due date of expiration of the
certificate under the rules as currently in effect. The New Regulations will
require, for Certificates held by a foreign partnership, that (1) the
certification described above be provided by the partners rather than by the
foreign partnership and (2) the partnership provide certain information,
including a United States taxpayer identification number. A look-through rule
would apply in the case of tiered partnerships.
Backup withholding
Distributions made on the Certificates and proceeds from the sale of the
Certificates to or through certain brokers may be subject to a "backup"
withholding tax under section 3406 of 31% of "reportable payments" (including
interest distributions, OID, and, in some circumstances, principal
distributions) unless, in general, the Certificate holder complies with
reporting and/or certification procedures, including the provision of its
taxpayer identification number to the Trustee, its agent or the broker who
effected the sale of the Certificate, or the Certificate holder is otherwise an
exempt recipient under the Internal Revenue Code. Amounts withheld from
distributions on the Certificates would be refunded by the IRS or allowed as a
credit against the holder's federal income tax liability. The New Regulations
change some of the presumptions for information reporting and backup
withholding.
Reporting requirements
Reports of accrued interest, OID and information necessary to compute the
accrual of market discount will be made annually to the IRS and to individuals,
estates, non-exempt and non-charitable trusts, and partnerships who are either
holders of record of Certificates or beneficial owners who own Certificates
through a broker or middleman as nominee. All brokers, nominees and all other
non-tax-exempt holders of record of Certificates (including corporations,
non-calendar year taxpayers, securities or commodities dealers, real estate
investment trusts, investment companies, common trust funds, thrift institutions
and charitable trusts) may request such information for any calendar quarter by
telephone or in writing by contacting the person designated in IRS Publication
938 for a particular Series of Certificates. Holders through nominees must
request such information from the nominee.
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Taxation of the Trust
REMIC qualification
CMSI will elect to treat the Trust or one or more segregated pools of assets of
the Trust as one or more REMICs. References to the "Trust" or the "REMIC" in
this tax discussion will refer to the Trust or those asset pools. The supplement
states whether CMSI will make more than one REMIC election for the Trust's
assets.
Rona Daniels, vice president and tax counsel of Citibank, has advised CMSI
that in her opinion
o the Trust will qualify as one or more REMICs under current law if CMSI makes
the REMIC election(s), all parties comply with the pooling agreement, and the
Trust complies with any changes to the REMIC rules,
o and the Certificates qualify as regular interests in a REMIC.
For the Trust to remain qualified as one or more REMICs, it must continue to
comply with the REMIC rules. These include a requirement that all but a de
minimis portion of the assets of the Trust must be "qualified mortgages" or
"permitted investments," as defined in the REMIC rules.
If the Trust fails to comply with the REMIC rules during a taxable year, the
Trust may cease to be a REMIC and may become taxed as a corporation for that and
subsequent tax years. Certificates would then be treated as equity interests in
the Trust.
Taxes that may be imposed on the REMIC
Prohibited transactions. Income from "prohibited transactions" by the REMIC will
be taxed directly to the REMIC at a 100% rate. Prohibited transactions
generally include
o the disposition of mortgage loans other than for (1) substitution within two
years of the closing date for a defective (including a defaulted) mortgage loan
(or the repurchase in lieu of substitution of a defective (including a
defaulted) mortgage loan at any time), or for any mortgage loan within three
months of the closing date, (2) foreclosure, default, or reasonably foreseeable
default of a mortgage loan, (3) bankruptcy or insolvency of the REMIC, or (4) a
qualified (complete) liquidation,
o the receipt of income from assets that are not the type of mortgage loan or
investments that the REMIC is permitted to hold,
o the receipt of compensation for services, or
o the receipt of gain from disposition of cash flow investments other than
pursuant to a qualified liquidation.
It is not a prohibited transaction, however, to sell REMIC property to
prevent a default on a regular interest as a result of a default on mortgage
loans or to facilitate a clean-up call. The REMIC regulations indicate that a
substantial modification of a mortgage loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the mortgage loan, the waiver of a due-on-sale clause or
due-on-encumbrance clause, or the conversion of an interest rate by a lender
pursuant to a convertible ARM.
Contributions to the REMIC after the closing date. In general, the REMIC will
be subject to tax at a 100% rate on the value of any property contributed to the
REMIC after the closing date. Exceptions are provided for cash contributions to
the REMIC
o during the three months following the closing date,
o made to a qualified reserve fund by a residual interest holder,
o in the nature of a guaranty, and made to facilitate a qualified liquidation
or clean-up call.
Net income from foreclosure property. A REMIC will be subject to federal
income tax at the highest corporate rate on "net income from foreclosure
property," determined by reference to the rules applicable to real estate
investment trusts. Generally, property acquired by deed in lieu of foreclosure
would be treated as "foreclosure property" for a period not exceeding the close
of the third calendar year beginning after the year of acquisition, with a
possible extension. Net income from foreclosure property generally means gain
from the sale of foreclosure property that is inventory property and gross
income from foreclosure property other than qualifying rents and other
qualifying income for a real estate investment trust.
Liquidation of the REMIC. If a REMIC adopts a plan of complete liquidation
under section 860F(a)(4)(A)(i), which may be accomplished by designating in the
REMIC's final tax return a date on which the adoption is deemed to occur, and
sells all of its assets (other than cash) within the 90-day period beginning on
that date, the remic will not be
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subject to the prohibited transaction rules on the sale of its assets, provided
that the REMIC credits or distributes in liquidation all of the sale proceeds
plus its cash (other than amounts retained to meet claims) to Certificate
holders within the 90-day period.
Legal aspects of mortgage loans
Mortgages and deeds of trust
The mortgage loans will be secured by either mortgages or deeds of trust,
depending on the prevailing practice in the state in which the mortgaged
property is located. A mortgage or a deed of trust creates a lien upon the
mortgaged property and represents the security for the repayment of an
obligation that is customarily evidenced by a promissory note or a bond. The
lien created by the mortgage or deed of trust is not prior to a lien for real
estate taxes and assessments and certain other liens. Priority over other
mortgages and deeds of trust depends on their terms and generally on the order
in which the mortgages or deeds of trust are recorded with a state, county or
municipal office.
There are two parties to a mortgage, the mortgagor, who is the
borrower/homeowner or the land trustee (as described below), and the mortgagee,
who is the lender. In keeping with the terminology used elsewhere in this
prospectus, we shall generally refer to the mortgagor as the "homeowner" or
"borrower" and the mortgagee as the "lender." For a land trust, title to the
property is held by a land trustee under a land trust agreement, while the
borrower/homeowner is the beneficiary of the land trust; at origination of a
mortgage loan involving a land trust, the borrower signs a separate undertaking
to the land trustee to make payments on the mortgage note. The security
arrangements for a living trust (also known as a family trust or inter vivos
trust) are similar to those for a land trust, except that the borrower signs the
mortgage note.
Although a deed of trust is similar to a mortgage, a deed of trust formally
has three parties, the trustor (similar to a mortgagor), who is the homeowner
and may or may not be the borrower, the beneficiary (similar to a mortgagee),
who is the lender, and the trustee, a third-party grantee. Under a deed of
trust, the trustor grants the property, irrevocably until the debt is paid, in
trust, generally with a power of sale, to the trustee to secure payment of the
obligation.
The lender's authority under a mortgage and the trustee's authority under a
deed of trust are governed by law, the express provisions of the mortgage or
deed of trust, and, in some cases, the directions of the beneficiary.
Foreclosure
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust that authorizes
the trustee to sell the property upon a default by the borrower under the terms
of the note or deed of trust. In some states, the trustee must record a notice
of default and send a copy to the borrower-trustor and to any person who has
recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. The
trustor, borrower or any person having a junior encumbrance on the real estate
may, during a reinstatement period, cure the default by paying the entire amount
in arrears plus the costs and expenses incurred in enforcing the obligation.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorney's fees, which may be recovered by a lender. If the deed of
trust is not reinstated, a notice of sale must be posted in a public place and,
in most states, published for a specific period of time in one or more
newspapers. In addition, some state laws require that a copy of the notice of
sale be posted on the property or the courthouse door of the county in which the
property is located, recorded and sent to all parties having an interest in the
real property.
An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the lender's rights under the mortgage. It is regulated by statutes
and rules and subject throughout to the court's equitable powers. For example,
in Texas it is necessary to give both notice of intent to accelerate as
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well as notice of acceleration of an installment note, and in New Jersey it is
also necessary to give a notice of intent to foreclose. Generally, a homeowner
is bound by the terms of the mortgage note and the mortgage as made and cannot
be relieved from his or her default. However, since a foreclosure action is
equitable in nature and is addressed to a court of equity, the court may relieve
a homeowner of a default and deny the lender foreclosure on proof that
o the homeowner's default was neither willful nor in bad faith and
o the lender's action established a waiver, or fraud, bad faith, oppressive or
unconscionable conduct that warrants a court of equity to refuse affirmative
relief to the lender. Under certain circumstances a court of equity may relieve
the homeowner from an entirely technical default if the default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Substantial delay and expense may be incurred if the
defaulting homeowner files a petition under the federal bankruptcy laws before
the initiation of a foreclosure action or during its pendency. Moreover, recent
judicial decisions suggest that a non-collusive, regularly conducted foreclosure
sale may be challenged as a fraudulent conveyance, regardless of the parties'
intent, if a court determines that the sale was for less than fair consideration
and such sale occurred while the homeowner was insolvent and within one year (or
within the statute of limitations if the trustee in bankruptcy elects to proceed
under state fraudulent conveyance law) of the filing of bankruptcy. Similarly, a
suit against the debtor on the mortgage note or bond may take several years.
In a foreclosure under either a mortgage or a deed of trust, the sale by the
referee or other designated officer or by the trustee is a public sale. However,
because of the difficulty potential third party purchasers at the sale have in
determining the exact status of title and because the physical condition of the
property may have deteriorated during the foreclosure proceedings, it often
happens that no third party purchases the property at the foreclosure sale.
Rather, it is more common for the lender to purchase the property from the
trustee or referee for an amount equal to the principal amount of the mortgage
or deed of trust plus accrued and unpaid interest and the expenses of
foreclosure. Thereafter, the lender will assume the burdens of ownership,
including obtaining casualty insurance, paying real estate taxes and any special
municipal assessments that have priority over the mortgage and making repairs at
its own expense to make the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the sale of the property. Depending upon market conditions, the
ultimate proceeds of the sale of the property may not equal the lender's
investment in the property. A loss may be reduced by the receipt of any mortgage
insurance proceeds.
CMSI is not required to expend its own funds to foreclose on a defaulted
mortgage loan unless it determines that foreclosure would increase the net
proceeds of liquidation available for distribution to Certificate holders and
that its expenditures will be recoverable. There may be circumstances - for
example, the possibility of incurring liability for environmental damage or a
substantial decline in the value of the underlying property that would cause
CMSI to elect not to foreclose on a defaulted mortgage loan.
Foreclosure of a mortgage is accomplished in New York, New Jersey and Florida
in most cases, and in Illinois in all cases, by an action in foreclosure
culminating in a judicial sale (or, in Illinois, a judicially approved sale) of
the real property by a court-appointed referee, sales agent or other official
following a judgment of foreclosure. A foreclosure action may enable a lender to
realize upon its security and to bar the homeowner, persons with liens
subordinate to the foreclosing lender, and other persons with interests in the
real property from their statutory rights and "equity of redemption."
The doctrine of equity of redemption provides that, until the property
covered by a mortgage has been sold in accordance with a properly conducted
foreclosure and foreclosure sale, those having an equity of redemption may
redeem the property by paying the entire debt with interest and, if a
foreclosure action is pending, all or part of the costs of the action. Those
having a statutory right or equity of redemption must be made parties and duly
summoned to the foreclosure action in order for their statutory right or equity
of redemption to be barred.
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In Connecticut a court in its discretion may order either a foreclosure by
judicial sale or strict foreclosure. Generally, Connecticut courts grant strict
foreclosure unless the United States is a party or the court upon the motion of
a party or upon its own motion determines that the net value of the mortgaged
property is materially in excess of the debt being foreclosed. If a court orders
strict foreclosure, it will establish a "law day" for each defendant in the
foreclosure action. The time between the entry of the judgment of foreclosure
and the first law day will be set by the court as at least 20 days after the
date of the judgment. The first law day will be for the owner of the mortgaged
property, and then, in sequence, there will be a law day for each party having a
lien on, or other interest in, the mortgaged property that is junior to the
foreclosing lender's interest, in inverse order of their priority. Unless a
party assigned a prior law day redeems by paying the debt due the foreclosing
lender in full, each party will have the right on his law day to redeem the
mortgaged property by paying off the foreclosing lender; after redemption, the
redeeming party will own the mortgaged property subject to any other liens or
interests as to which a law day has not passed. If a party fails to redeem on
his law day, his rights in the mortgaged property will be extinguished. If no
party redeems, the foreclosing lender becomes the owner of the mortgaged
property, subject to other liens or interests that are prior to the mortgage
foreclosed or as to which the holders were not parties to the foreclosure
action. If the court orders foreclosure by sale rather than strict foreclosure,
a committee is appointed by the court to sell the mortgaged property at auction.
The proceeds of the sale are then distributed first to pay the costs of the sale
and then to satisfy the debts of the parties in the order of their priority to
the extent the proceeds permit.
Upon commencement of a foreclosure action on a Connecticut mortgage, a
homeowner who is unemployed or under-employed may, in certain circumstances, be
granted a stay of the foreclosure proceedings not to exceed six months, and a
restructuring of the mortgage debt to add unpaid interest and certain other
charges to the outstanding principal amount of the debt. The total amount of the
restructured debt may not exceed the larger of the original mortgage debt or 90%
of the fair market value at the time of restructuring and the restructured
payments must be made over the remaining portion of the original term of the
mortgage.
In California, foreclosure can be judicial or nonjudicial. The primary
distinction between a judicial and a nonjudicial foreclosure is that in a
judicial sale a deficiency judgment may be obtained, while in a non-judicial
foreclosure, no deficiency judgment is allowed. Since California borrowers are
protected by anti-deficiency legislation for most purchase-money deeds of trust,
the lender will, in almost all instances, pursue non-judicial foreclosure. A
second difference between judicial and non-judicial foreclosures is that in the
former, if the lender chooses to maintain its right to a deficiency judgment,
the homeowner may redeem the property by paying the amount bid at the sale plus
statutory fees, costs and interest for a period of three months (if the proceeds
of sale are sufficient to pay the lender in full) or one year (if the sale
proceeds are insufficient to pay the lender in full) after the sale. The
purchaser at the sale, whether it is the lender or a third party, may not demand
possession of the property until expiration of the redemption period, although,
the redeemer will be required to pay reasonable rental value upon redemption.
A lender may accept a deed in lieu of foreclosure instead of pursuing either
judicial or nonjudicial foreclosure. By accepting a deed in lieu of foreclosure,
the lender takes the property back subject to any junior liens, which would be
subordinated or released of record.(1)
In California, a borrower has until 5 days before a trustee sale to reinstate
the loan. California law can delay foreclosure and collection of late charges if
a lender participates in the sale of credit disability
- ----------------------
(1) Even a transfer at a nonjudicial foreclosure sale has been held by one
federal court of appeals to constitute a fraudulent conveyance. The United
States Court of Appeals for the Ninth Circuit (in which California is located),
however, has held to the contrary. Amendments to the federal bankruptcy laws
addressed this conflict, at least in the bankruptcy context (as opposed to a
state court fraudulent conveyance claim), but not with complete clarity. It is
probable that a court would interpret these amendments to permit challenging a
nonjudicial foreclosure sale as a fraudulent conveyance if the property is worth
significantly more than the amount paid at the sale.
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insurance in connection with one of its loans and the borrower suffers a
disability.(2)
In Illinois, a borrower in a mortgage foreclosure suit is granted the right
to reinstate a mortgage within 90 days after the date the court obtains
jurisdiction over all homeowners for the mortgaged property. If this right is
exercised, the delinquent borrower need only pay the actual delinquency costs
and reasonable attorney fees, but not any amount due as a result of an
acceleration provision in the mortgage note. As a result, the borrower may
unilaterally reinstate the mortgage loan and terminate the foreclosure
proceedings. In addition, when the lender bids less than the total debt at the
judicial sale, Illinois law provides the borrower with a special 30-day right of
redemption after the approval of the judicial sale in the foreclosure of a
single-family residence. Upon exercise of such right, the borrower need only
redeem by paying the amount of the sale price, plus interest and costs, and not
the deficiency. Many Illinois mortgages, however, give the homeowners greater
contractual rights to reinstate a mortgage than are granted under Illinois
statutes.
Cooperatives
All cooperative apartments relating to cooperative apartment loans are located
in New York, New Jersey, Illinois, Maryland and the District of Columbia. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling units
and all common areas. The cooperative is responsible for project management and,
in most cases, payment of real estate taxes and hazard and liability insurance.
If there is a blanket mortgage on the cooperative apartment building and/or
underlying land, as is generally the case, the cooperative must meet the
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the cooperative's
apartment building.
The cooperative is owned by tenant-stockholders who, through ownership of
stock, shares or membership certificates in the corporation, receive proprietary
leases or occupancy agreements (cooperative apartment leases) that confer
exclusive rights to occupy specific units. Generally, a tenant-stockholder of a
cooperative must make a monthly payment to the cooperative representing the
tenant-stockholder's share of the cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses.
The interest of the occupant under a proprietary leases or occupancy
agreement is generally subordinate to the interest of the holder of the blanket
mortgage; that is, if the cooperative defaults under the blanket mortgage, the
lender holding the blanket mortgage could foreclose and terminate the
cooperative apartment lease.
A blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize, with a significant portion of principal
being due in one lump sum at final maturity. If the cooperative can not
refinance this mortgage or make the final payment, the lender could foreclose.
A foreclosure by the holder of the blanket mortgage could eliminate or
significantly diminish the value of the collateral securing a cooperative
apartment loan.
A cooperative apartment loan is evidenced by a promissory note and secured by
a security interest in the cooperative apartment lease and the related
cooperative shares. The lender takes possession of the share certificate and a
counterpart of the cooperative apartment and, if allowed under state law, a
financing statement covering the cooperative apartment lease and the cooperative
shares is filed in the appropriate state and local offices to perfect the
lender's interest in its collateral. Subject to the limitations discussed below,
upon the tenant-stockholder's default, the lender may sue for judgment on the
promissory note, dispose of the collateral at a public or private sale or
otherwise proceed against the collateral or tenant-stockholder as an individual
as provided in the security agreement covering the assignment of the cooperative
apartment lease and the pledge of cooperative shares.
The cooperative shares owned by the tenant-stockholder and pledged to the
lender are, in almost all cases, subject to restrictions on transfer, and may be
cancelled by the cooperative if the tenant-
- -------------------
(2) Citibank Service Corporation, a subsidiary of Citi FSB doing business as
Citibank Insurance Agency, sells such insurance in connection with mortgage
loans originated by Citi FSB.
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stockholder fails to pay rent or other charges owed by the tenant-stockholder,
including mechanics' liens against the cooperative apartment building incurred
by the tenant-stockholder. The cooperative can usually terminate the cooperative
apartment lease if the tenant-stockholder fails to make payments or defaults in
the performance of obligations under the lease.
Typically, the lender and the cooperative enter into a recognition agreement
that establishes the rights and obligations of both parties in the event of a
default by the tenant-stockholder under the cooperative apartment lease. A
default by the tenant-stockholder under the lease will usually constitute a
default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that if the tenant-stockholder
defaults under the cooperative apartment lease, the cooperative will take no
action to terminate the lease until the lender has had an opportunity to cure
the default. The recognition agreement typically provides that if the
cooperative apartment lease is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under the cooperative
apartment lease. The total amount owed to the cooperative by the
tenant-stockholder, which the lender generally cannot restrict and does not
monitor, could reduce the value of the collateral below the principal balance of
the cooperative apartment loan and accrued interest.
Recognition agreements also provide that if the cooperative loan is
foreclosed, the lender must obtain the cooperative's consent before transferring
the cooperative shares or assigning the cooperative apartment lease. Generally,
the lender is not limited in any rights it may have to dispossess the
tenant-stockholders.
In New York and New Jersey, foreclosure on the cooperative shares is
accomplished by a sale in accordance with the provisions of Article 9 of the
Uniform Commercial Code (the UCC) and the security agreement relating to those
shares. Article 9 of the UCC requires that a sale be conducted in a
"commercially reasonable" manner. Whether a foreclosure sale has been conducted
in a "commercially reasonable" manner will depend on the facts in each case. In
determining commercial reasonableness, a court will look to the notice given the
debtor and the method, manner, time, place and terms of the foreclosure.
Generally, a sale conducted according to the usual practice of banks selling
similar collateral will be considered reasonably conducted. Article 9 of the UCC
provides that the proceeds of the sale will be applied first to pay the costs
and expenses of the sale and then to satisfy the indebtedness secured by the
lender's security interest. The recognition agreement, however, generally
provides that the lender's right to reimbursement is subject to the right of the
cooperative to receive sums due under the proprietary lease or occupancy
agreement. If there are proceeds remaining, the lender must account to the
tenant-stockholder for the surplus. Conversely, if a portion of the indebtedness
remains unpaid, the tenant-stockholder is generally responsible for the
deficiency. See "Anti-deficiency laws and other limitations on lenders" below.
Rights of redemption
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or homeowner and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a nonstatutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The right of
redemption would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust or
after a foreclosure action.
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Anti-deficiency laws and other limitations on lenders
In some states, statutes limit the right of a lender to obtain a deficiency
judgment against the borrower following foreclosure or sale under a deed of
trust. A deficiency judgment is a personal judgment against the former borrower
equal in most cases to the difference between the net amount realized upon the
public sale of the real property and the amount due to the lender. Other
statutes require the beneficiary or lender to exhaust the security afforded
under a deed of trust or mortgage by foreclosure in an attempt to satisfy the
full debt before bringing a personal action against the borrower. Finally, other
statutory provisions limit any deficiency judgment against the former borrower
following a judicial sale to the excess of the outstanding debt over the fair
market value of the property at the time of the public sale. The purpose of
these statutes is generally to prevent a beneficiary or a lender from obtaining
a large deficiency judgment against the former borrower as a result of low or no
bids at the judicial sale.
Although CMSI may elect to pursue deficiency judgments on a mortgage loan,
CMSI does not have to do so, even if permitted by applicable law.
New York. Section 1371 of the New York Real Property Actions and Proceedings
Law provides that no award of a deficiency judgment can be made unless the court
has personal jurisdiction over the defendant. Moreover, any motion for a
deficiency judgment must be made within 90 days of the consummation of the sale
by the delivery of the deed to the purchaser. Section 1301 of the same law
limits the lender's right to bring separate actions for the mortgage debt and
for foreclosure. While the foreclosure action is pending, or after final
judgment for the plaintiff in the action, no other action may be commenced or
maintained to recover any part of the mortgage debt without leave of the court
in which the foreclosure action was brought. A deficiency judgment is limited to
the judgment amount in the foreclosure action, minus the higher of (1) the fair
and reasonable market value of the mortgaged property at the date of the
foreclosure sale or the nearest earlier date as of which the court determines a
market value or (2) the sale price of the property at the foreclosure sale.
Section 254-b of the New York Real Property Law also limits lenders' ability
to collect late payment charges. If the mortgage permits the lender to collect a
late payment charge on an installment that has become due and remains unpaid,
the charge cannot be more than 2% of the delinquent installment and cannot be
imposed on any installment paid within 15 days of the due date. In addition,
late payment charges cannot be deducted from the regular installment payments;
they must be separately charged and collected by the lender. Section 254-b also
applies to a note evidencing a cooperative loan.
In New York a lender can foreclose a mortgage on a residential leasehold
property by maintaining a traditional equitable foreclosure action. Any rent or
taxes paid by the lender following default by the leaseholder may be added to
the unpaid balance of the mortgage debt upon foreclosure. A judgment of
foreclosure of a leasehold, however, results in a public auction only if the
mortgage expressly so provides, whereas judgment of foreclosure on a real
property mortgage would result in a public auction in all cases. In the absence
of an express provision, in a leasehold mortgage, the lender can only recover a
money judgment. In this event, the lender may follow traditional enforcement
procedures. In addition to enforcement of judgment remedies, the leasehold
interest may then be subject to a post-judgment sale pursuant to an execution.
