<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
Registration No. 33-42987
PROSPECTUS SUPPLEMENT DATED JUNE 18, 1996
(TO PROSPECTUS DATED JUNE 18, 1996)
$9,422,000
GATEWAY MORTGAGE ACCEPTANCE CORPORATION
7.05% COLLATERALIZED MORTGAGE OBLIGATIONS, SERIES 1996A, DUE JULY 31, 2027
------------------------
Gateway Mortgage Acceptance Corporation (the "Issuer") is offering its
7.05% Collateralized Mortgage Obligations, Series 1996A (the "Bonds") in the
aggregate principal amount of $9,422,000. Interest on the Bonds will accrue from
their issue date and will be payable monthly on the last day of each month (the
"Interest Payment Dates"), commencing August 31, 1996. It is a condition to the
issuance of the Bonds that they be rated "AAA" by Standard & Poor's Ratings
Group.
The Bonds will be collateralized by GNMA Certificates (the "GNMA
Certificates") and the Collection Account described herein. The guaranty
obligation of GNMA with respect to the GNMA Certificates is backed by the full
faith and credit of the United States. Scheduled distributions on the GNMA
Certificates together with reinvestment earnings thereon at the Assumed
Reinvestment Rate described herein will be sufficient to make timely payments of
interest on the Bonds and to retire the Bonds not later than their Stated
Maturity. Funds available for application to principal payments on the Bonds
will be applied first to redeem Bonds tendered for redemption by Bondholders and
then, to the extent necessary, to redeem Bonds on a mandatory basis. See
"Description of the Bonds -- Payments of Principal", "-- Redemption at the
Request of Beneficial Owners" and "-- Mandatory Redemption of Bonds" in this
Prospectus Supplement. The Bonds are also subject to redemption at the option of
the Issuer to the extent described herein.
ALTHOUGH NO ASSURANCE CAN BE GIVEN AS TO THE ACTUAL REDEMPTION EXPERIENCE
OF ANY INDIVIDUAL BONDHOLDER DUE TO THE VARIOUS FACTORS DESCRIBED HEREIN UNDER
"PREPAYMENT OF THE BONDS -- THE EFFECTS OF INTEREST RATE CHANGES AND OTHER
FACTORS," IT IS ANTICIPATED THAT THE ACTUAL MATURITY OF THE MAJORITY OF THE
BONDS, BY PRINCIPAL BALANCE, WILL OCCUR SIGNIFICANTLY EARLIER THAN THE STATED
MATURITY OF THE BONDS. FURTHER, INVESTORS SHOULD BE AWARE THAT, FOR THE REASONS
DESCRIBED HEREIN, THE ACTUAL MATURITY OF SOME OF THE BONDS WILL OCCUR
SIGNIFICANTLY EARLIER THAN THE ACTUAL MATURITY OF OTHER BONDS.
Prior to their issuance there has been no market for the Bonds nor can
there be any assurance that one will develop.
The Bonds will be available to investors only in book entry form through
the facilities of The Depository Trust Company. Bond certificates will be
available only under certain limited circumstances as described herein.
The Issuer will not elect to treat the segregated pool of assets securing
the Bonds as a "real estate mortgage investment conduit" ("REMIC") for federal
income tax purposes.
THE ISSUER IS GATEWAY MORTGAGE ACCEPTANCE CORPORATION, A WHOLLY OWNED,
LIMITED PURPOSE FINANCE SUBSIDIARY OF EVEREN MORTGAGE GROUP, INC. ("EVEREN
MORTGAGE"). ALTHOUGH PAYMENT OF PRINCIPAL OF AND INTEREST ON THE GNMA
CERTIFICATES SECURING THE BONDS IS GUARANTEED BY GNMA, THE BONDS REPRESENT
OBLIGATIONS SOLELY OF THE ISSUER AND ARE NOT INSURED OR GUARANTEED BY GNMA, ANY
GOVERNMENT AGENCY OR INSTRUMENTALITY, EVEREN MORTGAGE OR ANY OTHER PERSON OR
ENTITY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<S> <C> <C> <C>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) ISSUER(1)(3)
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Per Bond.................................... 100.00% 3.50% 96.50%
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Total(4)............................. $9,422,000 $329,770 $9,092,230
</TABLE>
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(1) Plus accrued interest, if any, at the applicable rate from June 27, 1996.
(2) The Issuer has agreed to indemnify the Underwriters of the Bonds against
certain civil liabilities, including liabilities under the Securities Act of
1933.
(3) Before deducting expenses, payable by the Issuer, estimated to be $50,000.
(4) See "Additional Bonds Which May Be Offered" in this Prospectus Supplement.
------------------------
The Bonds are offered by the Underwriters, subject to prior sale, when, as
and if issued by the Issuer and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that the Bonds
will be delivered in book entry form on or about June 27, 1996 through the
facilities of The Depository Trust Company.
------------------------
EVEREN SECURITIES, INC.
J.C. BRADFORD & CO.
RAYMOND JAMES & ASSOCIATES, INC.
<PAGE> 2
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE BONDS. ADDITIONAL INFORMATION IS CONTAINED IN THE PROSPECTUS AND
PURCHASERS ARE URGED TO READ BOTH THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT.
SALES OF THE BONDS MAY NOT BE CONSUMMATED UNLESS THE PURCHASER HAS RECEIVED BOTH
THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT.
---------------------
THE ISSUER'S PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 77 WEST WACKER
DRIVE, SUITE 3100, CHICAGO, ILLINOIS 60601. ITS TELEPHONE NUMBER IS (800)
346-6616.
---------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE BONDS AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
---------------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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TERMS OF THE BONDS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and in the
accompanying Prospectus (the "Prospectus"). Terms used but not otherwise defined
herein shall have the respective meanings ascribed to them in the Prospectus.
Securities Offered........ The Bonds will be 7.05% Collateralized Mortgage
Obligations, Series 1996A, due July 31, 2027 (the
"Stated Maturity"). The Bonds will be issued in book
entry form in minimum denominations of $1,000 and
integral multiples thereof. See "Special
Considerations" and "Description of the Bonds" in
the Prospectus.
The Bonds are "Book Entry Bonds" as defined in the
Prospectus and will be issued initially in the form
of a single certificate registered in the name of a
nominee of The Depository Trust Company (the
"Clearing Agency"). Purchasers and other beneficial
owners of Bonds ("Beneficial Owners") will not
receive certificates ("Definitive Bonds")
representing their interests in the Bonds except
upon the termination of book entry registration
("Book Entry Termination") which will occur only
under certain limited circumstances. See
"Description of Book Entry Procedures" in this
Prospectus Supplement and "Special
Considerations -- Book Entry Registration" and
"Description of the Bonds -- Book Entry
Registration" in the Prospectus.
Issuer.................... Gateway Mortgage Acceptance Corporation, a Delaware
corporation (the "Issuer"), was incorporated on
October 26, 1988, for the purpose of issuing one or
more series of bonds (including the Bonds) directly
or through one or more trusts beneficially owned by
it and purchasing, owning and selling other
mortgage-related assets, and for certain related
limited purposes. No person or entity other than the
Issuer will be obligated to pay the Bonds. See "The
Issuer" and "Special Considerations" herein and in
the Prospectus.
Indenture Trustee......... The Bank of New York.
Interest Payments......... Each Bond will bear interest on its outstanding
principal balance at the rate of 7.05% per annum
(the "Bond Rate"), computed on the basis of a 360-
day year consisting of twelve 30-day months.
Interest on the Bonds will be paid monthly on the
last day of each month, commencing on August 31,
1996 (the "Interest Payment Dates"), to holders of
record on the last day of the month preceding the
month in which each Interest Payment Date occurs
(each such date being a "Regular Record Date").
Interest will accrue on the Bonds during each month
(each an "Accrual Period") for payment on the
Interest Payment Date which is the last day of the
month following the end of such Accrual Period.
Interest payable on August 31, 1996 will consist of
34 days' interest accrued from June 27, 1996 through
July 31, 1996 (the "Initial Accrual Period"). Upon
maturity or earlier redemption of any Bond, interest
will be paid to the date of maturity or redemption.
See "Description of the Bonds -- Payments of
Interest" in this Prospectus Supplement and
"Description of the Bonds -- Payments of Interest"
in the Prospectus.
The yield on the Bonds will be less than the yield
which would otherwise be produced by the interest
rate on the Bonds, because on each Interest Payment
Date (other than the month in which a Bond matures
or is redeemed) the interest payable on the Bonds is
the interest accrued
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during the Accrual Period or Initial Accrual Period,
as the case may be, ended one month prior to such
Interest Payment Date.
Principal Payments........ Principal payments on the Bonds will be made in the
form of redemptions as explained below on the last
day of each month, commencing on or after July 31,
1996 (each, a "Payment Date") in an aggregate amount
equal to the amount, if any, by which the
outstanding principal amount of the Bonds plus
$1,000 exceeds the aggregate Bond Values of the Bond
Value Groups (as both such terms are defined in
"Description of the Bonds -- Payments of Principal"
in this Prospectus Supplement) (the "Basic Principal
Payment") at the end of the monthly period (a "Due
Period") ending on the second business day preceding
such Payment Date. See "Description of the
Bonds -- Payments of Principal" in this Prospectus
Supplement and "Description of the Bonds -- Payments
of Principal" in the Prospectus.
All principal payments on the Bonds will be applied
first to redemption of Bonds at the request of
Beneficial Owners and then to mandatory redemption
of Bonds under the circumstances described below
under "Redemption". The Clearing Agency will
allocate any amounts of Bonds to be subject to
mandatory redemption among Clearing Agency
Participants (as defined under "Description of Book
Entry Procedures" herein) by random lot in
accordance with the Clearing Agency's rules and
procedures, based upon the assumption that each
Clearing Agency Participant holds individual $1,000
Bonds aggregating the full amount of that Clearing
Agency Participant's holdings. The Clearing Agency
shall notify those Clearing Agency Participants
whose holdings have been selected for mandatory
redemption on or before the Payment Date on which
Bonds are to be redeemed. The Clearing Agency
Participants will then determine the Beneficial
Owners (or other indirect participants acting on
behalf of Beneficial Owners through such Clearing
Agency Participants) whose Bonds have been redeemed
and will forward the mandatory redemption payment of
the Bonds to such Beneficial Owners or indirect
participants. No notice of redemption will be given
to Beneficial Owners prior to the respective Payment
Dates on which their Bonds are redeemed.
In the event of Book Entry Termination, if mandatory
redemptions are required or if the Issuer (or its
assignee) elects to conduct a partial optional
redemption, the Indenture Trustee will select the
Bonds to be so redeemed by random lot.
Factors Relating to
Prepayment.............. The rate of payments of principal on the Bonds will
depend on the rate of prepayments of the principal
of the Mortgage Loans underlying the GNMA
Certificates pledged to secure the Bonds.
Prepayments of principal on the underlying Mortgage
Loans are less likely to occur during periods when
prevailing mortgage interest rates are higher than
the interest rates on such Mortgage Loans, because
it is generally attractive to mortgagors to pay off
mortgage loans bearing "below-market" interest rates
as slowly as possible. However, although less funds
are likely to be available due to generally lower
prepayment rates on the Mortgage Loans during
periods of higher interest rates, it is likely that
greater numbers of Bondholders will tender their
Bonds for redemption in order to take
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<PAGE> 5
advantage of the generally higher interest rates
then payable on the other investments comparable to
the Bonds.
By contrast, prepayments of principal on the Mortgage
Loans underlying the GNMA Certificates are most
likely to occur during periods of generally lower
interest rates when it is expected that Bondholders
will least desire redemption of their Bonds. The
rate of payments on the Mortgage Loans underlying
the GNMA Certificates will depend upon a number of
factors in addition to the prevailing level of
interest rates, including the economic environment
as a whole and other factors affecting individual
mortgagors. Therefore, no assurance can be given as
to the actual prepayment experience with respect to
the Mortgage Loans underlying the GNMA Certificates
and, therefore, the actual prepayment experience
with respect to the Bonds. See "Prepayment of the
Bonds -- The Effects of Interest Rate Changes and
Other Factors" in this Prospectus Supplement and
"Description of the Bonds -- Maturity of the Bonds"
and "Special Considerations -- Funds Available for
Redemption at the Request of Bondholders" in the
Prospectus.
To the extent that principal prepayments with respect
to the Mortgage Loans result in prepayments on the
Bonds during periods of generally lower interest
rates, Bondholders may be unable to reinvest such
principal prepayments in securities having a yield
and rating comparable to the Bonds.
Redemption
A. Redemption at the
Request of Beneficial
Owners............... Redemption of Bonds pursuant to requests by
Beneficial Owners will be made on each Payment Date
in an amount equal to the aggregate of Bonds for
which redemption has been properly requested as
described below, but not to exceed the amount of the
Basic Principal Payment. A Beneficial Owner may at
any time submit a request for redemption of his
Bonds through the brokerage firm through which his
Bonds are held. Subject to certain priorities of
deceased holders and certain other limitations,
Bonds will be redeemed in the order that timely
requests for redemption are received by the Clearing
Agency (as evidenced by the time-stamp placed on
such requests by the Clearing Agency at the time of
receipt) or, in the event of Book Entry Termination,
by the Indenture Trustee. Requests for redemption on
a particular Payment Date must be submitted in
writing to the Clearing Agency by Clearing Agency
Participants and, in the case of a request on behalf
of a deceased Beneficial Owner, accompanied by
appropriate evidence of death and any tax waivers
requested by the Indenture Trustee, and must be
received by the Clearing Agency during the period
from the first through the tenth day of the month in
which the Payment Date occurs (each, a "Tender
Date"). The Clearing Agency will time-stamp and
forward requests for redemption to the Indenture
Trustee upon receipt. Requests for redemption
received by the Clearing Agency after the tenth day
of the month in which the Payment Date occurs on
which a given redemption is desired, and requests
for redemption received in a timely manner but not
accepted for redemption with respect to a given
Payment Date, will be treated as requests for
redemption on the next succeeding Payment Date and
each succeeding Payment Date thereafter until the
request is accepted or is
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withdrawn. See "Description of the
Bonds -- Redemption at the Request of the Beneficial
Owners" in this Prospectus Supplement.
In the event of Book Entry Termination, requests for
redemption must be submitted to the Indenture
Trustee by the Tender Date in writing, in the form
set forth on the Definitive Bonds, accompanied by
the Bonds to be redeemed and, in the case of a
request on behalf of a deceased Beneficial Owner,
accompanied by appropriate evidence of death and tax
waivers requested by the Indenture Trustee. See
"Description of Book Entry Procedures" in this
Prospectus Supplement.
Each request for redemption will remain in effect on
each subsequent Payment Date until such Bonds have
been redeemed or until written notice is submitted
withdrawing such request for redemption of such
Bonds, which request must be received by the Tender
Date in order to be effective for the next Payment
Date. See "Description of Book Entry Procedures" in
this Prospectus Supplement. All such requested
redemptions will be made at 100% of the principal
amount of the Bonds redeemed plus accrued interest
to the date of redemption.
The procedures to be used to determine the priority
of requests for redemption may be revised from time
to time by the Clearing Agency and its participating
brokerage firm members.
There is no assurance that the funds available in the
Collection Account will be sufficient to permit a
Beneficial Owner to have any Bonds redeemed prior to
maturity or within a reasonable time after
redemption is requested. Until redeemed, Bonds held
for future redemption will continue to earn interest
at the Bond Rate.
B. Mandatory Redemption
of Bonds............. On each Payment Date, the Basic Principal Payment
will be applied first to redeem Bonds at the request
of Beneficial Owners, as described above, and then
to mandatory redemption of Bonds. On the tenth
business day of the month in which each such Payment
Date occurs (each, an "Accounting Date"), the
Indenture Trustee will notify the Clearing Agency to
determine the amount of Bonds for which requests for
redemption have been accepted through the related
Tender Date and, thereby, to determine the
additional amount, if any, of Bonds that will be
subject to mandatory redemption on the next Payment
Date. The redemption price will be 100% of the
principal amount of the Bonds so redeemed plus
accrued interest to the Payment Date on which such
Bonds are redeemed. Each mandatory redemption will
be made in accordance with the procedures described
above under "Principal Payments" and under
"Description of the Bonds -- Payments of Principal"
in this Prospectus Supplement.
C. Optional Redemption
of Bonds............. The Bonds may be redeemed in whole or in part, at the
Issuer's (or its assignee's) option, on any Payment
Date, on or after the earlier of (i) the fourth
anniversary of their issuance or (ii) the date on
which the aggregate principal amount of Bonds then
outstanding is less than 20% of the initial
aggregate principal amount of the Bonds, at a
redemption price equal to 100% of the unpaid
principal amount of the Bonds so redeemed plus
accrued interest to such optional redemption date.
See "Maturity of the Bonds -- The Effects of
Interest Rate Changes and Other Factors" in
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this Prospectus Supplement and "Description of the
Bonds -- Redemption at the Option of the Issuer" in
the Prospectus.
Security for the Bonds.... The Bonds will be secured by collateral consisting of
the following:
A. GNMA Certificates.... The Bonds will be secured by a group of GNMA
Certificates which will be delivered to the
Indenture Trustee. Scheduled distributions on such
GNMA Certificates together with reinvestment
earnings thereon at the Assumed Reinvestment Rate
will provide a cash flow at least sufficient to
amortize the Bonds through redemptions and payment
at their Stated Maturity and to support the interest
payments on the Bonds. On the date of delivery of
the Bonds, such GNMA Certificates will have an
aggregate Bond Value at least equal to the principal
amount of the Bonds plus $1,000. See "Description of
the Certificates" herein. The GNMA Certificates are
guaranteed as to full and timely payment of
principal and interest by GNMA. The guarantee of
GNMA is backed by the full faith and credit of the
United States. See "Description of the Certificates"
herein.
In the event that the GNMA Certificates proposed to
be pledged (or comparable GNMA Certificates) are not
delivered on the Closing Date, the Issuer intends to
deposit cash with the Indenture Trustee, on an
interim basis pending such delivery, in an amount
and applied in such a manner as described in
"Description of the Certificates -- General" in this
Prospectus Supplement.
B. Collection Account... All distributions on the GNMA Certificates will be
remitted to a collection account (the "Collection
Account") to be established with the Indenture
Trustee on the closing date for the sale of the
Bonds (the "Closing Date"). All distributions on the
GNMA Certificates and all reinvestment income earned
thereon will be available for application to the
payment of principal of, and interest on, the Bonds
on the following Interest Payment Date or Payment
Date, as applicable. Any funds remaining in the
Collection Account immediately following a Payment
Date may be paid to the Issuer, free from the lien
of the Indenture (as defined hereafter under
"Description of the Bonds") after any required
deposit into the Expense Fund. See "Security for the
Bonds -- Collection Account" in the Prospectus. In
addition, on the Closing Date the Issuer will
deposit in the Collection Account any amount
necessary to receive a rating on the Bonds of "AAA"
from Standard & Poor's Ratings Group ("S&P").
C. Reserve Fund......... To the extent required by S&P, the Bonds will be
secured at all times by either (1) a Reserve Fund
into which will be deposited cash, a letter of
credit or a surety bond or (2) GNMA Certificates in
excess of that sufficient to support required
principal and interest payments on the Bonds.