New Jersey. Under New Jersey law, an action for deficiency judgment must be
commenced within three months from the date of the foreclosure sale of a
mortgaged premises. In a deficiency action, judgment will be rendered only for
the balance due on the debt and interest and costs of the action. The obligor
under the note may file an answer in the action for deficiency, disputing the
amount of the deficiency sued for. The court will determine the amount of the
deficiency by deducting from the debt the amount determined as the fair market
value of the premises.
In New Jersey, the commencement of a deficiency action reopens the
homeowner's right of redemption for a period of six months after the entry of
any deficiency judgment, which could have an adverse effect on the ability to
transfer good title to the mortgaged premises during this period.
Connecticut. If the lender took title to the mortgaged property under strict
foreclosure but the property's value was less than the debt, Connecticut
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law permits the lender to move for a deficiency judgment in the amount of the
difference within 30 days after the redemption period expires. If there was a
foreclosure sale and the sale proceeds were insufficient to discharge the
mortgage debt in full, the lender may obtain a deficiency judgment for the
difference. If, however, the sales price is less than the value of the mortgaged
property as found by the court, one half of the difference between such value
and the sales price must be credited against the deficiency claim of the person
who sought foreclosure by sale. To avoid this outcome, lenders do not generally
seek foreclosure sales.
California. Under California's "one-action rule," a lender must include all
claims in one action and must foreclose its security before seeking to impose
any personal liability. The anti-deficiency rules limit the recovery of personal
judgments. If a foreclosure is conducted by way of a nonjudicial foreclosure
sale, California law prohibits the recovery of a deficiency judgment. In
addition, a deficiency judgment is prohibited even if judicial foreclosure is
pursued when a lender finances the purchase price of residential real property
and the property has four or fewer units and is occupied by the purchaser.
Because most mortgage loans fall into this category, the Issuer intends to
pursue nonjudicial foreclosure. While it is possible to sue the borrower for any
fraud or damage to the mortgaged property, it generally is not practical to do
so.
Texas. In Texas most foreclosures are non-judicial. However, the lender must
give both notice of intent to accelerate as well as notice of acceleration of
the installment note unless proper waiver language is included in the note. If
the real property is the debtor's residence, the debtor must be given at least
20 days to cure the default before the entire debt is due and notice of sale is
given. A suit for a deficiency judgment must be brought within two years after
foreclosure. During the pendency of the suit, the debtor can request the court
to determine the fair market value of the property foreclosed upon. If the court
determines that the fair market value of the property is greater than the bid
price paid at foreclosure, the debtor is entitled to an offset against the
deficiency claim in the amount by which the fair market value exceeds the bid
price.
Illinois. In Illinois, if the price at the foreclosure sale is less than the
total amount held due in the judgment of foreclosure plus statutory interest,
certain advances and costs incurred at the time of judicial sale, the lender may
obtain a deficiency judgment against the homeowner provided that there is
personal jurisdiction over the homeowner.
Florida. Under Florida law, if the fair market value of the mortgaged
property at the time of the foreclosure sale is less than the debt of the final
judgment, the lender may seek a deficiency judgment, either as part of the
foreclosure action or in a separate action on the note. The decision whether to
grant a deficiency judgment sought as part of the foreclosure action lies within
the sound judicial discretion of the court but is subject to any equitable
defenses by the borrower. No award of a deficiency judgment can be made, either
as part of or separately from the foreclosure action, unless the court has
personal jurisdiction over the defendant. A request for a deficiency judgment is
subject to dismissal for lack of prosecution if the deficiency relief is not
sought within one year from the foreclosure sale date.
All mortgage loans. In addition to anti-deficiency and related legislation,
numerous other federal and state statutory provisions, including the United
States Bankruptcy Code (the Bankruptcy Code), and state laws affording relief to
debtors may interfere with or affect the ability of a secured mortgage lender to
obtain payment of a mortgage loan, to realize upon collateral and/or enforce a
deficiency judgment. For example, under the Bankruptcy Code, virtually all
actions (including foreclosure actions and deficiency judgment proceedings) are
automatically stayed upon the filing of a bankruptcy petition, and, usually, no
interest or principal payments are made during the course of the bankruptcy
case. Foreclosure of an interest in real property of a debtor in a case under
the Bankruptcy Code can typically occur only if the bankruptcy court vacates the
stay, an action the court may be reluctant to take, particularly if the debtor
has the prospect of restructuring his or her debts and the mortgage collateral
is not deteriorating in value. The delay and its consequences caused by the
automatic stay can be significant. Also, under the Bankruptcy Code, the filing
of a petition in bankruptcy by or on behalf of a junior lienor (a subordinate
lender secured by a mortgage on the property) may stay a senior lender from
taking action to foreclose.
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A homeowner may file for relief under any of three different chapters of the
Bankruptcy Code. Under Chapter 7, the assets of the debtor are liquidated and a
lender secured by a lien may "bid in" (ie, bid up to the amount of the debt) at
the sale of the asset. A homeowner may also file for relief under Chapter 11 of
the Bankruptcy Code and reorganize his or her debts through his or her
reorganization plan. Alternatively, a homeowner may file for relief under
Chapter 13 of the Bankruptcy Code and address his or her debts in a
rehabilitation plan. (Chapter 13 is often referred to as the "wage earner
chapter" or "consumer chapter" because most individuals seeking to restructure
their debts file for relief under Chapter 13 rather than Chapter 11).
The Bankruptcy Code permits a mortgage loan that is secured by property that
does not consist solely of the debtor's principal residence to be modified
without the consent of the lender provided certain substantive and procedural
safeguards are met. The lender's security interest may be reduced to the
then-current value of the property as determined by the court if the value is
less than the amount due on the loan, thereby leaving the lender as a general
unsecured creditor for the difference between the value of the collateral and
the outstanding balance of the mortgage loan. A borrower's unsecured
indebtedness will typically be discharged in full upon payment of a
substantially reduced amount. Other modifications to a mortgage loan may include
a reduction in the amount of each scheduled payment, which reduction may result
from a reduction in the rate of interest, an alteration of the repayment
schedule, an extension of the final maturity date, and/or a reduction in the
outstanding balance of the secured portion of the loan. In some circumstances,
subject to the court's approval, a debtor in a case under Chapter 11 of the
Bankruptcy Code may have the power to grant liens senior to the lien of a
mortgage.
A reorganization plan under Chapter 11 and a rehabilitation plan under
Chapter 13 of the Bankruptcy Code may each allow a debtor to cure a default with
respect to a mortgage loan on the debtor's residence by paying arrearages over
time and to deaccelerate and reinstate the original mortgage loan payment
schedule, even though the lender accelerated the loan and a final judgment of
foreclosure had been entered in state court (provided no sale of the property
had yet occurred) prior to the filing of the debtor's petition under the
Bankruptcy Code. Under a Chapter 13 plan, curing of defaults must be
accomplished within the five year maximum term permitted for repayment plans,
such term commencing when repayment plan becomes effective, while defaults may
be cured over a longer period under a Chapter 11 plan of reorganization.
Generally, a repayment plan in a case under Chapter 13 and a plan of
reorganization under Chapter 11 may not modify the claim of a mortgage lender if
the borrower elects to retain the property, the property is the borrower's
principal residence and the property is the lender's only collateral. Certain
courts have allowed modifications when the mortgage loan is secured both by the
debtor's principal residence and by collateral that is not "inextricably bound"
to the real property, such as appliances, machinery, or furniture.
The general protection for mortgages secured only by the debtor's principal
residence is not applicable in a case under Chapter 13 if the last payment on
the original payment schedule is due before the final date for payment under the
debtor's Chapter 13 plan (which date could be up to five years after the debtor
emerges from bankruptcy). Under several recently decided cases, the terms of
such a loan can be modified in the manner described above. While these decisions
are contrary to the holding in a prior case by a senior appellate court, it is
possible that the later decisions will become the accepted interpretation in
view of the language of the statute. If this interpretation is adopted by a
court considering the treatment in a Chapter 13 repayment plan of a mortgage
loan, it is possible that the mortgage loan could be modified.
State statutes and general principles of equity may also provide a homeowner
with means to halt a foreclosure proceeding or sale and to force a restructuring
of a mortgage loan on terms a lender would not otherwise accept.
If a court relieves a borrower's obligation to repay amounts otherwise due on
a mortgage loan, the servicer will not be required to advance those amounts, and
any loss will be borne by the Certificate holders.
In a bankruptcy or similar proceeding of a homeowner, action may be taken
seeking the recovery, as a preferential transfer or on other grounds, of any
payments made by the homeowner under the mortgage loan before the proceeding.
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Payments on long-term debt may be protected from recovery as preferences if they
are payments in the ordinary course of business made on debts incurred in the
ordinary course of business or if the value of the collateral exceeds the debt
at the time of payment. Whether any particular payment would be protected
depends upon the facts specific to a particular transaction.
A trustee in bankruptcy may sometimes be entitled to collect its costs and
expenses in preserving or selling the mortgaged property ahead of a payment to
the lender. Moreover, the laws of certain states also give priority to certain
tax and mechanics liens over the lien of a mortgage. Under the Bankruptcy Code,
if the court finds that actions of the lender have been unreasonable and
inequitable, the mortgage may be subordinated to the claims of unsecured
creditors.
Bankruptcy reform legislation passed by the Senate in September 1998 would
have amended the Bankruptcy Code to authorize bankruptcy court judges to
disallow claims based on secured debt if the creditor failed to comply with
certain provisions of the federal Truth in Lending Act. As proposed, the
provision would apply retroactively to secured debt incurred by a debtor prior
to the date of effectiveness of the legislation, including the mortgage loans.
The House bill and the conference report did not have a similar provision, and
Congress adjourned from its last session without acting on the proposed
legislation. However, such legislation may be introduced in the current session.
If the proposed amendment to the Bankruptcy Code were to become law, a violation
of the Truth in Lending Act in the origination of a mortgage loan could result
in a total loss on the loan in a bankruptcy proceeding. Such a violation would,
however, breach a representation and warranty of CMSI, which would require CMSI
to repurchase the mortgage loan.
Various proposals to amend the Bankruptcy Code in ways that could adversely
affect the value of the mortgage loans in a trust have been considered by
Congress, and more such proposed legislation may be considered in the future. No
assurance can be given that any particular proposal will or will not be enacted
into law or that any provision so enacted will not differ materially from the
proposal described above.
The Internal Revenue Code gives priority to some tax liens over the mortgage
or deed of trust. The laws of some states give priority to certain tax liens
over the lien of the mortgage or deed of trust. Numerous federal and some state
consumer protection laws impose substantive requirements upon mortgage lenders
in the origination, servicing, and enforcement of mortgage loans. These laws
include the federal Truth in Lending Act, Real Estate Settlement Procedures Act,
Equal Credit Opportunity Act, Fair Credit Billing Act, Fair Debt Collection
Practices Act, Fair Credit Reporting Act, and related statutes and regulations.
These federal laws and state laws impose specific statutory liabilities upon
lenders who originate or service mortgage loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
mortgage loans.
Due-on-sale clauses
For Trusts containing only fixed rate mortgage loans, at least 90% of the
scheduled principal balance of the loans on the cut-off date will contain
due-on-sale clauses. Generally, ARMs in a Trust will contain due-on-sale clauses
permitting the lender to accelerate only in situations where its security may be
impaired. These clauses permit the lender to accelerate the maturity of the loan
if the borrower sells, transfers or conveys the property or, for a land trust,
the beneficial interest.
The Garn-St Germain Depository Institutions Act of 1982 (the Garn-St Germain
Act) preempts state law that prohibits the enforcement of due-on-sale clauses.
Exempted from this preemption are some mortgage loans that were originated
o before October 15, 1982,
o for mortgaged properties in Minnesota, Michigan, New Mexico and Utah,
o by a lender that was not a federal savings and loan associations or a federal
savings bank.
However, the Garn-St Germain Act also provides for nine specific instances in
which a mortgage lender can notexercise a due-on-sale clause on a transfer of
the property. If a lender can not enforce a due-on-sale clause where the
mortgage loan has an interest rate below the current market rate, the loan will
be assumed by a new home buyer rather than being paid off. This may affect the
average life of the mortgage loans underlying a Series and the
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number of mortgage loans that may be outstanding until maturity.
Other limitations on foreclosure
Upon foreclosure, courts have imposed general equitable principles. The
equitable principles are generally designed to relieve the borrower from the
legal effect of his defaults under the loan documents. For example, courts have
o required lenders to take affirmative and expensive actions to determine the
causes for the borrower's default and the likelihood that the borrower will be
able to reinstate the loan,
o required lenders to reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability,
and
o limited the lender's right to foreclose if the default is not monetary, such
as the borrower's failure to adequately maintain the property or the borrower's
execution of a second mortgage or deed of trust affecting the property.
Courts have also been faced with the question whether federal or state
constitutional provisions reflecting due process concerns for adequate notice
require that homeowners receive notices in addition to the statutorily
prescribed minimums. For the most part, these cases have upheld the notice
provisions as being reasonable or have found that the sale by a trustee under a
deed of trust, or under a mortgage having a power of sale, does not involve
sufficient state action to afford constitutional protections to the borrower.
Applicability of usury laws
Title V of the Depository Institutions Deregulation and Monetary Control Act of
1980 (Title V), provides that state usury limitations will not apply to certain
types of residential first mortgage loans originated by certain lenders after
March 31, 1980. A similar federal statute was in effect for mortgage loans made
during the first three months of 1980. Title V authorized the states to reimpose
interest rate limits by adopting, before April 1, 1983, a law or constitutional
provision that expressly rejects an application of the federal law. In addition,
even where Title V is not so rejected, a state can limit discount points or
other charges on mortgage loans covered by Title V. Some states have reimposed
interest rate limits and/or limited discount points or other charges.
CMSI will warrant to the Trustee on the closing date that each mortgage loan
was originated in compliance in all material respects with applicable state law,
including usury laws.
Environmental considerations
Mortgaged properties will be subject to federal, state, and local environmental
protection laws. These laws may regulate
o emissions of air pollutants,
o discharges of wastewater or storm water,
o generation, transport, storage or disposal of hazardous waste or hazardous
substances,
o operation, closure and removal of underground storage tanks,
o removal and disposal of asbestos-containing materials
o management of electrical or other equipment containing polychlorinated
biphenyls (popularly known as "PCBs").
Failure to comply with these laws can result in significant penalties, including
civil and criminal fines. Under the laws of certain states, environmental
contamination on a property may give rise to a lien on the
property to ensure the availability and/or reimbursement of cleanup costs.
Generally, all subsequent liens on the property are subordinated to such a lien
and, in some states, even prior recorded liens are subordinated to such liens
(superliens). The Trustee's security interest in a property subject to a
superlien could be adversely affected.
Under the federal Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA), a secured party that takes a deed in lieu of
foreclosure, purchases a mortgaged property at a foreclosure sale, operates a
mortgaged property or undertakes certain types of activities that may constitute
"management" of the property may become liable in some circumstances for cleanup
costs if hazardous wastes or hazardous substances have been released or disposed
of on the property. Cleanup costs may be substantial and could exceed the value
of the property and the aggregate assets of the owner or operator. CERCLA
imposes strict, as well as joint and several, liability for environmental
remediation and/or damage costs on several classes of "potentially responsible
parties," including current "owners and/or operators" of property, regardless
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of whether those owners or operators caused or contributed to contamination on
the property. In addition, owners and operators of properties that generate
hazardous substances that are disposed of at other off-site locations may be
held strictly, jointly and severally liable for environmental remediation and/or
damages at the off-site locations. Many states also have laws that are similar
to CERCLA. Liability under CERCLA or under similar state law could exceed the
value of the property itself as well as the aggregate assets of the property
owner.
The law is unclear as to whether and under what precise circumstances cleanup
costs, or the obligation to take remedial actions, could be imposed on a secured
lender such as the Trust. Under the laws of some states and under CERCLA, a
lender may be liable as an owner or operator for costs of addressing releases or
threatened releases of hazardous substances on a mortgaged property if the
lender or its agents or employees have "participated in the management" of the
operations of the borrower, even though the environmental damage or threat was
caused by a prior owner or current owner or operator or other third party.
Excluded from CERCLA's definition of "owner or operator," is a person "who
without participating in the management of . . . [the] facility, holds indicia
of ownership primarily to protect his security interest" (the secured creditor
exemption). This exemption for holders of a security interest such as a secured
lender applies only to the extent that the lender seeks to protect its security
interest in the contaminated facility or property. Thus, if a lender's
activities begin to encroach on the actual management of the facility or
property, the lender faces potential liability as an "owner or operator" under
CERCLA. Similarly, when a lender forecloses and takes title to a contaminated
facility or property, the lender may incur potential CERCLA liability if, for
example, it holds the facility or property as an investment (including leasing
the facility or property to a third party), fails to market the property in a
timely fashion or fails to properly address environmental conditions at the
property or facility.
The Resource Conservation and Recovery Act (RCRA), contains a similar secured
creditor exemption for lenders who hold a security interest in petroleum
underground storage tanks (USTs) or in real estate containing a UST, or that
acquire title to a UST or facility or property on which such a UST is located.
As under CERCLA, a lender may lose its secured creditor exemption and be held
liable under RCRA as a UST owner or operator if such lender or its employees or
agents participate in the management of the UST. And, if the lender takes title
to or possession the UST or the real estate containing the UST, under certain
circumstances the secured creditor exemption may be unavailable.
Court decisions have taken varying views of the scope of the secured creditor
exemption, leading to administrative and legislative efforts to provide guidance
to lenders on the scope of activities that would trigger CERCLA and/or RCRA
liability. Until recently, these efforts have failed to provide substantial
guidance.
On September 30, 1996, however, the President signed into law legislation
intended to clarify the scope of the secured creditor exemption under both
CERCLA and RCRA. This legislation more explicitly defined the kinds of
"participation in management" that would trigger liability under CERCLA and
specified certain activities that would not constitute "participation in
management" or otherwise result in a loss of the secured creditor exemption
before foreclosure or during a workout period. The legislation also clarifies
the extent of protection against foreclosure liability under CERCLA. The
legislation also authorizes regulatory clarifications of the scope of the
secured creditor exemption for purposes of RCRA, similar to the statutory
protections under CERCLA. However, since the courts have not yet had the
opportunity to interpret the new statutory provisions, the scope of the
additional protections offered by the new law is not fully defined. It also is
important to note that the new legislation does not offer complete protection to
lenders and that risk of liability remains.
If a secured lender does become liable, it may be entitled to bring an action
for contribution against the owner or operator who created the environmental
contamination or against some other liable party, but that person or entity may
be bankrupt or otherwise judgment-proof. It is therefore possible that cleanup
or other environmental liability costs could become a liability of the Trust and
occasion a loss to the Trust and to Certificate holders in certain
circumstances. The new secured creditor amendments to CERCLA also affect the
potential for
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liability in actions by either a state or a private party under other federal or
state laws which may impose liability on "owners or operators" but do not
incorporate the secured creditor exemption.
Traditionally, residential mortgage lenders have not taken steps to evaluate
whether hazardous wastes or hazardous substances are present on a mortgaged
property prior to origination of the mortgage loan or prior to foreclosure or
accepting a deed in lieu of foreclosure. Neither CMSI nor any originator has
made such evaluations prior to the origination of the mortgage loans, and CMSI
does not require that originators who sell mortgage loans to it make such
evaluations. CMSI is not required to undertake any such evaluations prior to
foreclosure or accepting a deed in lieu of foreclosure. CMSI does not make any
representations or warranties or assume any liability with respect to: the
environmental condition of any mortgaged property; the absence or presence of
hazardous wastes or hazardous substances on a mortgaged property; any casualty
resulting from the presence or effect of hazardous wastes or hazardous
substances on, near or emanating from such property; or the impact of any
environmental condition or the presence of any substance on or near the property
on the performance of the mortgage loans or the compliance of a mortgaged
property with any environmental laws, nor is any agent, person or entity
otherwise affiliated with CMSI authorized or able to make any such
representation, warranty or assumption of liability relating to a mortgaged
property.
Use of proceeds
CMSI intends to use net proceeds from the sale of the Certificates to originate
or purchase new residential mortgage loans and for other general corporate
purposes. These other purposes may include repayment of indebtedness to
Citicorp, its affiliates or unaffiliated parties.
Certificates will be sold in Series from time to time. The timing and amount
of the sales will depend upon many factors, including the volume of mortgage
loans CMSI acquires, prevailing interest rates, availability of funds and
general market conditions.
Plan of distribution
CMSI may offer and sell the Certificates either through agents or through
underwriters. CMSI normally sells Certificates through underwriters. An
underwriter or agent that offers the Certificates may be an affiliate of CMSI,
and offers and sales of Certificates may include secondary market transactions
by CMSI affiliates. Affiliates may act as principal or agent in these
transactions. Sales will be at prices related to prevailing market prices at the
time of sale.
The supplement sets forth the terms of the offering, including the names of
any underwriters or agents, the managing underwriters of any underwriting
syndicate, the net proceeds to CMSI from the sale, and any securities exchange
on which the Certificates will be listed. CMSI does not normally list
Certificates on any securities exchange. Dealer trading may take place in the
Certificates, including Certificates not listed on a securities exchange.
If an underwriter is used in the sale of the Certificates, each underwriter
will acquire Certificates for its own account, and its Certificates may be
resold from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices determined
at the time of sale.
The underwriters will be obligated to buy all Certificates if any are bought.
CMSI and Citicorp may agree to indemnify underwriters, agents and their
controlling persons against certain civil liabilities, including liabilities
under the Securities Act of 1933, in connection with their participation in the
distribution of Certificates.
CMSI anticipates that Certificates will be sold primarily to institutional
investors. A purchaser of Certificates, including a dealer, may be deemed to be
an "underwriter" of those securities under the Securities Act of 1933 in making
re-offers and sales by it of Certificates. Certificate holders should con-
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sult their legal advisers as to the consequences of being deemed an
"underwriter."
Underwriters and agents participating in the distribution of the
Certificates, and their affiliates, may engage in transactions with and perform
services for Citicorp or its affiliates in the ordinary course of business.
Additional information
SEC filings
The following documents are incorporated by reference into this prospectus:
o All documents subsequently filed by CMSI on behalf of the Trust with the
Securities and Exchange Commission (the SEC) pursuant to section 13(a), 13(c),
14 or 15(d) of the Securities Exchange Act of 1934 before the termination of the
offering of the Certificates.
o If Citicorp issues a guaranty as part of the credit enhancement for the
Series offered by this prospectus, Citicorp's most recent Annual Report on Form
10-K and any subsequent reports on Form 8-K or Form 10-Q filed with the SEC by
Citicorp, and all reports filed by Citicorp pursuant to sections 13(a), 13(c),
14 and 15(d) of the Securities Exchange Act before the termination of the
offering of the Certificates.
CMSI will provide without charge to any person, including a beneficial owner
of Certificates, to whom a copy of this prospectus is delivered, a copy of any
document incorporated by reference in this prospectus (without exhibits, except
for exhibits incorporated by reference in the document).
Written or telephone requests for documents should be made
o for documents filed by CMSI, to Citicorp Mortgage Securities, Inc., 909 Third
Avenue, New York, New York 10043, telephone (212) 559-6727, and
o for documents filed by Citicorp, to Citicorp, 399 Park Avenue, New York, NY
10043, Attention: Investor Relations Department, telephone (212) 559-2718.
You may read and copy any materials CMSI or Citicorp file with the SEC at the
SEC's public reference room at 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the public reference room by
calling the sec at 1-800-SEC-0330.
The SEC also maintains an Internet site at http://www.sec.gov that contains,
reports, proxy and information statements, and other information regarding
issuers that file electronically with the SEC, including CMSI and Citicorp.
Our delivery of this prospectus or any document incorporated by reference at
any time does not imply that information in those documents is correct at any
time after their dates.
Mortgage loan information
You may subscribe for detailed mortgage loan information in machine readable
format updated monthly for each outstanding Series of Certificates. This
information reflects payments made on the individual mortgage loans, including
full and partial prepayments and liquidation proceeds, and identifies various
characteristics of the mortgage loans. Contact Citicorp Mortgage, Inc., 15851
Clayton Road West, Ballwin, Missouri 63011, telephone (314) 256-6406, for
subscription information.