Expense Fund.............. The Issuer will, to the extent required by S&P,
establish with the Trustee an account (the "Expense
Fund") to provide for the payment of future expenses
relating to the administration of the Bonds. Funds
deposited in such Expense Fund will equal an amount
determined pursuant to the Terms Indenture (as
defined hereafter under "Description of the Bonds")
to be sufficient to assure that funds will be
available to pay future expenses relating to the
administration of the Bonds. If the funds in the
Expense Fund exceed the amount required by the Terms
Indenture to be maintained in the Expense Fund, any
excess funds in the Expense Fund
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<PAGE> 8
will be released to the Issuer. The funds maintained
in the Expense Fund will not be subject to the lien
of the Indenture, and will not be available for
payment of principal or interest on the Bonds. The
Issuer, to the extent allowed by the Terms
Indenture, will have the option to substitute a
qualified letter of credit for all or a portion of
the funds in the Expense Fund.
Certain Federal Income Tax
Matters................. Taxable Beneficial Owners will be required to include
interest paid or accrued on the Bonds in gross
income. Payments on Bonds held by foreign persons
will generally be exempt from United States
withholding tax, subject to compliance with
applicable certification requirements. Counsel to
the Issuer have advised the Issuer that in their
opinion the Bonds will be treated for federal income
tax purposes as indebtedness of the Issuer. The
Bonds are not issued with any original issue
discount, except to the extent interest paid or
accrued may be required to be reported as original
issue discount as described in "Certain Federal
Income Tax Consequences -- Original Issue Discount"
in the Prospectus.
Bonds owned by a real estate investment trust will
not be treated as "real estate assets" or
"Government securities" and interest on the Bonds
will not be considered "interest on obligations
secured by mortgages on real property or on
interests in real property". Similarly, the Bonds
will not constitute "qualifying real property loans"
for mutual savings banks or domestic building and
loan associations and will not constitute "loans
secured by an interest in real property" or
"obligations of the United States" for domestic
building and loan associations. In addition, Bonds
held by a regulated investment company will not
constitute "Government securities". The Issuer will
not elect to treat the segregated pool of assets
securing the Bonds as a "real estate mortgage
investment conduit" ("REMIC"). See "Certain Federal
Income Tax Consequences" in the Prospectus.
Use of Proceeds........... The net proceeds from the issuance of the Bonds will
be applied to the purchase of the GNMA Certificates.
The GNMA Certificates will simultaneously be pledged
as security for the Bonds under the Indenture. See
"Use of Proceeds" in the Prospectus.
Legal Investment.......... The Bonds constitute "mortgage related securities"
for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), and as such, are
legal investments for certain entities to the extent
provided in SMMEA. However, certain states have
enacted legislation overriding the exemption
afforded by SMMEA. Notwithstanding SMMEA, there are
other restrictions on the ability of certain
investors, including depository institutions, either
to purchase Bonds or to purchase Bonds representing
more than a specified percentage of such investors'
assets. Investors should consult their own legal
advisors in determining whether and to what extent
the Bonds constitute legal investments or are
subject to restrictions on investment. See "Legal
Investment Matters" in the accompanying Prospectus.
Bond Rating............... It is a condition to the issuance of the Bonds that
they be rated "AAA" by S&P. See "Bond Ratings"
herein.
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<PAGE> 9
DESCRIPTION OF THE CERTIFICATES
GENERAL
The GNMA Certificates pledged to secure the Bonds will be "fully modified
pass-through" mortgage-backed certificates guaranteed as to full and timely
payment of principal and interest by GNMA. The guarantee of GNMA is backed by
the full faith and credit of the United States. (See "Security for the
Bonds -- GNMA" and " -- GNMA Certificates" in the Prospectus.) It is anticipated
that the GNMA Certificates will be held on deposit at the Participants Trust
Company, a limited purpose trust company organized under the banking laws of the
State of New York.
Regular monthly installment payments on a GNMA Certificate will be composed
of interest due as specified on the GNMA Certificate plus the scheduled
principal payments on the FHA Loans, FmHA Loans and VA Loans underlying such
GNMA Certificate due on the first day of the month in which the scheduled
monthly installment on the GNMA Certificate is due. The regular monthly
installments on each GNMA Certificate will be paid to the Indenture Trustee on
the first business day following the 15th day of each calendar month in the case
of GNMA Certificates issued under the GNMA I program ("GNMA I Certificates") and
by the 20th day of each calendar month in the case of GNMA Certificates issued
under the GNMA II program ("GNMA II Certificates"). In addition, any unscheduled
recoveries of principal on the FHA Loans, VA Loans or FmHA Loans backing such
GNMA Certificates received during any month will be passed through to the
Indenture Trustee on the first business day following the 15th or on the 20th
day of the following month for GNMA I and GNMA II Certificates, respectively.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on each GNMA I Certificate
is equal to the interest rate on the mortgage loans included in the pool of
mortgage loans backing such GNMA I Certificate, less one half percentage point
per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate is between one half percentage
point and one and one half percentage points lower than the highest interest
rate on the mortgage loans included in the pool of mortgage loans backing such
GNMA II Certificate (except of pools of mortgages secured by manufactured
homes).
It is anticipated that the GNMA Certificates pledged to secure the Bonds
will consist of GNMA I and GNMA II Certificates. Each GNMA Certificate securing
the Bonds was or will be issued by a mortgage banking company or other entity
which has been approved by GNMA as an authorized issuer of GNMA Certificates and
will have an original maturity of not more than 30 years. No GNMA Certificate
backed by graduated payment mortgage loans will be included in the collateral
for the Bonds.
On the date of delivery of the Bonds, such GNMA Certificates will have an
aggregate Bond Value, as of the payment date of each GNMA Certificate
immediately preceding the date of issuance of the Bonds, at least equal to the
principal amount of the Bonds plus $1,000. The Issuer anticipates that the GNMA
Certificates which will secure the Bonds on the date of delivery will have been
issued not earlier than January 1, 1986 and not later than June 1, 1996. It is
further anticipated that such GNMA Certificates will bear interest at rates
ranging from 7.0% to 9.5% per annum.
The foregoing information is approximate based on information available as
of the date of this Prospectus Supplement. Since the GNMA Certificates have not
been acquired as of the date of this Prospectus Supplement, there may be
discrepancies between the actual GNMA Certificates which will secure the Bonds
and the GNMA Certificates which the Issuer currently expects to acquire.
However, all of the GNMA Certificates initially securing the Bonds must bear
interest at rates ranging from 6.5% to 10.0% per annum and must have maturity
dates no earlier than February 1, 2016 and no later than July 1, 2026. The
actual GNMA Certificates delivered to secure the Bonds will be described in a
Current Report on Form 8-K filed with the Securities and Exchange Commission
following the closing of the Bonds.
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In the event that the GNMA Certificates proposed to be pledged (or
comparable GNMA Certificates) are not delivered on the Closing Date, the Issuer
intends to deposit cash with the Indenture Trustee, on an interim basis pending
such delivery, in an amount such that the sum of (a) the cash deposited on the
Closing Date and (b) the reinvestment income thereon to the first Payment Date
at the Assumed Reinvestment Rate is at least equal to (i) the Bond Value of the
GNMA Certificates not delivered (which shall be assumed to have the
characteristics of the GNMA Certificates described above) (the "Undelivered
Amount") plus (ii) the interest that will accrue during the Initial Accrual
Period at the Bond Rate on an aggregate principal amount of the Bonds equal to
the Undelivered Amount. The Issuer will agree to deliver to the Indenture
Trustee such GNMA Certificates or comparable GNMA Certificates within 35 days
after the Closing Date. To the extent such GNMA Certificates are not delivered
within 35 days after the Closing Date, the cash so deposited with the Indenture
Trustee will be applied to the extent required by the Indenture, which may
require the application of all or a part of such cash to redeem an aggregate
principal amount of Bonds up to the Undelivered Amount. To the extent that the
Issuer is not able to obtain adequate assurance of delivery of suitable GNMA
Certificates within the requisite 35-day period in an amount sufficient to meet
the criteria then imposed by the Securities and Exchange Commission in order for
the Bonds to be "mortgage-related securities," the aggregate principal amount of
the Bonds being issued may be reduced to the extent necessary to meet the
Commission's current criteria.
It is currently anticipated that all of the GNMA Certificates securing the
Bonds will be acquired by the Issuer from EVEREN Securities, Inc., one of the
Underwriters and a subsidiary of the Issuer's indirect parent corporation,
EVEREN Securities Holdings, Inc., in a privately negotiated transaction.
SUBSTITUTIONS
The Issuer may deposit additional GNMA Certificates as Collateral for the
Bonds or substitute GNMA Certificates for GNMA Certificates previously pledged
as Collateral for the Bonds, in each case under the conditions prescribed in the
Indenture. Notwithstanding the Issuer's ability to deposit, substitute and
withdraw GNMA Certificates, all of the GNMA Certificates securing the Bonds must
at all times conform to the characteristics prescribed for the GNMA Certificates
initially pledged to secure the Bonds, as previously described under "General",
except that the substitute GNMA Certificates may have maturity dates no later
than August 1, 2029. Any payments of principal and interest due to be received
on any GNMA Certificate after July 31, 2027, the Stated Maturity of the Bonds,
will not be included in the calculation of Bond Value. Additionally, the Bond
Value of the total pool of GNMA Certificates securing the Bonds may not, at any
time, exceed 104% of the Bond Value then required to be maintained to secure the
Bonds pursuant to the provisions of the Indenture. In addition, such substitute
GNMA Certificates may not be substituted for more than 40% of the aggregate face
amount of the GNMA Certificates initially pledged as collateral for the Bonds.
In no event may any additional GNMA Certificates be substituted for any
substitute GNMA Certificate.
The effect of the deposit or substitution of other GNMA Certificates as
Collateral for the Bonds may be to limit the amount of funds available in the
Collection Account for the redemption of Bonds and may therefore reduce the
availability of funds to redeem Bonds prior to their maturity date.
Alternatively, substitutions of GNMA Certificates may result in an increase in
funds available in the Collection Account to redeem Bonds pursuant to requests
by Bondholders. If sufficient requests for redemption by Bondholders have not
been submitted and funds remain available in the Collection Account on any
Payment Date after all such requests for redemption have been honored, such
substitutions of GNMA Certificates may increase the rate of mandatory
redemptions on the Bonds. See "Special Considerations -- Funds Available For
Redemptions at the Request of Bondholders" in the Prospectus.
DESCRIPTION OF BOOK ENTRY PROCEDURES
The Bonds will be issued in book entry form in denominations of $1,000 and
integral multiples of $1,000 in excess of such amount. The Bonds will be
represented by a single certificate registered in the name of the nominee of the
depository, The Depository Trust Company (the "Clearing Agency") or its nominee.
The Clearing Agency will maintain book entry records of ownership, transfers and
pledges of the Bonds only in the names of its participants (the "Clearing Agency
Participants"), which include securities brokers and dealers, banks and trust
companies and clearing corporations and may include certain other organizations.
Prior to
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Book Entry Termination (as defined below), Beneficial Owners who are not
Clearing Agency Participants may transfer and pledge their interests in the
Bonds, and exercise any other rights and remedies of Bondholders, only through
Clearing Agency Participants or other entities that maintain relationships with
Clearing Agency Participants ("Indirect Participants"). The Clearing Agency may
charge its customary fee to Clearing Agency Participants in connection with any
such transfers and pledges. Additionally, prior to Book Entry Termination,
payments of principal and interest on the Bonds will be made to Beneficial
Owners only through the Clearing Agency and its Clearing Agency Participants.
See "Special Considerations -- Book Entry Registration" and "Description of the
Bonds -- Book Entry Registration" in the Prospectus.
The Clearing Agency, which is a New York-chartered limited purpose trust
company, performs services for its participants, some of whom (and/or their
representatives) own the Clearing Agency. In accordance with its normal
procedures, the Clearing Agency is expected to record the positions held by each
Clearing Agency Participant in the Bonds, whether held for its own account or as
a nominee for another person.
Each payment of principal and interest on the Bonds shall be paid to the
Clearing Agency, whose nominee will be the record holder of Bonds. The Clearing
Agency will be responsible for crediting the amount of such payments to the
respective accounts of the applicable Clearing Agency Participants in accordance
with the Clearing Agency's normal procedures, which currently provide for
payments in next-day funds settled through the New York Clearing House. Each
Clearing Agency Participant will be responsible for disbursing such payments to
Indirect Participants or the Beneficial Owners that it represents and to each
brokerage firm for which it acts as agent. Each such brokerage firm will be
responsible for disbursing funds to the Beneficial Owners that it represents.
Whenever principal is to be paid on the Bonds, the payment will be rounded
downward to the amount required to redeem an integral number of the Bonds. The
Indenture Trustee will give notice to the Clearing Agency, and the Clearing
Agency will determine the number of Bonds to be redeemed from the account of
each Clearing Agency Participant. Each Clearing Agency Participant will in turn
determine the number of Bonds to be redeemed from the account of each Indirect
Participant and Beneficial Owner that it represents. A Beneficial Owner of Bonds
may request that all or any portion of his Bonds be redeemed by the Issuer at
the earliest opportunity by submitting a request for redemption to the Clearing
Agency Participant or Indirect Participant that maintains his account in the
Bonds. If submitted to an Indirect Participant, that firm should in turn make
the request to the Clearing Agency Participant which acts as its agent. The
Clearing Agency Participant will submit such requests for redemption to the
Clearing Agency.
Pursuant to the Letter of Representations to be entered into among the
Issuer, the Indenture Trustee and the Clearing Agency, the Indenture Trustee
shall select Bonds to be redeemed at the option of the Beneficial Owners from
voluntary offering forms previously transmitted to the Indenture Trustee by the
Clearing Agency in the order such forms were received by the Clearing Agency.
The required form of the voluntary offering forms to be submitted by Beneficial
Owners, as well as the exact procedures to be followed by the Clearing Agency
for purposes of determining the order of receipt, will be established from time
to time by the Clearing Agency. In the event of termination of registration of
the Bonds in the name of the Clearing Agency, requests for redemption must be
submitted directly to the Indenture Trustee. A Beneficial Owner may withdraw his
request for redemption by notifying the Clearing Agency Participant or Indirect
Participant that maintains his account in the Bonds. For a request for
redemption, or withdrawal of request for redemption, to be honored with respect
to a Payment Date, it must be received by the Clearing Agency (in the case of a
request for redemption) and by the Trustee (in the case of a withdrawal of a
request for redemption) during the period from the first through the tenth day
of the month in which such Payment Date occurs (each, a "Tender Date"). Requests
for redemption received by the Clearing Agency after the tenth day of the month
in which the Payment Date occurs on which a given redemption is desired, and
requests for redemption received in a timely manner but not accepted for
redemption with respect to a given Payment Date, will be treated as requests for
redemption on the next succeeding Payment Date and each succeeding Payment Date
thereafter until the request is accepted or is withdrawn. If a notice of
withdrawal of a request for redemption has not been received by the Indenture
Trustee by the tenth day of the month in which such Payment Date occurs, the
previously made request for redemption will be irrevocable with respect to the
selection of Bonds for redemption on the applicable Payment Date.
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To the extent that the aggregate amount of principal payments required by
the Indenture to be applied to the Bonds exceeds the aggregate principal amount
of Bonds tendered for redemption by Beneficial Owners, Bonds will be mandatorily
redeemed in accordance with applicable established random lot procedures of the
Clearing Agency and the other established procedures of the Clearing Agency
Participants and Indirect Participants representing the Beneficial Owners.
Accordingly, a Clearing Agency Participant or Indirect Participant may determine
to redeem Bonds from the account of some Beneficial Owners (which could include
such Clearing Agency Participant or Indirect Participant) without redeeming such
Bonds from the account of other Beneficial Owners. In the event that the Issuer
elects to conduct a partial optional redemption, the Bonds to be optionally
redeemed will also be determined by such Clearing Agency procedures.
The Bonds will be issued in definitive, registered form to Beneficial
Owners or their nominees, and thereupon such Beneficial Owners will become
Bondholders if, and only if, one of the following events shall occur (any such
event being referred to as "Book Entry Termination"): (i) the Clearing Agency or
the Issuer advises the Indenture Trustee in writing that the Clearing Agency is
no longer willing or able properly to discharge its responsibilities as nominee
and depository with respect to the Bonds and the Issuer and the Indenture
Trustee are unable to locate a qualified successor to serve as a Clearing
Agency, (ii) the Issuer, in its sole discretion but with the consent of the
Trustee, elects to terminate the book entry system by notice to the Clearing
Agency and the Trustee; or (iii) an Event of Default (as defined in the
Prospectus) shall occur and be continuing and the Clearing Agency and the
Clearing Agency Participants, at the direction of Beneficial Owners representing
a majority in outstanding principal amount of the Bonds, advise the Indenture
Trustee in writing that the continuation of a book entry system is no longer in
the best interests of Beneficial Owners. Upon Book Entry Termination, Beneficial
Owners will become registered Bondholders and will deal directly with the
Indenture Trustee with respect to transfers, notices, payments and requests for
redemption.
The Clearing Agency has advised the Issuer and the Indenture Trustee that,
prior to Book Entry Termination, the Clearing Agency will take any action
permitted to be taken by a Bondholder under the Indenture only at the direction
of one or more Clearing Agency Participants to whom the Bonds are credited in an
account maintained by the Clearing Agency. The Clearing Agency has advised that
it will take such action with respect to any principal amount of the Bonds only
at the direction of and on behalf of Clearing Agency Participants with respect
to those principal amounts of such Bonds. For example, if a vote of Beneficial
Owners is required to accelerate maturity of the Bonds following an Event of
Default, the Clearing Agency, acting at the direction of Clearing Agency
Participants (which in turn are acting at the direction of Beneficial Owners),
may vote in favor of acceleration of maturity with respect to a portion of the
principal amount of such Bonds owned by a group of Beneficial Owners and against
acceleration with respect to other principal amounts of such Bonds owned by a
different group of Beneficial Owners.
Issuance of the Book Entry Bonds offered hereby in book entry form rather
than as physical certificates may adversely affect the liquidity of the Book
Entry Bonds in the secondary market and the ability of Beneficial Owners to
pledge them. In addition, as described previously prior to Book Entry
Termination distributions on the Book Entry Bonds will be made by the Indenture
Trustee to the Clearing Agency and the Clearing Agency will credit such
distributions to the accounts to its Clearing Agency Participants, which will
further credit them to the accounts of Indirect Participants or Beneficial
Owners. As a result, Beneficial Owners may experience delays in the receipt of
such distributions. See "Special Considerations -- Book Entry Registration" in
the Prospectus.
DESCRIPTION OF THE BONDS
The Bonds will be issued pursuant to a Series Supplement to the Terms
Indenture (collectively, the "Terms Indenture") between the Issuer and the
Indenture Trustee, incorporating by reference the Issuer's Standard Indenture
Provisions (such Terms Indenture and Standard Indenture Provisions are,
collectively, referred to as the "Indenture"). The following summaries
describing certain provisions of the Bonds do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, the Prospectus
and the provisions of the Indenture relating to the Bonds offered hereby.