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Index of defined terms
100% SDA, S-28
accrual classes, 3
affiliated mortgage loans, 3
affiliated originators, 11
agency certificates, 4
ARMs, 11
available for distribution, 7
balloon mortgage loan, 14
Bankruptcy Code, 46
bankruptcy losses, S-13
beneficial owner, 27
book-entry securities, 27
CERCLA, 50
Certificates, 3
Citi FSB, 11
class A prepayment percentage, S-16
class percentage, S-6 classes, 3 clean-up
call, 10
CMSI, 3
Conference Committee Report, 32
cooperative apartment leases, 43
cooperative apartment loans, 13
cut-off date, 5
debt burden, 20
determination day, 6
discount loans, S-10
distribution day, 6
DTC, 27
due-on-sale clause, 9
ERISA, 5, 28
ERISA plans, 28
events of default, 24
FDIC, 19
fraud losses, S-13
Freddie Mac, 4
fully amortizing mortgage loan, 14
Garn-St Germain Act, 48
Ginnie Mae, 4
graduated-payment mortgage loan, 14
homeowner, 5
hypothetical mortgage loans, S-11
interest-only, 3
interest-only loan, S-10
IO, 3
IO loan, S-10
IO strip, S-11
IRA, 28
IRS, 32
liquidated loan, S-21
loan-to-value ratio, 15
losses, 10
master servicer, 22
mortgage loans, 3
mortgaged properties, 3
mortgagee, 40
mortgagor, 40
net loan rate, S-10
non-U.S. person, 38
OID, 32
OID rules, 32
order of seniority, 10
order of subordination, 10
original issue discount, 32
original subordinated amount, S-16
outstanding, 10
parity, S-27
percent of the prepayment model, S-22
PO, 3
PO loan, S-10
PO strip, S-11
pool insurance, 17
pooling agreement, 25
premium loans, S-10
prepayment charge, 8
prepayment interest shortfall, 9
prepayment model, S-22
57
<PAGE>
principal balance, 5
principal-only, 3
principal-only loan, S-10
PTE 83-1, 29
[rating agency 1], S-6
[rating agency 2], S-6
RCRA, 50
realized loss, S-21
registered holder, 27
regular classes, 6
REMIC, 3
residual class, 6
retail class Certificate, 34
scheduled payment, 5
scheduled principal, S-15
scheduled principal balance, S-15
SDA, S-28
SEC, 52
secured creditor exemption, 50
securities intermediaries, 27
securitized, 12
senior classes, 3, 10
Series, 3
servicer, 22
SMMEA, 30
special hazard insurance, 17
special hazard losses, S-13
standard default assumption, S-28
structuring assumptions, S-22
subordinated classes, 3, 10
subordination depletion date, S-12
subordination level, S-13
superliens, 49
TAC class, S-17
target interest rate, S-10
targeted amortization class, S-17
target-rate classes, S-11
target-rate loan, S-10
target-rate strip, S-11
third-party mortgage loans, 3
Title V, 49
Trust, 3
Trustee, 3
UCC, 44
[Underwriter], S-7
[Underwriter] exemption, S-29
unscheduled principal, S-15
UST, 50
variable rate Certificates, 34
voluntary advance, 7
58
<PAGE>
APPENDIX
ARMS, BUYDOWN LOANS AND AGENCY CERTIFICATES
ARMs
Adjustable rate mortgage loans (ARMs) bear interest at a rate that is adjusted
at regular intervals to equal a fixed number of basis points over a variable
index interest rate. (A basis point is 0.01%.) The adjusted rate is generally
rounded to the nearest eighth of a percent. There are often limits on the size
of any one upward or downward adjustment or on the total upward or downward
adjustment during a specified period (such as a year), and there is usually a
limit on the maximum interest rate (and, less commonly, on the minimum interest
rate) that can ever be charged on the mortgage loan.
When the interest rate on an ARM is adjusted, some ARMs may adjust the
scheduled monthly payment of principal and interest in order to amortize fully
the mortgage loan by its stated maturity; other ARMs may keep the scheduled
mortgage payment constant but extend or shorten the maturity to take account of
the increase or decrease in the principal portion of the payment.
The initial scheduled monthly payment by the homeowner is the amount that
will fully amortize the initial principal balance of the ARM in equal
installments over its remaining term and pay interest at the initial interest
rate. On the first day of the month following the month in which an interest
rate adjusts, the homeowner must begin making scheduled monthly payments that
will fully amortize the principal balance of the ARM in equal installments over
its remaining term and pay interest at the adjusted interest rate (except for
ARMs that defer a portion of interest, as described in the preceding paragraph).
The homeowner under an ARM may have been qualified at an interest rate that
is lower than the current interest rate at origination. Accordingly, the
repayment of the ARM will depend on the homeowner's ability to make larger
monthly payments after the initial interest rate adjustment date.
ARMs included in the Trust will generally not be convertible at the
homeowner's option into fixed-rate fully amortizing loans.
Negative amortization
If an ARM limits the amount by which monthly payments may be increased, or if
changes to the interest rate of the ARM are made more frequently than changes in
the scheduled payments, an increase in the interest rate may not be fully
covered by the adjusted scheduled monthly payment. In that case, the uncollected
portion of interest will be deferred and added to the principal balance of the
ARM. Interest will accrue on the additional principal at the then applicable
interest rate from the date of the addition
Such a deferral is referred to as negative amortization. Negative
amortization tends to lengthen the weighted average life of a mortgage loan and
may cause payments near the maturity of the mortgage loan to be larger than the
previously scheduled monthly payments unless the mortgage loan permits its
maturity to be extended.
Yield considerations
When the scheduled monthly payment on an ARM is adjusted, the first distribution
to certificate holders that reflects the adjustment will be made on the
distribution day in the month following the month in which the interest rate on
the ARM is adjusted. Furthermore, adjustments in the interest rates are based on
the relevant index most recently available 45 days before the date of the
interest rate adjustment. Moreover, there may be a delay between the time the
index is set and its public availability. Accordingly, the yield to Certificate
holders will be adjusted on a delayed basis relative to movements in the index.
Adjustments to the interest rate on an ARM may also be limited by a maximum
periodic adjustment or a maximum or minimum interest rate. The following table
illustrates the timing of the adjustments and receipt by Certificate holders of
related distributions for a hypothetical ARM pool containing ARMs having a July
1 adjustment date. All dates are assumed to be business days.
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May 1 Index published
May 15 Index fixed, based on May 1
publication.
July 1 Interest rates adjusted based on May
15 index.
August 1 Homeowners make first adjusted monthly payments at adjusted
interest rates.
August 18 Determination day.
August 25 First payment to Certificate holders that reflects adjusted
scheduled monthly payments on underlying ARMs.
On the cut-off date for a Trust containing ARMs, some ARMs may be newly
originated while others may have had one or more adjustments. ARMs that have not
had their first interest rate adjustment will generally bear interest at rates
that are lower than the rate that would otherwise be produced by the sum of the
index and the number of basis points over the index used to compute the interest
rate for the mortgage loan.
State law restrictions
Adjustable interest rate mortgage loans originated by non-federally chartered
lenders have historically been subject to a variety of restrictions. Such
restrictions differed from state to state, resulting in difficulties in
determining whether a particular alternative mortgage instrument originated by a
state-chartered lender complied with applicable law. These difficulties were
alleviated substantially by Title VIII of the Garn-St Germain Act (Title VIII).
Title VIII provides that, notwithstanding any state law to the contrary,
o state-chartered banks may originate "alternative mortgage instruments"
(including adjustable rate mortgage loans) in accordance with regulations of the
Comptroller of the Currency for origination of alternative mortgage instruments
by national banks,
o state-chartered credit unions may originate alternative mortgage instruments
in accordance with regulations of the National Credit Union Administration for
origination of alternative mortgage instruments by federal credit unions and all
other non-federally chartered housing creditors, including state-chartered
savings and loan associations, and
o state-chartered savings banks and mortgage banking companies may originate
alternative mortgage instruments in accordance with the regulations of the
Federal Home Loan Bank Board (now the Office of Thrift Supervision) for
origination of alternative mortgage instruments by federal savings and loan
associations.
Title VIII allowed states to reject Title VIII by adopting, before October
15, 1985, a law or constitutional provision expressly rejecting its
applicability. Some states have taken that action.
CMSI has been advised by its counsel that, in their opinion, a court would
hold that adjustable interest rate mortgage loans originated by state-chartered
lenders before enactment of a state law or constitutional provision rejecting
applicability of Title VIII would not be subject to state laws imposing
restrictions or prohibitions on the ability of state-chartered lenders to
originate alternative mortgage instruments.
Any ARMs in the Trust
o originated by a state-chartered lender after enactment of a state law or
constitutional provision rejecting the applicability of Title VIII complied with
applicable state law, and
o originated by federally chartered lenders, or by state-chartered lenders
before enactment of a state law or constitutional provision rejecting the
applicability of Title VIII, were originated in compliance with all applicable
federal regulations.
Buydown loans
Some mortgage loans in the Trust may be subject to temporary buydown plans
(buydown mortgage loans). In a buydown mortgage loan, monthly payments by the
homeowner during the early years of the loan (the buydown period) are less than
the scheduled monthly payments, the difference being
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made up from buydown funds contributed by the homeowner, the homeowner's
employer, the seller or builder of the mortgaged property or another source. The
buydown funds may be contributed at the origination of the buydown mortgage loan
or in some cases when buydown funds are contributed by an employer, on an annual
basis.
Buydown funds contributed on an annual basis by the homeowner's employer will
generally have a buydown period of three years but may have a buydown period of
up to five years. The employer may or may not be required to guarantee the
payment of buydown funds even if the homeowner is no longer employed by the
employer.
Buydown funds contributed at origination are placed on the closing date in a
depository account maintained by CMSI or the originator (or for third party
mortgage loans, the subservicer), and amounts are withdrawn monthly from the
account promptly following receipt of the homeowner's monthly payment and
deposited with the Trust.
Buydown funds for different Series may be held in the same deposit account.
Each affiliated originator originates buydown mortgage loans. Each buydown
mortgage loan will
o provide for payments by the homeowner during the buydown period based on a
hypothetical reduced interest rate (the buydown mortgage rate) that will not be
more than 5% below the mortgage rate at origination,
o have an annual increase in the buydown mortgage rate during the buydown
period that will not exceed 1%.
o have a buydown period not exceeding three years for mortgage loans originated
by Citibank or originated by the Florida branches of Citi FSB, five years for
mortgage loans originated or acquired by CMI, and six years for other mortgage
loans originated or acquired by Citi FSB.
For mortgage loans originated before October 1, 1991, the maximum buydown
funds that the seller or builder of the related mortgaged property can
contribute is 9% of the value at origination of the mortgaged property; for
mortgage loans originated on or after October 1, 1991, the maximum buydown funds
that the seller or builder of the related mortgaged property can contribute is
6% of the value at origination of the mortgaged property. These limits do not
apply to contributions from the homeowner, the homeowner's immediate relatives
or the homeowner's employer.
The homeowner under a buydown mortgage loan will have been qualified at an
interest rate that is not more than 5% per annum below the current mortgage rate
at origination. Accordingly, repayment of a buydown mortgage loan depends on the
homeowner's ability to make larger monthly payments after the buydown funds are
depleted and, for some buydown mortgage loans, while the funds are being
depleted during the buydown period.
Agency certificates
Ginnie Mae
The Government National Mortgage Association (Ginnie Mae) is a wholly-owned
corporate instrumentality of the United States within the Department of Housing
and Urban Development. Ginnie Mae is authorized to guarantee the timely payment
of principal and interest on certificates (Ginnie Mae certificates) that are
backed by, and represent an interest in, pools of mortgage loans insured by the
Federal Housing Administration (FHA loans) or partially guaranteed by the
Veterans Administration (VA loans) or by pools of other eligible mortgage loans.
The full faith and credit of the United States is pledged to the payment of
all amounts that Ginnie Mae guarantees on Ginnie Mae certificates. Ginnie Mae
can borrow from the United States Treasury in any amount required to enable
Ginnie Mae to perform its obligations under its guaranties.
Ginnie Mae certificates
All of the Ginnie Mae certificates are "fully modified pass-through"
certificates. They are issued and serv-
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iced by issuers approved by Ginnie Mae or by Fannie Mae as a seller-servicer of
FHA Loans or VA Loans. The mortgage loans underlying Ginnie Mae certificates may
be
o FHA Loans secured by mortgages on one- to four-family residential properties
or multifamily residential properties,
o VA loans, and
o other mortgage loans eligible for inclusion in mortgage pools underlying
Ginnie Mae certificates, which may be level payment mortgage loans (including
buydown mortgage loans) or graduated payment mortgage loans each secured by a
first lien on a one- to four-family residential property.
All payments on Ginnie Mae certificates are made by or on behalf of the
issuer of the Ginnie Mae certificate to the registered holder of the
certificate. Except for Ginnie Mae certificates backed by graduated payment
mortgage loans, each Ginnie Mae certificate provides for monthly payments of the
registered holder's proportionate share of
o the aggregate monthly scheduled principal and interest payments on the
underlying mortgage loans (less servicing and guaranty fees),
o any principal prepayments on the mortgage loans and,
o any net proceeds of foreclosure or other disposition of mortgage loans.
Ginnie Mae certificates may be issued under either the Ginnie Mae I program
(Ginnie Mae I certificates) or the Ginnie Mae II program (Ginnie Mae II
certificates). A principal difference between the two programs is that under the
Ginnie Mae I program payments are made directly by the issuer of the Ginnie Mae
I Certificate to the registered holder, while under the Ginnie Mae II program
payments are made to the registered holder through Chemical Bank as paying
agent. A further difference between the two programs is that under the Ginnie
Mae I program single issuer approach, an individual Ginnie Mae issuer assembles
a pool of mortgages against which it issues and markets Ginnie Mae I
Certificates, while under the Ginnie Mae II program multiple issuer pools may be
formed by aggregating loan packages of several Ginnie Mae issuers. However,
single issuer pools may be formed under the Ginnie Mae II program as well.
[If specified in the related prospectus supplement, Ginnie Mae certificates
in the Trust may be held on deposit at the Participants Trust Company (PTC), a
limited trust company organized under the banking laws of the State of New York.
PTC operates a private sector, industry owned depository and settlement facility
for book-entry transfer of interests in Ginnie Mae certificates. Distribution of
principal of and interest on such Ginnie Mae certificate held through PTC will
be credited by PTC to the PTC participant to whose account the Ginnie Mae
certificate is credited.]
All mortgage loans underlying a particular Ginnie Mae I Certificate must have
the same annual interest rate (except for pools of mortgages secured by mobile
homes). The annual interest rate on each Ginnie Mae I Certificate is 50 basis
points less than the annual interest rate on the mortgage loans included in the
pool of mortgages backing such Ginnie Mae I Certificate.
Mortgages underlying a particular Ginnie Mae II Certificate may have annual
interest rates that vary from each other by up to 100 basis points. The annual
interest rate on each Ginnie Mae II Certificate will be between 50 basis points
and 150 basis points per annum less than the highest annual interest rate on the
mortgage loans included in the pool of mortgages backing such Ginnie Mae II
Certificate.
All of the Ginnie Mae certificates included in the Trust have original
maturities of not more than 30 years (but may have original maturities of
substantially less than 30 years). In general, Ginnie Mae requires that at least
90% of the original principal amount of the mortgage pool underlying a Ginnie
Mae certificate must be mortgage loans with maturities of 20 years or more.
However, in some circumstances Ginnie Mae certificates may be backed by pools of
mortgage loans at least 90% of the original principal amount of which have
original maturities of at least 15 years.
Each mortgage loan underlying a Ginnie Mae certificate, at the time Ginnie
Mae issues its guarantee commitment, must be originated no more than 12 months
prior to the commitment date.
The Ginnie Mae certificates are not a liability of, or evidence any recourse
against, the issuer of the
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<PAGE>
Ginnie Mae certificates or any of its affiliates. The only recourse of a
registered holder of Ginnie Mae certificates, such as the Trustee, is to enforce
Ginnie Mae's guaranty.
Ginnie Mae approves the issuance of each Ginnie Mae certificate in accordance
with a guaranty agreement between Ginnie Mae and the servicer of the mortgage
loans underlying the Ginnie Mae certificate, which is the issuer of the Ginnie
Mae certificates. The agreement requires the issuer to advance its own funds to
make timely payments of all amounts due on the Ginnie Mae certificate, even if
the payments received by the issuer on the mortgage loans backing the Ginnie Mae
certificate are less than the amounts due on the Ginnie Mae certificate. If the
issuer is unable to make payments on a Ginnie Mae certificate as it becomes due,
it must promptly notify Ginnie Mae and request Ginnie Mae to make the payment.
Upon the notification and request, Ginnie Mae will make the payments directly to
the registered holder of the Ginnie Mae certificate. If no payment is made by
the issuer and the issuer fails to notify and request Ginnie Mae to make the
payment, the registered holder of the Ginnie Mae certificate has recourse only
against Ginnie Mae to obtain the payment. The Trustee or its nominee, as
registered holder of the Ginnie Mae certificates in the Trust can proceed
directly against Ginnie Mae for any amounts that are not paid when due under a
Ginnie Mae certificate.
Freddie Mac
The Federal Home Loan Mortgage Corporation (Freddie Mac) is a corporate
instrumentality of the United States. Freddie Mac's common stock is owned by the
Federal Home Loan Banks. Freddie Mac was established primarily to increase the
availability of mortgage credit for the financing of urgently needed housing. It
seeks to provide an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of Freddie Mac currently consists
of the purchase of first lien conventional residential mortgage loans or
participation interests in such mortgage loans and the resale of the mortgage
loans in the form of mortgage securities. Freddie Mac is confined to purchasing,
so far as practicable, conventional mortgage loans and participation interests
therein that it deems to be of a quality, type and class that generally meet the
purchase standards imposed by private institutional mortgage investors.
Freddie Mac certificates
Each Freddie Mac certificate represents an undivided interest in a group of
mortgage loans. The mortgage loans underlying any Freddie Mac certificates in
the Trust are fixed rate mortgage loans with original terms to maturity of
between 10 and 30 years. The mortgage loans may include whole loans,
participation interests in whole loans and undivided interests in whole loans
and/or participations underlying other Freddie Mac certificates.
For some Freddie Mac certificates (Original PCs), the period between the
first day of the month in which the certificate is issued and the initial
payment date for the certificate is approximately 75 days. For other Freddie Mac
certificates (Gold PCs), the period between the first day of the month in which
the certificate is issued and the initial payment date for the certificate is
approximately 45 days. Also, the record date for payments of principal and
interest on a Gold PC is the last day of the month immediately preceding the
month in which the related payment date occurs, whereas the record date for
payments of principal and interest on an Original PC is the last day of the
second month preceding the month in which the payment date occurs.
Freddie Mac guarantees timely payment of interest at the rate provided for
each Freddie Mac certificate. Freddie Mac also guarantees the ultimate
collection by the registered holder of a Freddie Mac certificate of its pro rata
share of all principal on the underlying mortgage loans, without any offset or
deduction. However, only Gold PCs guarantee the timely payment of scheduled
principal. Pursuant to its guaranties, Freddie Mac indemnifies certificate
holders against any diminution in principal for property repairs, maintenance
and foreclosure.
Freddie Mac may pay any amount due on its guaranty of collection of principal
at any time after de-
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<PAGE>
fault on an underlying mortgage loan, but not later than 30 days following the
later of
o foreclosure sale,
o payment of the claim by a mortgage insurer, or
o expiration of any right of redemption,
but in no event later than one year after demand has been made upon the
homeowner for accelerated payment of principal. In collecting principal after
default on a mortgage loan, including timing a demand for acceleration, Freddie
Mac may exercise its servicing judgment in the same manner as for mortgages that
it has purchased but not sold.
Freddie Mac certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. Accordingly, Freddie Mac's guaranty is not
backed by the full faith and credit of the United States.
Registered holders of Freddie Mac certificates receive their monthly pro rata
share of all principal payments on the underlying mortgage loans received by
Freddie Mac, including any scheduled principal payments, full and partial
payments of principal, and principal received by Freddie Mac by virtue of
condemnation, insurance or foreclosure, and repurchases of the mortgages by
Freddie Mac or the sellers of the mortgages. Freddie Mac is required to remit to
each registered Freddie Mac certificate holder its pro rata share of principal
payments on the underlying mortgage loans, interest at the Freddie Mac
certificate rate and any other sums (such as prepayment fees), within 60 days of
the date the payments are deemed received by Freddie Mac.
Under Freddie Mac's Cash Program, before June 1987 there was no limit on the
amount by which interest rates on the mortgage loans underlying a Freddie Mac
certificate could exceed the interest rate on the Freddie Mac certificate. Under
the Cash Program, Freddie Mac purchases groups of whole mortgage loans from
sellers at percentages up to 100% of their unpaid principal amount, adjusted for
accrued or prepaid interest, that results in the yield required by Freddie Mac.
The required yield, which includes a minimum servicing fee retained by the
servicer, is calculated using the outstanding principal balance of the mortgage
loans, an assumed term and a prepayment period determined by Freddie Mac. The
range of interest rates on the mortgage loans underlying a Freddie Mac
certificate under the Cash Program formed before June 1987 will vary since
mortgage loans are purchased and assigned to a Freddie Mac certificate based
upon their yield to Freddie Mac rather than on the interest rate on the mortgage
loans.
Since June 1987, the range of interest rates on the mortgage loans and
participations underlying a Freddie Mac certificate comprised of 15-and 30-year
fixed rate single family mortgage loans bought by Freddie Mac under the Cash
Program is limited to 1%. Moreover, the lowest coupon on any mortgage loan
underlying a Freddie Mac certificate can not be less than the annual
pass-through rate on the certificate, and the highest mortgage interest rate can
not be more than 2% above the pass-through rate.
Under Freddie Mac's Guarantor Program, the annual pass-through rate on a
Freddie Mac certificate is established based upon the lowest interest rate on
the underlying mortgage loans, minus a minimum servicing fee and the amount of
Freddie Mac's management and guaranty income as agreed between the seller and
Freddie Mac. Before December 1987, the range between the lowest and highest
annual interest rates on the mortgage loans underlying a Freddie Mac certificate
formed under the Guarantor Program could not exceed 2%. Beginning in December
1987, the range was limited to 1%.
Freddie Mac certificates duly presented for registration of transfer on or
before the last business day of a month are registered effective as of the first
day of that month. The first remittance check to a registered holder of a
Freddie Mac certificate is mailed to be received normally by the 15th day of the
second month following the month in which the purchaser became a registered
holder of the Freddie Mac certificate. Thereafter checks will be mailed monthly
to the registered holder to be received normally by the 15th day of each month.
The Federal Reserve Bank of New York maintains book-entry accounts for Freddie
Mac certificates sold by Freddie Mac on or after January 2, 1985, and makes
payments of interest and principal each month to the registered holders in
accordance with the holders' instructions.
A-6
<PAGE>
Fannie Mae
Fannie Mae was established in 1938 as a United States government agency to
provide supplemental liquidity to the mortgage market. It was transformed into a
stockholder-owned and privately managed corporation by legislation enacted in
1968.
Fannie Mae provides funds to the mortgage market primarily by purchasing home
mortgage loans from lenders, thereby replenishing their funds for additional
lending. Fannie Mae acquires funds to purchase loans from many capital market
investors that may not ordinarily invest in mortgage loans, thereby expanding
the total amount of funds available for housing. By operating nationwide, Fannie
Mae helps to redistribute mortgage funds from capital-surplus to capital-short
areas. In addition, Fannie Mae issues mortgage-backed securities primarily in
exchange for pools of mortgage loans from lenders.
Fannie Mae certificates
A Fannie Mae certificate represents a fractional undivided interest in a pool of
mortgage loans formed by Fannie Mae. Each mortgage loan must meet the applicable
standards of the Fannie Mae purchase program. Mortgage loans comprising a pool
are either provided by Fannie Mae from its own portfolio or purchased under
Fannie Mae's purchase program.
Mortgage loans underlying Fannie Mae certificates in the Trust consist of
conventional mortgage loans, FHA Loans or VA Loans. The original maturities of
substantially all of the conventional, level payment mortgage loans underlying a
Fannie Mae certificate are expected to be between either 8 and 15 years or 20
and 30 years. The original maturities of substantially all of the level payment
FHA Loans or VA Loans are expected to be 30 years.
Mortgage loans underlying a Fannie Mae certificate may have annual interest
rates that vary by as much as 2% from each other. The rate of interest payable
on a Fannie Mae certificate is the lowest interest rate of any mortgage loan in
the related pool, less a specified minimum annual percentage representing
servicing compensation and Fannie Mae's guaranty fee. Under a regular servicing
option (pursuant to which the mortgagee or other servicer assumes the entire
risk of foreclosure losses), the annual interest rates on the mortgage loan
underlying a Fannie Mae certificate will be between 50 basis points and 250
basis points greater than the annual interest rate for the Fannie Mae
certificates. Under a special servicing option (pursuant to which Fannie Mae
assumes the entire risk for foreclosure losses), the annual interest rates on
the mortgage loans underlying a Fannie Mae certificate will generally be between
55 basis points and 255 basis points greater than the annual Fannie Mae
certificate interest rate.
Fannie Mae guarantees scheduled principal and interest (at the rate provided
for by the Fannie Mae certificate) on the mortgage loans in the pool represented
by a Fannie Mae certificate, whether or not received, and the full principal
amount of any foreclosed or other finally liquidated mortgage loan, regardless
of the portion of the principal amount actually recovered. Fannie Mae's
obligations under its guaranties are obligations solely of Fannie Mae and are
not backed by the full faith and credit of the United States. Although the
Secretary of the Treasury of the United States has discretionary authority to
lend Fannie Mae up to $2.25 billion outstanding at any time, neither the United
States nor any of its agencies is obligated to finance Fannie Mae's operations
or to assist Fannie Mae in any other way. If Fannie Mae is unable to satisfy its
obligations, distributions on Fannie Mae certificates would consist solely of
payments and other recoveries on the underlying mortgage loans and, accordingly,
monthly distributions on Fannie Mae certificates would be affected by delinquent
payments and defaults on those mortgage loans.
Fannie Mae certificates evidencing interests in pools of mortgage loans
formed on or after May 1, 1985 are available in book-entry form only and will
not be convertible to definitive form. Distributions of principal and interest
on each Fannie Mae certificate will be made by Fannie Mae on the 25th day of
each month to the persons in whose name the Fannie Mae certificate is entered on
the books of the Federal Reserve Bank (or registered in the Fannie Mae
certificate register in the case of fully registered Fannie Mae certificates) as
of the close of business on the last day of the preceding month. For Fannie Mae
certificates issued in book-entry form, distributions will be made
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<PAGE>
by wire, and for fully registered Fannie Mae certificates, distributions will be
made by check.
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<PAGE>
TABLE OF CONTENTS
Prospectus Supplement
Page
Summary.................................................
Series Risk Factors.....................................
Ratio Stripping.........................................
Subordination...........................................
Distributions of Interest...............................
Distributions of Principal..............................
Losses..................................................
Sensitivity of Certificates to Prepayment ..............
Voting Rights...........................................
Additional ERISA Considerations.........................
Legal Investment........................................
Federal Income Tax Consequences.........................
Plan of Distribution....................................
Experts.................................................
Legal Matters...........................................
Incorporation of Documents by Reference.................
Prospectus
Summary.................................................
General Risk Factors....................................
Distributions on the Certificates.......................
Delinquency, Foreclosure and Loss Experience............
The Mortgage Loans......................................
Defective Mortgage Loans................................
Insurance and other Credit Support......................
Mortgage Documents......................................
CMSI and its Affiliates.................................
Mortgage Loan Underwriting Policies.....................
Servicing...............................................
Default by CMSI.........................................
The Trustee.............................................
The Pooling Agreement...................................
Book-Entry and Physical Certificates....................
ERISA Considerations....................................
Legal Investment Considerations.........................
Taxation of Certificateholders..........................
Taxation of the Trust...................................
Legal Aspects of Mortgage Loans.........................
Use of Proceeds.........................................
Plan of Distribution....................................
Incorporation by Reference; Additional
Information.............................................
Appendix: ARMs, Buydown Loans and Agency Certificates...
Index of Defined Terms..................................
$[ ]
(Approximate)
Citicorp Mortgage
Securities, Inc.
(Packager and Servicer)
REMIC Pass-Through Certificates
Series [ ]
[ ]
Dated [ ]
<PAGE>
[Alternate Page]
EXPERTS
The consolidated financial statements of Citicorp and subsidiaries
included in Citicorp's Annual Report on Form 10-K for 1998 have been
incorporated by reference in reliance upon the report in such Form 10-K of KPMG
LLP, independent certified public accountants, and upon the authority of that
said firm as experts in accounting and auditing.
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1998, included in this
Amendment No. 2 to Form S-3 (333-72459), have been included herein in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of that firm as experts in accounting and auditing.
<PAGE>
[The following are alternate pages for the consolidated financial
statements of MBIA Insurance Corporation and Subsidiaries to be set
forth in, or incorporated by reference in, the MBIA Supplement.]
<PAGE>
[Alternate Page]
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDER OF
MBIA INSURANCE CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and changes in shareholder's equity and cash
flows present fairly, in all material respects, the financial position of MBIA
Insurance Corporation and Subsidiaries as of December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
New York, New York
February 2, 1999
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------- --------------------------
ASSETS
<S> <C> <C>
Investments:
Fixed-maturity securities held as available-for-sale
at fair value (amortized cost $5,565,060 and $4,600,528) $5,884,053 $4,867,254
Short-term investments, at amortized cost
(which approximates fair value) 423,188 242,730
Other investments 17,850 16,802
--------------- ----------------
TOTAL INVESTMENTS 6,325,091 5,126,786
Cash and cash equivalents 6,546 3,983
Securities purchased under agreements to resell 187,500 182,820
Accrued investment income 91,239 78,601
Deferred acquisition costs 230,085 154,100
Prepaid reinsurance premiums 352,699 252,893
Goodwill (less accumulated amortization of
$52,031 and $47,152) 90,950 95,829
Property and equipment, at cost (less accumulated
depreciation of $23,840 and $18,256) 71,952 53,484
Receivable for investments sold 33,880 1,616
Other assets 97,970 37,437
--------------- ----------------
TOTAL ASSETS $7,487,912 $5,987,549
=============== ================
LIABILITIES AND SHAREHOLDER'S EQUITY
LIABILITIES:
Deferred premium revenue $ 2,251,211 $ 1,984,104
Loss and loss adjustment expense reserves 270,114 78,872
Securities sold under agreements to repurchase 187,500 182,820
Deferred income taxes 303,407 251,134
Deferred fee revenue 33,785 ---
Payable for investments purchased 29,523 23,020
Other liabilities 135,027 103,740
--------------- ----------------
TOTAL LIABILITIES 3,210,567 2,623,690
--------------- ----------------
Shareholder's Equity:
Common stock, par value $150 per share; authorized,
issued and outstanding - 100,000 shares 15,000 15,000
Additional paid-in capital 1,491,033 1,139,949
Retained earnings 2,566,222 2,042,323
Accumulated other comprehensive income,
net of deferred income tax provision of
$112,283 and $94,416 205,090 166,587
--------------- ----------------
TOTAL SHAREHOLDER'S EQUITY 4,277,345 3,363,859
--------------- ----------------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $7,487,912 $5,987,549
=============== ================
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(2)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
-----------------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Gross premiums written $725,269 $544,974 $462,444
Ceded premiums (149,280) (79,781) (54,852)
-------------- -------------- --------------
Net premiums written 575,989 465,193 407,592
Increase in deferred premium revenue (166,182) (165,858) (154,111)
-------------- -------------- --------------
Premiums earned (net of ceded
premiums of $49,474,
$43,734 and $38,893) 409,807 299,335 253,481
Net investment income 326,391 282,460 247,286
Net realized gains 29,891 17,478 11,740
Advisory fees 23,964 --- ---
Other 713 1,201 3,163
-------------- -------------- --------------
Total revenues 790,766 600,474 515,670
-------------- -------------- --------------
Expenses:
Losses and loss adjustment 33,661 18,673 15,334
Policy acquisition costs, net 33,168 27,873 24,660
Operating 65,445 50,016 46,654
-------------- -------------- --------------
Total expenses 132,274 96,562 86,648
-------------- -------------- --------------
Income before income taxes 658,492 503,912 429,022
Provision for income taxes 134,593 112,904 90,562
-------------- -------------- --------------
Net income $523,899 $391,008 $338,460
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(3)
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[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
For the years ended December 31, 1998, 1997 and 1996
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Total
----------------- Paid-in Retained Comprehensive Shareholder's
Shares Amount Capital Earnings Adjustment Equity
--------- --------- ------------ ---------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996 100,000 $15,000 $1,021,584 $1,341,855 $147,433 $2,525,872
--------- --------- ------------ ---------- ---------- -----------
Comprehensive income:
Net income --- --- --- 338,460 --- 338,460
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $26,197 --- --- --- --- (47,861) (47,861)
Change in foreign
currency translation --- --- --- --- (3,892) (3,892)
----------
Other comprehensive income (51,753)
----------
Total comprehensive income 286,707
----------
Dividends declared
(per common share $290.00) --- --- --- (29,000) --- (29,000)
Tax reduction related to tax
sharing agreement with MBIA Inc. --- --- 20,292 --- --- 20,292
-------- --------- ------------ ---------- ---------- -----------
Balance, December 31, 1996 100,000 15,000 1,041,876 1,651,315 95,680 2,803,871
-------- --------- ------------ ---------- ---------- -----------
Comprehensive income:
Net income --- --- --- 391,008 --- 391,008
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $(42,241) --- --- --- --- 78,418 78,418
Change in foreign
currency translation --- --- --- --- (7,511) (7,511)
----------
Other comprehensive income 70,907
----------
Total comprehensive income 461,915
----------
Capital contribution from MBIA Inc. --- --- 80,000 --- --- 80,000
Tax reduction related to tax
sharing agreement with MBIA Inc. --- --- 18,073 --- --- 18,073
-------- --------- ------------ ---------- ---------- -----------
Balance, December 31, 1997 100,000 15,000 1,139,949 2,042,323 166,587 3,363,859
-------- --------- ------------ ---------- ---------- -----------
Comprehensive income:
Net income --- --- --- 523,899 --- 523,899
Other comprehensive income:
Change in unrealized
appreciation of investments
net of change in deferred
income taxes of $17,867 --- --- --- --- 34,084 34,084
Change in foreign
currency translation --- --- --- --- 4,419 4,419
----------
Other comprehensive income 38,503
----------
Comprehensive income 562,402
----------
Capital contribution from MBIA Inc. --- --- 324,915 --- --- 324,915
Tax reduction related to tax
sharing agreement with MBIA Inc. --- --- 26,169 --- --- 26,169
-------- --------- ------------ ---------- ---------- -----------
Balance, December 31, 1998 100,000 $15,000 $1,491,033 $2,566,222 $205,090 $4,277,345
======== ========= ============ ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Disclosure of reclassification amount:
Unrealized appreciation of investments
arising during the period, net of taxes $53,415 $89,536 $(40,074)
Reclassification of adjustment, net of taxes (19,331) (11,118) (7,787)
------- ------- --------
Net unrealized appreciation, net of taxes $34,084 $78,418 $(47,861)
======= ======= ========
</TABLE>
The accompany notes are an integral part of the consolidated
financial statements.
(4)
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[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Years ended December 31
------------------------------------------------------
1998 1997 1996
------------------- ------------------ -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 523,899 $ 391,008 $ 338,460
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in accrued investment income (12,638) (13,407) (4,947)
Increase in deferred acquisition costs (75,985) (6,350) (7,402)
Increase in prepaid reinsurance premiums (99,806) (36,047) (15,959)
Increase in deferred premium revenue 265,983 201,905 170,070
Increase in loss and loss adjustment
expense reserves 191,242 19,558 16,809
Depreciation 5,626 3,934 2,952
Amortization of goodwill 4,879 4,889 4,896
Amortization of bond (discount) premium, net (15,831) (10,830) (7,526)
Net realized gains on sale of investments (29,891) (17,478) (11,740)
Deferred income taxes 21,856 13,382 8,982
Other, net 43,593 50,258 26,687
----------------- ------------------ ------------------
Total adjustments to net income 299,028 209,814 182,822
----------------- ------------------ ------------------
Net cash provided by operating activities 822,927 600,822 521,282
----------------- ------------------ ------------------
Cash flows from investing activities:
Purchase of fixed-maturity securities, net
of payable for investments purchased (2,800,008) (2,090,236) (1,519,213)
Sale of fixed-maturity securities, net of
receivable for investments sold 1,086,973 1,247,860 873,823
Redemption of fixed-maturity securities,
net of receivable for investments redeemed 745,516 190,803 158,087
Sale (purchase) of short-term investments, net (158,339) (18,922) 4,676
Sale (purchase) of other investments, net (527) 664 468
Capital expenditures, net of disposals (18,894) (10,296) (8,970)
----------------- ------------------ ------------------
Net cash used by investing activities (1,145,279) (680,127) (491,129)
----------------- ------------------ ------------------
Cash flows from financing activities:
Capital contribution from MBIA Inc. 324,915 80,000 ---
Dividends paid --- --- (29,000)
----------------- ------------------ ------------------
Net cash used by financing activities 324,915 80,000 (29,000)
----------------- ------------------ ------------------
Net increase in cash and cash equivalents 2,563 695 1,153
Cash and cash equivalents - beginning of year 3,983 3,288 2,135
----------------- ------------------ ------------------
Cash and cash equivalents - end of year $ 6,546 $ 3,983 $ 3,288
================= ================== ==================
Supplemental cash flow disclosures:
Income taxes paid $ 105,451 $ 82,125 $ 63,018
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
(5)
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[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION
- - -----------------------------
MBIA Insurance Corporation (MBIA Corp.), formerly known as Municipal Bond
Investors Assurance Corporation, is a wholly owned subsidiary of MBIA Inc. MBIA
Inc. was incorporated in Connecticut on November 12, 1986 as a licensed insurer
and, through a series of transactions during December 1986, became the successor
to the business of the Municipal Bond Insurance Association (the Association), a
voluntary unincorporated association of insurers writing municipal bond and note
insurance as agent for the member insurance companies.
Effective December 31, 1989, MBIA Inc. acquired for $288 million all of
the outstanding stock of Bond Investors Group, Inc. (BIG), the parent company of
Bond Investors Guaranty Insurance Company (BIG Ins.), which was subsequently
renamed MBIA Insurance Corp. of Illinois (MBIA Illinois).
In January 1990, MBIA Illinois ceded its portfolio of net insured
obligations to MBIA Corp. in exchange for cash and investments equal to its
unearned premium reserve of $153 million. Subsequent to this cession, MBIA Inc.
contributed the common stock of BIG to MBIA Corp. resulting in additional
paid-in capital of $200 million. The insured portfolio acquired from BIG Ins.
consists of municipal obligations with risk characteristics similar to those
insured by MBIA Corp. On December 31, 1990, BIG was merged into MBIA Illinois.
Also in 1990, MBIA Inc. formed MBIA Assurance S.A. (MBIA Assurance), a
wholly owned French subsidiary, to write financial guarantee insurance in the
international community. MBIA Assurance provides insurance for public
infrastructure financings, structured finance transactions and certain
obligations of financial institutions. The stock of MBIA Assurance was
contributed to MBIA Corp. in 1991 resulting in additional paid-in capital of $6
million. Pursuant to a reinsurance agreement with MBIA Corp., a substantial
amount of the risks insured by MBIA Assurance is reinsured by MBIA Corp.
In 1993, MBIA Inc. formed a wholly owned subsidiary, MBIA Investment
Management Corp. (IMC). IMC provides guaranteed investment agreements to states,
municipalities and municipal authorities that are guaranteed as to principal and
interest. MBIA Corp. insures IMC's outstanding investment agreement liabilities.
In 1994, MBIA Inc. formed a wholly owned subsidiary, MBIA Securities
Corp., which was subsequently renamed MBIA Capital Management Corp. (CMC). CMC
provides fixed-income investment management services for MBIA Inc., its
municipal cash management service businesses and public pension funds. In 1995,
portfolio management for a portion of MBIA Corp.'s insurance related investment
portfolio was transferred to CMC; the management of the balance of this
portfolio was transferred in January 1996.
(6)
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[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On February 17, 1998 MBIA Inc. and CapMAC Holdings Inc. (CapMAC)
consummated a merger. Under the terms of the merger, CapMAC shareholders
received 0.4675 of a share of MBIA Inc. common stock for each CapMAC share, for
a total of 8,102,255 newly issued shares of MBIA Inc. common stock, the value of
which was $536 million. On April 1, 1998, the company assumed the net insured
obligations of Capital Markets Assurance Corporation (CMAC) in exchange for
investments equal to $176.1 million. The cession of the deferred premium revenue
(net of prepaid reinsurance premiums) in the amount of $68.2 million has been
reflected as a component of gross premium written in the second quarter of 1998.
Subsequent to the cession MBIA Inc. contributed the common stock of CMAC to the
company resulting in additional paid-in capital of $324.9 million.
2. SIGNIFICANT ACCOUNTING POLICIES
- - -----------------------------------
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles (GAAP). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
accounting policies are as follows:
CONSOLIDATION
The consolidated financial statements include the accounts of MBIA Corp. and its
wholly owned subsidiaries. All significant intercompany balances have been
eliminated. Certain amounts have been reclassified in prior years' financial
statements to conform to the current presentation.
INVESTMENTS
MBIA Corp.'s entire investment portfolio is considered available-for-sale and is
reported in the financial statements at fair value, with unrealized gains and
losses, net of deferred taxes, reflected as a separate component of
shareholder's equity.
Bond discounts and premiums are amortized using the effective-yield method
over the remaining term of the securities. For pre-refunded bonds the remaining
term is determined based on the contractual refunding date. Short-term
investments are carried at amortized cost, which approximates fair value, and
include all fixed-maturity securities with a remaining term to maturity of less
than one year. Investment income is recorded as earned. Realized gains or losses
on the sale of investments are determined by specific identification and are
included as a separate component of revenues.
(7)
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MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other investments include MBIA Corp.'s interest in a limited partnership
and a mutual fund which invests principally in marketable equity securities.
MBIA Corp. records dividends from these investments as a component of investment
income. In addition, MBIA Corp. records its share of the unrealized gains and
losses on these investments, net of applicable deferred income taxes, as a
separate component of shareholder's equity.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on hand and demand deposits with banks.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL AND SECURITIES SOLD UNDER
AGREEMENTS TO REPURCHASE
Securities purchased under agreements to resell and securities sold under
agreements to repurchase are accounted for as collateralized transactions and
are recorded at principal or contract value. It is MBIA Corp.'s policy to take
possession of securities purchased under agreements to resell.
MBIA Corp. minimizes the credit risk that counterparties to transactions
might be unable to fulfill their contractual obligations by monitoring customer
credit exposure and collateral value and requiring additional collateral to be
deposited with MBIA Corp. when deemed necessary.
POLICY ACQUISITION COSTS
Policy acquisition costs include only those expenses that relate primarily to,
and vary with, premium production. For business produced directly by MBIA Corp.,
such costs include compensation of employees involved in underwriting and policy
issuance functions, certain rating agency fees, state premium taxes and certain
other underwriting expenses, reduced by ceding commission income on premiums
ceded to reinsurers. Policy acquisition costs are deferred and amortized over
the period in which the related premiums are earned.
PREMIUM REVENUE RECOGNITION
Upfront premiums are earned pro rata over the period of risk. Premiums are
allocated to each bond maturity based on par amount and are earned on a
straight-line basis over the term of each maturity. Installment premiums are
earned over each installment period - generally one year or less. When an
insured issue is retired early, is called by the issuer, or is in substance paid
in advance through a refunding or defeasance accomplished by placing U.S.
Government securities in escrow, the remaining deferred premium revenue, net of
the portion which is credited to a new policy in those cases where MBIA Corp.
insures the refunding issue, is earned at that time, since there is no longer
risk to MBIA Corp. Accordingly, deferred premium revenue represents the portion
of premiums written that is applicable to the unexpired risk of insured bonds
and notes.
(8)
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[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ADVISORY FEE REVENUE RECOGNITION
MBIA Corp. collects certain advisory fees for services rendered in connection
with advising clients as to the most appropriate structure to use for a given
structured finance transaction that the company will insure. Advisory fees are
deferred and earned consistent with the premium revenues generated on the
transactions.
GOODWILL
Goodwill represents the excess of the cost of acquisitions over the tangible net
assets acquired. Goodwill attributed to the acquisition of MBIA Corp. is
amortized by the straight-line method over 25 years. Goodwill attributed to the
acquisition of MBIA Illinois is amortized according to the recognition of future
profits from its deferred premium revenue and installment premiums, except for a
minor portion attributed to state licenses, which is amortized by the
straight-line method over 25 years.
PROPERTY AND EQUIPMENT
Property and equipment consists of MBIA Corp.'s headquarters, furniture,
fixtures and equipment, which are recorded at cost and are depreciated on the
straight-line method over their estimated service lives ranging from 3 to 31
years. Maintenance and repairs are charged to expenses as incurred.
LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expense (LAE) reserves are established in an amount
equal to MBIA Corp.'s estimate of identified or case basis reserves and
unallocated losses, including costs of settlement, on the obligations it has
insured.
Case basis reserves are established when specific insured issues are
identified as currently or likely to be in default. Such a reserve is based on
the present value of the expected loss and LAE payments, net of recoveries,
under salvage and subrogation rights. The total reserve is calculated by
applying a loss factor, determined based on an independent rating agency study
of bond defaults, to net debt service written. When a case basis reserve is
recorded, a corresponding reduction is made to the unallocated reserve.
Management of MBIA Corp. periodically evaluates its estimates for losses
and LAE and any resulting adjustments are reflected in current earnings.
Management believes that the reserves are adequate to cover the ultimate net
cost of claims, but the reserves are necessarily based on estimates, and there
can be no assurance that the ultimate liability will not exceed such estimates.
(9)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
INCOME TAXES
MBIA Corp. is included in the consolidated tax return of MBIA Inc. The tax
provision for MBIA Corp. for financial reporting purposes is determined on a
stand alone basis. Any benefit derived by MBIA Corp. as a result of the tax
sharing agreement with MBIA Inc. and its subsidiaries is reflected directly in
shareholder's equity for financial reporting purposes.
Deferred income taxes are provided with respect to the temporary
differences between the tax bases of assets and liabilities and the reported
amounts in the financial statements that will result in deductible or taxable
amounts in future years when the reported amount of the asset or liability is
recovered or settled. Such temporary differences relate principally to premium
revenue recognition, deferred acquisition costs and the contingency reserve.
The Internal Revenue Code permits companies writing financial guarantee
insurance to deduct from taxable income amounts added to the statutory
contingency reserve, subject to certain limitations. The tax benefits obtained
from such deductions must be invested in non-interest bearing U.S. Government
tax and loss bonds. MBIA Corp. records purchases of tax and loss bonds as
payments of federal income taxes. The amounts deducted must be restored to
taxable income when the contingency reserve is released, at which time MBIA
Corp. may present the tax and loss bonds for redemption to satisfy the
additional tax liability.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities denominated in foreign currencies are translated at
year-end exchange rates. Operating results are translated at average rates of
exchange prevailing during the year. Unrealized gains or losses resulting from
translation are included as a separate component of shareholder's equity.
Gains and losses resulting from transactions in foreign currencies are recorded
in current income.
3. RECENT ACCOUNTING PRONOUNCEMENTS
- - ------------------------------------
In March 1998, the American Institute of Certified Public Accountants'
Accounting Standards Executive Committee issued Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The statement requires that entities capitalize certain
internal-use software costs once certain criteria are met. The statement is
effective for fiscal years beginning after December 15, 1998. The company will
adopt SOP 98-1 in 1999. Adoption of SOP 98-1 is not expected to have a material
impact on the consolidated financial statements.
(10)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. STATUTORY ACCOUNTING PRACTICES
- - ----------------------------------
The financial statements have been prepared on the basis of GAAP, which differs
in certain respects from the statutory accounting practices prescribed or
permitted by the insurance regulatory authorities. Statutory accounting
practices differ from GAAP in the following respects:
o upfront premiums are earned only when the related risk has expired rather
than over the period of the risk;
o acquisition costs are charged to operations as incurred rather than
deferred and amortized as the related premiums are earned;
o a contingency reserve is computed on the basis of statutory requirements,
and reserves for case basis losses and LAE are established, at present
value, for specific insured issues that are identified as currently or
likely to be in default. Under GAAP, reserves are established based on
MBIA Corp.'s reasonable estimate of the identified and unallocated losses
and LAE on the insured obligations it has written;
o federal income taxes are only provided on taxable income for which income
taxes are currently payable, while under GAAP, deferred income taxes are
provided with respect to temporary differences;
o fixed-maturity securities are reported at amortized cost rather than fair
value;
o tax and loss bonds purchased are reflected as admitted assets as well as
payments of income taxes; and
o certain assets designated as "non-admitted assets" are charged directly
against surplus but are reflected as assets under GAAP.