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PAYMENTS OF INTEREST
The Bonds will bear interest at 7.05% per annum. Interest will be payable
monthly on each Interest Payment Date, commencing August 31, 1996. Interest will
accrue on the Bonds during the monthly period ending on the last day of the
month preceding the month in which each Interest Payment Date occurs (each, an
"Accrual Period"). Interest payable on August 31, 1996 will consist of 34 days'
interest accrued from June 27, 1996 through July 31, 1996 (the "Initial Accrual
Period"). Interest will be computed with respect to the Bonds on the basis of a
360-day year consisting of twelve 30-day months. See "Description of the
Bonds -- Payments of Interest" in the Prospectus.
The yield on the Bonds will be less than the yield which would otherwise be
produced by the interest rate on the Bonds, because on each Interest Payment
Date (other than the month in which a Bond matures or is redeemed) the interest
payable on the Bonds is the interest accrued during the related Accrual Period
or Initial Accrual Period, as the case may be, even though such Accrual Period
ends one month prior to such Interest Payment Date.
PAYMENTS OF PRINCIPAL
Principal payments on the Bonds will be made in the form of redemptions as
explained below on each Payment Date, commencing on or after July 31, 1996, in
an aggregate amount (the "Basic Principal Payment") equal to the amount, if any,
by which the outstanding principal amount of the Bonds plus $1,000 exceeds the
aggregate Bond Values of the Bond Value Groups (as both such terms are defined
below) at the end of the monthly period (a "Due Period") ending on the second
business day prior to such Payment Date. For purposes of determining the Basic
Principal Payment, the Bond Values of the GNMA Certificates will be reduced by
taking into account all distributions of principal (including prepayments)
received or due to be received by the Indenture Trustee on such GNMA
Certificates during the Due Period immediately preceding such Payment Date. No
portion of the Spread (as defined in the Prospectus) will be applied to
principal payments on the Bonds.
The "Bond Value" for a GNMA Certificate represents the principal amount of
Bonds that, based on certain assumptions, can be supported by the distributions
on such GNMA Certificate. For convenience of calculation, GNMA Certificates that
are backed by the same pool of mortgage loans are aggregated into one group (a
"Bond Value Group") which is assigned an aggregate Bond Value. The "Bond Value"
of a Bond Value Group on the last day of a Due Period (or on the day preceding
the first Due Period) will be in the case of each Bond Value Group, the Maximum
Bond Value Percentage (as specified in the Terms Indenture) of the lesser of (x)
the present value of the sum of (a) the scheduled distributions on all the GNMA
Certificates included in such Bond Value Group assuming no prepayments and (b)
the reinvestment income thereon to the Payment Date following the month of
receipt at the Assumed Reinvestment Rate, both discounted monthly at the Bond
Rate, and (y) the aggregate outstanding principal amount of all of the GNMA
Certificates included in such Bond Value Group as of the end of the related Due
Period. The Bond Value for each Bond Value Group will be determined assuming
that each Mortgage Loan underlying a GNMA Certificate included in such Bond
Value Group (x) matures on the stated maturity of such GNMA Certificate and (y)
bears interest at a rate of 0.50% for a GNMA I Certificate (1.50% for a GNMA II
Certificate) in excess of the pass-through rate borne by such GNMA Certificate.
The Maximum Bond Value Percentage for a Bond Value Group produces a Bond
Value for such Bond Value Group such that, irrespective of the actual level of
prepayments experienced, the scheduled distributions on such Bond Value Group,
together with the assumed reinvestment income, will be sufficient to make the
required payments on the Bonds supported by such Bond Value Group.
All principal payments on the Bonds will be applied first to redemption of
Bonds at the request of Beneficial Owners and then to mandatory redemption of
Bonds under the circumstances described below.
Distributions on the GNMA Certificates, together with reinvestment earnings
thereon at an assumed annual rate of no more than 2.5% (the "Assumed
Reinvestment Rate") will be sufficient to retire the Bonds not later than their
Stated Maturity set forth on the cover page hereof.
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REDEMPTION AT THE REQUEST OF THE BENEFICIAL OWNERS
Redemption of Bonds pursuant to requests by Beneficial Owners will be made
on each Payment Date in the order of priority described in the following
paragraph and in an amount equal to the aggregate amount of Bonds properly
tendered for redemption as described below, subject to the limitations that (i)
redemption of Bonds will be made only in principal amounts of $1,000 or integral
multiples thereof and (ii) the aggregate amount of Bonds so redeemed cannot
exceed the Basic Principal Payment to be applied to the Bonds on such date. See
"Description of the Bonds -- Payments of Principal" herein, and "Special
Considerations -- Funds Available for Redemptions at the Request of Bondholders"
and "Description of the Bonds -- Payments of Principal" in the Prospectus.
On each Payment Date, subject to the above limitations, the Issuer will
redeem Bonds for which redemption has been requested in the following order: (i)
Bonds beneficially owned by the estates of deceased Beneficial Owners ("Deceased
Holders"), subject to a limitation of $100,000 principal amount of Bonds
beneficially owned by any one Deceased Holder; (ii) Bonds registered in the name
of other Beneficial Owners, subject to a limitation of $10,000 principal amount
of Bonds beneficially owned by any one Beneficial Owner; (iii) Bonds
beneficially owned by the estates of Deceased Holders in excess of such $100,000
limitation; and (iv) Bonds beneficially owned by other Beneficial Owners in
excess of such $10,000 limitation. For purposes of the limitations described in
the preceding sentence, a Bond held by tenants by the entirety, joint tenants or
tenants in common is considered to be held by a single Beneficial Owner.
However, a Bond held by a trustee is considered to be held by each beneficiary
of the trust to the extent of such beneficiary's beneficial interest therein.
Also for purposes of these limitations, the death of a tenant by the entirety,
joint tenant or tenant in common will be deemed to be the death of the holder of
the Bond and the entire principal amount of the Bond so held will be subject to
priority in redemption, and the death of a beneficiary of a trust will be deemed
to be the death of the holder of a Bond held by the trustee of the trust to the
extent of such beneficiary's beneficial interest in such Bond. A person who is,
or during his lifetime was, entitled to substantially all of the beneficial
interests of ownership of a Bond will be deemed to be the Beneficial Owner and
holder of such Bond to the extent of his beneficial interest therein, regardless
of the person or entity in whose name such Bond is registered, if such
beneficial interest can be established to the satisfaction of the Indenture
Trustee. Such beneficial interest will be deemed to exist in typical cases of
street name or nominee ownership, ownership by a trustee, ownership under the
Uniform Gifts to Minors Act and community property or other joint ownership
arrangements between a husband and wife and in trust arrangements and certain
other arrangements where a person has substantially all of the beneficial
ownership interest in the Bond during his or her lifetime. Beneficial interests
shall include the power to sell, transfer or otherwise dispose of a Bond and the
right to receive the proceeds therefrom, as well as interest and principal
payable with respect thereto.
Within any of the categories described in the first sentence of the
preceding paragraph, Bonds will be redeemed in the order that timely requests
for redemption are received by the Clearing Agency (as evidenced by the
time-stamp placed on such requests by the Clearing Agency at the time of
receipt) or, after Book Entry Termination, by the Indenture Trustee. The
Clearing Agency or, in the case of Book Entry Termination, the Trustee, may
establish such procedures as either deems equitable to determine the order of
receipt of requests for redemption delivered on the same day. Requests for
redemption on any Payment Date must be submitted in writing to the Clearing
Agency by Clearing Agency Participants and, in the case of a request on behalf
of a Deceased Holder, accompanied by appropriate evidence of death and any tax
waivers requested by the Indenture Trustee, and must be received by the Clearing
Agency on or prior to the related Tender Date. The Clearing Agency will
time-stamp and forward requests to the Indenture Trustee upon receipt. After
Book Entry Termination, requests for redemption must be submitted to the
Indenture Trustee by the appropriate Tender Date in writing, in the form set
forth on the Bonds, accompanied by the Bonds to be redeemed and, in the case of
a request on behalf of a Deceased Holder, accompanied by appropriate evidence of
death and tax waivers requested by the Indenture Trustee. If not redeemed on the
Payment Date for which such request was initially submitted, a request for
redemption will remain in effect on each subsequent Payment Date until the Bonds
for which such request was submitted have been redeemed or until written notice
is submitted withdrawing such request for redemption. In order to be effective
for any particular Payment Date, a withdrawal notice must be received by the
related Tender Date.
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All such requested redemptions will be made at 100% of the principal amount
of the Bonds so redeemed plus accrued interest to the Payment Date on which such
Bonds are redeemed. There is no assurance that principal payments on the Bonds
will be sufficient to permit an owner of Bonds to have all his Bonds redeemed
prior to maturity or within a reasonable time after redemption is requested. See
"Maturity of the Bonds -- The Effects of Interest Rate Changes and Other
Factors" in this Prospectus Supplement and "Special Considerations -- Funds
Available for Redemptions at the Request of Bondholders" and "Description of the
Bonds -- Redemption at Request of Bondholders" in the Prospectus.
MANDATORY REDEMPTION OF BONDS
On each Payment Date the amount of principal payments to be applied to the
Bonds will be applied first to redeem Bonds at the request of Beneficial Owners
and then to mandatory redemption of Bonds. On the tenth business day of the
month in which each Payment Date occurs (each, an "Accounting Date"), the
Indenture Trustee will notify the Clearing Agency to determine requests for
redemption of Bonds that have been accepted through the related Tender Date and,
thereby, to determine the additional amount, if any, of Bonds which will be
subject to mandatory redemption on such Payment Date.
The redemption price will be 100% of the principal amount of the Bonds so
redeemed plus accrued interest to the Payment Date on which such Bonds are
redeemed. See "Description of the Bonds -- Payments of Principal" in this
Prospectus Supplement.
REDEMPTION AT THE OPTION OF THE ISSUER
The Bonds will be redeemable at the option of the Issuer (or its assignee),
in whole or in part, on any Payment Date, on or after the earlier of (i) the
fourth anniversary of their issuance, or (ii) the date on which the aggregate
principal amount of the Bonds then outstanding is less than 20% of their initial
aggregate principal amount, at a price equal to 100% of the unpaid principal
amount of the Bonds so redeemed, together with accrued and unpaid interest to
the optional redemption date.
PREPAYMENT OF THE BONDS --
THE EFFECTS OF INTEREST RATE CHANGES AND OTHER FACTORS
GENERAL
Payments of principal on the Bonds will depend on the rate of prepayments
of the principal of the GNMA Certificates, which in turn will depend upon the
rate of principal prepayments with respect to the Mortgage Loans underlying such
GNMA Certificates. Prepayments of principal on the underlying Mortgage Loans are
less likely to occur during periods when prevailing mortgage interest rates are
higher than the interest rates on such Mortgage Loans, because it is generally
attractive to mortgagors to pay off mortgage loans bearing "below-market"
interest rates as slowly as possible. However, during such periods when mortgage
interest rates are higher than the rates on the Mortgage Loans it is also likely
that interest rates on investments comparable to the Bonds will be higher than
the Bond interest rate. When this is the case, greater numbers of Bonds are
expected to be tendered for redemption because Bondholders will desire to take
advantage of the higher interest rates payable on such other investments then
available. Thus, it is likely that greater numbers of Bondholders will be
tendering their Bonds for redemption during periods when less funds will be
available to honor such redemptions as a result of lower principal prepayments
on the Mortgage Loans underlying the GNMA Certificates.
By contrast, prepayments of principal on the Mortgage Loans underlying the
GNMA Certificates are most likely to occur during periods of lower interest
rates when it is expected that Bondholders will least desire redemption of their
Bonds. During periods in which prevailing mortgage interest rates are lower than
the interest rates on the underlying Mortgage Loans, many mortgagors are likely
to desire to refinance their Mortgage Loans in order to take advantage of the
lower mortgage rates then available. When a Mortgage Loan is "refinanced" the
original loan is paid off, with the result that the Mortgage Loan is prepaid in
full. Such refinancings of Mortgage Loans will, therefore, result in a greater
level of principal prepayments on the GNMA Certificates which must be applied to
principal redemptions of the Bonds. As described previously
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under "Description of the Bonds -- Payments of Principal," to the extent that
the amount of principal payments required by the Indenture to be applied to the
Bonds as a result of principal prepayments on the Mortgage Loans underlying the
GNMA Certificates exceeds the aggregate principal amount of the Bonds then
tendered to the Indenture Trustee for redemption, Bonds will be redeemed by
mandatory redemption in accordance with the random lot procedures of the
Clearing Agency. Thus, even though they may not have tendered their Bonds for
redemption, Bondholders are more likely to have their Bonds repaid on a
mandatory basis if interest rates fall, and Mortgage Loan prepayments increase,
following the issuance of the Bonds. During such periods of lower interest
rates, Bondholders are not expected to desire redemption of their Bonds, as they
may not be able to reinvest principal received back on the Bonds in other
investments of comparable quality bearing comparable interest rates.
The foregoing discussion of the effect of interest rates on Mortgage Loan
prepayment experience should be understood as a generalization, however, as
factors other than interest rates are likely to affect principal prepayments on
the Mortgage Loans underlying the GNMA Certificates, resulting in prepayments of
the Bonds. Principal prepayments may be influenced by a variety of economic,
geographic, social and other factors. Other factors affecting prepayment of
Mortgage Loans include changes in mortgagors' housing needs, job transfers,
unemployment and mortgagors' net equity in the mortgaged properties. For
example, even though falling interest rates may make refinancing attractive, not
all mortgagors will be able to obtain alternative financing or be in a financial
position to make partial prepayments and will continue to make only scheduled
principal payments. Higher interest rates notwithstanding, generally depressed
economic conditions may result in increased levels of foreclosures, each of
which will have the effect of a prepayment in full of the related Mortgage Loan.
Additionally, the terms of the redemption mechanism for application of
principal to the Bonds creates additional uncertainties with respect to timing
of principal payments. Investors should note that principal is applied to the
Bonds on a mandatory basis on each Payment Date when the total principal which
must be applied to the Bonds pursuant to the Indenture exceeds the aggregate
principal balance of the Bonds tendered for redemption. See "Description of the
Bonds -- Mandatory Redemptions of Bonds" in this Prospectus Supplement. In the
case of such mandatory redemptions whole Bonds are redeemed out in $1,000
increments on a random lot basis. Therefore, some Bondholders will receive all
of their principal much earlier, and other Bondholders will receive none of
their principal until much later, than would have been the case if principal
were applied to all Bonds on a pro rata basis on each Payment Date. The fact
that Bondholders may tender their Bonds for redemption and, further, that there
are certain priorities for redemption of Bonds of deceased Bondholders, pose
additional uncertainties as to timing of redemption of the Bonds owned by any
given Bondholder. Finally, the Bonds are subject to redemption at the option of
the Issuer at the sooner of four years following the date of issuance or the
date on which the aggregate outstanding principal balance of the Bonds declines
to 20% of their original aggregate principal balance.
Although no assurance can be given as to the actual prepayment experience
of any individual Bondholder, it is anticipated that the actual maturity of
substantially all of the Bonds, by principal balance, will occur significantly
earlier than the Stated Maturity of the Bonds. Further, for the reasons
described in the preceding paragraphs, the actual maturity of some of the Bonds
will occur much earlier than the actual maturity of other Bonds.
COMPARISON OF THE BONDS WITH FIXED-TERM CORPORATE BONDS
Investors should note that the Bonds differ from certain other types of
fixed-term corporate bonds and debt instruments in that the Bonds may be prepaid
at varying rates depending upon the amortization of the specific pool of assets,
i.e., the GNMA Certificates, which are pledged to secure such Bonds. See
"-- General" above. By contrast, certain other fixed-term corporate bonds or
debt instruments will be, by their terms, payable on a date certain. Such
payment will, of course, be subject to the issuing corporation's ability to pay
on such date in light of the issuing corporation's then available assets and the
potential competing claims of its other creditors. It should be noted, however,
that although the yield on the Bonds is sensitive to fluctuations in interest
rates, such fluctuations are not expected to affect the likelihood that the
Bondholders will ultimately be repaid their principal investment in full, but,
merely, the timing of such repayment. As
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previously described, the Bonds have been secured by a specific, identifiable
pool of GNMA Certificates up to a level necessary to obtain a "AAA" rating by
Standard & Poor's Ratings Group. Such GNMA Certificates are not expected to be
available to any other present or future creditors of the Issuer. By contrast,
an investor in certain other types of fixed-term corporate debt instruments not
secured by a segregated pool of assets but, rather, by the general credit of the
corporate issuer, may be at greater risk as to ultimate repayment of the
principal of such debt instruments than are investors in the Bonds. Should such
general corporate debt obligations not be secured by a segregated pool of
assets, the holders of such debt instruments may be in competition with other
creditors of the corporate issuers for repayment of their instruments. Further,
it should be noted that the business or financing opportunities of such
corporate issuers and, therefore, their ability to timely or ultimately repay
such instruments, may be affected by general economic conditions, including
fluctuations in interest rates.
THE ISSUER
The Issuer has previously issued twenty-five Series of its Collateralized
Mortgage Obligations in an aggregate initial principal amount totaling
$399,962,000. All such prior Series of Bonds were issued pursuant to the
Indenture and are secured by Collateral other than the Collateral securing the
Bonds. No Collateral securing any other Series of Bonds will secure payments of
principal of and interest on the Bonds, and no Collateral securing the Bonds
will secure payments of principal of and interest on any other Series of Bonds.
UNDERWRITING
The Underwriters severally have agreed, subject to the terms and conditions
of the Terms Agreement, which incorporates by reference the terms of an
Underwriting Agreement, to purchase the respective principal amounts of the
Bonds set forth opposite their respective names.
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF BONDS
-----------
<S> <C>
EVEREN Securities, Inc................................................... $ 4,922,000
J.C. Bradford & Co....................................................... 2,500,000
Raymond James & Associates, Inc.......................................... 2,000,000
-----------
Total.......................................................... $ 9,422,000
=========
</TABLE>
Pursuant to the Underwriting Agreement, the several Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
the Bonds offered hereby if any Bonds are purchased. In the event of default by
any Underwriter, the Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Issuer has been advised by the Underwriters that they propose initially
to offer the Bonds to the public at the public offering price set forth on the
cover page of this Prospectus Supplement and to certain dealers at such prices
less a concession of 3% of the principal amount of the Bonds; that the
Underwriters and such dealers may allow a discount of 2.5% of such principal
amount on sales to other dealers; and that the public offering price and
concession and discount to dealers may be changed by the Underwriters.
The Issuer will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or contribute to
payments the Underwriters may be required to make in respect thereof.
It is currently anticipated that all of the GNMA Certificates will be
acquired by the Issuer from EVEREN Securities, Inc. in a privately negotiated
transaction. EVEREN Securities, Inc. will have acquired such GNMA Certificates
from time to time in the open market or in privately negotiated transactions.
S-17
<PAGE> 18
The Representative of the Underwriters has agreed with the Issuer that,
under certain circumstances, the Representative of the Underwriters will
reimburse the Issuer for certain expenses incurred by the Issuer in connection
with the offering of the Bonds.
LEGAL MATTERS
Certain legal matters in connection with the Bonds will be passed upon for
the Issuer and for the Underwriters by Andrews & Kurth L.L.P., Dallas, Texas.