(11)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following is a reconciliation of consolidated shareholder's equity
presented on a GAAP basis to statutory capital and surplus for MBIA Corp. and
its subsidiaries:
As of December 31
------------------------------------------
In thousands 1998 1997
-----------------------------------------------------------------------------
GAAP shareholder's equity $4,277,345 $3,363,859
Premium revenue recognition (448,250) (408,654)
Deferral of acquisition costs (230,085) (154,100)
Unrealized (gains) losses (321,653) (269,702)
Contingency reserve (1,450,413) (1,094,117)
Loss and loss adjustment
expense reserves 81,489 53,938
Deferred income taxes 303,407 251,134
Tax and loss bonds 162,523 129,508
Goodwill (90,950) (95,829)
Other 6,556 (15,839)
-----------------------------------------------------------------------------
Statutory capital and surplus $2,289,969 $1,760,198
-----------------------------------------------------------------------------
Aggregate net income of MBIA Corp. and its subsidiaries determined in
accordance with statutory accounting practices for the years ended December 31,
1998, 1997 and 1996 was $498.2 million, $377.1 million and $316.6 million,
respectively.
5. PREMIUMS EARNED FROM REFUNDED AND CALLED BONDS
- - --------------------------------------------------
Premiums earned include $68.4 million, $50.9 million and $44.4 million for 1998,
1997 and 1996, respectively, related to refunded and called bonds.
6. INVESTMENTS
- - ---------------
MBIA Corp.'s investment objective is to optimize long-term, after-tax returns
while emphasizing the preservation of capital through maintenance of
high-quality investments with adequate liquidity. MBIA Corp.'s investment
policies limit the amount of credit exposure to any one issuer. The
fixed-maturity portfolio is comprised of high-quality (average rating Double-A)
taxable and tax-exempt investments of diversified maturities.
The following tables set forth the amortized cost and fair value of the
fixed-maturities and short-term investments included in the consolidated
investment portfolio of MBIA Corp. as of December 31, 1998 and 1997:
(12)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998
Taxable bonds
United States Treasury
and Government Agency $ 38,984 $ 770 $ (174) $ 39,580
Corporate and other
obligations 1,543,654 60,867 (1,950) 1,602,571
Mortgage-backed 632,232 20,614 (690) 652,156
Tax-exempt bonds
State and municipal
obligations 3,773,378 241,200 (1,644) 4,012,934
- - -------------------------------------------------------------------------------------------------------------
Total $5,988,248 $323,451 $(4,458) $6,307,241
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1997
Taxable bonds
United States Treasury
and Government Agency $ 6,451 $ 191 $ --- $ 6,642
Corporate and other
obligations 1,193,321 36,106 (472) 1,228,955
Mortgage-backed 541,898 18,659 (732) 559,825
Tax-exempt bonds
State and municipal
obligations 3,101,588 213,551 (577) 3,314,562
- - ---------------------------------------------------------------------------------------------------------------
Total $ 4,843,258 $268,507 $(1,781) $5,109,984
- - ---------------------------------------------------------------------------------------------------------------
</TABLE>
(13)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Fixed-maturity investments carried at fair value of $12.0 million and $7.7
million as of December 31, 1998 and 1997, respectively, were on deposit with
various regulatory authorities to comply with insurance laws.
The following table sets forth the distribution by expected maturity of the
fixed-maturities and short-term investments at amortized cost and fair value at
December 31, 1998. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations.
Amortized Fair
In thousands Cost Value
---------------------------------------------------------------------------
Maturity
Within 1 year $ 423,188 $ 423,188
Beyond 1 year but within 5 years 751,065 790,907
Beyond 5 years but within 10 years 1,392,855 1,488,916
Beyond 10 years but within 15 years 906,424 987,981
Beyond 15 years but within 20 years 921,647 978,708
Beyond 20 years 960,837 985,385
---------------------------------------------------------------------------
Mortgage-backed 632,232 652,156
---------------------------------------------------------------------------
Total fixed-maturities and
short-term investments $5,988,248 $6,307,241
---------------------------------------------------------------------------
(14)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. INVESTMENT INCOME AND GAINS AND LOSSES
- - -----------------------------------------
Investment income consists of:
Years ended December 31
--------------------------------------
In thousands 1998 1997 1996
- - ---------------------------------------------------------------------
Fixed-maturities $326,820 $279,900 $245,109
Short-term investments 5,311 5,676 4,961
Other investments 16 (4) 61
- - ---------------------------------------------------------------------
Gross investment income 332,147 285,572 250,131
Investment expenses 5,756 3,112 2,845
- - ---------------------------------------------------------------------
Net investment income 326,391 282,460 247,286
Net realized gains (losses):
Fixed-maturities:
Gains 32,211 22,791 16,760
Losses (3,149) (5,877) (5,353)
- - ---------------------------------------------------------------------
Net 29,062 16,914 11,407
- - ---------------------------------------------------------------------
Other investments:
Gains 829 564 333
Losses --- --- ---
- - ---------------------------------------------------------------------
Net 829 564 333
- - ---------------------------------------------------------------------
Total net realized gains 29,891 17,478 11,740
- - ---------------------------------------------------------------------
Total investment income $356,282 $299,938 $259,026
- - ---------------------------------------------------------------------
Net unrealized gains consist of:
As of December 31
-------------------------------
In thousands 1998 1997
- - ------------------------------------------------------------
Fixed-maturities:
Gains $323,451 $268,507
Losses (4,458) (1,781)
- - ------------------------------------------------------------
Net 318,993 266,726
- - ------------------------------------------------------------
Other investments:
Gains 2,660 3,033
Losses --- (57)
- - ------------------------------------------------------------
Net 2,660 2,976
- - ------------------------------------------------------------
Total 321,653 269,702
Deferred income taxes 112,283 94,416
- - ------------------------------------------------------------
Unrealized gains, net $209,370 $175,286
- - ------------------------------------------------------------
(15)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The change in net unrealized gains (losses) consists of:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------
In thousands 1998 1997 1996
- - ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed-maturities $52,267 $118,588 $(75,497)
Other investments (316) 2,071 1,439
- - ------------------------------------------------------------------------------------
Total 51,951 120,659 (74,058)
Deferred income taxes 17,867 42,241 (26,197)
- - ------------------------------------------------------------------------------------
Unrealized gains (losses), net $34,084 $78,418 $(47,861)
- - ------------------------------------------------------------------------------------
</TABLE>
8. Income Taxes
The provision for income taxes is composed of:
Years ended December 31
-----------------------------------------------------
In thousands 1998 1997 1996
- - ---------------------------------------------------------------------------
Current $112,737 $ 99,522 $ 81,580
Deferred 21,856 13,382 8,982
- - ---------------------------------------------------------------------------
Total $134,593 $112,904 $ 90,562
- - ---------------------------------------------------------------------------
The provision for income taxes gives effect to permanent differences
between financial and taxable income. Accordingly, MBIA Corp.'s effective income
tax rate differs from the statutory rate on ordinary income. The reasons for
MBIA Corp.'s lower effective tax rates are as follows:
Years ended December 31
----------------------------
1998 1997 1996
- - -----------------------------------------------------------------------
Income taxes computed on pre-tax
financial income at statutory rates 35.0% 35.0% 35.0%
Increase (reduction) in taxes
resulting from:
Tax-exempt interest (9.1) (10.6) (12.0)
Amortization of goodwill 0.3 0.3 0.4
Other (5.8) (2.3) (2.3)
- - -----------------------------------------------------------------------
Provision for income taxes 20.4% 22.4% 21.1%
- - -----------------------------------------------------------------------
(16)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
MBIA Corp. recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax bases of assets
and liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The effect on tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date.
The tax effects of temporary differences that give rise to deferred tax
assets and liabilities at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
In thousands 1998 1997
- - -----------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets
Tax and loss bonds $160,064 $130,080
Alternative minimum tax credit carryforward 54,722 62,279
Loss and loss adjustment expense reserves 26,458 18,878
Other 46,516 7,444
- - -----------------------------------------------------------------------------------
Total gross deferred tax assets 287,760 218,681
- - -----------------------------------------------------------------------------------
Deferred tax liabilities
Contingency reserve 280,203 234,904
Deferred premium revenue 106,555 77,150
Deferred acquisition costs 77,753 53,935
Unrealized gains 112,283 94,416
Contingent commissions 408 408
Other 13,965 9,002
- - -----------------------------------------------------------------------------------
Total gross deferred tax liabilities 591,167 469,815
- - -----------------------------------------------------------------------------------
Net deferred tax liability $303,407 $251,134
- - -----------------------------------------------------------------------------------
</TABLE>
MBIA Corp. believes that no valuation allowance is necessary in connection
with the deferred tax assets.
9. DIVIDENDS AND CAPITAL REQUIREMENTS
- - --------------------------------------
Under New York state insurance law, MBIA Corp. may pay dividends only from
earned surplus subject to the maintenance of a minimum capital requirement. The
dividends in any 12-month period may not exceed the lesser of 10% of its
policyholders' surplus as shown on its last filed statutory-basis financial
statements, or of adjusted net investment income, as defined, for such 12-month
period, without prior approval of the superintendent of the New York State
Insurance Department.
(17)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Corp. had $228 million available for the
payment of dividends as of December 31, 1998. In 1998 and 1997 no dividends were
paid by MBIA Corp. due to cash available from financing activities. In 1996,
MBIA Corp. declared and paid $29 million to MBIA Inc.
Under Illinois Insurance Law, MBIA Illinois may pay a dividend from
unassigned surplus, and the dividends in any 12-month period may not exceed the
greater of 10% of policyholders' surplus (total capital and surplus) at the end
of the preceding calendar year, or the net income of the preceding calendar year
without prior approval of the Illinois State Insurance Department.
In accordance with such restrictions on the amount of dividends which can
be paid in any 12-month period, MBIA Illinois had $14.9 million available for
the payment of dividends as of December 31, 1998.
The insurance departments of New York state and certain other statutory
insurance regulatory authorities and the agencies that rate the bonds insured by
MBIA Corp. and its subsidiaries have various requirements relating to the
maintenance of certain minimum ratios of statutory capital and reserves to net
insurance in force. MBIA Corp. and its subsidiaries were in compliance with
these requirements as of December 31, 1998.
10. LINES OF CREDIT
- - --------------------
MBIA Corp. has a standby line of credit commitment in the amount of $825 million
with a group of major Triple-A rated banks to provide loans to MBIA Corp. if it
incurs cumulative losses (net of any recoveries) from October 7, 1998 in excess
of the greater of $825 million or 4.00% of average annual debt service. The
obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations including certain installment premiums
(18)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and other collateral. This commitment has a seven-year term expiring on October
31, 2005, and contains an annual renewal provision subject to approval by the
bank group. CMAC maintains stop-loss reinsurance coverage of $75 million in
excess of incurred losses of $150 million.
MBIA Corp. and MBIA Inc. maintain bank liquidity facilities totaling $650
million. During 1998, these facilities replaced existing facilities aggregating
$450 million. At December 31, 1997, $20 million was outstanding under these
facilities.
11. NET INSURANCE IN FORCE
- - ---------------------------
MBIA Corp. guarantees the timely payment of principal and interest on municipal,
asset-/mortgage-backed and other non-municipal securities. MBIA Corp.'s ultimate
exposure to credit loss in the event of nonperformance by the insured is
represented by the insurance in force as set forth below.
As of December 31, 1998, insurance in force, net of cessions to reinsurers,
had a range of maturity of 1-41 years. The distribution of net insurance in
force by geographic location and type of bond, including $3.5 billion and $3.2
billion relating to IMC's municipal investment agreements guaranteed by MBIA
Corp. in 1998 and 1997, respectively, is set forth in the following table:
<TABLE>
<CAPTION>
As of December 31
- - -------------------------------------------------------------------------------------------------------------------------------
$ in billions 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------------
Net Number % of Net Net Number % of Net
Geographic Insurance of Issues Insurance Insurance of Issues Insurance
Location In Force Outstanding In Force In Force Outstanding In Force
- - -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
California $ 76.3 3,681 12.7% $ 68.4 3,441 14.1%
New York 65.1 5,684 10.9 40.4 5,265 8.3
Florida 36.1 1,589 6.0 33.0 1,577 6.8
New Jersey 26.2 1,884 4.4 24.6 2,086 5.1
Texas 25.3 2,131 4.2 24.5 1,859 5.0
Pennsylvania 24.7 2,278 4.1 22.7 2,209 4.7
Illinois 23.7 1,275 4.0 20.0 1,191 4.1
Massachusetts 18.4 1,107 3.1 15.5 1,085 3.2
Michigan 14.6 1,066 2.4 12.4 1,005 2.5
Ohio 13.8 1,076 2.3 11.1 1,016 2.3
- - -------------------------------------------------------------------------------------------------------------------------------
Subtotal 324.2 21,771 54.1 272.6 20,734 56.1
Nationally
diversified 81.7 842 13.6 55.8 502 11.5
Other states 169.0 12,004 28.2 147.3 11,429 30.3
- - -------------------------------------------------------------------------------------------------------------------------------
Total domestic 574.9 34,617 95.9 475.7 32,665 97.9
International 24.5 323 4.1 10.1 207 2.1
- - -------------------------------------------------------------------------------------------------------------------------------
Total $599.4 34,940 100.0% $485.8 32,872 100.0%
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(19)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The insurance policies issued by MBIA Corp. are unconditional commitments to
guarantee timely payment on the bonds and notes to bondholders. The
creditworthiness of each insured issue is evaluated prior to the issuance of
insurance and each insured issue must comply with MBIA Corp.'s underwriting
guidelines. Further, the payments to be made by the issuer on the bonds or notes
may be backed by a pledge of revenues, reserve funds, letters of credit,
investment contracts or collateral in the form of mortgages or other assets. The
right to such money or collateral would typically become MBIA Corp.'s upon the
payment of a claim by MBIA Corp.
Under certain MBIA Corp.'s structured asset-backed transactions, a pool of
assets covering at least 100% of the principal amount guaranteed under its
insurance contract is sold or pledged to a special-purpose bankruptcy remote
entity. MBIA Corp.'s primary risk from such insurance contracts is the
impairment of cash flows due to delinquency or loss on the underlying assets.
MBIA Corp. therefore evaluates all the factors affecting past and future asset
performance by studying historical data on losses, delinquencies and recoveries
of the underlying assets. Each transaction is reviewed to ensure that an
appropriate legal structure is used to protect against the bankruptcy risk of
the originator of the assets. Along with the legal structure, an additional
level of first-loss protection is also created to protect against losses due to
credit or dilution. This first level of loss protection is usually available
from reserve funds, excess cash flows, overcollateralization or recourse to a
third party. The level of first-loss protection depends upon the historical
losses and dilution of the underlying assets, but is typically several times the
normal historical loss experience for the underlying type of assets. The
distribution of net insurance in force by type of bond is set forth in the table
below:
(20)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
- - ---------------------------------------------------------------------------------------------------------------------------------
$ in billions 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
Net Number % of Net Net Number % of Net
Insurance of Issues Insurance Insurance of Issues Insurance
Type of Bond In Force Outstanding In Force In Force Outstanding In Force
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Domestic
Municipal:
General obligation $140.7 12,694 23.6% $118.8 12,016 24.5%
Utilities 80.9 4,895 13.5 75.1 4,739 15.5
Health care 70.9 2,241 11.8 62.2 2,246 12.8
Transportation 46.2 1,543 7.7 40.5 1,487 8.3
Special revenue 42.8 1,787 7.1 34.0 1,641 7.0
Higher education 26.7 1,498 4.5 20.4 1,359 4.2
Housing 22.3 2,161 3.7 18.9 1,891 3.9
Industrial
development and
pollution control
revenue 19.4 1,037 3.2 19.6 943 4.0
Other 5.6 75 0.9 11.4 539 2.4
- - ---------------------------------------------------------------------------------------------------------------------------------
Total municipal 455.5 27,931 76.0 400.9 26,861 82.6
- - ---------------------------------------------------------------------------------------------------------------------------------
Structured finance* 97.1 850 16.2 56.1 510 11.5
- - ---------------------------------------------------------------------------------------------------------------------------------
Other:
Investor owned utility 13.0 5,068 2.2 9.4 4,610 1.9
Financial institution 5.4 381 0.9 5.8 366 1.2
Corporate direct 3.9 387 0.6 3.5 318 0.7
- - ---------------------------------------------------------------------------------------------------------------------------------
Total other 22.3 5,836 3.7 18.7 5,294 3.8
- - ---------------------------------------------------------------------------------------------------------------------------------
Total domestic 574.9 34,617 95.9 475.7 32,665 97.9
- - ---------------------------------------------------------------------------------------------------------------------------------
International
Infrastructure:
Sovereign 1.6 32 0.3 1.3 21 0.3
Transportation 1.4 12 0.2 0.8 5 0.2
Sub-sovereign 1.2 44 0.2 1.4 53 0.3
Higher education 0.9 13 0.1 0.6 1 0.1
Housing 0.6 3 0.1 0.3 2 0.1
Health care 0.4 6 0.1 0.2 6 ---
Utilities 0.4 4 0.1 0.8 60 0.2
- - ---------------------------------------------------------------------------------------------------------------------------------
Total infrastructure 6.5 114 1.1 5.4 148 1.2
- - ---------------------------------------------------------------------------------------------------------------------------------
Structured finance* 14.8 102 2.5 2.6 32 0.5
- - ---------------------------------------------------------------------------------------------------------------------------------
Other:
Investor owned utility 1.8 72 0.3 0.2 3 ---
Financial institution 1.0 29 0.1 1.9 24 0.4
Corporate direct 0.4 6 0.1 --- --- ---
- - ---------------------------------------------------------------------------------------------------------------------------------
Total other 3.2 107 0.5 2.1 27 0.4
- - ---------------------------------------------------------------------------------------------------------------------------------
Total international 24.5 323 4.1 10.1 207 2.1
- - ---------------------------------------------------------------------------------------------------------------------------------
Total $599.4 34,940 100.0% $485.8 32,872 100.0%
- - ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Asset-/mortgage-backed
(21)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. REINSURANCE
- - ----------------
MBIA Corp. reinsures portions of its risks with other insurance companies
through various quota and surplus share reinsurance treaties and facultative
agreements. In the event that any or all of the reinsurers were unable to meet
their obligations, MBIA Corp. would be liable for such defaulted amounts.
Amounts deducted from gross insurance in force for reinsurance ceded by
MBIA Corp. and its subsidiaries were $108.2 billion and $67.0 billion, at
December 31, 1998 and 1997, respectively. The distribution of ceded insurance in
force by geographic location and type of bond is set forth in the following
tables:
<TABLE>
<CAPTION>
As of December 31
- - ------------------------------------------------------------------------------------------------------
In billions 1998 1997
- - ------------------------------------------------------------------------------------------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance Insurance
Geographic Location In Force In Force In Force In Force
- - ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic
California $ 12.4 11.5% $10.4 15.5%
New York 10.7 9.9 5.8 8.7
New Jersey 5.4 5.0 3.7 5.5
Texas 5.3 4.9 4.0 6.0
Pennsylvania 3.8 3.5 2.9 4.3
Massachusetts 3.7 3.4 3.0 4.5
Illinois 3.4 3.1 2.7 4.0
Florida 3.2 3.0 2.6 3.9
Puerto Rico 3.1 2.9 2.3 3.4
Colorado 2.3 2.1 2.4 3.6
- - -----------------------------------------------------------------------------------------------------
Subtotal 53.3 49.3 39.8 59.4
Nationally diversified 14.6 13.5 3.4 5.0
Other states 23.6 21.8 19.1 28.6
- - -----------------------------------------------------------------------------------------------------
Total domestic 91.5 84.6 62.3 93.0
International 16.7 15.4 4.7 7.0
- - -----------------------------------------------------------------------------------------------------
Total $108.2 100.0% $67.0 100.0%
- - -----------------------------------------------------------------------------------------------------
</TABLE>
(22)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
As of December 31
- - --------------------------------------------------------------------------------
In billions 1998 1997
- - --------------------------------------------------------------------------------
% of % of
Ceded Ceded Ceded Ceded
Insurance Insurance Insurance nsurance
Type of Bond In Force In Force In Force In Force
- - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Domestic
Municipal:
Utilities $15.5 14.3% $11.5 17.2%
General obligation 15.4 14.2 12.1 18.1
Health care 13.4 12.4 8.0 12.0
Transportation 10.6 9.8 9.6 14.3
Special revenue 5.8 5.3 5.0 7.5
Industrial
development and
pollution control revenue 3.8 3.5 3.2 4.7
Housing 2.3 2.1 1.7 2.5
Higher education 1.7 1.6 1.3 1.9
Other 1.2 1.1 2.7 4.0
- - --------------------------------------------------------------------------------
Total municipal 69.7 64.3 55.1 82.2
- - --------------------------------------------------------------------------------
Structured finance* 19.5 18.0 5.6 8.3
- - --------------------------------------------------------------------------------
Other:
Investor-owned utility 1.3 1.2 0.1 0.3
Financial institution 0.9 0.8 1.3 1.9
Corporate direct 0.1 0.1 0.2 0.3
- - --------------------------------------------------------------------------------
Total other 2.3 2.1 1.6 2.5
- - --------------------------------------------------------------------------------
Total domestic 91.5 84.4 62.3 93.0
- - --------------------------------------------------------------------------------
International
Infrastructure:
Transportation 1.3 1.2 0.4 0.6
Higher education 1.0 0.9 0.6 0.9
Sovereign 0.8 0.7 0.7 1.1
Sub-sovereign 0.4 0.4 0.6 0.9
Utilities 0.4 0.4 0.1 0.1
Health care 0.2 0.2 0.2 0.3
Housing 0.1 0.1 --- ---
- - --------------------------------------------------------------------------------
Total infrastructure 4.2 3.9 2.6 3.9
- - --------------------------------------------------------------------------------
Structured finance* 11.1 10.3 1.3 1.9
- - --------------------------------------------------------------------------------
Other:
Financial institution 0.5 0.5 0.8 1.2
Corporate direct 0.5 0.5 --- ---
Investor-owned utilities 0.4 0.4 --- ---
- - --------------------------------------------------------------------------------
Total other 1.4 1.4 0.8 1.2
- - --------------------------------------------------------------------------------
Total international 16.7 15.6 4.7 7.0
- - --------------------------------------------------------------------------------
Total $108.2 100.0% $67.0 100.0%
- - --------------------------------------------------------------------------------
</TABLE>
* Asset-/mortgage-backed
(23)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As part of the MBIA Corp's portfolio shaping activity in 1998, the company has
entered into facultative share reinsurance agreements with highly rated
reinsurers that obligate the company to cede future premiums to the reinsurers
through January 1, 2005. Certain reinsurance contracts in 1998 were accounted
for on a retroactive basis in accordance with SFAS 113.
Ceding commissions received from reinsurers before deferrals were $37.2
million, $20.8 million and $13.7 million in 1998, 1997 and 1996, respectively.
In 1998, $170.0 million was received in reinsurance recoveries related to the
bankruptcy of a Pennsylvania hospital group.
13. EMPLOYEE BENEFITS
- - ----------------------
MBIA Corp. participates in MBIA Inc.'s pension plan covering substantially all
employees. The pension plan is a defined contribution plan and MBIA Corp.
contributes 10% of each eligible employee's annual total compensation. Pension
expense for the years ended December 31, 1998, 1997 and 1996 was $5.9 million,
$3.9 million and $3.4 million, respectively. MBIA Corp. also has a profit
sharing/401(k) plan which allows eligible employees to contribute up to 10% of
eligible compensation. MBIA Corp. matches employee contributions up to the first
5% of total compensation. MBIA Corp. contributions to the profit sharing plan
aggregated $2.6 million, $1.6 million and $1.5 million for the years ended
December 31, 1998, 1997 and 1996, respectively. The 401(k) plan amounts are
invested in common stock of MBIA Inc. Amounts relating to the above plans that
exceed limitations established by Federal regulations are contributed to a
non-qualified deferred compensation plan. In 1998, former CMAC employees were
covered under MBIA Inc.'s pension and profit sharing plans. Of the above amounts
for the pension and profit sharing plans, $5.3 million, $3.4 million and $3.0
million for the years ended December 31, 1998, 1997 and 1996, respectively, were
included in policy acquisition costs.