BOND RATING
It is a condition to the issuance of the Bonds that they be rated "AAA" by
Standard & Poor's Ratings Group ("S&P"). The rating of "AAA" is the highest
rating that S&P assigns to bonds. Publications of S&P indicate that it assigns
such rating to bonds for which the obligor's "capacity to pay interest and repay
principal is extremely strong." Such rating takes into consideration the nature
of the GNMA Certificates pledged to secure the Bonds, the guaranty of GNMA, to
the extent applicable, the structural and legal aspects associated with the
Bonds and the extent to which the stream of principal and interest payments on
the GNMA Certificates pledged to secure the Bonds is adequate to make required
payments of principal of and interest on the Bonds, as well as other criteria.
Investors should be aware that any rating assigned to the Bonds by any rating
agency will reflect such agency's assessment solely of the likelihood that
holders of such Bonds will receive such payments. Such rating will not
constitute an assessment of the likelihood that principal prepayments on the
mortgage loans underlying the GNMA Certificates will be made by mortgagors or of
the degree to which the rate of such prepayments might differ from that
originally anticipated.
The Issuer has not requested a rating on the Bonds by any rating agency
other than S&P. However, there can be no assurance as to whether any other
rating agency will rate the Bonds, or, if it does, what rating would be assigned
by any such other rating agency. A rating on the Bonds by another rating agency,
if assigned at all, may be lower than the rating assigned to the Bonds by S&P.
A security rating is not a recommendation to buy, sell, or hold securities
and may be subject to revision or withdrawal at any time by S&P.
ADDITIONAL BONDS WHICH MAY BE OFFERED
The Issuer and the Underwriters may execute an additional Terms Agreement
or Agreements for the sale of Bonds in addition to those offered hereby. If
there is an increase in the Bonds offered, additional GNMA Certificates will be
pledged to the Indenture Trustee having an aggregate Bond Value, as of the
payment date of each GNMA Certificate immediately preceding the date of issuance
of the Bonds, at least equal to the principal amount of such additional Bonds.
Such additional GNMA Certificates will conform to the parameters set forth above
under "Description of the Certificates -- General."
S-18
<PAGE> 19
PROSPECTUS
$150,038,000
GATEWAY MORTGAGE ACCEPTANCE CORPORATION
AND CERTAIN TRUSTS, ALL OF THE BENEFICIAL OWNERSHIP INTEREST
IN WHICH IS OWNED BY GATEWAY MORTGAGE ACCEPTANCE CORPORATION
COLLATERALIZED MORTGAGE OBLIGATIONS (ISSUABLE IN SERIES)
---------------------
This Prospectus relates to $150,038,000 aggregate principal amount of
Collateralized Mortgage Obligations (the "Bonds"), which may be sold from time
to time in one or more Series on terms determined at the time of sale and
described in the related Prospectus Supplement or Supplements. The issuer of a
Series of Bonds (the "Issuer") will be Gateway Mortgage Acceptance Corporation
or a trust beneficially owned by it. Each Series of Bonds will consist of one or
more Classes of Bonds, which may include one or more Classes of Compound
Interest Bonds. Interest on each Class of Bonds other than a Class of Compound
Interest Bonds will be payable on the dates specified in the related Prospectus
Supplement. Interest payments on each Class of Compound Interest Bonds will
commence only when all Bonds of the related Series having a Stated Maturity
prior to the Stated Maturity of such Class of Compound Interest Bonds have been
paid in full, unless the related Prospectus Supplement provides otherwise. Prior
to such time, interest on such Class of Compound Interest Bonds will accrue and
the amount of interest so accrued will be added to the principal thereof on each
Payment Date. The amount of principal required to be paid on a Series of Bonds
on each Payment Date will be applied to the Classes of Bonds of such Series in
the manner specified in the related Prospectus Supplement. As more fully
described herein, Bonds may constitute a Series of Special Allocation Bonds.
Principal payments on each Class of Bonds of a Series will be made on a pro rata
basis among all Bonds of such Class, unless otherwise provided in the related
Prospectus Supplement.
The Bonds of each Series will be collateralized by "fully modified
pass-through" mortgage-backed certificates ("GNMA Certificates") guaranteed as
to timely payment of principal and interest by the Government National Mortgage
Association ("GNMA"), by Guaranteed Mortgage Pass-Through Certificates ("FNMA
Certificates") issued and guaranteed as to timely payment of principal and
interest by the Federal National Mortgage Association ("FNMA"), by Mortgage
Participation Certificates ("FHLMC Certificates") issued and guaranteed as to
timely payment of interest and ultimate collection (and to the extent specified
in the related Prospectus Supplement, timely payment) of principal by the
Federal Home Loan Mortgage Corporation ("FHLMC"), by pass-through certificates
or participation certificates which are neither issued nor guaranteed by any
agency or instrumentality of the United States and which evidence undivided
interests in pools of mortgages secured by single family or multi-family
residences ("Non-Agency Certificates"), or by a combination of such
Certificates. The Non-Agency Certificates pledged to secure any Series of Bonds
may be guaranteed as to payment of principal and interest by a third party
insurer or guarantor, to the extent provided in the related Prospectus
Supplement. The GNMA Certificates will be backed by the full faith and credit of
the United States. The FNMA Certificates, the FHLMC Certificates and the
Non-Agency Certificates will not be backed, directly or indirectly, by the full
faith and credit of the United States.
Distributions on the Certificates pledged as collateral for a Series of
Bonds, together with the reinvestment earnings thereon at the assumed
reinvestment rate for such Series specified in the related Prospectus Supplement
(the "Assumed Reinvestment Rate") and, if applicable, the cash available to be
withdrawn from any Reserve Fund established for such Series, will be sufficient
to make timely payments of interest on the Bonds of such Series and to retire
each such Class of Bonds not later than its Stated Maturity. Each Series of
Bonds may be subject to redemption only under the limited circumstances
described herein and in the related Prospectus Supplement.
The Issuers will have no significant assets other than those pledged as
collateral to secure separately each Series of the Bonds issued by it. Although
the payment of principal of and interest on any Non-Agency Certificates pledged
to collateralize a Series of Bonds may be guaranteed as described in the related
Prospectus Supplement, the payment of principal and interest on the Bonds,
unless otherwise specified in the Prospectus Supplement, is not guaranteed or
insured by GNMA, FNMA, FHLMC, or any other governmental organization or by any
other person or entity.
The Issuer may elect to treat the Issuer or the segregated pool of assets
securing any Series of Bonds as a "real estate mortgage investment conduit"
("REMIC"). See "Certain Federal Income Tax Consequences." The Bonds of such
Series ("REMIC Bonds") will include one or more Classes of regular interests in
such REMIC ("REMIC Regular Bonds") and may include one Class of residual
interests in such REMIC ("Residual Bonds").
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Prospectus may not be used to consummate sales of the Bonds unless
accompanied by a Prospectus Supplement.
---------------------
EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS JUNE 18, 1996.
<PAGE> 20
PROSPECTUS SUPPLEMENT
The Prospectus Supplement or Supplements relating to a Series of Bonds to
be offered hereunder will set forth with respect to such Series of Bonds, among
other things:
(i) information regarding the Issuer of such Series;
(ii) the aggregate principal amount, the interest rate or the method
by which such interest rate may be determined, and the authorized
denominations of each Class of such Bonds;
(iii) the identification and characteristics of the collateral
securing such Bonds, including, if applicable, any Reserve Fund or Funds
for such Series;
(iv) the order of the application of principal payments to the Classes
of such Bonds and the allocation of principal to be so applied;
(v) the circumstances, if any, under which the Bonds of such Series
are subject to special redemption or optional redemption;
(vi) any minimum principal payment requirements and the terms of any
related minimum principal payment agreement with respect to such Series;
(vii) the Stated Maturity of each Class of such Bonds and the method
used to determine such Stated Maturities;
(viii) the method used to calculate the aggregate amount of principal
required to be paid on the Bonds of such Series on each Payment Date;
(ix) the principal amount of each Class of such Bonds that would be
outstanding on specified Payment Dates if the mortgages underlying the
Certificates pledged as security for such Bonds were prepaid at various
assumed rates;
(x) the Payment Dates, record dates, redemption dates, if any, and the
Assumed Reinvestment Rate for such Series of Bonds;
(xi) whether such Series constitutes a Series of Special Allocation
Bonds;
(xii) if all or part of the collateral for the Bonds of such Series
consists of Non-Agency Certificates, information concerning the mortgages
evidenced by such Certificates and, if applicable, related servicing and
insurance or guaranty arrangements;
(xiii) whether ownership of Bonds of any Class of such Series will
initially be available only in book entry form through a clearing agency
and, if so, the duties to be performed by the clearing agency with respect
to principal payments and redemptions and the conditions, if any, under
which definitive Bonds will be available to beneficial owners;
(xiv) the investment rating agencies and ratings required with respect
to such Series;
(xv) the extent, if any, to which deposits, withdrawals or
substitutions of Certificates securing the Bonds may be permitted;
(xvi) whether the Issuer intends to elect to treat the segregated pool
of assets securing such series as a REMIC;
(xvii) the identity of the Indenture Trustee for such Series; and
(xviii) additional information with respect to the plan of
distribution of such Bonds.
2
<PAGE> 21
AVAILABLE INFORMATION
The Issuer will be subject to the informational requirements of the
Securities Exchange Act of 1934 and, in accordance therewith, will file reports
and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information filed by the Issuer with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Regional Offices of the Commission at 7
World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511.
Copies of such material can be obtained from the Public Reference Section of the
Commission at its principal office, 450 Fifth Street, N.W., Washington, D.C., at
prescribed rates or may be examined without charge at the offices of the
Commission. Additionally, the Commission maintains a Web site that contains any
such reports and other information regarding the Issuer. The address of the Web
site is http://www.sec.gov.
The Issuer has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Bonds offered by this Prospectus and the related Prospectus
Supplement. This Prospectus and Prospectus Supplement, which form a part of the
Registration Statement, do not contain all of the information set forth in the
Registration Statement, certain parts having been omitted pursuant to the rules
and regulations of the Commission. The Registration Statement will be available
for inspection and copying as set forth above.
The Issuer does not plan to send any financial reports to holders of Bonds.
The Indenture Trustee, however, will include with each payment on Bonds of a
Series a statement containing certain payment information concerning the Bonds.
3
<PAGE> 22
SUMMARY OF TERMS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and by reference to the
information with respect to each Series of Bonds contained in the Prospectus
Supplement or Supplements to be prepared and delivered in connection with the
offering of Bonds of such Series.
Securities Offered........ Collateralized Mortgage Obligations (the "Bonds")
collateralized by certificates ("Certificates")
evidencing undivided interests in pools of
residential mortgage loans. The Certificates will
consist of one or more of the following:
(i) "fully modified pass-through" mortgage-backed
certificates ("GNMA Certificates") guaranteed as to
timely payment of principal and interest by the
Government National Mortgage Association ("GNMA"),
(ii) Guaranteed Mortgage Pass-Through Certificates
("FNMA Certificates") issued and guaranteed as to
timely payment of principal and interest by the
Federal National Mortgage Association ("FNMA"),
(iii) Mortgage Participation Certificates ("FHLMC
Certificates") issued and guaranteed as to timely
payment of interest and ultimate collection (and to
the extent specified in the related Prospectus
Supplement, timely payment) of principal by the
Federal Home Loan Mortgage Corporation ("FHLMC"),
(iv) pass-through certificates or participation
certificates ("Non-Agency Certificates") which are
neither issued nor guaranteed by an agency or
instrumentality of the United States and which
evidence undivided interests in pools of mortgage
loans secured by single family (one- to four-units)
or multi-family (five or more) residences, or
(v) a combination of such Certificates.
The Non-Agency Certificates pledged to secure any
Series of Bonds may be guaranteed as to payment of
principal and interest by a third-party insurer or
guarantor, to the extent provided in the related
Prospectus Supplement. GNMA Certificates, FNMA
Certificates and FHLMC Certificates are referred to
collectively in this Prospectus as "Agency
Certificates."
The Bonds will be issued from time to time in Series
pursuant to a Terms Indenture (the "Terms
Indenture") between the respective Issuer (as
defined below) and the trustee for such Series (the
"Indenture Trustee") incorporating by reference the
Standard Indenture Provisions (the "Standard
Indenture Provisions") of the Issuer (collectively,
the "Indenture"). Each Indenture will describe the
terms and conditions for a Series of Bonds. Each
Series will consist of one or more Classes of Bonds,
which may include one or more Classes of Compound
Interest Bonds ("Compound Interest Bonds").
The Bonds of a Class may differ from Bonds of other
Classes of the same Series in the amounts allocated
to and the priority of principal payments, maturity
date and interest rate or in such other manner as
specified in the related Prospectus Supplement. The
Bonds of each Class of each Series will be issued
either in definitive, fully registered form or book
entry form in the authorized denominations specified
in the related Prospectus Supplement. The Bonds will
represent obligations solely of the Issuer of
4
<PAGE> 23
that Series of Bonds and will not be insured or
guaranteed by any affiliate of the Issuer or by any
other person or entity.
Issuer.................... The Issuer of each Series of Bonds (the "Issuer")
will be Gateway Mortgage Acceptance Corporation
("Gateway") or a trust beneficially owned by it.
Gateway was established for the purpose of issuing
and administering one or more Series of Bonds and
similar series of bonds directly or through one or
more trusts beneficially owned by it (a "Trust" or
"Trust Issuer") and purchasing, owning and selling
other mortgage-related assets. Gateway is a
wholly-owned limited purpose subsidiary of EVEREN
Mortgage Group, Inc., a Delaware corporation
("EVEREN Mortgage"), which is a wholly-owned
subsidiary of EVEREN Securities Holdings, Inc.
("EVEREN Holdings"), which is, in turn, a wholly-
owned subsidiary of EVEREN Capital Corporation
("EVEREN Capital"). See "Introduction" and "The
Issuer."
The assets of the Issuer, other than those pledged as
collateral for the Bonds and any other bonds issued
by it, are not expected to be significant. Except to
the extent specified otherwise in the related
Prospectus Supplement, the assets pledged to
collateralize the Bonds of any Series will not be
used to collateralize the Bonds of any other Series.
Neither Gateway nor any affiliate of Gateway (other
than any related Trust Issuer) will guarantee, or
otherwise be obligated to pay, the Bonds of any
Series issued by a Trust beneficially owned by
Gateway, and no affiliate of Gateway will guarantee,
or otherwise be obligated to pay, the Bonds of any
Series issued by Gateway. See "The Issuer."
Gateway was incorporated in the State of Delaware on
October 26, 1988. Its principal executive offices
are located at 77 West Wacker Drive, Suite 3100,
Chicago, Illinois 60601; telephone number (800)
346-6616. See "The Issuer."
Interest Payments......... Each Class of Bonds of a Series will bear interest at
the respective rate described for such Class in the
related Prospectus Supplement. Interest on any Class
of Floating Interest Rate Bonds (See "Description of
the Bonds -- Payments of Interest") will be
calculated and paid in accordance with provisions
set forth in the related Prospectus Supplement,
which provisions will include (among other things):
(a) the interest rate ("Floating Interest Rate") for
the initial Interest Accrual Period (as defined
below) on the Floating Interest Rate Bonds;
(b) the formula or index by which the Floating
Interest Rate will be determined for subsequent
Interest Accrual Periods;
(c) the intervals at which the Floating Interest
Rate will be recalculated and the period over which
the newly calculated Floating Interest Rate will be
applicable; and
(d) any minimum or maximum Floating Interest Rate or
the method by which same may be calculated.
Interest on each Class of Bonds will accrue over the
respective periods and be paid on the respective
dates (which periods and dates will be specified in
the related Prospectus Supplement) for such Class
specified in the related Prospectus Supplement (each
such period an "Interest Accrual Period" and each
such date a "Payment Date"). Unless otherwise
5
<PAGE> 24
specified in the Prospectus Supplement for a Series,
payments of interest on each Class of Compound
Interest Bonds will commence only when all Bonds of
such Series having a Stated Maturity prior to the
Stated Maturity of such Class of Compound Interest
Bonds have been paid in full. Prior to such time,
interest on such Class of Compound Interest Bonds
will accrue and the amount of interest so accrued
will be added to the principal thereof on each
Payment Date. Upon maturity or earlier redemption of
the Bonds of any Series, interest will be paid to
the date specified in the related Prospectus
Supplement. Unless otherwise specified in the
related Prospectus Supplement for a Series of
Special Allocation Bonds, upon the occurrence of
certain specified events the timing of interest
payment in respect of a Class of Special Allocation
Bonds may be modified. Unless interest is accrued to
the Payment Date or the maturity date, as the case
may be, for any Class of Bonds, the effective yield
to the holder of such Bonds will be reduced to a
level below the yield that would apply if interest
were paid to the respective Payment Dates and
maturity date of such Class of Bonds. See
"Description of the Bonds -- Payments of Interest"
herein.
Interest payments will be paid by check mailed by the
Indenture Trustee or paying agent, if any, appointed
by the Issuer for such purpose, to holders of
definitive Bonds at their respective addresses
appearing on the register on the applicable record
date specified in the Prospectus Supplement.
Beneficial owners of Bonds held in book entry form
("Book Entry Bonds") will receive interest payments
according to procedures described under "Description
of the Bonds -- Book Entry Registration" herein and
the related Prospectus Supplement for any Series of
Bonds having one or more Classes of Book Entry
Bonds.
Principal Payments........ Unless the Prospectus Supplement relating to a Series
of Bonds provides otherwise, principal payments on
each Series of Bonds will be made on each Payment
Date (each Payment Date on which principal is
payable being a "Principal Payment Date") in an
aggregate amount equal to the sum of (i) the amount
of interest, if any, accrued on any Compound
Interest Bonds of such Series in the prior Interest
Accrual Period but not then payable ; (ii) an amount
(the "Basic Principal Payment") determined on the
basis of the Bond Values (as defined below) of the
Certificates securing such Series in a specified
period (a "Due Period") ending subsequent to the
previous Principal Payment Date; and (iii) the
percentage, if any, of the Spread (as defined below)
specified in such Prospectus Supplement. The
Prospectus Supplement for each Series of Bonds will
specify the manner in which the amount of such
aggregate principal payment will be determined.
The "Bond Value" for a Certificate represents the
principal amount of Bonds of a Series that, based on
certain assumptions, can be supported by the
distributions on such Certificate, regardless of any
prepayments on such Certificate, together with
(depending on the type of Certificate and the method
used to determine its Bond Value) the reinvestment
income thereon at the Assumed Reinvestment Rate
and/or, if applicable, the cash available to be
withdrawn from any related Reserve Fund (as defined
below). The Prospectus Supplement for a Series of
Bonds will specify the method or methods (and
related assumptions) used to determine the Bond
Values of the Certificates pledged to secure such
Series of Bonds.
6
<PAGE> 25
Unless otherwise specified in the related Prospectus
Supplement, the "Spread" for a Series of Bonds as of
any Payment Date is the excess, if any, of the sum
of (i) all distributions received on the
Certificates securing such Series of Bonds in the
Due Period prior to such Principal Payment Date,
(ii) the reinvestment income thereon and (iii) if
applicable, the amount of cash, if any, initially
deposited to the Collection Account (as defined
below) or withdrawn from any related Reserve Fund
prior to such Principal Payment Date and
reinvestment income thereon, over the sum of (i) all
interest payable on the Bonds of such Series on such
Payment Date, (ii) the Basic Principal Payment for
such Series of Bonds for such Principal Payment
Date, including, if applicable, the amount (the
"Scheduled Amortization Amount") to be paid on any
Class of Scheduled Amortization Bonds (the
"Scheduled Amortization Bonds"), (iii) interest, if
any, accrued on any Compound Interest Bonds of such
Series in the prior Interest Accrual Period but not
then payable, (iv) the amounts, if any, paid with
respect to special redemption of the Bonds of such
Series, as described below, during such Due Period
and (v) if applicable, an amount allocable to the
payment of fees and expenses of the Indenture
Trustee, independent accountants and/or other
administrative expenses related to the Bonds of such
Series. To the extent specified in the related
Prospectus Supplement, Spread may be distributed to
the Issuer following required payments of principal
and interest on each Principal Payment Date. Any
Spread distributed to the Issuer will not be
available for payment of principal and interest on
the Bonds.
Principal payments will be applied in the order and
amounts specified in the Prospectus Supplement for
each Class of a Series of Bonds. Unless otherwise
specified in the related Prospectus Supplement for a
Series of Special Allocation Bonds, upon the
occurrence of certain specified events the priority
of principal payments may be reordered. See
"Description of the Bonds -- Payments of Principal."
The Stated Maturity for each Class of Bonds
comprising a Series of Bonds is the date on which
all the Bonds of such Class will be fully paid,
assuming (i) timely receipt of scheduled payments
(with no prepayments) on the Certificates securing
such Bonds, (ii) all such scheduled payments are
reinvested on receipt at the Assumed Reinvestment
Rate specified in the related Prospectus Supplement,
and (iii) no portion of the Spread is applied to the
payment of principal on the Bonds, unless the
related Prospectus Supplement provides otherwise, in
which event such Stated Maturities will be based on
the assumptions specified in such Prospectus
Supplement. The Assumed Reinvestment Rate for a
Series of Bonds will be specified in the related
Prospectus Supplement, but in no event will it be
more than the highest rate permitted by the
nationally recognized statistical rating agency or
agencies rating such Series of Bonds or a rate
insured by means of a surety bond or similar
arrangement satisfactory to such rating agency or
agencies. If the Assumed Reinvestment Rate is so
insured, the related Prospectus Supplement will set
forth the terms of such arrangement. The rate of
prepayments on the Certificates securing any Series
of Bonds will depend on the characteristics of the
underlying mortgage loans (the "Mortgage Loans"), as
well as on the prevailing level of interest rates
and other economic factors, and no assurance can be
given as to the actual prepayment experience of the
Certificates. See "Description of the
Bonds -- Maturity of the Bonds."
7
<PAGE> 26
Redemption of Bonds....... To the extent provided in the related Prospectus
Supplement, the Bonds of any Class of each Series
may be subject to redemption as follows:
A. Redemption at Request
of Bondholders....... To the extent permitted by a Prospectus Supplement
and Terms Indenture for a Series of Bonds,
redemptions of one or more Classes of Bonds of such
Series may be made pursuant to the request of
Bondholders. See "Description of the
Bonds -- Redemption at the Request of Bondholders."
B. Special Redemption... The Bonds of a Series may be subject to special
redemption under the circumstances and in the manner
described below and in the related Prospectus
Supplement. If applicable, Bonds of a Series will be
subject to special redemption, in whole or in part,
on a specified date in each month other than a month
including a Principal Payment Date (each a "Special
Redemption Date"), at 100% of the principal amount
of the Bonds so redeemed, plus accrued interest to
the date designated in the Prospectus Supplement for
a Series of Bonds, if, as a result of principal
payments on the underlying mortgages and/or
reinvestment yields then available, the Indenture
Trustee determines, based on the assumptions
specified in the Indenture, that the future debt
service requirements on any portion of the Bonds
cannot be met. Any such special redemption will not
exceed the principal amount of Bonds of such Series
that would otherwise be required to be paid on the
next Principal Payment Date. Unless otherwise
specified in the related Prospectus Supplement,
Bonds of a Series subject to special redemption will
be redeemable in the same priority and manner as
payments of principal are made on a Principal
Payment Date. See "Description of the
Bonds -- Special Redemption."
C. Redemption at the
Option of the
Issuer.................. The Bonds of any Class or Classes of a Series may be
subject to redemption at the option of the Issuer
(or its assignee) in the circumstances provided in
the related Prospectus Supplement at the redemption
price set forth in such Prospectus Supplement. See
"Description of the Bonds -- Redemption at the
Option of the Issuer."
D. Optional Floating
Interest Rate Bond
Redemption........... Unless specified otherwise in the Prospectus
Supplement for a Series of Bonds, the Issuer, at its
option, may use all or a portion of the Spread to
redeem any Class of Floating Interest Rate Bonds of
such Series, in whole or in part (an "Optional
Floating Interest Rate Bond Redemption"), on any
Payment Date on such Class of Floating Interest Rate
Bonds (a "Floating Interest Rate Payment Date"), at
100% of the principal amount thereof, together with
accrued and unpaid interest thereon to the date
designated in the Prospectus Supplement for a Series
of Bonds if the Floating Interest Rate at which
interest on such Floating Interest Rate Bonds
accrues during the period specified in the related
Prospectus Supplement preceding such Floating
Interest Rate Payment Date (a "Floating Interest
Rate Period") is equal or, pursuant to the related
Prospectus Supplement, deemed to be equal to the
Maximum Floating Interest Rate at which interest may
accrue on such Floating Interest Rate Bonds, as set
forth in the related Prospectus Supplement (the
"Maximum Floating Interest Rate"). If any such
Optional Floating Interest Rate Bond Redemption
occurs, the rate of principal payments on the Bonds
of
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Classes with later Stated Maturities will not be
thereby affected, unless otherwise provided in the
related Prospectus Supplement. Accordingly, after a
redemption in full of a Class of Floating Interest
Rate Bonds in which any Optional Floating Interest
Rate Bond Redemption has occurred, if so provided in
a Prospectus Supplement, there may be a period of
time, such period to include one or more Payment
Dates, after the Class of Floating Interest Rate
Bonds has been fully redeemed and before principal
payments on the Bonds of another Class are to
commence (a "Time-Out Period"). A Time-Out Period
shall extend for the length of time required such
that principal payments on the Bonds of other
Classes shall commence on that Payment Date on which
they would otherwise have commenced if there had
been no Optional Floating Interest Rate Bond
Redemption in that Series. See "Description of the
Bonds -- Optional Floating Interest Rate Bond
Redemption."
Security for the Bonds.... Except to the extent specified otherwise in the
related Prospectus Supplement, each Series of Bonds
will be separately secured by collateral
("Collateral") consisting of the following:
A. Certificates......... The Certificates securing a Series of Bonds may
consist of (i) GNMA Certificates, (ii) FNMA
Certificates, (iii) FHLMC Certificates, (iv)
Non-Agency Certificates, or (v) a combination of
such Certificates. Any GNMA Certificates will be
backed by the full faith and credit of the United
States. Any FNMA and FHLMC Certificates will not be
backed, directly or indirectly, by the full faith
and credit of the United States. Any Non-Agency
Certificates will not be backed, directly or
indirectly, by any agency or instrumentality of the
United States but may, or the underlying Mortgage
Loans may, be insured, guaranteed or otherwise
backed in the manner described in the related
Prospectus Supplement. If so provided in the
Prospectus Supplement for a Series of Bonds, the
Issuer may deposit cash on the closing date for such
Series, to secure such Series, in lieu of any
Certificates to secure such Series which are not
delivered on such closing date. Any Agency
Certificate and any Non-Agency Certificate securing
the Bonds of any Series will evidence an interest in
a pool of mortgage loans secured by single-family
residences (one- to four-units) or multi-family
residences (five or more units). The Prospectus
Supplement for each Series will specify (i) the
aggregate approximate amount of the Collateral
securing such Series that consists of GNMA, FNMA and
FHLMC Certificates, of Certificates backed by level
payment and graduated payment mortgages and, if
known to the Issuer, of Certificates that are backed
by mortgages insured or guaranteed by a governmental
entity and (ii) the aggregate approximate amount of
the Collateral securing such Series that consists of
Non-Agency Certificates, including the principal
characteristics of the underlying Mortgage Loans and
any insurance, guarantees or other backing for such
Mortgage Loans, Certificates or both. The
Certificates securing each Series of Bonds will be
registered in the name of the Indenture Trustee or
its nominee or in the name of a financial
intermediary or its nominee acting on behalf of the
Indenture Trustee and held by the Indenture Trustee
as Collateral only for the specified Series of
Bonds. See "Security for the Bonds -- Certificates
Collateralizing the Bonds."
B. Collection Account... All distributions on the Certificates pledged as
security for a Series of Bonds will be remitted to a
collection account (the "Collection Account") to be
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established with the Indenture Trustee on the
closing date for the sale of such Series of Bonds
and, together with the reinvestment earnings
thereon, the amount of cash, if any, initially
deposited therein by the Issuer, and, if applicable,
the cash withdrawn from any related Reserve Fund,
will be available for application to the payment of
principal of, and interest on, such Series of Bonds
on the next Payment Date. Unless specified otherwise
in the Prospectus Supplement for a Series of Bonds,
any funds remaining in a Collection Account
immediately following a Payment Date after deducting
certain Indenture Trustee fees and administrative
expenses will be either deposited in a related
Reserve Fund if the Prospectus Supplement for such
Series of Bonds so provides or, if not so required,
will be promptly paid over to the Issuer free from
the lien of the Indenture. See "Security for the
Bonds -- Collection Account."
C. Reserve Funds........ Cash, letters of credit, surety bonds, Eligible
Investments or a combination thereof in the
aggregate amount, if any, specified in the
Prospectus Supplement for any Series of Bonds will
be deposited in one or more accounts to be
established by the Indenture Trustee (the "Reserve
Funds") on the closing date for the sale of such
Series of Bonds if such cash, letters of credit,
surety bonds or Eligible Investments are required to
make timely payments of principal of, and interest
on, such Series of Bonds or are otherwise required
to obtain the rating by the nationally recognized
statistical rating agency specified in the
Prospectus Supplement, or if the Issuer elects to do
so in order to minimize the likelihood of a special
redemption of such Bonds. Following each Payment
Date, amounts may be withdrawn from any related
Reserve Fund and remitted to the Issuer free from
the lien of the Indenture under the conditions and
to the extent specified in the related Prospectus
Supplement. Additional information concerning any
Reserve Fund securing a Series of Bonds will be set
forth in the related Prospectus Supplement. See
"Security for the Bonds -- Reserve Funds."
D. Minimum Principal
Payment Agreement.... If provided in the Prospectus Supplement with respect
to a Series of Bonds, the Issuer will enter into an
agreement with an institution pursuant to which such
institution will provide such funds as may be
necessary to enable the Issuer to make principal
payments on the Bonds of such Series at a minimum
rate set forth in the Prospectus Supplement relating
to such Series. See "Security for the
Bonds -- Minimum Principal Payment Agreement."
E. Deposits,
Substitution
and Withdrawal....... If and to the extent provided in the related
Prospectus Supplement for a Series of Bonds, the
Issuer may deposit or withdraw Certificates or
substitute new Certificates for Certificates
previously pledged as Collateral for a Series, in
each case under the conditions described in the
Indenture. See "Security for the Bonds -- Deposits,
Substitution and Withdrawal of Certificates."
Book Entry Registration... If the Prospectus Supplement for a Series so
provides, Bonds of one or more Classes of such
Series may be issued in book entry form in which
case a single certificate will be issued in the name
of a clearing agency registered with the Commission
(a "Clearing Agency") or its nominee. Transfers and
pledges of Book Entry Bonds may be made only through
entries on the books of the Clearing Agency in the
name of brokers, dealers, banks
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and other organizations eligible to maintain
accounts with the Clearing Agency ("Clearing Agency
Participants") or their nominees, and transfers and
pledges by purchasers and other beneficial owners of
Book Entry Bonds ("Beneficial Owners") other than
Clearing Agency Participants may be effected only
through Clearing Agency Participants. Beneficial
Owners will receive payments of principal and
interest, and may tender Bonds for redemption to the
Indenture Trustee, only through the Clearing Agency
and Clearing Agency Participants. Except as
otherwise specified in this Prospectus or a related
Prospectus Supplement, the terms "Bondholders" and
"holders" shall be deemed to include Beneficial
Owners. See "Special Considerations -- Book Entry
Registration" and "Description of the Bonds -- Book
Entry Registration."
Certain Federal Income Tax
Consequences............ The Bonds, other than Residual Bonds (if any), of
each Series ("Regular Bonds") will be taxable
obligations under the Internal Revenue Code of 1986
(the "Code"), and interest paid or accrued,
including original issue discount with respect to
any Compound Interest Bonds or Regular Bonds of any
other Class issued with original issue discount,
will be taxable to Bondholders. The Issuer may elect
to treat the Issuer or the segregated pool of assets
securing any Series of Bonds as a REMIC. REMIC Bonds
generally will be treated as "qualifying real
property loans" for thrift institutions taxed as
"mutual savings banks" or "domestic building and
loan associations" and as "real estate assets" for
real estate investment trusts. Bonds for which a
REMIC election is not made ("Non-REMIC Bonds") will
not be so characterized. Payments on Regular Bonds
held by foreign persons will generally be exempt
from United States withholding tax, provided that
applicable procedures are satisfied or as otherwise
specified in the related Prospectus Supplement.
Special tax considerations apply to an investment in
Residual Bonds. See "Certain Federal Income Tax
Consequences."
Legal Investment.......... Unless otherwise specified in the Prospectus
Supplement, Bonds of each Series offered by this
Prospectus and the related Prospectus Supplement
will constitute "mortgage related securities" under
the Secondary Mortgage Market Enhancement Act of
1984 ("SMMEA"), and, as such, will be legal
investments for certain types of investors to the
extent provided in SMMEA, subject, in any case, to
any other regulations which may govern investments
by such investors. See "Legal Investment Matters."
ERISA Matters............. An acquisition or holding of Bonds by an employee
benefit plan or an individual retirement account
with respect to which certain affiliates of the
Issuer, certain affiliates of an underwriter or an
underwriter of the Bonds is a "party in interest" or
"disqualified person" may constitute a "prohibited
transaction" within the meaning of the Employee
Retirement Income Security Act of 1974, as amended,
and the Internal Revenue Code of 1986 (the "Code").
See "ERISA Matters." Under certain circumstances,
the acquisition or holding by an employee benefit
plan or an individual retirement account of a Bond
which is a Residual Bond or which is characterized
as an "equity interest" (as defined in Department of
Labor regulations) in the Issuer of the related
Series of Bonds, or in the collateral securing such
Series of Bonds, could be deemed to give rise to one
or more prohibited transactions." Any employee
benefit plan or individual retirement account
proposing to invest in the Bonds should
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consult with its counsel. Under certain
circumstances, certain employee benefit plans and
other persons may be prohibited from investing in
one or more Classes, or in an entire Series, of
Bonds.
Use of Proceeds........... The Issuer will use substantially all of the net
proceeds from the issuance of each Series of Bonds
either to pay certain indebtedness incurred in
connection with the acquisition of, or to acquire,
the Certificates which are pledged as Collateral for
such Series of Bonds, or to pay certain indebtedness
incurred in connection with the acquisition of, or
to acquire, the Mortgage Loans underlying the
Certificates, which payment or acquisition is
expected to be simultaneous with the closing of the
sale of each Series of Bonds. The Issuer
subsequently may distribute all or a portion of any
remaining net proceeds to the stockholders or
beneficial owners of the Issuer. See "Use of
Proceeds."
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INTRODUCTION
The Collateralized Mortgage Obligations (the "Bonds") offered hereby and by
the related Prospectus Supplements will be issued in Series by Gateway Mortgage
Acceptance Corporation ("Gateway") or by trusts beneficially owned by Gateway.
Gateway is a limited purpose finance corporation established for the sole
purpose of issuing one or more Series of Bonds and similar series of bonds
directly or through one or more trusts beneficially owned by it (each, a "Trust"
or "Trust Issuer"). Each such Trust will be created by an agreement (the
"Deposit Trust Agreement") between Gateway (the "Initial Depositor"), acting as
depositor, and a bank, trust company or other fiduciary, acting as
owner-trustee, solely for the purpose of issuing one or more Series of Bonds.
Gateway may sell or assign the certificates of beneficial ownership (the
"Certificates of Beneficial Ownership") of each such trust, in whole or in part,
to another entity or entities at the time of, or subsequent to, the issuance of
any Bonds by such Trust. See "The Issuer."
Each Series of Bonds will be separately secured by the Collateral described
in the Prospectus Supplement relating to such Series, which Collateral will
constitute the only significant assets available to make payments on the Bonds
of such Series. Accordingly, the investment characteristics of a Series of Bonds
will be determined by the Collateral pledged to secure such Series and will not
be affected by the identity of the obligor with respect to such Series of Bonds.
The term "Issuer", as used herein with respect to a Series of Bonds, refers to
the entity (Gateway or a Trust, as the case may be) that issues and administers
such Series of Bonds.
Each Series of Bonds will be issued pursuant to a Terms Indenture between
the respective Issuer of such Series and the Indenture Trustee thereunder
incorporating by reference the Standard Indenture Provisions of the Issuer. The
Terms Indenture relating to each Series of Bonds will be filed with the
Commission promptly following the closing of the sale of such Series of Bonds.
Each Series of Bonds will be secured by the pledge to the Indenture Trustee
under the Indenture of all of the Issuer's right, title and interest in one or
more of the following: (i) GNMA Certificates, (ii) FNMA Certificates, (iii)
FHLMC Certificates, (iv) Non-Agency Certificates, or (v) a combination of such
Certificates.
SPECIAL CONSIDERATIONS
Investors should consider, among other things, the following factors in
connection with the purchase of Bonds.
Limited Liquidity. There will be no market for the Bonds of any Series
prior to the issuance thereof, and there can be no assurance that a secondary
market will develop or, if it does develop, that it will provide Bondholders
with liquidity of investment or will continue for the life of the Bonds of such
Series. The market value of the Bonds will fluctuate with changes in prevailing
rates of interest. Consequently, the sale of Bonds by a Bondholder in any market
that may develop may be at a discount from the Bonds' par value or such
Bondholder's purchase price. Unless specified otherwise in the Prospectus
Supplement for a Series of Bonds, Bondholders have no right to request
redemption of Bonds, and the Bonds are subject to redemption by the Issuer only
under the limited circumstances described in each such Prospectus Supplement.