MBIA Corp. also participates in the "MBIA Long-Term Incentive Program". The
incentive program includes a stock option program and adds a compensation
component linked to the growth in adjusted book value per share (ABV) of MBIA
Inc.'s stock. Awards under the long-term program are divided equally between the
two components, with 50% of the award given in stock options and 50% of the
award (multiplied by a 1.5 conversion factor for the December 1995 award only)
paid in cash or shares of MBIA Inc.'s stock. Target levels for the
option/incentive award are established as a percentage of total salary and
(24)
<PAGE>
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MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
bonus, based upon the recipient's position. The awards under the long-term
program typically will be granted from the vice president level up to and
including the chairman and chief executive officer.
The ABV portion of the long-term incentive program may be awarded every
year. The 1998 award will cover growth in ABV from December 31, 1998 through
December 31, 2001; the 1997 award will cover growth in ABV from December 31,
1997 through December 31, 2000; and the 1995 award will cover growth in ABV from
December 31, 1995 through December 31, 1998, with a base line growth of 12% on
all awards. The amount to be paid in respect of such award will be adjusted
upward or downward based on the actual ABV growth with a minimum growth of 8%
necessary to receive any payment and an 18% growth needed to receive the maximum
payment of 200% of the target levels. The amount, if any, to be paid under this
portion of the program will be paid in early 2002 for the 1998 award, in early
2001 for the 1997 award and early 1999 for the 1995 award in the form of cash or
shares of MBIA Inc.'s common stock. Subsequent awards, if any, will be made
every year with concomitant payments occurring after the three-year cycle.
During 1998, 1997 and 1996, $4.8 million, $3.2 million and $2.6 million,
respectively, were recorded as a charge related to the 1998, 1997 and 1995 ABV
awards. Of these amounts, $3.0 million, $2.0 million and $1.6 million were
included in policy acquisition costs for the same respective periods.
MBIA Corp. also participates in MBIA Inc.'s restricted stock program,
adopted in December 1995, whereby key executive officers of MBIA Corp. are
granted restricted shares of MBIA Inc. common stock. These stock awards may only
be sold three or four years from the date of grant, at which time the awards
fully vest. Compensation expense related to the restricted stock was $0.9
million, $0.5 million and $0.2 million for the years ended December 31, 1998,
1997 and 1996, respectively, of which $0.5 million, $0.3 million and $0.1
million were included in policy acquisition costs.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based
Compensation," effective for financial statements for fiscal years beginning
after December 15, 1995. SFAS 123 required MBIA Inc. to adopt, at its election,
either 1) the provisions in SFAS 123 which require the recognition of
compensation expense for employee stock-based compensation plans, or 2) the
provisions in SFAS 123 which require the pro forma disclosure of net income and
earnings per share as if the recognition provisions of SFAS 123 had been
adopted. MBIA Inc. adopted the disclosure requirements of SFAS 123 effective
(25)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
January 1, 1996 and continues to account for its employee stock-based
compensation plans under Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees". Accordingly, the adoption of SFAS 123 had no
impact on MBIA Corp.'s financial position or results of operations. Had
compensation cost for the MBIA Inc. stock option program been recognized based
on the fair value at the grant date consistent with the recognition provisions
of SFAS 123, the impact on MBIA Corp.'s net income would not have been material.
14. RELATED PARTY TRANSACTIONS
- - -------------------------------
Since 1989, MBIA Corp. has executed five surety bonds to guarantee the payment
obligations of the members of the Association who had their Standard & Poor's
Corporation claims-paying rating downgraded from Triple-A on their previously
issued Association policies. In the event that they do not meet their
Association policy payment obligations, MBIA Corp. will pay the required amounts
directly to the paying agent. The aggregate outstanding exposure on these surety
bonds as of December 31, 1998 is $340 million.
Included in other assets at December 31, 1998 is a $45.4 million net
receivable from MBIA Inc. and other subsidiaries. As of December 31, 1997,
included in other liabilities is a $27.1 million net payable to MBIA Inc. and
other subsidiaries.
MBIA Corp. entered into an agreement with MBIA Inc. and IMC whereby MBIA
Corp. held securities subject to agreements to resell of $187.5 million and
$182.8 million as of December 31, 1998 and 1997, respectively, and transferred
securities subject to agreements to repurchase of $187.5 million and $182.8
million as of December 31, 1998 and 1997. These agreements have a term of less
than one year. The interest expense relating to these agreements was $11.1
million and $8.3 million, respectively, for the years ended December 31, 1998
and 1997. The interest income relating to these agreements was $11.6 million and
$8.4 million, respectively, for the years ended December 31, 1998 and 1997.
(26)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
- - ----------------------------------------
The estimated fair value amounts of financial instruments shown in the following
table have been determined by MBIA Corp. using available market information and
appropriate valuation methodologies. However, in certain cases considerable
judgment is necessarily required to interpret market data to develop estimates
of fair value. Accordingly, the estimates presented herein are not necessarily
indicative of the amount MBIA Corp. could realize in a current market exchange.
The use of different market assumptions and/or estimation methodologies may have
a material effect on the estimated fair value amounts.
FIXED-MATURITY SECURITIES - The fair value of fixed-maturity securities is based
upon quoted market price, if available. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
SHORT-TERM INVESTMENTS - Short-term investments are carried at amortized cost
which approximates fair value.
OTHER INVESTMENTS - Other investments include MBIA Corp.'s interest in a limited
partnership and a mutual fund that invests principally in marketable equity
securities. The fair value of these investments is based on quoted market
prices.
CASH AND CASH EQUIVALENTS, RECEIVABLE FOR INVESTMENTS SOLD AND PAYABLE FOR
INVESTMENTS PURCHASED - The carrying amounts of these items are a reasonable
estimate of their fair value.
SECURITIES PURCHASED UNDER AGREEMENTS TO RESELL - The fair value is estimated
based upon the quoted market prices of the transactions' underlying
collateral.
PREPAID REINSURANCE PREMIUMS - The fair value of MBIA Corp.'s prepaid
reinsurance premiums is based on the estimated cost of entering into an
assumption of the entire portfolio with third party reinsurers under current
market conditions.
DEFERRED PREMIUM REVENUE - The fair value of MBIA Corp.'s deferred premium
revenue is based on the estimated cost of entering into a cession of the entire
portfolio with third party reinsurers under current market conditions.
(27)
<PAGE>
[Alternate Page]
MBIA INSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES - The carrying amount is composed of
the present value of the expected cash flows for specifically identified claims
combined with an estimate for unallocated claims. Therefore, the carrying amount
is a reasonable estimate of the fair value of the reserve.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE - The fair value is estimated
based upon the quoted market prices of the transactions' underlying collateral.
INSTALLMENT PREMIUMS - The fair value is derived by calculating the present
value of the estimated future cash flow stream discounted at 9%.
<TABLE>
<CAPTION>
As of December 31, 1998 As of December 31, 1997
- - -----------------------------------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
In thousands Amount Fair Value Amount Fair Value
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS:
Fixed-maturity securities $5,884,053 $5,884,053 $4,867,254 $4,867,254
Short-term investments 423,188 423,188 242,730 242,730
Other investments 17,850 17,850 16,802 16,802
Cash and cash equivalents 6,546 6,546 3,983 3,983
Securities purchased under
agreements to resell 187,500 299,412 182,820 203,333
Prepaid reinsurance
premiums 352,699 297,238 252,893 218,571
Receivable for
investments sold 33,880 33,880 1,616 1,616
LIABILITIES:
Deferred premium
revenue 2,251,211 1,939,971 1,984,104 1,716,477
Loss and loss adjustment
expense reserves 270,114 270,114 78,872 78,872
Securities sold under
agreements to repurchase 187,500 194,491 182,820 191,932
Payable for investments
purchased 29,523 29,523 23,020 23,020
OFF-BALANCE SHEET INSTRUMENTS:
Installment premiums --- 644,132 --- 349,619
</TABLE>
(28)
<PAGE>
[Alternate Page]
EXPERTS
The consolidated financial statements of Citicorp and subsidiaries
included in Citicorp's Annual Report on Form 10-K for 1998 have been
incorporated by reference in reliance upon the report in such Form 10-K of KPMG
LLP, independent certified public accountants, and upon the authority of that
firm as experts in accounting and auditing.
The consolidated balance sheets of Financial Security Assurance Inc.
and Subsidiaries as of December 31, 1998 and 1997 and the related consolidated
statements of income, changes in shareholder's equity, and cash flows for each
of the three years in the period ended December 31, 1998, included in this
Amendment No. 2 to Form S-3 (333-72459), have been included herein in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of that firm as experts in accounting and auditing.
<PAGE>
[The following are alternate pages for the consolidated
financial statements of Financial Security Assurance Inc.
and Subsidiaries to be set forth in, or incorporated by
reference in, the FSA Supplement.]
<PAGE>
[Alternate Page]
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AND REPORT OF INDEPENDENT ACCOUNTANTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
REPORT OF INDEPENDENT ACCOUNTANTS 1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Shareholder's Equity 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
<PAGE>
[Alternate Page]
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
of Financial Security Assurance Inc.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows present fairly, in all material respects, the financial position of
Financial Security Assurance Inc. and Subsidiaries (the Company) at December 31,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
PricewaterhouseCoopers LLP
New York, New York
January 26, 1999
1
<PAGE>
[Alternate Page]
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1998 1997
---- ----
<S> <C> <C>
Bonds at market value (amortized cost of $1,631,094
and $1,192,771) $1,683,928 $1,235,441
Equity investments at market value (cost of $34,250 and
$20,405) 37,268 20,762
Short-term investments 92,241 103,926
---------- ----------
Total investments 1,813,437 1,360,129
Cash 2,729 11,235
Deferred acquisition costs 199,559 171,098
Prepaid reinsurance premiums 217,096 173,123
Reinsurance recoverable on unpaid losses 3,907 30,618
Receivable for securities sold 1,656 20,535
Other assets 105,379 72,901
---------- ----------
TOTAL ASSETS $2,343,763 $1,839,639
========== ==========
LIABILITIES AND MINORITY INTEREST AND SHAREHOLDER'S EQUITY
Deferred premium revenue $ 721,699 $ 595,196
Losses and loss adjustment expenses 63,947 75,417
Deferred federal income taxes 56,672 59,867
Ceded reinsurance balances payable 31,502 11,199
Payable for securities purchased 105,749 72,979
Long-term debt 120,000 50,000
Minority interest 20,388
Accrued expenses and other liabilities 119,215 77,121
---------- ----------
TOTAL LIABILITIES AND MINORITY INTEREST 1,239,172 941,779
---------- ----------
COMMITMENTS AND CONTINGENCIES
Common stock (500 and 528 shares authorized, issued and
outstanding; par value of $30,000 and $28,391 per
share) 15,000 15,000
Additional paid-in capital 694,788 617,870
Accumulated other comprehensive income (net of deferred
income tax provision of $19,904 and $15,059) 36,964 27,968
Accumulated earnings 357,839 237,022
---------- ----------
TOTAL SHAREHOLDER'S EQUITY 1,104,591 897,860
---------- ----------
TOTAL LIABILITIES AND MINORITY INTEREST AND
SHAREHOLDER'S EQUITY $2,343,763 $1,839,639
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
2
<PAGE>
[Alternate Page]
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Net premiums written $ 219,853 $ 172,878 $ 121,000
Increase in deferred premium revenue (81,926) (63,367) (30,552)
--------- --------- ---------
Premiums earned 137,927 109,511 90,448
Net investment income 76,023 69,643 62,728
Net realized gains 21,667 6,023 1,851
Other income 381 10,774 502
--------- --------- ---------
TOTAL REVENUES 235,998 195,951 155,529
--------- --------- ---------
EXPENSES:
Losses and loss adjustment expenses 3,949 9,156 6,874
Policy acquisition costs 35,439 27,962 23,829
Other operating expenses 28,502 20,717 14,852
--------- --------- ---------
TOTAL EXPENSES 67,890 57,835 45,555
--------- --------- ---------
Minority interest (388)
---------
INCOME BEFORE INCOME TAXES 167,720 138,116 109,974
--------- --------- ---------
Provision (benefit) for income taxes:
Current 54,942 29,832 28,208
Deferred (8,039) 8,025 911
--------- --------- ---------
Total provision 46,903 37,857 29,119
--------- --------- ---------
NET INCOME 120,817 100,259 80,855
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising
during period (net of deferred income tax
provision (benefit) of $12,428, $12,268
and $(5,057)) 23,080 22,784 (9,392)
Less: reclassification adjustment for gains
included in net income (net of deferred
income tax provision
of $7,583, $2,108 and $648) (14,084) (3,915) (1,203)
--------- --------- ---------
Other comprehensive income (loss) 8,996 18,869 (10,595)
--------- --------- ---------
COMPREHENSIVE INCOME $ 129,813 $ 119,128 $ 70,260
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
3
<PAGE>
[Alternate Page]
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Unrealized
Additional Gain
Common Paid-In (Loss) on Retained
Stock Capital Investments Earnings Total
----- ------- ----------- -------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 $ 15,000 $ 681,470 $ 19,694 $ 73,822 $ 789,986
Net income 80,855 80,855
Dividends paid on common stock (18,000) (18,000)
Net change in accumulated
comprehensive income
(net of deferred income
tax benefit of $5,705) (10,595) (10,595)
Stock repurchase (27,000) (27,000)
Adjustment to prior-year disposal of
subsidiary 86 86
--------- ----------- --------- --------- -----------
BALANCE, December 31, 1996 15,000 654,470 9,099 136,763 815,332
Net income 100,259 100,259
Net change in accumulated
comprehensive income
(net of deferred income
taxes of $10,160) 18,869 18,869
Stock repurchase (39,500) (39,500)
Deferred equity payout by Parent 2,900 2,900
--------- ----------- --------- --------- -----------
BALANCE, December 31, 1997 15,000 617,870 27,968 237,022 897,860
Net income 120,817 120,817
Net change in accumulated
comprehensive income
(net of deferred income
taxes of $4,844) 8,996 8,996
Stock repurchase (8,500) (8,500)
Capital contribution from Parent 80,000 80,000
Deferred equity payout by Parent 5,418 5,418
--------- ----------- --------- --------- -----------
BALANCE, December 31, 1998 $ 15,000 $ 694,788 $ 36,964 $ 357,839 $ 1,104,591
========= =========== ========= ========= ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
4
<PAGE>
[Alternate Page]
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Premiums received, net $ 247,229 $ 171,145 $ 124,540
Policy acquisition and other operating
expenses paid, net (81,559) (50,046) (49,261)
Recoverable advances received (paid) 1,473 (7,629) 10,213
Losses and loss adjustment expenses
recovered (paid) 10,989 (6,463) (15,473)
Net investment income received 67,268 63,207 59,923
Federal income taxes paid (52,210) (27,080) (33,297)
Interest paid (22)
Other (877) 2,142 1,330
----------- ----------- -----------
Net cash provided by operating
activities 192,313 145,276 97,953
----------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of bonds 1,735,585 1,071,845 1,095,929
Proceeds from sales of equity investments 22,571 3,568
Proceeds from maturities of bonds 32,468 2,965
Purchases of bonds (2,098,264) (1,196,117) (1,139,129)
Purchases of equity investments (37,034) (24,662)
Gain on sale of subidiaries 9,486
Purchases of property and equipment (1,071) (2,985) (2,081)
Net decrease (increase) in short-term
investments 15,857 (45,661) (3,675)
Other investments 20,037
----------- ----------- -----------
Net cash provided by (used for)
investing activities (342,319) (152,058) (45,991)
----------- ----------- -----------
Cash flows from financing activities:
Stock repurchase (8,500) (39,500) (27,000)
Surplus notes issued 70,000 50,000
Capital contribution 80,000
Dividends paid (18,000)
----------- ----------- -----------
Net cash provided by (used for)
financing activities 141,500 10,500 (45,000)
----------- ----------- -----------
Net increase (decrease) in cash (8,506) 3,718 6,962
Cash at beginning of year 11,235 7,517 555
----------- ----------- -----------
Cash at end of year $ 2,729 $ 11,235 $ 7,517
=========== =========== ===========
</TABLE>
Continued
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
5
<PAGE>
[Alternate Page]
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Reconciliation of net income to net cash
flows from operating activities:
Net income $ 120,817 $ 100,259 $ 80,855
Increase in accrued investment income (3,939) (1,811) (842)
Increase in deferred premium revenue and
related foreign exchange adjustment 82,530 62,101 29,622
Increase in deferred acquisition costs (28,461) (24,865) (13,282)
Increase (decrease) in current federal
income taxes payable 2,732 (519) (5,090)
Increase (decrease) in unpaid losses and
loss adjustment expenses 15,240 2,596 (8,023)
Increase in amounts withheld for others 81 133 52
Provision (benefit) for deferred income
taxes (8,039) 11,296 911
Net realized gains on investments (21,667) (6,023) (1,851)
Depreciation and accretion of bond
discount (3,540) (1,736) (1,616)
Gain on sale of subsidiaries (9,486)
Minority interest 388
Change in other assets and liabilities 36,171 13,331 17,217
--------- --------- ---------
Cash provided by operating activities $ 192,313 $ 145,276 $ 97,953
========= ========= =========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
6
<PAGE>
[Alternate Page]
FINANCIAL SECURITY ASSURANCE INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1. ORGANIZATION AND OWNERSHIP
Financial Security Assurance Inc. (the Company), an indirect wholly owned
subsidiary of Financial Security Assurance Holdings Ltd. (the Parent), is an
insurance company domiciled in the State of New York. The Company is engaged in
providing financial guaranty insurance on asset-backed and municipal
obligations. The Company's underwriting policy is to insure asset-backed and
municipal obligations that it determines would be of investment-grade quality
without the benefit of the Company's insurance. The asset-backed obligations
insured by the Company are generally issued in structured transactions and are
backed by pools of assets such as residential mortgage loans, consumer or trade
receivables, securities or other assets having an ascertainable cash flow or
market value. The municipal obligations insured by the Company consist primarily
of general obligation bonds that are supported by the issuers' taxing power and
special revenue bonds and other special obligations of states and local
governments that are supported by the issuers' ability to impose and collect
fees and charges for public services or specific projects. Financial guaranty
insurance written by the Company guarantees scheduled payments on an issuer's
obligation. In the case of a payment default on an insured obligation, the
Company is generally required to pay the principal, interest or other amounts
due in accordance with the obligation's original payment schedule or, at its
option, to pay such amounts on an accelerated basis.
The Company expects to continue to emphasize a diversified insured
portfolio characterized by insurance of both asset-backed and municipal
obligations, with a broad geographic distribution and a variety of revenue
sources and transaction structures. The Company's insured portfolio consists
primarily of asset-backed and municipal obligations originated in the United
States, but the Company has also written and continues to pursue business in
Europe and the Asia Pacific region.
At December 31, 1996, the Parent was owned 40.4% by U S WEST Capital
Corporation (U S WEST), 11.5% by Fund American Enterprises Holdings, Inc. (Fund
American), 6.4% by The Tokio Marine and Fire Insurance Co., Ltd. (Tokio Marine)
and 41.7% by the public and employees. At December 31, 1997, the Parent was
owned 42.1% by U S WEST, 12.0% by Fund American, 6.7% by Tokio Marine and 39.2%
by the public and employees. At December 31, 1998, the Parent was owned 40.5% by
MediaOne Capital Corporation (MediaOne), formerly U S WEST, 11.6% by Fund
American, 6.4% by Tokio Marine, 5.5% by XL Capital Ltd (XL) and 36.0% by the
public and employees.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP), which differ in certain
material respects from the accounting practices prescribed or permitted by
insurance regulatory authorities (see Note 5). The preparation of financial
statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities in the Company's consolidated
balance sheets at December 31, 1998 and 1997 and the reported amounts of
revenues and expenses in the consolidated statements of income during the years
ended December 31, 1998, 1997 and 1996. Such estimates and assumptions include,
but are not limited to, losses and loss adjustment expenses and the deferral and
amortization of deferred policy acquisition costs. Actual results may differ
from those estimates. Significant accounting policies under GAAP are as follows:
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its direct and indirect subsidiaries, FSA Insurance Company, Financial
Security Assurance International Ltd., Financial Security Assurance of Oklahoma,
Inc. and Financial Security Assurance (U.K.) Limited (collectively, the
Subsidiaries). All intercompany accounts and transactions have been eliminated.
Certain prior-year balances have been reclassified to conform to the 1998
presentation.
7
<PAGE>
[Alternate Page]
Investments
Investments in debt securities designated as available for sale are
carried at market value. Equity investments are carried at market value. Any
resulting unrealized gain or loss is reflected as a separate component of
shareholders' equity, net of applicable deferred income taxes. All of the
Company's long-term investments are classified as available for sale.
Bond discounts and premiums are amortized on the effective yield method
over the remaining terms of the securities acquired. For mortgage-backed
securities, and any other holdings for which prepayment risk may be significant,
assumptions regarding prepayments are evaluated periodically and revised as
necessary. Any adjustments required due to the resulting change in effective
yields are recognized in current income. Short-term investments, which are those
investments with a maturity of less than one year at time of purchase, are
carried at market value, which approximates cost. Realized gains or losses on
sale of investments are determined on the basis of specific identification.
Investment income is recorded as earned.
The Company holds derivative securities, including U.S. Treasury bond
futures contracts and call option contracts, that are not accounted for as
hedges and are marked-to-market on a daily basis. Any gains or losses are
included in capital gains or losses.
Premium Revenue Recognition
Gross and ceded premiums are earned in proportion to the amount of risk
outstanding over the expected period of coverage. Deferred premium revenue and
prepaid reinsurance premiums represent the portion of premium that is applicable
to coverage of risk to be provided in the future on policies in force. When an
insured issue is retired or defeased prior to the end of the expected period of
coverage, the remaining deferred premium revenue and prepaid reinsurance
premium, less any amount credited to a refunding issue insured by the Company,
are recognized.
Losses and Loss Adjustment Expenses
A case basis reserve for unpaid losses and loss adjustment expenses is
recorded at the present value of the estimated loss when, in management's
opinion, the likelihood of a future loss is probable and determinable at the
balance sheet date. The estimated loss on a transaction is discounted using
current risk-free rates.
The general reserve is calculated by applying a loss factor to the total
net par amount outstanding of the Company's insured obligations over the term of
such insured obligations and discounting the result at risk-free rates. The loss
factor used for this purpose has been determined based upon an independent
rating agency study of bond defaults and the Company's portfolio characteristics
and history. The general reserve is available to be applied against future
additions or accretions to existing case basis reserves or to new case basis
reserves to be established in the future.
Management of the Company periodically evaluates its estimates for losses
and loss adjustment expenses and establishes reserves that management believes
are adequate to cover the present value of the ultimate net cost of claims. The
reserves are necessarily based on estimates, and there can be no assurance that
the ultimate liability will not differ from such estimates. The Company will, on
an ongoing basis, monitor these reserves and may periodically adjust such
reserves based on the Company's actual loss experience, its future mix of
business, and future economic conditions.
Deferred Acquisition Costs
Deferred acquisition costs comprise those expenses that vary with and are
primarily related to the production of business, including commissions paid on
reinsurance assumed, compensation and related costs of underwriting and
marketing personnel, certain rating agency fees, premium taxes and certain other
underwriting expenses, reduced by ceding commission income on premiums ceded to
reinsurers. Deferred acquisition costs and the cost of acquired business are
amortized over the period in which the related premiums are earned.
Recoverability of deferred acquisition costs is determined by considering
anticipated losses and loss adjustment expenses.
Federal Income Taxes
The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods
reflected at current income tax rates.
8
<PAGE>
[Alternate Page]
Segment Reporting
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosure about Segments of an
Enterprise and Related Information, establishing standards for the way that
public business enterprises report information about operating segments in
annual and interim financial statements and requiring presentation of a measure
of profit or loss, certain specific revenue and expense items and segment
assets. The Company has no reportable operating segments as a monoline financial
guaranty insurer.
3. INVESTMENTS
Bonds at amortized cost of $11,481,000 and $11,025,000 at December 31,
1998 and 1997, respectively, were on deposit with state regulatory authorities
as required by insurance regulations.