Limited Assets. The Issuer does not have, nor is it expected in the future
to have, any significant assets other than assets pledged to secure separately
each outstanding Series of Bonds. Consequently, holders of Bonds of each Series
must rely upon distributions on the Certificates securing such Series of Bonds,
together with the reinvestment income thereon, and, if applicable, the cash to
be withdrawn from the related Reserve Fund for the payment of principal of, and
interest on, that Series of Bonds. In addition, funds remaining in a Collection
Account for a Series of Bonds immediately after each required payment of
principal of, and interest on, such Series of Bonds has been paid in full (other
than any funds required to be deposited in a related Reserve Fund) will be
promptly remitted to the Issuer. In addition, certain amounts remaining in
related Reserve Funds may likewise be remitted to the Issuer following a Payment
Date. Any amounts withdrawn by the Issuer from a Collection Account or Reserve
Fund will no longer be subject to the lien of the Indenture. If the Collateral
securing a Series of Bonds is insufficient to make payments on such Bonds, it is
unlikely that any other assets of the Issuer will be available for payment of
the deficiency. In the event of a sale of the
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<PAGE> 32
Collateral securing any Series of Bonds as provided in the Indenture following
an Event of Default, the Bonds of such Series will be payable pro rata, unless
specified otherwise in the Prospectus Supplement for any Series of Special
Allocation Bonds. Because payments of principal may, if so provided in the
related Prospectus Supplement, be applied to Classes of outstanding Bonds of a
Series in the order of their respective Stated Maturities (except in the case of
Scheduled Amortization Bonds as described herein), a deficiency that arises
after Bonds having earlier Stated Maturities have been fully or partially repaid
will have a disproportionately greater effect on the Bonds of Classes having
later Stated Maturities. The disproportionate effect of any such deficiency is
further increased in the case of Classes of Compound Interest Bonds of any
Series because, prior to the retirement of all Classes of such Series having
Stated Maturities earlier than the Stated Maturity of the Compound Interest
Bonds, interest is not payable, unless provided otherwise in the related
Prospectus Supplement, but is accrued on such Compound Interest Bonds and added
to principal. In addition, due to the priority of payments and the allocation of
losses, defaults experienced on the Collateral securing a Series of Special
Allocation Bonds may have a disproportionate effect on a specified Class or
Classes within such Series. See "The Indenture -- Rights Upon Event of Default."
Neither Gateway nor any affiliate of Gateway (other than a Trust Issuer) will
guarantee, or otherwise be obligated to pay, the Bonds of any Series issued by a
Trust beneficially owned by Gateway, and no affiliate of Gateway will guarantee,
or otherwise be obligated to pay, the Bonds of any Series issued by Gateway.
Special Allocation Bonds; Events of Default. To the extent described in the
related Prospectus Supplement, a Series of Bonds may be Special Allocation Bonds
in which, upon the occurrence of specified events, the timing and/or priority of
principal and/or interest may be modified or reordered to favor one or more
Classes of Bonds (the "Priority Bonds") over one or more other Classes of Bonds
(the "Non-Priority Bonds"). Under certain circumstances, payments of available
cash flow will be made to holders of Priority Bonds prior to the payment to
holders of Non-Priority Bonds. Unless specified otherwise in the related
Prospectus Supplement, prior to the declaration of an Event of Default, the
Non-Priority Bonds will not accrue interest on any payment shortfall of
principal or interest experienced by such Non-Priority Bonds.
The Non-Priority Bonds may have limited liquidity. There can be no
assurance that a secondary market will develop for the Non-Priority Bonds or, if
one does develop, that it will provide the holders of the Non-Priority Bonds
with liquidity of investment or that it will remain for the term of the
Non-Priority Bonds.
Sale of Collateral on Default; Interest Rate Considerations. Upon an Event
of Default with respect to a Series of Bonds, if the Collateral for such Series
of Bonds is sold by the Indenture Trustee, there is no assurance that the
interest rates on such Collateral will be sufficiently high so that the proceeds
of any such sale will be sufficient to pay in full the principal of, and
interest on, such Series of Bonds. The rate of prepayment on the Certificates
securing a Series of Bonds will directly affect the average life of such Series
of Bonds. During periods of generally declining interest rates such prepayments
are likely to accelerate, thereby increasing the rate of prepayment on the
Bonds, and Bondholders may be unable to reinvest such payments in securities of
comparable quality having interest rates similar to those borne by such Bonds.
Deposits, Substitutions and Withdrawals of Collateral. To the extent
provided in the Prospectus Supplement for a Series of Bonds, the Issuer of a
Series of Bonds may, subsequent to the Closing Date for such Series, deposit
additional Certificates and withdraw Certificates previously pledged to secure
such Series. The effect of deposit or substitution of other Certificates as
Collateral for a Series may be to (i) overcollateralize such Series, thus
limiting the amount of funds available for application to payments of principal
on such Series of Bonds, or (ii) alter the characteristics of the Mortgage Loans
underlying the Certificates, either of which may alter the timing of principal
payments on, and the maturity of, the Bonds of such Series. See "Security for
the Bonds -- Deposits, Substitution and Withdrawal of Certificates."
Nature of Direct or Indirect Backing for Bonds. Only Agency Certificates
are guaranteed by any agency or instrumentality of the United States and only
the guarantee by GNMA of GNMA Certificates is entitled to the full faith and
credit of the United States. The guarantees by FNMA and FHLMC of FNMA
Certificates and FHLMC Certificates, respectively, are backed only by the credit
of FNMA, a federally chartered, privately owned corporation, or by the credit of
FHLMC, a federally chartered corporation controlled by the Federal Home Loan
Banks. See "Security for the Bonds -- FNMA" and "Security for the Bonds --
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FHLMC." Although payment of principal of, and interest on, any Agency
Certificate securing a Series of Bonds will be guaranteed by either GNMA, FNMA
or FHLMC, such guarantee will run only to such Agency Certificate and will not
guarantee the payment of principal or interest on the Bonds of such Series. The
Prospectus Supplement for a Series of Bonds which is secured in whole or in part
by Non-Agency Certificates may describe certain arrangements through which such
Certificates, and/or the Mortgage Loans underlying such Certificates are
insured, guaranteed or otherwise backed, but any such guarantee will inure only
to the benefit of such Non-Agency Certificates or underlying Mortgage Loans, as
the case may be, and will not guarantee the payment of principal or interest on
the Bonds of such Series. Any such backing may be subject to contingencies
described in the applicable Prospectus Supplement and will be limited to the
credit and assets of the particular specified insurer or guarantor and will not
be entitled to the full faith and credit of the United States or to any agency
or instrumentality thereof.
Insurance Considerations for Non-Agency Certificates. Potential investors
should be aware that (a) any decline in the value of a property securing a
Mortgage Loan underlying a Non-Agency Certificate may result in a loss on such
Certificate if the mortgagor on such Mortgage Loan defaults and the loss is not
covered by any insurance policy, guarantee or comparable instrument, and (b) any
hazard loss not covered by a standard hazard insurance policy or any applicable
special hazard insurance policy or comparable instrument covering a defaulted
Mortgage Loan underlying a Non-Agency Certificate will result in a loss on such
Certificate. Any such loss on a Non-Agency Certificate, if not covered by funds
available in the Reserve Fund, if any, or Collection Account, or by a guarantee,
will result in a loss to Bondholders.
Federal Income Tax Considerations. All of the Compound Interest Bonds will
be, and certain of the other Regular Bonds may be, issued with original issue
discount for federal income tax purposes. A holder of a Regular Bond issued with
original issue discount will be required to include original issue discount in
ordinary gross income for federal income tax purposes as it accrues, in advance
of receipt of the cash attributable to such income. Accrued but unpaid interest
on the Compound Interest Bonds generally will be treated as original issue
discount for this purpose. See "Certain Federal Income Tax Consequences -- Tax
Treatment of Regular Bonds -- Original Issue Discount and Market Discount."
The Issuer may elect to treat the Issuer or the segregated pool of assets
securing any Series of Bonds as a REMIC for federal income tax purposes. Holders
of Residual Bonds ("Residual Bondholders") must report on their federal income
tax returns their pro rata share of REMIC taxable income or loss. All or a
portion of the REMIC taxable income reportable by Residual Bondholders may be
treated as such holders' "excess inclusion" subject to special rules for federal
income tax purposes. The REMIC taxable income and, possibly the tax liabilities
of the Residual Bondholders, may exceed the cash distributions on the Residual
Bonds during the corresponding period. Residual Bondholders who are individuals
may be subject to limitations on the deductibility of servicing fees on the
Collateral and other REMIC administrative expenses. Hence, Residual Bondholders
may experience an after-tax return that is significantly lower than would be
anticipated based upon the stated interest rate of their Residual Bonds. See
"Certain Federal Income Tax Considerations -- Special Tax Considerations
Applicable to Residual Bonds."
Funds Available for Redemptions at the Request of Bondholders. With respect
to any Series of Bonds for which the related Prospectus Supplement provides for
redemptions at the request of Bondholders, there can be no assurance that
amounts available for such redemption, if any, for such Series of Bonds will be
sufficient to permit Bonds to be redeemed within a reasonable time after
redemption is requested, for reasons including the following:
1. Scheduled principal payments on the Mortgage Loans underlying each
Certificate pledged with respect to each Series of Bonds will be minimal in
the early years and will increase in the later years of such Mortgage
Loans. As a result, the scheduled principal payments on the Certificates
and the amount thus available to be applied to payments of principal on the
Bonds of such Series, including redemptions at the request of Bondholders,
will be limited in the early years and will increase during the later years
of each such Series. Accordingly, the availability of funds for redemption
of Bonds of any Series at the request of Bondholders will depend largely
upon the rates of prepayment of the Certificates securing the Series. See
"Security for the Bonds."
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2. Prepayments of principal on Certificates are least likely to occur
during periods of higher interest rates when it is expected that requests
for redemption by Bondholders will be greatest. During periods in which
prevailing interest rates are higher than the interest rate paid on a
Series of Bonds, greater numbers of Bonds are expected to be tendered for
redemption in order to take advantage of the higher interest rates payable
on other investments then available. During such periods, there will likely
also be a reduction in the rate of prepayments on the Certificates securing
a Series of Bonds, thus limiting the funds available to satisfy requested
redemption by Bondholders.
3. Certain Bondholders, such as personal representatives of deceased
Bondholders, as specified in the related Prospectus Supplement may have
certain priorities as to redemption at the request of Bondholders.
Book Entry Registration. Because transfers and pledges of Book Entry Bonds
can be effected only through book entries at a Clearing Agency through Clearing
Agency Participants, the liquidity of the secondary market for Book Entry Bonds
may be reduced to the extent that some investors are unwilling to hold Bonds in
book entry form in the name of Clearing Agency Participants and the ability to
pledge Book Entry Bonds may be limited due to lack of a physical certificate.
Beneficial Owners of Book Entry Bonds may, in certain cases, experience delay in
the receipt of payments of principal and interest since such payments will be
forwarded by the Indenture Trustee to the Clearing Agency who will then forward
payment to the Clearing Agency Participants who will thereafter forward payment
to Beneficial Owners. In the event of the insolvency of the Clearing Agency or
of a Clearing Agency Participant in whose name Bonds are recorded, the ability
of Beneficial Owners to obtain timely payment and (if the limits of applicable
insurance coverage by the Securities Investor Protection Corporation are
exceeded, or if such coverage is otherwise unavailable) ultimate payment of
principal and interest on Book Entry Bonds may be impaired.
THE ISSUER
GENERAL
The Bonds offered hereby and by the related Prospectus Supplements will be
issued in Series by Gateway Mortgage Acceptance Corporation ("Gateway") or by
trusts beneficially owned by Gateway. Gateway is a limited purpose finance
corporation established for the purpose of issuing one or more Series of Bonds
and similar series of bonds directly or through one or more trusts beneficially
owned by it (each, a "Trust"). Each Series of Bonds will be separately secured
by the Collateral described in the Prospectus Supplement relating to such
Series, which Collateral will constitute the only significant assets available
to make payments on the Bonds of such Series. Accordingly, the investment
characteristics of a Series of Bonds will be determined by the Collateral
pledged to secure such Series and will not be affected by the identity of the
Issuer with respect to such Series of Bonds. The term "Issuer", as used herein
with respect to a particular Series of Bonds, refers to the entity (Gateway or a
Trust, as the case may be) that issues and administers such Series of Bonds.
The Issuer does not plan to send any financial reports to holders of Bonds.
The Indenture Trustee, however, will include with each payment on Bonds of a
Series a statement containing certain payment information concerning the Bonds.
See "Description of the Bonds -- General."
The shareholders of Gateway do not intend to cause Gateway to file, and
Gateway does not intend to cause any Trust Issuer to file, a voluntary
application under any applicable insolvency laws as long as Gateway or such
Trust Issuer, as the case may be, is solvent and does not foresee becoming
insolvent.
GATEWAY MORTGAGE ACCEPTANCE CORPORATION
Gateway was incorporated under the laws of the State of Delaware on October
26, 1988. Gateway is a wholly-owned limited purpose subsidiary of EVEREN
Mortgage Group, Inc., a Delaware corporation ("EVEREN Mortgage," formerly known
as Kemper Mortgage Group, Inc.), which is a wholly-owned subsidiary of EVEREN
Securities Holdings, Inc. ("EVEREN Holdings," formerly known as Kemper
Securities Holdings, Inc.), which is, in turn, a wholly-owned subsidiary of
EVEREN Capital Corporation ("EVEREN Capital"). On November 1, 1990, EVEREN
Holdings contributed all of the outstanding shares
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of common stock of Gateway to EVEREN Mortgage. EVEREN Holdings had acquired the
common stock of Gateway contemporaneously with the merger into EVEREN
Securities, Inc. ("EVEREN Securities," formerly Kemper Securities, Inc.),
effective August 31, 1990, of Lovett Underwood Neuhaus & Webb, Inc. ("Lovett"),
a Delaware corporation and former parent corporation of Gateway. Lovett acquired
the common stock of Gateway from Underwood, Neuhaus & Co. Incorporated, a Texas
corporation ("Underwood"), the initial parent corporation of Gateway, as of
November 15, 1989. EVEREN Securities is a wholly-owned subsidiary of EVEREN
Holdings.
Prior to September 13, 1995, Kemper Securities Holdings, Inc. ("Kemper
Holdings") was a wholly-owned subsidiary of Kemper Financial Companies, Inc.
("Kemper Financial"). As of September 13, 1995 (i) Kemper Holdings changed its
name to EVEREN Securities Holdings, Inc., (ii) Kemper Financial transferred all
of the outstanding shares of common stock of EVEREN Holdings to EVEREN Capital
in exchange for approximately 96% of the common stock of EVEREN Capital and
certain shares of exchangeable preferred stock of EVEREN Capital, and (iii)
Kemper Securities sold such common stock to the EVEREN Capital Corporation
401(k) and Employee Stock Ownership Plan.
Gateway's principal executive offices are located at 77 West Wacker Drive,
Suite 3100, Chicago, Illinois 60601. Its telephone number is (800) 346-6616.
Gateway has not engaged, and will not engage, in any business or investment
activities other than, directly or through one or more trusts beneficially owned
by it, (i) issuing and selling Bonds under the Indenture and receiving, owning,
holding and pledging as Collateral therefor the related Certificates or the
Mortgage Loans underlying any Certificates, (ii) issuing and selling bonds under
any other indenture, and receiving, owning, holding and pledging as collateral
therefor mortgage-related assets similar in nature to the Collateral; provided,
however, that any such bonds must be rated in one of the two highest rating
categories by each rating agency rating such bonds, (iii) investing cash
balances on an interim basis in high quality short-term securities, (iv)
purchasing, owning, holding, pledging or selling other mortgage-related assets;
provided, however, that any indebtedness incurred in connection with such
transactions shall be secured only by collateral other than the Collateral or
shall be subordinate to the Bonds, (v) transferring, pledging or assigning the
rights to any amounts remitted or to be remitted to Gateway under the Indenture,
(vi) becoming a general partner in a limited partnership engaging in the
foregoing activities, and (vii) engaging in other activities which are necessary
or convenient to accomplish the foregoing and are incidental thereto. Article
III of Gateway's Certificate of Incorporation limits Gateway's purposes to the
above and provides that any Bonds issued must be rated in one of the two highest
rating categories established by one or more nationally recognized statistical
rating agencies. Article VIII of Gateway's Certificate of Incorporation
prohibits Gateway, without obtaining the prior written consent of the Indenture
Trustee, from amending Articles III or VIII of its Certificate of Incorporation,
from dissolving or liquidating or from merging or consolidating with any entity
or conveying or transferring its properties and assets to any other entity,
except to a trust beneficially owned by it or a corporation wholly owned,
directly or indirectly by any person or entity owning, directly or indirectly,
100% of the outstanding common stock of Gateway and having a certificate of
incorporation containing provisions substantially identical to the provisions of
Articles III and VIII of Gateway's Certificate of Incorporation.
The directors and executive officers of Gateway are as follows:
<TABLE>
<CAPTION>
NAME POSITION
- ----------------------
<S> <C>
Thomas R. Reedy Director, Chairman and Chief Executive Officer
John S. Gallop Director and President
Nelson Cannon Director and Secretary
Christopher J. Blum Director, Vice President, Treasurer and Assistant
Secretary
Joseph A. Cari, Jr. Director
Thomas M. Mansheim Vice President and Chief Financial Officer
</TABLE>
Thomas R. Reedy, age 36, has been Director, Chairman of the Board and Chief
Executive Officer of Gateway since August 17, 1990. Mr. Reedy has been a Senior
Executive Vice President of EVEREN
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<PAGE> 36
Securities, Inc. since December 1993, was an Executive Vice President of EVEREN
Securities between September 1993 and December 1993, and was a Senior Vice
President of EVEREN Securities between January 1991 and September 1993. Prior to
joining EVEREN Securities, he was Senior Vice President and Manager of the
Public Finance Department of Blunt Ellis & Loewi Incorporated from August 1988
to June 1990.
John S. Gallop, age 35, has been Director, President and Chief Financial
Officer of Gateway since November 15, 1994. Mr. Gallop has been an Executive
Vice President of EVEREN Securities since October, 1993. Mr. Gallop was with
Bear Stearns from November 1989 to October 1993. Prior to joining Bear Stearns,
he was with Geneva Capital Markets from March 1989 to October 1989.
Nelson Cannon, age 42, has been Director and Secretary of Gateway since
October 1995. Mr. Cannon has been administrative officer of Capital Markets of
EVEREN Securities since January 1995, and risk manager since October 1990.
Christopher J. Blum, age 28, has been Director and Treasurer of Gateway
since May 1, 1992 and Vice President and Assistant Secretary of the Issuer since
March 6, 1991. Mr. Blum has been an Associate of EVEREN Securities since
December 1990. Mr. Blum was with Spencer Stuart and Associates from 1989 to
1990. Prior to joining Spencer Stuart, he was with Bear Stearns in 1989, and
Edward D. Jones and Company from 1987 to 1989.
Joseph A. Cari, Jr., age 42, has been a Director of Gateway since July 27,
1994. Mr. Cari has been a partner with the law firm of Coffield Ungaretti and
Harris since 1983 and a partner since October, 1984.
Thomas M. Mansheim, age 38, has been Vice President and Chief Financial
Officer of Gateway since June 1995. He was elected Vice President, Controller
and Chief Accounting Officer of EVEREN Capital in May 1995 and Senior Vice
President, Controller and Chief Accounting Officer as of July 1995. Since
January 1991 he has been Senior Vice President, and since January 1994 he has
been Director of Accounting, of EVEREN Securities.
No officer or director of Gateway owns any shares of its capital stock. All
of Gateway's common stock is owned by EVEREN Mortgage.
Each of the directors and executive officers of Gateway will hold office
until their successors are elected and qualify in accordance with the terms of
Gateway's Certificate of Incorporation and the laws of the State of Delaware.
There are no family relationships among or between such directors and executive
officers. None of the directors and executive officers of Gateway, presently
receives any remuneration from Gateway nor do they receive any separate
compensation from any of Gateway's affiliates for their services as officers and
directors of Gateway.
The officers and directors of Gateway will devote such of their time as may
be necessary to ensure that Gateway and the Trusts beneficially owned by Gateway
fulfill their duties under the Indenture and such other duties as the officers
and directors shall deem necessary to protect the interests of the Bondholders
or which may be required by law. It is not expected that such duties will
require a significant amount of time. Gateway in the future may pay to one or
more of its directors or executive officers or to entities controlled by such
directors or officers consulting fees or other remuneration.
The Certificate of Incorporation and Bylaws of Gateway provide for the
indemnification of the directors and officers of Gateway to the full extent
permitted by Delaware law. Delaware law provides that Delaware corporations
shall have the power, under specified circumstances, to indemnify their
directors, officers, employees and agents in connection with actions, suits or
proceedings brought against them by a third party or in the right of the
corporation, by reason of the fact that they were or are such directors,
officers, employees or agents, against expenses incurred in any such action,
suit or proceeding. Insofar as indemnification for liabilities arising under the
Act may be permitted to directors, officers or persons controlling Gateway
pursuant to the foregoing provisions, Gateway has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
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<PAGE> 37
TRUST ISSUER
Any Trust established to act as an Issuer of one or more Series of Bonds
will be created pursuant to a Deposit Trust Agreement between Gateway (the
"Initial Depositor"), acting as depositor, and a bank, trust company or other
fiduciary, acting as Owner-Trustee. Gateway may sell or assign the Certificates
of Beneficial Ownership of each such Trust, in whole or in part, to another
entity or entities at the time of, or subsequent to, the issuance of any Bonds
by such Trust.
The Trust issuing a Series of Bonds will pledge the Collateral securing
such Series of Bonds to the Indenture Trustee under the Indenture for such
Series. The Bond Trustee will hold such Collateral as security for the Bonds of
such Series and holders of the Bonds of such Series will be entitled to the
equal and proportionate benefits of such security as if the same had been
granted by a corporate issuer. Each Indenture will prohibit such Trust from
incurring debt obligations other than Bonds and similar series of bonds unless
(i) the debtholder's sole recourse with respect to such obligations is to
collateral other than the Collateral or (ii) such obligations are subordinate to
the Bonds.
Each Deposit Trust Agreement will provide that the Trust created under such
agreement may not engage in any activities other than (i) issuing and selling
one or more Series of Bonds and other similar series of bonds, (ii) purchasing,
owning, holding, pledging, or selling other mortgage-related assets; provided,
however, that any indebtedness incurred in connection with such transactions
shall be secured only by collateral other than the Collateral or shall be
subordinate to the Bonds, and (iii) other activities which are necessary or
convenient to accomplish the foregoing and are incidental thereto.
No Deposit Trust Agreement will be subject to amendment without the prior
written consent of the Owner-Trustee, holders representing 50% of the
Certificates of Beneficial Ownership of the Trust and the Indenture Trustee
(which consent may not be unreasonably withheld if such amendment would not
adversely affect the interests of the Bondholders) except that holders of not
less than 66 2/3% of the aggregate principal amount of the Bonds outstanding
must consent to any amendment of the provision limiting the Trust's activities
and the provision regarding amendments to such agreement. The holders of
Certificates of Beneficial Ownership of a Trust will not be liable for payment
of principal or interest on the Bonds of any Series issued by such Trust and
each of the holders of the Bonds of such Series will be deemed to have released
such holders of Certificates of Beneficial Ownership from any such claim,
liability or obligation on or with respect to such Bonds.
Each Deposit Trust Agreement will provide that the holders of Certificates
of Beneficial Ownership of the Trust created under such agreement shall
indemnify the Owner-Trustee against all losses and liability suffered by it in
acting upon the holders' instructions, except in the case of willful misconduct
or gross negligence on the part of the Owner-Trustee. The Owner-Trustee will
have no liability for action taken by it in good faith in reliance upon
direction to it for the disposition of monies or collateral pursuant to a
Deposit Trust Agreement.
MANAGEMENT AGREEMENT
The Issuer may enter into a management agreement (the "Management
Agreement") with an entity deemed appropriate by the Issuer (the "Manager"),
pursuant to which the Manager will, among other things, prepare and make such
reports as are required to be delivered by the Issuer to the Indenture Trustee
and provide advisory, accounting, administrative, clerical and other services
required in the conduct of the Issuer's business. As compensation for its
services, the Issuer will pay the Manager a management fee. The Manager will not
assume any responsibility under the Management Agreement other than to render
services called for thereunder and may subcontract to a third party all or a
portion of its duties thereunder. The Manager and its affiliates, shareholders,
directors, officers and employees will not be liable to the Issuer, the
Bondholders or others, except by reason of acts constituting bad faith, gross
negligence or willful misconduct. The Manager and its affiliates will be
indemnified with respect to all expenses, losses, damages, liabilities, demands,
charges and claims of any nature in respect of acts or omissions performed or
omitted by it in accordance with the standards set forth in the preceding
sentence. The Manager may be an affiliate of the Issuer. See "The
Issuer -- Gateway Mortgage Acceptance Corporation" and "-- Trust Issuer."
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<PAGE> 38
TRANSACTIONS WITH EVEREN MORTGAGE GROUP, INC.
All of the Common Stock of Gateway is owned by EVEREN Mortgage, a
wholly-owned subsidiary of EVEREN Holdings, which is, in turn, a wholly-owned
subsidiary of EVEREN Capital Corporation. See "The Issuer -- Gateway Mortgage
Acceptance Corporation."
The Indenture provides that the Issuer (whether Gateway or a Trust) may not
engage in business transactions with EVEREN Mortgage or any affiliate thereof on
terms and conditions less favorable to the Issuer than terms and conditions
available at the time to the Issuer for comparable arms-length transactions with
unaffiliated persons and any such transaction must, in addition to any other
required approval, be approved by the Issuer's entire Board of Directors.
USE OF PROCEEDS
The Issuer will use substantially all of the net proceeds from the sale of
a Series of Bonds either to (i) pay certain indebtedness incurred in connection
with the acquisition of, or to acquire, the Certificates securing the Bonds or
(ii) to pay certain indebtedness incurred in connection with the acquisition of,
or to acquire, the Mortgage Loans underlying the Certificates securing the
Bonds. Subsequently, an Issuer may distribute to the shareholders or beneficial
owners of the Issuer, as the case may be, all or a portion of any remaining net
proceeds.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds of each Series will be issued pursuant to a Terms Indenture
between the respective Issuer of such Series and the Indenture Trustee,
incorporating by reference the Standard Indenture Provisions of the Issuer
(collectively, an "Indenture"), and will be secured by the Certificates pledged
by the Issuer as security for such Series of Bonds as specified in the related
Prospectus Supplement.
The following summaries describe certain provisions common to each Series
of the Bonds, unless otherwise noted. The summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, the Prospectus Supplement and the provisions of the Indenture relating to
each Series of Bonds. When particular provisions or terms used in the Standard
Indenture Provisions are referred to, the actual provisions (including
definitions of terms) are incorporated by reference as part of such summaries.
The Bonds are issuable in Series. Each Series will consist of one or more
Classes of Bonds, which may include one or more Classes of "Compound Interest
Bonds." Interest will accrue on Compound Interest Bonds but will not be payable
until all Bonds having a Stated Maturity prior to the Stated Maturity of such
Class of Compound Interest Bonds have been paid in full, unless the related
Prospectus Supplement provides otherwise, in which event such interest payments
will commence at the time specified in such Prospectus Supplement. Prior to such
time, the amount of interest so accrued will be added to the principal of such
Class of Compound Interest Bonds on each Payment Date.
A Series of Bonds may include one or more Classes of "Scheduled
Amortization Bonds" and "Companion Bonds." Scheduled Amortization Bonds are
Bonds with respect to which payments of principal are to be made in specified
amounts on specified Payment Dates, to the extent of funds available on such
Payment Date. Companion Bonds are Bonds which receive payments of all or a
portion of any funds available on a given Payment Date which are in excess of
amounts required to be applied to payments on Scheduled Amortization Bonds on
such Payment Date. Because of the manner of application of payments of principal
to Scheduled Amortization Bonds, the weighted average lives of Scheduled
Amortization Bonds of a Series may be expected to be less sensitive to the
actual rate of prepayments on the Mortgage Loans underlying the Certificates
securing such Series of Bonds than will the Companion Bonds of such Series.
The Bonds of each Series will be issued as provided in the related
Prospectus Supplement either in definitive, fully-registered form or in book
entry form, in either case only in the minimum denominations and authorized
denominations in excess of such amount specified in the related Prospectus
Supplement. The Bonds may be transferred or exchanged without the payment of any
service charge other than any tax or
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<PAGE> 39
governmental charge payable in connection with such transfer or exchange except
that, in the case of any exchange of a mutilated, lost, destroyed or stolen
Bond, the Issuer may charge such Bondholder an amount equal to the reasonable
expenses incurred in connection therewith. (Standard Indenture Provisions,
Sections 2.07 and 2.08)
Payments of principal of, and interest on, each Series of Bonds will be
made on the Payment Dates set forth in the Prospectus Supplement relating to
such Series. With respect to Bonds that are not Book Entry Bonds, such payments
shall be made by check mailed to Bondholders of such Series registered as such
on the related record date preceding such Payment Date at the addresses
appearing on the Bond Register, except that final payments of principal in
retirement of each Bond (other than a Book Entry Bond) will be made only upon
presentation and surrender of such Bond at the corporate trust office of the
Indenture Trustee or the New York office of the Paying Agent for such Series of
Bonds. (Standard Indenture Provisions, Section 2.09) With respect to Book Entry
Bonds, such payments will be made as described below under "Book Entry
Registration" and in the related Prospectus Supplement.
The Indenture Trustee will include with each payment on a Bond which
includes both interest and principal a statement showing the amount of such
payment that constitutes interest and principal, respectively, and the remaining
unpaid principal amount of such Bond. Payments on Bonds which include only
interest will be accompanied by a statement showing the aggregate unpaid
principal amount of the Bonds of each Class of the same Series. On each Payment
Date before payments of principal are first made on a particular Class of
Compound Interest Bonds of such Series, the Indenture Trustee will furnish to
each holder of a Bond of such Class a statement showing the aggregate unpaid
principal amount of such Class of Bonds and the new principal balance of such
holder's Compound Interest Bond. (Standard Indenture Provisions, Section 8.07)
Except to the extent specified otherwise in the related Prospectus
Supplement, the Bonds of each Series will be secured by separate Collateral.
Subject to certain assumptions explained more fully elsewhere in this Prospectus
and the related Prospectus Supplement, the Certificates deposited as Collateral
for each Series will have, on the date of issuance of the Bonds of such Series,
an aggregate Bond Value that (a) will at least equal the aggregate principal
amount of the Bonds of such Series, and (b) will produce, together with other
deposited Collateral, a cash flow sufficient to amortize each Class of Bonds of
the Series through redemption and payment at their respective Stated Maturities
and to support the interest payments required to be made on the Bonds of the
Series while they are to be outstanding. See "Security for the Bonds."
Bonds may constitute a Series of "Special Allocation Bonds." Unless
otherwise specified in the related Prospectus Supplement for a Series of Special
Allocation Bonds, upon the occurrence of specified events, the timing and/or
priority of payments of principal and/or interest may be modified or reordered.
Unless otherwise specified in the related Prospectus Supplement for a Series of
Special Allocation Bonds, losses on the Collateral securing such Series may be
disproportionately borne by one or more Classes of such Series, and the proceeds
of the sale of such Collateral may be applied to the payment in full of one or
more Classes within such Series before the balance, if any, of such proceeds are
applied to one or more other Classes within such Series.
PAYMENTS OF INTEREST
The Bonds of each Class will bear interest on their unpaid principal
balances from the date and at the rate per annum specified in, or determined as
specified in, the related Prospectus Supplement. Interest will be calculated on
the basis of a 360-day year of twelve 30-day months, except to the extent
specified otherwise in the related Prospectus Supplement. Interest on Bonds
other than Compound Interest Bonds will be payable on the Payment Dates
specified in the related Prospectus Supplement. Payments of interest on each
Class of Compound Interest Bonds will commence only when all Bonds of such
Series having a Stated Maturity prior to the Stated Maturity of such Class of
Compound Interest Bonds have been paid in full, unless the related Prospectus
Supplement provides otherwise, in which event such interest payments will
commence at the time specified in such Prospectus Supplement. Prior to such
time, interest on such Class of Compound Interest Bonds will accrue and the
amount of interest so accrued will be added to the principal thereof on each
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<PAGE> 40
Payment Date. Such Class of Compound Interest Bonds will thereafter accrue
interest on the outstanding principal amount thereof as so adjusted.
One or more Classes of Bonds of a Series may bear interest at a floating
rate ("Floating Interest Rate Bonds"). The interest rate of a Class of Floating
Interest Rate Bonds is a variable rate which may have an interest rate maximum
(the "Maximum Floating Interest Rate") or an interest rate minimum (the "Minimum
Floating Interest Rate") or both, subject to general market conditions. For each
Class of Floating Interest Rate Bonds, the related Prospectus Supplement will
set forth the interest rate ("Floating Interest Rate") for the initial Interest
Accrual Period on the Floating Interest Rate Bonds, the intervals at which the
Floating Interest Rate will be recalculated, and the periods (each such period,
a "Floating Interest Rate Period") over which the initial Floating Interest Rate
and each successively calculated Floating Interest Rate shall apply and the
formula or index by which the Floating Interest Rate for each succeeding
Floating Interest Rate Period will be determined. The interest payment dates on
Floating Interest Rate Bonds will be set forth in the related Prospectus
Supplement and may not be the same as the Payment Dates for the other Bonds of
such Series but may be either more or less frequent.
Unless otherwise specified in the related Prospectus Supplement for a
Series of Special Allocation Bonds, upon the occurrence of certain specified
events the timing of interest payments in respect of a Class of Special
Allocation Bonds may be modified.
PAYMENTS OF PRINCIPAL
On each Principal Payment Date for a Series of Bonds, the Issuer will be
obligated to make principal payments in the manner described below and in the
related Prospectus Supplement to the holders of the Bonds of such Series for
which principal is then due. The Prospectus Supplement will specify the manner
in which principal payments will be applied among the Classes of Bonds of that
Series. Principal payments on a Class of Bonds will be allocated pro rata among
the Bonds of that Class, unless otherwise provided in the related Prospectus
Supplement. In any event, each Class of Bonds will be fully paid no later than
the Stated Maturity for such Class of Bonds specified in such Prospectus
Supplement. Unless otherwise specified in the Prospectus Supplement for a Series
of Special Allocation Bonds, upon the occurrence of certain specified events the
priority of principal payments may be reordered.
Unless the related Prospectus Supplement provides otherwise, the total
amount of each principal payment required to be made on the Bonds of a Series on
a Principal Payment Date will be equal to the sum of (i) the amount of interest,
if any, accrued on any Compound Interest Bonds of such Series in the prior
Interest Accrual Period but not then payable; (ii) an amount (the "Basic
Principal Payment") determined on the basis of the Bond Values (as defined
below) of the Certificates securing such Series in a specified period (a "Due
Period") ending subsequent to the previous Principal Payment Date; and (iii) the
percentage, if any, of the Spread (as defined below) specified in such
Prospectus Supplement. The Prospectus Supplement for each Series of Bonds will
specify the manner in which the amount of such aggregate principal payment will
be determined. The aggregate amount of principal payments required to be made on
a Series of Bonds on any Principal Payment Date will be reduced by the principal
amount of such Bonds of such Series redeemed pursuant to any special redemption
occurring subsequent to the preceding Principal Payment Date. See "Description
of the Bonds -- Special Redemption."
The "Bond Value" for a Certificate represents the principal amount of Bonds
of a Series that, based on certain assumptions and regardless of any prepayments
on such Certificate, can be supported by the distributions on such Certificate,
together with (depending on the type of Certificate and the method used to
determine its Bond Value) the reinvestment income thereon at the Assumed
Reinvestment Rate and/or, if applicable, the cash available to be withdrawn from
any related Reserve Fund. For convenience of calculation, Certificates that are
backed by the same pool of Mortgage Loans may be aggregated into one or more
groups (a "Bond Value Group"), each of which will be assigned an aggregate Bond
Value. Unless the related Prospectus Supplement provides otherwise, the
aggregate Bond Value of such a Bond Value Group will be calculated as if the
underlying Mortgage Loans constituted a single mortgage loan having such of the
payment characteristics of the Mortgage Loans underlying the Certificates
included in such Bond Value Group as would result in the lowest Bond Value being
assigned to the Certificates included in such Bond Value Group.
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<PAGE> 41
There are a number of alternative means of determining the Bond Value of a
Certificate, including determinations based on the discounted present value of
the remaining scheduled distributions on such Certificate and determinations
based on the relationship of the interest rate borne by such Certificate and by
the related Bonds. The Prospectus Supplement for a Series of Bonds will specify
the method or methods (and related assumptions) used to determine the Bond
Values of the Bond Value Groups securing such Series of Bonds. In any event, the
aggregate of the Bond Values of all the Bond Value Groups securing a Series of
Bonds will always be at least equal to the outstanding principal amount of the
Bonds of such Series.
The Assumed Reinvestment Rate for a Series of Bonds will be specified in
the related Prospectus Supplement, but in no event will it be more than the
highest rate permitted by the nationally recognized statistical rating agency or
agencies rating such Series of Bonds or a rate insured by means of a surety bond
or similar arrangement satisfactory to such rating agency or agencies. If the
Assumed Reinvestment Rate is so insured, the related Prospectus Supplement will
set forth the terms of such arrangement.
Unless otherwise specified in the related Prospectus Supplement, the
"Spread" for each Series of Bonds as of any Principal Payment Date is the
excess, if any, of the sum of (i) all distributions received on the Certificates
securing such Series of Bonds in the Due Period prior to such Principal Payment
Date, (ii) the reinvestment income thereon, and (iii) if applicable, the amount
of cash initially deposited to the Collection Account or withdrawn from any
related Reserve Fund prior to such Principal Payment Date and reinvestment
income thereon, over the sum of (i) all interest payable on the Bonds of such
Series on such Principal Payment Date, (ii) the Basic Principal Payment required
to be made on such Series of Bonds for such Principal Payment Date, (iii)
interest, if any, accrued on any Compound Interest Bonds of such Series in the
prior Interest Accrual Period but not then payable, (iv) the amounts, if any,
paid with respect to special redemptions of the Bonds of such Series, as
described below, during such Due Period and (v) if applicable, an amount
allocable to the payment of fees and expenses of the Indenture Trustee,
independent accountants and/or other administrative expenses related to the
Bonds of such Series.