Consolidated net investment income consisted of the following (in
thousands):
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Bonds $ 69,216 $ 65,149 $ 61,130
Equity investments 830 376 14
Short-term investments 7,376 5,452 3,525
Investment expenses (1,399) (1,334) (1,941)
-------- -------- --------
Net investment income $ 76,023 $ 69,643 $ 62,728
======== ======== ========
The credit quality of the fixed-income investment portfolio at December
31, 1998 was as follows:
Percent of Fixed-Income
Rating Investment Portfolio
------------------- -----------------------
AAA 68.7%
AA 21.3
A 9.3
BBB 0.4
Other 0.3
The amortized cost and estimated market value of bonds were as follows (in
thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
December 31, 1998 Cost Gains Losses Value
- - ----------------- ---- ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 134,910 $ 2,297 $ (337) $ 136,870
Obligations of states and political
subdivisions 1,041,718 42,265 (637) 1,083,346
Mortgage-backed securities 261,322 3,911 (180) 265,053
Corporate securities 162,663 5,510 (463) 167,710
Asset-backed securities 30,481 493 (25) 30,949
---------- ---------- ---------- ----------
Total $1,631,094 $ 54,476 $ (1,642) $1,683,928
========== ========== ========== ==========
</TABLE>
9
<PAGE>
[Alternate Page]
December 31, 1997
<TABLE>
<S> <C> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies $ 120,314 $ 800 $ (436) $ 120,678
Obligations of states and political
subdivisions 777,042 40,187 (135) 817,094
Foreign securities 8,252 (562) 7,690
Mortgage-backed securities 195,567 2,213 (28) 197,752
Corporate securities 72,388 1,375 (1,093) 72,670
Asset-backed securities 19,208 349 19,557
---------- ---------- ---------- ----------
Total $1,192,771 $ 44,924 $ (2,254) $1,235,441
========== ========== ========== ==========
</TABLE>
The change in net unrealized gains (losses) consisted of (in thousands):
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Bonds $ 10,164 $ 28,671 $(16,299)
Equity investments 2,661 357
Other 1,017
-------- -------- --------
Change in net unrealized gains (losses) $ 13,842 $ 29,028 $(16,299)
======== ======== ========
The amortized cost and estimated market value of bonds at December 31,
1998, by contractual maturity, are shown below (in thousands). Actual maturities
could differ from contractual maturities because borrowers have the right to
call or prepay certain obligations with or without call or prepayment penalties.
Estimated
Amortized Market
Cost Value
---- -----
Due in one year or less $ 1,002 $ 1,006
Due after one year through five years 135,398 137,917
Due after five years through ten years 211,500 219,185
Due after ten years 991,391 1,029,818
Mortgage-backed securities (stated maturities of 1 to
30 years) 261,322 265,053
Asset-backed securities (stated maturities of 3 to 30
years) 30,481 30,949
---------- ----------
Total $1,631,094 $1,683,928
========== ==========
Proceeds from sales of bonds during 1998, 1997 and 1996 were
$2,132,146,000, $1,124,848,000 and $1,096,568,000, respectively. Gross gains of
$26,373,000, $11,702,000 and $13,420,000 and gross losses of $4,156,000,
$6,007,000 and $11,569,000 were realized on sales in 1998, 1997 and 1996,
respectively.
Proceeds from sales of equity investments during 1998 and 1997 were
$22,571,000 and $3,568,000, respectively. Gross gains of $973,000 and $33,000
and gross losses of $1,323,000 and $7,000 were realized on sales in 1998 and
1997, respectively.
10
<PAGE>
[Alternate Page]
4. DEFERRED ACQUISITION COSTS
Acquisition costs deferred for amortization against future income and the
related amortization charged to expenses are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance, beginning of period $ 171,098 $ 146,233 $ 132,951
--------- --------- ---------
Costs deferred during the period:
Ceding commission income (27,693) (18,956) (15,956)
Assumed commission expense 22 31 38
Premium taxes 8,081 5,554 3,718
Compensation and other acquisition costs 83,490 66,198 49,311
--------- --------- ---------
Total 63,900 52,827 37,111
--------- --------- ---------
Costs amortized during the period (35,439) (27,962) (23,829)
--------- --------- ---------
Balance, end of period $ 199,559 $ 171,098 $ 146,233
========= ========= =========
</TABLE>
5. STATUTORY ACCOUNTING PRACTICES
GAAP for the Company differs in certain significant respects from
accounting practices prescribed or permitted by insurance regulatory
authorities. The principal differences result from the following statutory
accounting practices:
- Upfront premiums on municipal business are recognized as earned
when related principal and interest have expired rather than over the
expected coverage period;
- Acquisition costs are charged to operations as incurred rather
than as related premiums are earned;
- A contingency reserve (rather than a general reserve) is computed
based on the following statutory requirements:
(i) For all policies written prior to July 1, 1989, an amount equal
to 50% of cumulative earned premiums less permitted reductions, plus;
(ii) For all policies written on or after July 1, 1989, an amount
equal to the greater of 50% of premiums written for each category of
insured obligation or a designated percentage of principal guaranteed for
that category. These amounts are provided each quarter as either 1/60th or
1/80th of the total required for each category, less permitted reductions;
- Certain assets designated as "non-admitted assets" are charged
directly to statutory surplus but are reflected as assets under GAAP;
- Federal income taxes are provided only on taxable income for which
income taxes are currently payable;
- Accruals for deferred compensation are not recognized;
- Purchase accounting adjustments are not recognized;
- Bonds are carried at amortized cost;
- Surplus notes are recognized as surplus rather than a liability.
11
<PAGE>
[Alternate Page]
A reconciliation of net income for the calendar years 1998, 1997 and 1996
and shareholder's equity at December 31, 1998 and 1997, reported by the Company
on a GAAP basis, to the amounts reported by the Subsidiaries on a statutory
basis, is as follows (in thousands):
<TABLE>
<CAPTION>
Net Income: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
GAAP BASIS $ 120,817 $ 100,259 $ 80,855
Premium revenue recognition (16,411) (23,130) (5,518)
Losses and loss adjustment expenses incurred 12,938 4,653 (2,138)
Deferred acquisition costs (28,461) (24,865) (12,482)
Deferred income tax provision (benefit) (8,039) 8,025 911
Amortization of bonds 56 566
Accrual of deferred compensation, net 33,268 26,681 12,737
Other 100 (61) 1,404
--------- --------- ---------
STATUTORY BASIS $ 114,212 $ 91,618 $ 76,335
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------
Shareholder's Equity: 1998 1997
---- ----
<S> <C> <C>
GAAP BASIS $ 1,104,591 $ 897,860
Premium revenue recognition (91,297) (74,863)
Loss and loss adjustment expense reserves 47,250 34,313
Deferred acquisition costs (199,559) (171,098)
Contingency reserve (367,454) (287,694)
Unrealized gain on investments, net of tax (55,851) (43,027)
Deferred income taxes 56,672 59,867
Accrual of deferred compensation 70,022 41,451
Surplus notes 120,000 50,000
Other (14,118) (12,841)
----------- -----------
STATUTORY BASIS SURPLUS $ 670,256 $ 493,968
=========== ===========
SURPLUS PLUS CONTINGENCY RESERVE $ 1,037,710 $ 781,661
=========== ===========
</TABLE>
6. FEDERAL INCOME TAXES
The Parent, the Company and its Subsidiaries (except Financial Security
Assurance International Ltd.) file a consolidated federal income tax return. The
calculation of each member's tax benefit or liability is controlled by a tax
sharing agreement that bases the allocation of such benefit or liability upon a
separate return calculation.
The cumulative balance sheet effects of deferred tax consequences are (in
thousands):
December 31,
------------
1998 1997
---- ----
Deferred acquisition costs $ 69,079 $ 59,884
Deferred premium revenue adjustments 10,354 8,424
Unrealized capital gains 20,749 16,998
Contingency reserves 46,260 38,037
--------- ---------
Total deferred tax liabilities 146,442 123,343
--------- ---------
Loss and loss adjustment expense reserves (16,613) (12,009)
Deferred compensation (34,020) (20,328)
Tax and loss bonds (38,726) (30,520)
Other, net (411) (619)
--------- ---------
Total deferred tax assets (89,770) (63,476)
--------- ---------
Total deferred income taxes $ 56,672 $ 59,867
========= =========
12
<PAGE>
[Alternate Page]
No valuation allowance was necessary at December 31, 1998 or 1997.
A reconciliation of the effective tax rate with the federal statutory rate
follows:
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Tax at statutory rate 35.0% 35.0% 35.0%
Tax-exempt interest (8.1) (7.9) (8.9)
Other 1.1 0.3 0.4
---- ---- ----
Provision for income taxes 28.0% 27.4% 26.5%
==== ==== ====
7. DIVIDENDS AND CAPITAL REQUIREMENTS
Under New York Insurance Law, The Company may pay a dividend without the
prior approval of the Superintendent of the New York State Insurance Department
only from earned surplus subject to the maintenance of a minimum capital
requirement. In addition, the dividend, together with all dividends declared or
distributed by it during the preceding twelve months, may not exceed the lesser
of 10% of its policyholders' surplus shown on its last filed statement, or
adjusted net investment income, as defined, for such twelve-month period. As of
December 31, 1998, the Company had $65,726,000 available for the payment of
dividends over the next twelve months.
In 1998, the Company repurchased $8,500,000 of its shares from the Parent,
representing the balance remaining of $75,000,000 that had been approved for
repurchase by the New York Insurance Department.
8. CREDIT ARRANGEMENTS AND ADDITIONAL CLAIMS-PAYING RESOURCES
The Company has a credit arrangement aggregating $150,000,000 at December
31, 1998, which is provided by commercial banks and intended for general
application to transactions insured by the Company and the Subsidiaries. At
December 31, 1998, there were no borrowings under this arrangement, which
expires on November 23, 1999. In addition, there are credit arrangements
assigned to specific insured transactions. In August 1994, the Company entered
into a facility agreement with Canadian Global Funding Corporation and Hambros
Bank Limited. Under the agreement, which expires in August 2004, the Company can
arrange financing for transactions subject to certain conditions. The amount of
this facility was $186,911,000, of which $44,974,000 was unutilized at December
31, 1998.
The Company has a standby line of credit commitment in the amount of
$240,000,000 with a group of international Aaa/AAA-rated banks to provide loans
to the Company after it has incurred, during the term of the facility,
cumulative municipal losses (net of any recoveries) in excess of the greater of
$230,000,000 or 5.75% of average annual debt service of the covered portfolio.
The obligation to repay loans made under this agreement is a limited recourse
obligation payable solely from, and collateralized by, a pledge of recoveries
realized on defaulted insured obligations in the covered portfolio, including
certain installment premiums and other collateral. This commitment has a term
beginning on April 30, 1997 and expiring on April 30, 2004 and contains an
annual renewal provision subject to approval by the banks. No amounts have been
utilized under this commitment as of December 31, 1998.
At December 31, 1998, the Company has borrowed $120,000,000 from its
Parent in the form of Surplus Notes. These notes carried a simple interest rate
of 5.0% per annum. Principal of and interest on the Surplus Notes may be paid at
any time at the option of the Company, subject to prior approval of the New York
Insurance Department and compliance with the conditions to such payments as
contained in the New York Insurance Laws. These notes have no stated maturity.
The Company did not pay interest in 1998 or 1997.
9. EMPLOYEE BENEFIT PLANS
The Company maintains both a qualified and a non-qualified
non-contributory defined contribution pension plan for the benefit of all
eligible employees. The Company's contributions are based upon a fixed
percentage of employee compensation. Pension expense, which is funded as
accrued, amounted to $2,380,000, $2,312,000 and $1,977,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
13
<PAGE>
[Alternate Page]
The Company has an employee retirement savings plan for the benefit of all
eligible employees. The plan permits employees to contribute a percentage of
their salaries up to limits prescribed by the Internal Revenue Service (IRS
Code, Section 401(k)). The Company's contributions are discretionary, and none
have been made.
Pursuant to the 1993 Equity Participation Plan, 1,810,780 shares of the
Parent's common stock, subject to anti-dilutive adjustment, were reserved for
awards of options, restricted shares of common stock, and performance shares to
employees for the purpose of providing, through the grant of long-term
incentives, a means to attract and retain key personnel and to provide to
participating officers and other key employees long-term incentives for
sustained high levels of performance. Shares available under the 1993 Equity
Participation Plan were increased from 1,810,780 to 2,110,780 in December 1995.
The 1993 Equity Participation Plan also contains provisions that permit the
Human Resources Committee to pay all or a portion of employees' bonuses in the
form of shares of the Parent's common stock credited to the employees at a 15%
discount from current market value and paid to employees five years from the
date of award. Up to an aggregate of 10,000,000 shares may be allocated to such
equity bonuses. Common stock to pay performance shares, stock options and equity
bonus awards is acquired by the Parent through open-market purchases by a trust
established for such purpose.
Performance shares are awarded under the Parent's 1993 Equity
Participation Plan. The Plan authorizes the discretionary grant of performance
shares by the Human Resources Committee to key employees of the Company. The
number of shares of the Parent's common stock earned for each performance share
depends upon the attainment by the Parent of certain growth rates of adjusted
book value per outstanding share over a three-year period. At each payout date,
each performance share is adjusted to pay out from zero up to two common shares.
No common shares are paid out if the compound annual growth rate of the Parent's
adjusted book value per outstanding share was less than 7%. Two common shares
per performance share are paid out if the compound annual growth rate was 19% or
greater. Payout percentages are interpolated for compound annual growth rates
between 7% and 19%.
Performance shares granted under the 1993 Equity Participation Plan were
as follows:
Outstanding
at Granted Earned Forfeited Outstanding Market
Beginning During During During at End Price at
of Year the Year the Year the Year of Year Grant Date
------- -------- -------- -------- ------- ----------
1996 1,109,150 282,490 17,300 1,374,340 $25.2500
1997 1,374,340 253,057 201,769 59,253 1,366,375 35.5000
1998 1,366,375 273,656 229,378 26,145 1,384,508 46.0625
The Company applies APB Opinion 25 and related Interpretations in
accounting for the Parent's performance shares. The Company estimates the final
cost of these performance shares and accrues for this expense over the
performance period. The accrued expense for the performance shares was
$39,480,000, $28,439,000 and $12,737,000 for the years ended December 31, 1998,
1997 and 1996, respectively. In tandem with this accrued expense, the Parent
estimates those performance shares that it expects to settle in stock and
records this amount in shareholders' equity as deferred compensation. The
remainder of the accrual, which represents the amount of performance shares that
the Parent estimates it will settle in cash, is recorded in accrued expenses and
other liabilities. The Company recognized a benefit for the difference between
the market value of the Parent's common stock and the cost of the stock when it
was purchased by the independent trustee (which amount was reimbursed by the
Company to its Parent) for shares distributed under the performance share plan.
This benefit was recorded by the Company as a capital contribution which totaled
$5,418,000 and $2,900,000 in 1998 and 1997, respectively. In 1996, the Parent
adopted disclosure provisions of SFAS No. 123. Had the compensation cost for the
Parent's performance shares been determined based upon the provisions of SFAS
No. 123, there would have been no effect on the Company's reported net income.
In November 1994, the Parent appointed an independent trustee authorized
to purchase shares of the Parent's common stock in open market transactions, at
times and prices determined by the trustee. These purchases are intended to fund
future obligations relating to equity bonuses, performance shares and stock
options under the 1993 Equity Participation Plan and other employee benefit
plans and are presented as treasury stock in these financial statements. During
1998, 1997 and 1996, the total number of shares purchased by the trust was
496,940, 162,573 and 529,131, respectively, at a cost of $23,907,000, $5,434,000
and $14,111,000, respectively. In 1996, the Parent also repurchased stock from
its employees in satisfaction of withholding taxes on shares distributed under
its restricted stock plan.
14
<PAGE>
[Alternate Page]
The Company does not currently provide post-retirement benefits, other
than under its defined contribution plans, to its employees, nor does it provide
post-employment benefits to former employees other than under its severance
plans.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under non-cancelable
operating leases, which expire at various dates through 2005.
Future minimum rental payments are as follows (in thousands):
Year Ended December 31,
-----------------------
1999 $ 2,489
2000 2,327
2001 2,014
2002 1,739
2003 1,739
Thereafter 3,333
--------
Total $ 13,641
========
Rent expense for the years ended December 31, 1998, 1997 and 1996 was
$4,025,000, $3,708,000 and $3,383,000, respectively.
During the ordinary course of business, the Company and its Subsidiaries
have become parties to certain litigation. Management believes that these
matters will be resolved with no material financial impact on the Company.
11. REINSURANCE
The Company reinsures portions of its risks with affiliated (see Note 13)
and unaffiliated reinsurers under quota share and first-loss treaties and on a
facultative basis. The Company's principal ceded reinsurance program consisted
in 1998 of two quota share treaties, one first-loss treaty and four automatic
facultative facilities. One treaty covered all of the Company's approved regular
lines of business, except U.S. municipal obligation insurance. Under this treaty
in 1998, the Company ceded 6.75% of each covered policy, up to a maximum of
$13,500,000 insured principal per policy. At its sole option, the Company could
have increased, and in certain instances did increase, the ceding percentage to
13.5% up to $27,000,000 of each covered policy. A second treaty covered the
Company's U.S. municipal obligation insurance business. Under this treaty in
1998, the Company ceded 6% of each covered policy that is classified by the
Company as providing U.S. municipal bond insurance as defined by Article 69 of
the New York Insurance Law up to a limit of $16,000,000 per single risk, which
is defined by revenue source. At its sole option, the Company could have
increased, and in certain instances did increase, the ceding percentage to 30%
up to $80,000,000 per single risk. These cession percentages under both treaties
were reduced on smaller-sized transactions. The first-loss treaty applied to
qualifying U.S. mortgage-backed transactions. Under the four automatic
facultative facilities in 1998, the Company at its option could allocate up to a
specified amount for each reinsurer (ranging from $4,000,000 to $40,000,000
depending on the reinsurer) for each transaction, subject to limits and
exclusions, in exchange for which the Company agreed to cede in the aggregate a
specified percentage of gross par insured by the Company. Each of the quota
share treaties and automatic facultative facilities allowed the Company to
withhold a ceding commission to defray its expenses. The Company also employed
non-treaty quota share and first-loss facultative reinsurance on various
transactions in 1998.
In the event (which management considers to be highly unlikely) that any
or all of the reinsuring companies were unable to meet their obligations to the
Company, the Company would be liable for such defaulted amounts. The Company has
also assumed reinsurance of municipal obligations from unaffiliated insurers.
15
<PAGE>
[Alternate Page]
Amounts reinsured were as follows (in thousands):
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
Written premiums ceded $ 99,413 $ 63,513 $ 55,965
Written premiums assumed 935 1,352 1,873
Earned premiums ceded 55,939 41,713 38,723
Earned premiums assumed 4,271 5,121 6,020
Loss and loss adjustment expense payments
ceded 22,619 2,862 29,408
Loss and loss adjustment expense payments
assumed 3 2 3
Incurred (recovered) losses and loss
adjustment expenses ceded (4,673) 3,605 (2,249)
Incurred (recovered) losses and loss
adjustment expenses assumed (139) 161 38
December 31,
------------
1998 1997
---- ----
Principal outstanding ceded $32,914,844 $24,547,361
Principal outstanding assumed 1,360,916 1,670,468
Deferred premium revenue ceded 217,096 173,123
Deferred premium revenue assumed 10,799 14,128
Loss and loss adjustment expense reserves
ceded 3,907 30,618
Loss and loss adjustment expense reserves
assumed 723 865
12. OUTSTANDING EXPOSURE AND COLLATERAL
The Company's policies insure the scheduled payments of principal and
interest on asset-backed and municipal obligations. The principal amount insured
(in millions) as of December 31, 1998 and 1997 (net of amounts ceded to other
insurers) and the terms to maturity are as follows:
December 31, 1998 December 31, 1997
----------------- -----------------
Terms to Maturity Asset-Backed Municipal Asset-Backed Municipal
- - ----------------- ------------ --------- ------------ -------
0 to 5 Years $ 8,468 $ 2,756 $ 7,553 $ 2,230
5 to 10 Years 7,516 7,495 5,637 5,683
10 to 15 Years 5,661 12,427 2,858 8,257
15 to 20 Years 670 20,265 524 14,340
20 Years and Above 15,308 24,107 11,917 16,479
------- ------- ------- -------
Total $37,623 $67,050 $28,489 $46,989
======= ======= ======= =======
The principal amount ceded as of December 31, 1998 and 1997 and the terms
to maturity are as follows (in millions):
December 31, 1998 December 31, 1997
----------------- -----------------
Terms to Maturity Asset-Backed Municipal Asset-Backed Municipal
- - ----------------- ------------ --------- ------------ -------
0 to 5 Years $ 2,727 $ 1,157 $ 3,828 $ 965
5 to 10 Years 1,859 2,143 2,118 1,693
10 to 15 Years 1,116 3,022 553 2,078
15 to 20 Years 591 4,852 257 3,005
20 Years and Above 3,230 12,218 3,373 6,677
------- ------- ------- -------
Total $ 9,523 $23,392 $10,129 $14,418
======= ======= ======= =======
16
<PAGE>
[Alternate Page]
The Company limits its exposure to losses from writing financial
guarantees by underwriting investment-grade obligations, diversifying its
portfolio and maintaining rigorous collateral requirements on asset-backed
obligations, as well as through reinsurance. The gross principal amounts of
insured obligations in the asset-backed insured portfolio are backed by the
following types of collateral (in millions):
Net of Amounts Ceded Ceded
December 31, December 31,
------------ ------------
Types of Collateral 1998 1997 1998 1997
- - ------------------- ---- ---- ---- ---
Residential mortgages $15,647 $12,928 $ 3,324 $ 3,665
Consumer receivables 12,539 10,659 3,663 4,601
Government securities 821 787 267 120
Pooled corporate obligations 6,776 3,004 1,388 540
Commercial mortgage portfolio:
Commercial real estate 15 98 49 418
Corporate secured 42 55 314 481
Investor-owned utility obligations 757 643 464 229
Other asset-backed obligations 1,026 315 54 75
------- ------- ------- -------
Total asset-backed obligations $37,623 $28,489 $ 9,523 $10,129
======= ======= ======= =======
The asset-backed insured portfolio, which aggregated $47,146,604,000
principal before reinsurance at December 31, 1998, was collateralized by assets
with an estimated fair value of $53,754,485,000. At December 31, 1997, it
aggregated $38,618,244,000 principal before reinsurance and was collateralized
by assets with an estimated fair value of $44,382,716,000. Such estimates of
fair value are calculated at the inception of each insurance policy and are
changed only in proportion to changes in exposure. At December 31, 1998, the
estimated fair value of collateral and reserves over the principal insured
averaged from 110% for commercial real estate to 181% for corporate secured
obligations. At December 31, 1997, the estimated fair value of collateral and
reserves over the principal insured averaged from 100% for commercial real
estate to 172% for corporate secured obligations. Collateral for specific
transactions is generally not available to pay claims related to other
transactions. The amounts of losses ceded to reinsurers are determined net of
collateral.
The gross principal amount of insured obligations in the municipal insured
portfolio includes the following types of issues (in millions):
<TABLE>
<CAPTION>
Net of Amounts Ceded Ceded
December 31, December 31,
------------ ------------
Types of Collateral 1998 1997 1998 1997
- - ------------------- ---- ---- ---- ----
<S> <C> <C> <C> <C>
General obligation bonds $25,337 $17,101 $ 4,517 $ 3,182
Housing revenue bonds 2,509 1,770 1,108 955
Municipal utility revenue bonds 9,218 5,892 5,489 2,294
Health care revenue bonds 5,812 3,924 3,348 2,175
Tax-supported bonds (non-general obligation) 14,731 11,210 5,238 3,526
Transportation revenue bonds 2,937 1,972 2,154 1,041
Other municipal bonds 6,506 5,120 1,538 1,245
------- ------- ------- -------
Total municipal obligations $67,050 $46,989 $23,392 $14,418
======= ======= ======= =======
</TABLE>
In its asset-backed business, the Company considers geographic
concentration as a factor in underwriting insurance covering securitizations of
pools of such assets as residential mortgages or consumer receivables. However,
after the initial issuance of an insurance policy relating to such
securitization, the geographic concentration of the underlying assets may not
remain fixed over the life of the policy. In addition, in writing insurance for
other types of asset-backed obligations, such as securities primarily backed by
government or corporate debt, geographic concentration is not deemed by the
Company to be significant given other more relevant measures of diversification
such as issuer or industry.
17
<PAGE>
[Alternate Page]
The Company seeks to maintain a diversified portfolio of insured municipal
obligations designed to spread its risk across a number of geographic areas. The
following table sets forth, by state, those states in which municipalities
located therein issued an aggregate of 2% or more of the Company's net par
amount outstanding of insured municipal securities as of December 31, 1998:
<TABLE>
<CAPTION>
Net Par Percent of Total Ceded Par
Number Amount Municipal Net Par Amount
State of Issues Outstanding Amount Outstanding Outstanding
----- --------- ----------- ------------------ -----------
(in millions) (in millions)
<S> <C> <C> <C> <C>
California 517 $10,233 15.3% $ 3,103
New York 388 5,836 8.7 4,137
Pennsylvania 356 4,821 7.2 834
Texas 414 4,128 6.1 1,441
Florida 130 4,091 6.1 1,616
New Jersey 275 3,475 5.2 1,486
Illinois 359 3,125 4.7 628
Massachusetts 126 2,259 3.4 976
Michigan 217 2,161 3.2 511
Wisconsin 252 1,685 2.5 228
Indiana 103 1,461 2.2 162
Minnesota 146 1,340 2.0 191
All Other States 1,453 20,993 31.3 6,812
Non-U.S 32 1,442 2.1 1,267
----- ------- ----- -------
Total 4,768 $67,050 100.0% $23,392
===== ======= ===== =======
</TABLE>
13. RELATED PARTY TRANSACTIONS
Allocable expenses are shared by the Company and its Parent on a basis
determined principally by estimates of respective usage as stated in an expense
sharing agreement. The agreement is subject to the provisions of the New York
Insurance Law. Amounts included in other assets at December 31, 1998 and 1997
are $1,625,000 and $4,702,000, respectively, for unsettled expense allocations
due from the Parent.
The Company ceded premiums of $23,838,000, $21,216,000 and $19,890,000 to
Tokio Marine for the years ended December 31, 1998, 1997 and 1996, respectively.
The amounts included in prepaid reinsurance premiums at December 31, 1998 and
1997 for reinsurance ceded to Tokio Marine were $62,422,000 and $53,603,000,
respectively. Reinsurance recoverable on unpaid losses ceded to Tokio Marine was
$612,000 and $613,000 at December 31, 1998 and 1997, respectively. The Company
ceded losses and loss adjustment expenses of $603,000, $1,095,000 and $232,000
to Tokio Marine for the years ended December 31, 1998, 1997 and 1996,
respectively. The Company ceded premiums of $7,297,000 and $15,000 to X.L.
Insurance Company, Ltd., a subsidiary of XL, for the years ended December 31,
1998 and 1997, respectively. The amounts included in prepaid reinsurance
premiums at December 31, 1998 and 1997 for reinsurance ceded to X.L. Insurance
Company, Ltd. were $5,306,000 and $6,000, respectively.
The Company ceded premiums of $25,862,000, $16,890,000 and $15,409,000 on
a quota share basis to affiliates of MediaOne (Enhance Reinsurance Company,
Asset Guaranty Insurance Company and Commercial Reinsurance Company) for the
years ended December 31, 1998, 1997 and 1996, respectively. The amounts included
in prepaid reinsurance premiums for reinsurance ceded to these affiliates were
$61,088,000 and $51,980,000 at December 31, 1998 and 1997, respectively. The
amounts of reinsurance recoverable on unpaid losses ceded to these affiliates at
December 31, 1998 and 1997 were $1,755,000 and $24,195,000, respectively. The
Company ceded losses and loss adjustment expenses (recoveries) of $(11,956,000),
$2,105,000 and $(3,316,000) to these affiliates for the years ended December 31,
1998, 1997 and 1996, respectively.
18
<PAGE>
[Alternate Page]
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following estimated fair values have been determined by the Company
using available market information and appropriate valuation methodologies.
However, considerable judgment is necessary to interpret the data to develop the
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amount the Company could realize in a current
market exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
Bonds -- The carrying amount of bonds represents fair value. The fair
value of bonds is based upon quoted market price.
Short-term investments -- The carrying amount is fair value, which
approximates cost due to the short maturity of these instruments.
Cash, receivable for investments sold and payable for investments
purchased -- The carrying amount approximates fair value because of the short
maturity of these instruments.
Deferred premium revenue, net of prepaid reinsurance premiums -- The
carrying amount of deferred premium revenue, net of prepaid reinsurance
premiums, represents the Company's future premium revenue, net of reinsurance,
on policies where the premium was received at the inception of the insurance
contract. The fair value of deferred premium revenue, net of prepaid reinsurance
premiums, is an estimate of the premiums that would be paid under a reinsurance
agreement with a third party to transfer the Company's financial guaranty risk,
net of that portion of the premiums retained by the Company to compensate it for
originating and servicing the insurance contracts.
Installment premiums -- Consistent with industry practice, there is no
carrying amount for installment premiums since the Company will receive premiums
on an installment basis over the term of the insurance contract. Similar to
deferred premium revenue, the fair value of installment premiums is the
estimated present value of the future contractual premium revenues that would be
paid under a reinsurance agreement with a third party to transfer the Company's
financial guaranty risk, net of that portion of the premium retained by the
Company to compensate it for originating and servicing the insurance contract.
Losses and loss adjustment expenses, net of reinsurance recoverable on
unpaid losses -- The carrying amount is fair value, which is the present value
of the expected cash flows for specifically identified claims and potential
losses in the Company's insured portfolio.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Carrying Estimated Carrying Estimated
(In thousands) Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Assets:
Bonds $1,683,928 $1,683,928 $1,235,441 $1,235,441
Short-term investments 92,241 92,241 103,926 103,926
Cash 2,729 2,729 11,235 11,235
Receivable for securities sold 1,656 1,656 20,535 20,535
Liabilities:
Deferred premium revenue, net of
prepaid reinsurance premiums 504,603 417,130 422,073 347,855
Losses and loss adjustment
expenses, net of reinsurance
recoverable on unpaid losses 60,040 60,040 44,799 44,799
Notes payable 120,000 120,000 50,000 50,000
Payable for investments purchased 105,749 105,749 72,979 72,979
Off-balance-sheet instruments:
Installment premiums 163,239 116,888
</TABLE>
19
<PAGE>
[Alternate Page]
15. LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
The Company's liability for losses and loss adjustment expenses consists
of the case basis and general reserves. Activity in the liability for losses and
loss adjustment expenses is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Balance at January 1 $ 75,417 $ 72,079 $ 111,759
Less reinsurance recoverable 30,618 29,875 61,532
--------- --------- ---------
Net balance at January 1 44,799 42,204 50,227
Incurred losses and loss adjustment expenses:
Current year 8,049 5,400 5,300
Prior years (4,100) 3,756 1,574
Recovered (paid) losses and loss adjustment expenses:
Current year (192) (2,850)
Prior years 11,484 (3,711) (14,897)
--------- --------- ---------
Net balance December 31 60,040 44,799 42,204
Plus reinsurance recoverable 3,907 30,618 29,875
--------- --------- ---------
Balance at December 31 $ 63,947 $ 75,417 $ 72,079
========= ========= =========
</TABLE>
During 1996, the Company increased its general reserve by $6,874,000, of
which $5,300,000 was for originations of new business and $1,574,000 was to
reestablish a portion of the general reserve that had previously been
transferred to case basis reserves. During 1996, the Company transferred
$9,012,000 from its general reserve to case basis reserves associated
predominantly with certain residential mortgage and timeshare receivables
transactions. Giving effect to these transfers, the general reserve totaled
$29,660,000 at December 31, 1996.
During 1997, the Company increased its general reserve by $9,156,000, of
which $5,400,000 was for originations of new business and $3,756,000 was to
reestablish a portion of the general reserve that had previously been
transferred to case basis reserves. During 1997, the Company transferred
$4,503,000 from its general reserve to case basis reserves associated
predominantly with certain residential mortgage transactions. Giving effect to
these transfers, the general reserve totaled $34,313,000 at December 31, 1997.
During 1998, the Company increased its general reserve by $3,949,000, of
which $8,049,000 was for originations of new business offset by a $4,100,000
decrease in the amount needed to fund the general loss reserve because of
recoveries on certain commercial mortgage transactions. During 1998, the Company
transferred $18,403,000 to its general reserve from case basis reserves due to
those recoveries on commercial mortgage transactions. Also during 1998, the
Company transferred $9,414,000 from its general reserve to case basis reserves
associated predominantly with certain consumer receivable transactions. Giving
effect to these transfers, the general reserve totaled $47,251,000 at December
31, 1998.
Reserves for losses and loss adjustment expenses are discounted at
risk-free rates. The amount of discount taken was approximately $16,029,000,
$19,779,000 and $17,944,000 at December 31, 1998, 1997 and 1996, respectively.
16. RECENTLY ISSUED ACCOUNTING STANDARD
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 is effective January 1, 2000.
The Company is in the process of determining the effect of these standards
on its financial statements, but management does not believe that it will have a
material effect on the Company's financial condition.
20
<PAGE>
[Alternate Page]
17. FINANCIAL SECURITY ASSURANCE INTERNATIONAL LTD. AND MINORITY INTEREST
On November 3, 1998, the Parent funded the Company's $80,000,000
investment in Financial Security Assurance International Ltd. (International), a
new Bermuda-based financial guaranty insurer.
In November 1998, XL made a minority investment in International for
$20,000,000. This interest is in the form of Cumulative Participating Voting
Preferred Shares, which in total have a minimum fixed dividend of $1,000,000 per
annum. For the period ended December 31, 1998, the Company recognized minority
interest of $388,000.
21
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution.
The following is an itemized list of the estimated expenses to be
incurred in connection with the offering of the Certificates other than
underwriting discounts and commissions.
SEC filing fee.................................................. $2,780,000
Printing and engraving expenses................................. 1,000,000*
Accounting fees and expenses.................................... 1,500,000*
Legal fees and expenses......................................... 850,000*
Trustee fees and expenses....................................... 850,000*
Rating agency fees.............................................. 2,500,000*
Miscellaneous................................................... 520,000*
Total..................................................... $10,000,000
- --------
* Estimated.
Item 15. Indemnification of Directors and Officers.
a. Citicorp Indemnification. Subsection (a) of Section 145 of the General
Corporation Law of Delaware empowers a corporation to indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation and except that no indemnification may be made
in respect to any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent that the
Court of Chancery or the
<PAGE>
court in which such action or suit was brought shall determine that, despite the
adjudication of liability, such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper.
Section 145 further provides that to the extent a director, officer,
employee or agent of a corporation has been successful in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) or in the
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection therewith; that expenses of the indemnified party may be paid by the
corporation in advance of a final disposition; that indemnification provided for
by Section 145 shall not be deemed exclusive of any other rights to which the
indemnified party may be entitled; and empowers the corporation to purchase and
maintain insurance on behalf of a director, officer, employee or agent of the
corporation against any liability asserted against him or incurred by him in any
such capacity or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
The Certificate of Incorporation of Citicorp provides, in effect, that
to the extent and under the circumstances permitted by subsections (a) and (b)
of Section 145 of the General Corporation Law of the State of Delaware, Citicorp
(i) shall indemnify any person who was or is a party or is threatened to be made
a party to any action, suit or proceeding described in subsections (a) and (b)
by reason of the fact that he or she is or was a director or officer of Citicorp
against expenses, judgments, fines and amounts paid in settlement, and (ii) may
indemnify any person who was or is a party or is threatened to be made a party
to any such action, suit or proceeding if such person was an employee or agent
of Citicorp, or is or was serving at the request of Citicorp as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise.
b. Issuer Indemnification. The Issuer's Certificate of Incorporation provides
that the Issuer shall (or, in the case of an employee or agent of the Issuer, or
a person who was serving at the request of the Issuer as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, may) indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Issuer) by reason of the fact
that he is or was a director, officer, employee or agent of the Issuer, or was
serving at the request of the Issuer as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Issuer,
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe his conduct was unlawful. The Issuer's Certificate of Incorporation
also provides that the termination of any such action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Issuer, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
<PAGE>
The Issuer's Certificate of Incorporation further provides that the
Issuer shall (or, in the case of an employee or agent of the Issuer, or a person
who was serving at the request of the Issuer as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, may) indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the Issuer to procure a judgment in its favor by reason of the fact
that he is or was a director, officer, employee or agent of the Issuer, or was
serving at the request of the Issuer as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust or other enterprise
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Issuer and except that no indemnification
shall be made in respect of any claim, issue or matter as to which such person
shall have been adjudged to be liable to the Issuer unless and only to the
extent that the Court of Chancery of the State of Delaware or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery of the State of Delaware or such other court shall
deem proper.
<PAGE>
The Issuer's Certificate of Incorporation provides that any
indemnification thereunder (unless ordered by a court) shall be made by the
Issuer only as authorized in the specific case upon a determination that
indemnification of the director or officer is proper in the circumstances
because he has met the applicable standard of conduct set forth therein. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum (as defined in the by-laws of the Issuer) consisting of directors who
were not parties to such action, suit or proceeding, or (b) if such quorum is
not obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (c) by the
stockholders.
The Issuer's Certificate of Incorporation provides that expenses of the
indemnified party may be paid by the Issuer in advance of a final disposition
and that the indemnification and advancement of expenses provided for therein
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled. The Issuer's Certificate of Incorporation empowers the Issuer
to purchase and maintain insurance, in such amounts as the Board of Directors
deems appropriate, on behalf of any person who is or was a director, officer,
employee or agent of the Issuer, or of any corporation a majority of the voting
stock of which is owned by the Issuer, or is serving at the request of the
Issuer as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Issuer would have the power or would be
required to indemnify him against such liability under the provisions of the
Issuer's Certificate of Incorporation or of the General Corporation Law of the
State of Delaware.
The Issuer's Certificate of Incorporation provides that a director of
the Issuer shall not be personally liable to the Issuer or its stockholders for
monetary damages for breach of fiduciary duty as a director, except to the
extent such exemption from liability or limitations thereof is not permitted
under the Delaware General Corporation Law as the same existed at the time of
the Issuer's incorporation or may thereafter be amended; and that any repeal or
modification of the foregoing provision by the stockholders of the Issuer shall
not adversely affect any right or protection of a director of the Issuer
existing at the time of such repeal or modification.
c. Insurance. Pursuant to Section 145 of the General Corporation Law of
Delaware, liability insurance is maintained covering directors and principal
officers of Citicorp and the Issuer.
<PAGE>
Item 16. Exhibits.
1.1 - Form of Underwriting Agreement.*
4.1 - Form of Pooling and Servicing Agreement with respect to REMIC
Certificates representing interests in fixed-rate mortgage loans
backed by Guaranty, between Citicorp Mortgage Securities, Inc., as
packager and servicer, and the Trustee, including forms of
Certificates, Subservicing Agreement, Custodial Agreement and Guaranty
(incorporated by reference to Exhibit 4.1 of the Registration
Statement on Forms S-11 and S-3 filed by the Issuer and others (File
No. 33-33448)).
4.2 - Standard Terms of Pooling and Servicing Agreements with respect to
REMIC Certificates representing interests in fixed-rate mortgage loans
backed by Guaranty (incorporated by reference to Exhibit 4.2 of the
Registration Statement on Forms S-11 and S-3 filed by the Issuer and
others (File No. 33-33448)).
4.3 - Form of Pooling and Servicing Agreement with respect to REMIC
Certificates representing interests in adjustable-rate mortgage loans
backed by Guaranty between Citicorp Mortgage Securities, Inc., as
packager and servicer, and the Trustee, including forms of
Certificates, Custodial Agreement, Subservicing Agreement and Guaranty
(incorporated by reference to Exhibit 4.3 of the Registration
Statement on Forms S-11 and S-3 filed by the Issuer and others (File
No. 33-33448)).
4.4 - Standard Terms of Pooling and Servicing Agreements with respect to
REMIC Certificates representing interests in adjustable-rate mortgage
loans backed by Guaranty (incorporated by reference to Exhibit 4.4 of
the Registration Statement on Forms S-11 and S-3 filed by the Issuer
and others (File No. 33-33448)).
4.5 - Form of Pooling and Servicing Agreement with respect to REMIC
Certificates representing interests in adjustable-rate convertible
mortgage loans backed by Guaranty, between Citicorp Mortgage
Securities Inc., as packager and servicer, and the Trustee, including
forms of CitiCertificates, Limited Guaranty, Custodial Agreement,
Subservicing Agreement and Power of Attorney (incorporated by
reference to Exhibit 4.13 of the Registration Statement on Forms S-11
and S-3 filed by the Issuer and others (File No. 33-37536)).
4.6 - Form of Pooling and Servicing Agreement with respect to REMIC
Certificates having three Senior/Subordinated classes representing
interests in mortgage loans between Citicorp Mortgage Securities,
Inc., as packager and servicer, and the Trustee, including forms of
Certificates, Subservicing Agreement, Deposit Agreement, Mortgage Note
Custodial Agreement, Guaranty and Mortgage Document Custodial
Agreement (incorporated by reference to Exhibit 4.22 of the
Registration Statement on Forms S-11 and S-3 filed by the Issuer and
others (File No. 33-37536)).
4.7 - Standard Terms of Pooling and Servicing Agreements with respect to
REMIC Certificates having three Senior/Subordinated classes
representing interests in mortgage loans (incorporated by reference to
Exhibit 4.23 of the Registration Statement on Forms S-11 and S-3 filed
by the Issuer and others (File No. 33-37536)).
4.8 - Form of Pooling and Servicing Agreement with respect to REMIC
Certificates representing interests in mortgage loans backed by other
forms of credit support between Citicorp Mortgage Securities, Inc., as
packager and servicer and the Trustee, including forms of
Certificates, Custodial Agreement, Subservicing Agreement, Deposit
Agreement and Letter of Credit (incorporated by reference to Exhibit
4.24 of the Registration Statement on Forms S-11 and S-3 filed by the
Issuer and others (File No. 33-37536)).
4.9 - Standard Terms of Pooling and Servicing Agreements with respect to
REMIC Certificates backed by other forms of credit support
representing interests in mortgage loans (incorporated by reference to
Exhibit 4.25 of the Registration Statement on Forms S-11 and S-3 filed
by the Issuer and others (File No. 33-37536)).
4.10 - Form of Pooling and Servicing Agreement with respect to REMIC
Certificates representing interests in mortgage loans backed by a
mortgage pool insurance policy, between Citicorp Mortgage Securities,
Inc., as packager and servicer, and the Trustee, including forms of
Certificates, Subservicing Agreement, Custodial Agreement and Mortgage
Pool Insurance Policy (incorporated by reference to Exhibit 4.10 of
the Registration Statement on Forms S-11 and S-3 filed by the Issuer
and others (File No. 33-66222)).
4.11 - Standard Terms of Pooling and Servicing Agreements with respect to
REMIC Certificates representing interests in mortgage loans backed by
a mortgage pool insurance policy (incorporated by reference to Exhibit
4.11 of the Registration Statement on Forms S-11 and S-3 filed by the
Issuer and others (File No. 33-66222)).
<PAGE>
4.12 - Form of Pooling and Servicing Agreement with respect to shifting
interest REMIC Certificates representing interests in mortgage loans
between Citicorp Mortgage Securities, Inc., as packager and servicer,
and the Trustee, including forms of Certificates, Subservicing
Agreement and Custodial Agreement.*
4.13 - Standard Terms of Pooling and Servicing Agreements with respect to
shifting interest REMIC Certificates representing interests in
mortgage loans.*
4.14 - Form of financial guaranty insurance policy issued by MBIA Insurance
Corporation (incorporated by reference to Exhibit 4.26 of the
Registration Statement on Forms S-11 and S-3 filed by the Issuer and
others (File No. 33-37536)).
4.15 - Form of financial guaranty insurance policy issued by Financial
Security Assurance Inc. (incorporated by reference to Exhibit 4.15 of
the Registration Statement on Forms S-11 and S-3 filed by the Issuer
and others (File No. 33-66222)).
5.1 - Opinion of Marla A. Berman, Esq. with respect to the Certificates and
Guaranties being registered.*
8.1 - Opinion of Rona Daniels, Esq. with respect to certain tax matters.*
23.1 - Consent of KPMG LLP (incorporated by reference to Citicorp's Annual
Report on Form 10-K for 1998 (Commission File No. 1-5738)).
23.2 - Consents of Marla A. Berman, Esq., and Rona Daniels, Esq. are
contained in their opinions filed herewith as Exhibits 5.1 and 8.1,
respectively.
23.3 - Consent of PricewaterhouseCoopers LLP regarding MBIA Insurance
Corporation.**
23.4 - Consent of PricewaterhouseCoopers LLP regarding Financial Security
Assurance Inc.**
24.1 - Powers of Attorney of Messrs. Reed, Collins, Lipp, Menezes, Rhodes
and Ruding and Ms. Miller as Directors and/or officers of Citicorp.*
24.2 - Powers of Attorney of Messrs. Outland, Levites and Young.*
24.3 - Power of Attorney of Mr. Trupin.*
--------------------
* Previously filed
** Filed herewith
Item 17. Undertakings.
(a) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in this registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration statement or any
material change to such information in this registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the
Securities Act of 1933, each filing of Citicorp's annual report pursuant to
Section 13(a) or 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 or persons
controlling the registrants pursuant to the foregoing provisions or otherwise,
the registrants have been informed that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrants of expenses incurred or paid by a director, officer
or controlling person of the registrants in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrants will,
unless in the opinion of their 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 Securities Act of 1933 and will be governed by the final
adjudication of such issue.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Citicorp
Mortgage Securities, Inc. 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 to Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of New York, State of New
York, on May 4, 1999.
CITICORP MORTGAGE SECURITIES, INC.
By: /s/ Andrew E. LaBarbera
------------------------
Andrew E. LaBarbera
President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed on May 4, 1999 by the
following persons in the capacities indicated.
Signature Capacity
--------- --------
/s/ Andrew E. LaBarbera President and a Director
------------------------ (Principal Executive Officer)
(Andrew E. LaBarbera)
* Senior Vice President and
(John H. Outland) Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
<PAGE>
* Director
(James Levites)
* Director
(David W. Young)
________________
*ANDREW E. LABARBERA, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by such person and filed with the Securities and Exchange Commission.
/s/ Andrew E. LaBarbera
-----------------------
Andrew E. Labarbera
Attorney-in-fact
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Citicorp
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 to
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the City of New York, State of New York, on May 4, 1999.
CITICORP
By:/s/ Gregory C. Ehlke
--------------------
Gregory C. Ehlke
Vice President
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to Registration Statement has been signed on May 4, 1999 by the
following persons in the capacities indicated.
Signature Capacity
--------- --------
* Chairman and Director
(John S. Reed) (Principal Executive Officer)
* Corporate Executive Vice President and Director
(Victor J. Menezes)
* Director
(Paul J. Collins)
* Vice Chairman and Director
(William R. Rhodes)
* Vice Chairman and Director
(H. Onno Ruding)
* Director
(Robert I. Lipp)
* Chief Financial Officer
(Heidi G. Miller)
* Controller
(Roger W. Trupin) (Principal Accounting Officer)
<PAGE>
- -------------
* GREGORY C. EHLKE, by signing his name hereto, does sign this document on
behalf of the person indicated above pursuant to a power of attorney duly
executed by such person and filed with the Securities and Exchange Commission.
/s/ Gregory C. Ehlke
--------------------
Gregory C. Ehlke
Attorney-in-Fact
CONSENT OF INDEPENDANT ACCOUNTANTS
We consent to the inclusion in Amendment No. 2 to Form S-3 (333-72459) of
Citicorp Mortgage Securities, Inc. of our report dated February 2, 1999 on our
audits of the consolidated financial statements of MBIA Insurance Corporation
and Subsidiaries as of December 31, 1998 and 1997, and for each of the three
years in the period ended December 31, 1998. We also consent to the reference
to our Firm under the caption "Experts".
PricewaterhouseCoopers LLP
April 30, 1999
We consent to the inclusion in Amendment No. 2 to Form S-3 (333-72459) of
Citicorp Mortgage Securities, Inc. of our report dated January 26, 1999 on our
audits of the consolidated financial statements of Financial Security Assurance
Inc. and Subsidiaries as of December 31, 1998 and 1997, and for each of the
three years in the period ended December 31, 1998. We also consent to the
reference to our Firm under the caption "Experts".
PricewaterhouseCoopers LLP
May 3, 1999