MATURITY OF THE BONDS
All of the Mortgage Loans underlying any GNMA Certificates securing a
Series of Bonds will consist of mortgage loans insured by the Federal Housing
Administration ("FHA Loans") or the Farmers Home Administration ("FmHA Loans")
or partially guaranteed by the Veterans' Administration ("VA Loans"). The
Mortgage Loans underlying any FNMA, FHLMC or Non-Agency Certificates securing a
Series of Bonds will consist of conventional (that is, neither insured nor
guaranteed by any government agency) mortgage loans ("Conventional Loans") and
may also consist of FHA, FmHA or VA Loans. Each Certificate will provide by its
terms for monthly payments of principal and interest in the amounts described in
"Security for the Bonds" and in the related Prospectus Supplement.
Since the aggregate amount of the principal payment required to be made on
a Series of Bonds on a Principal Payment Date will depend on the amount of the
principal received on the related Certificates in the preceding Due Period, the
prepayment experience on the Mortgage Loans will affect the average life of each
Class of Bonds and the extent to which such Class is paid prior to its Stated
Maturity. The Stated Maturity for each Class of Bonds is the date on which the
principal thereof will be fully paid, assuming (i) timely receipt of scheduled
payments (with no prepayments) on the Certificates securing such Bonds, (ii) all
such scheduled payments are reinvested on receipt at the Assumed Reinvestment
Rate for such Series and (iii) no portion of the Spread is applied to the
payment of principal on the Bonds, unless the related Prospectus Supplement
provides otherwise, in which event such Stated Maturities will be based on the
assumptions specified in such Prospectus Supplement.
The Prospectus Supplement for each Series of Bonds may contain a table
setting forth the projected weighted average life of each Class of Bonds of such
Series and the percentage of the original principal amount of each Class of
Bonds of such Series that would be outstanding on specified Principal Payment
Dates for such Series based on the assumption that prepayments on the Mortgage
Loans underlying the related Certificates are made at rates corresponding to
various percentages of the prepayment model and on such other assumptions as may
be specified in such Prospectus Supplement.
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REDEMPTION AT THE REQUEST OF BONDHOLDERS
To the extent permitted by the Prospectus Supplement and Indenture for a
Series of Bonds, one or more Classes of Bonds of such Series may be subject to
redemption at the request of Bondholders. Any such requested redemptions with
respect to a Series will be conducted on the terms and conditions in the related
Prospectus Supplement.
SPECIAL REDEMPTION
The Bonds of each Series may be subject to special redemption under the
circumstances and in the manner described below. The Prospectus Supplement for
each Series of Bonds will specify the circumstances under which the Bonds of
such Series are so redeemable. Unless otherwise specified in the related
Prospectus Supplement, the Issuer will be required to redeem, on a specified
date in each month other than a month including a Principal Payment Date (each,
a "Special Redemption Date"), outstanding Bonds of a Series in the amount
described below if, as a result of principal payments on the Mortgage Loans
underlying the Certificates pledged as security for such Series of Bonds and/or
low yields then available for reinvestment of distributions on such
Certificates, the Indenture Trustee determines, based on the assumptions
specified in the Indenture, that the future debt service requirements on any
portion of the Bonds cannot be met. (Standard Indenture Provisions, Section
10.01) The amount of Bonds required to be so redeemed will not exceed the
principal amount of Bonds of such Series that would otherwise be required to be
paid on the next Principal Payment Date.
Unless otherwise specified in the related Prospectus Supplement, all
payments of principal pursuant to any special redemption will be paid in the
same priority and manner as payments of principal on Principal Payment Dates.
Unless otherwise provided in the related Prospectus Supplement, bonds of the
same Class will be redeemed pro rata. Notice of any special redemption will be
given by the Issuer or the Indenture Trustee prior to the special redemption
date. (Standard Indenture Provisions, Section 10.07) The redemption price for
any Bond so redeemed will be equal to 100% of the principal amount of such Bond
so redeemed, together with accrued interest thereon to the date specified in the
related Prospectus Supplement. (Standard Indenture Provisions, Sections 10.01
and 10.08)
REDEMPTION AT THE OPTION OF THE ISSUER
The Issuer (or its assignee), at its option, may redeem all or a portion of
any Class or Classes of Bonds of any Series pursuant to conditions specified in
the related Prospectus Supplement, which conditions may include that any such
Class or Classes may be redeemed in whole, but not in part, on any Payment Date
for such Bonds after a date specified in the related Prospectus Supplement and
that any such Class or Classes may be redeemed in whole, but not in part, on any
Payment Date after the aggregate principal amount of any such Class has declined
below a specified percentage of the original aggregate principal amount of such
Class. Notice of such redemption will be given by the Issuer (or its assignee)
or the Indenture Trustee prior to the redemption date. The redemption price for
any Bond so redeemed will be as specified in the related Prospectus Supplement,
together with accrued interest thereon to the date specified in the related
Prospectus Supplement. (Standard Indenture Provisions, Sections 10.05 and 10.08)
OPTIONAL FLOATING INTEREST RATE BOND REDEMPTION
Unless specified otherwise in the related Prospectus Supplement, the
Issuer, at its option, may use all or a portion of the Issuer's Spread to redeem
any Class of Floating Interest Rate Bonds, in whole or in part (an "Optional
Floating Interest Rate Bond Redemption"), on any Floating Interest Rate Payment
Date, at 100% of the principal amount thereof, together with accrued and unpaid
interest thereon to the date designated in the Prospectus Supplement, if the
Floating Interest Rate at which interest on such Class of Floating Interest Rate
Bonds accrues during the Floating Interest Rate Period applicable to such
Floating Interest Rate Payment Date is equal or, pursuant to the related
Prospectus Supplement, deemed to be equal to the Maximum Floating Interest Rate
set forth in the related Prospectus Supplement. (Standard Indenture Provisions,
Section 10.06) If any such Optional Floating Interest Rate Bond Redemption
occurs, the rate of principal payments on the Bonds of Classes with later Stated
Maturities will not be thereby affected, unless otherwise provided in the
related Prospectus Supplement. Accordingly, after a redemption in full of a
Class of
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Floating Interest Rate Bonds in which any Optional Floating Interest Rate Bond
Redemption has occurred, if so provided in a Prospectus Supplement, there may be
a period of time, such period to include one or more Payment Dates, after the
Class of Floating Interest Rate Bonds has been fully redeemed and before
principal payments on the Bonds of another Class are to commence (a "Time-Out
Period"). A Time-Out Period shall extend for the length of time required such
that principal payments on the Bonds of other Classes shall commence on that
Payment Date on which they would otherwise have commenced if there had been no
Optional Floating Interest Rate Bond Redemptions in that Series.
PROCEDURES AND REDEMPTION NOTICES
With respect to any special or optional redemption of the Bonds, unless a
Prospectus Supplement provides otherwise, the Indenture Trustee will mail to the
holders of the Bonds to be redeemed a notice setting forth: (a) the Special
Redemption Date on which a special redemption is to take place or the Payment
Date on which an optional redemption is to take place, (b) the redemption price,
(c) if the Bonds of a Class are not to be redeemed in full, the amount of
principal to be paid, that no interest will accrue on such principal amount
thereafter and, except as otherwise provided herein and in the Prospectus
Supplement with respect to Book Entry Bonds, that payment of the redemption
price will be made by check mailed to the registered holders of the Bonds on the
relevant record date and (d) in the case of Bonds other than Book Entry Bonds,
if the Bonds are to be redeemed in full then the place where such Bonds should
be surrendered for payment.
BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a Series so provides, Bonds of any Class
of such Series may be Book Entry Bonds issued and held in the form of a single
certificate issued in the name of a Clearing Agency registered with the
Commission or its nominee. (Standard Indenture Provisions, Section 2.13).
Transfers and pledges of Book Entry Bonds may be made only through entries on
the books of the Clearing Agency in the name of Clearing Agency Participants or
their nominees. Clearing Agency Participants may also be Beneficial Owners of
Bonds.
Purchasers and other Beneficial Owners of Book Entry Bonds may not hold
Book Entry Bonds directly, but may hold, transfer or pledge their ownership
interest in the Bonds only through Clearing Agency Participants and will receive
all payments of principal and interest with respect to the Bonds, and, if
applicable, may request redemption of Bonds, only through the Clearing Agency
and the Clearing Agency Participants. Beneficial Owners will not be registered
holders of Bonds or be entitled to receive definitive certificates representing
their ownership interest in the Bonds except under the limited circumstances, if
any, described in the related Prospectus Supplement. See "Special
Considerations -- Book Entry Registration."
If Bonds of a Series are issued as Book Entry Bonds, the Clearing Agency
will be required to make book entry transfers among Clearing Agency
Participants, to receive and transmit payments of principal and interest with
respect to the Bonds of such Series, and to receive and transmit requests for
redemption with respect to such Bonds. Clearing Agency Participants with whom
Beneficial Owners have accounts with respect to such Book Entry Bonds will be
similarly required to make book entry transfers and receive and transmit
payments and redemption requests on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not be registered holders
of Bonds and will not possess physical certificates, a method will be provided
whereby Beneficial Owners may receive payments, transfer their interests, and
submit redemption requests.
SECURITY FOR THE BONDS
GENERAL
Each Series of Bonds will be secured by assignments to the Indenture
Trustee of collateral (the "Collateral") consisting of (i) Certificates, a
portion of which may constitute overcollateralization, (ii) the distributions
thereon, (iii) cash, letters of credit, surety bonds, Eligible Investments or a
combination thereof in the aggregate amount, if any, required by the related
Prospectus Supplement to be deposited by the Issuer in a related Reserve Fund,
(iv) the amount of cash, if any, specified in such Prospectus Supplement to be
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initially deposited by the Issuer in the related Collection Account, and (v) the
reinvestment income on such distributions and cash. The Prospectus Supplement
for a Series may specify that the Bonds of such Series are secured by collateral
in addition to the Collateral referred to above. Scheduled distributions on the
Certificates securing each Series of Bonds, together with the earnings on the
reinvestment of such distributions at the Assumed Reinvestment Rate specified in
the related Prospectus Supplement and, if applicable, amounts available to be
withdrawn from any related Reserve Fund, will be sufficient to make timely
payments of interest on the Bonds of such Series and to retire each Class of
Bonds comprising such Series not later than the Stated Maturity of such Class of
Bonds specified in the related Prospectus Supplement. See "Description of the
Bonds -- Payments of Principal". Unless otherwise specified in the related
Prospectus Supplement, the Collateral securing each Series of Bonds will equally
and ratably secure the Bonds of each Class of such Series, and the Collateral
securing such Series will secure only that Series of Bonds.
GNMA
The Government National Mortgage Association is a wholly-owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. Section 306(g) of Title III of the National Housing Act of 1934, as
amended (the "Housing Act"), authorizes GNMA to guarantee the timely payment of
the principal of, and interest on, certificates that are based on and backed by
a pool of mortgage loans insured by the FHA under the Housing Act, or Title V of
the Housing Act of 1949, or guaranteed by the VA under the Servicemen's
Readjustment Act of 1944, as amended, or Chapter 37 of Title 38, United States
Code.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under such guarantees, GNMA is authorized, under Section 306(d)
of the Housing Act, to borrow from the United States Treasury with no
limitations as to amount.
GNMA CERTIFICATES
Each GNMA Certificate (which may be a GNMA I or a GNMA II Certificate as
referred to by GNMA) will be a "fully modified pass-through" mortgage-backed
certificate issued and serviced by a mortgage banking company or other financial
concern (the "GNMA Servicer") approved by GNMA or approved by FNMA as a
seller-servicer of FHA Loans and/or VA Loans. Each GNMA Certificate will be
based on and backed by a pool of FHA Loans, FmHA Loans and/or VA Loans and will
provide for the payment by or on behalf of the GNMA Servicer to the registered
holder of such GNMA Certificate of monthly payments of principal and interest
equal to the certificate holder's proportionate interest in the aggregate amount
of the scheduled monthly principal and interest payments on each such FHA Loan,
FmHA Loan or VA Loan, less servicing and guarantee fees aggregating the excess
of the interest on the FHA Loans, FmHA Loans or the VA Loans over the GNMA
Certificate's pass-through rate. In addition, each payment to a GNMA certificate
holder will include proportionate pass-through payments to such holder of any
prepayments of principal of the FHA Loans, FmHA Loans or VA Loans underlying the
GNMA Certificate and the certificate holder's proportionate interest in the
proceeds in the event of a foreclosure or other disposition of any such FHA
Loan, FmHA Loan or VA Loan.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation will be backed by the
full faith and credit of the United States.
Each such GNMA Certificate will have an original maturity of not more than
30 years, but may have original maturities of substantially less than 30 years.
In general, GNMA requires that at least 90% of the original principal amount of
the mortgage pool underlying a GNMA Certificate must consist of mortgage loans
with maturities of twenty years or more. However, in certain circumstances, GNMA
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 GNMA Certificate, at the time GNMA issues
its guarantee commitment, must be originated no more than 12 months prior to
such commitment date. Such Mortgage Loans may be secured by either one-to
four-family or multifamily residential properties.
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All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools for mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on such GNMA I Certificate
will equal the interest rate on the mortgage loans included in the pool of
mortgage loans underlying such GNMA I Certificate, less one-half percentage
point per annum of the unpaid principal balance of the mortgage loans.
Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans secured
by manufactured homes).
Regular monthly installment payments of each GNMA Certificate will be
comprised of interest due as specified on such GNMA Certificate plus the
scheduled principal payments on the mortgage loans underlying such GNMA
Certificate due on the first day of the month in which the scheduled monthly
installment on such GNMA Certificate is due. Such regular monthly installments
on each such GNMA Certificate will be paid to the registered holder by the 15th
day of each month in the case of a GNMA I Certificate and will be mailed by the
20th day of each month in the case of a GNMA II Certificate. Any principal
prepayments on any mortgage loans underlying a GNMA Certificate or any other
unscheduled recovery of principal on such mortgage loans will be passed through
to the registered holder of such GNMA Certificate and, in turn, a portion of
such prepayments or other unscheduled recoveries will be paid to holders of the
Bonds, secured thereby, as additional principal payments.
GNMA will have approved the issuance of each of the GNMA Certificates
securing a Series of Bonds in accordance with a guaranty agreement (the
"Guaranty Agreement") between GNMA and the GNMA Servicer of such GNMA
Certificate. Pursuant to the Guaranty Agreement, the GNMA Servicer is required
to advance its own funds in order to make timely payments of all amounts due on
the GNMA Certificate, even if the payments received by the GNMA Servicer on the
FHA Loans, FmHA Loans and VA Loans backing the GNMA Certificate are less than
the amounts due on such GNMA Certificate.
If a GNMA Servicer is unable to make payments on a GNMA Certificate as it
becomes due, it is required promptly to notify GNMA and request GNMA to make
such payment. Upon such notification and request, GNMA will make such payments
directly to the registered holder of the GNMA Certificate. In the event no
payment is made by a GNMA Servicer and the GNMA Servicer fails to notify and
request GNMA to make such payment, the holder of the GNMA Certificate has
recourse only against GNMA to obtain such payment. The Indenture Trustee, as
registered holder of the GNMA Certificates pledged to secure a Series of Bonds,
may proceed directly against GNMA under the terms of the Guarantee Agreements
relating to such GNMA Certificates for any amounts that are not paid when due.
If specified in the related Prospectus Supplement, GNMA Certificates
securing a Series of Bonds may be held on deposit at the Participants Trust
Company ("PTC"), a newly established, limited purpose trust company organized
under the banking law of the State of New York. PTC operates a private sector,
industry-owned depository and settlement facility for the book-entry transfer of
interests in GNMA Certificates. Distributions of principal of and interest on
each GNMA Certificate held through PTC will be credited by PTC to the PTC
participant to whose account the GNMA Certificate is credited.
FNMA
FNMA is a federally chartered and privately owned corporation organized and
existing under the Federal National Mortgage Association Charter Act. It is the
nation's largest supplier of residential mortgage funds. FNMA was originally
established in 1938 as a United States government agency to provide supplemental
liquidity to the mortgage market and was transformed into a stockholder owned
and privately managed corporation by legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home
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mortgage loans from many capital market investors that may not ordinarily invest
in mortgages, thereby expanding the total amount of funds available for housing.
Operating nationwide, FNMA helps to redistribute mortgage funds from
capital-surplus to capital-short areas. In addition, FNMA issues mortgage-backed
securities, primarily in exchange for pools of mortgage loans from lenders.
Although the Secretary of the Treasury of the United States has
discretionary authority to lend funds to FNMA, neither the United States nor any
agency thereof is obligated to finance FNMA's operations or to assist FNMA in
any other manner.
FNMA CERTIFICATES
Each FNMA Certificate securing a Series of Bonds will be backed by a pool
of Mortgage Loans which may consist of FHA Loans, VA Loans or Conventional
Loans. Such Mortgage Loans may be secured by either one- to four-family or
multifamily residential properties. FNMA guarantees to each registered holder of
a FNMA Certificate that it will distribute amounts representing such certificate
holder's proportionate interest in scheduled principal and interest payments,
and any principal prepayments, on the Mortgage Loans in the pool represented by
such FNMA Certificate (less servicing and guarantee fees aggregating the excess
of the interest on such Mortgage Loans over the FNMA Certificate's pass-through
rate), and such certificate holder's proportionate interest in the full
principal amount of any foreclosed or other liquidated Mortgage Loan, in each
case whether or not such amounts are actually received.
The obligations of FNMA under its guarantees are obligations solely of FNMA
and are not backed by, or entitled to, the full faith and credit of the United
States. If FNMA were unable to satisfy such obligations, distributions to
holders of FNMA Certificates would consist solely of payments and other
recoveries on the underlying Mortgage Loans and, accordingly, monthly
distributions to holders of FNMA Certificates would be affected by delinquent
payments and defaults on such Mortgage Loans.
FHLMC
FHLMC is a corporate instrumentality of the United States created pursuant
to Title III of the Emergency Home Finance Act of 1970, as amended, (the "FHLMC
Act"). FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of needed housing. It provides
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 FHLMC currently consists of the purchase of first lien
conventional mortgage loans or participation interests in such mortgage loans
and the resale of the mortgage loans so purchased in the form of mortgage
securities, primarily FHLMC Certificates. All mortgage loans purchased by FHLMC
must meet certain standards set forth in the FHLMC Act. FHLMC is confined to
purchasing, so far as practicable, mortgage loans which it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
FHLMC CERTIFICATES
Each FHLMC Certificate will represent an undivided interest in a pool of
first lien FHA Loans, VA Loans or Conventional Loans. Such Mortgage Loans may be
secured by either one-to four-family or multifamily residential properties.
FHLMC guarantees to each registered holder of a FHLMC Certificate that it will
distribute amounts representing such certificate holder's proportionate interest
in interest payments on the Mortgage Loans in the pool represented by such FHLMC
Certificate (less servicing and guarantee fees aggregating the excess of the
interest on such Mortgage Loans over the FHLMC Certificate's pass-through rate),
whether or not such amount is actually received, and such certificate holder's
proportionate interest in scheduled principal payments on such Mortgage Loans,
if timely received. FHLMC also guarantees ultimate collection of scheduled
principal payments, prepayments of principal and the remaining principal balance
in the event of a foreclosure or other disposition of a Mortgage Loan. FHLMC may
remit the amount due on account of its guarantee of collection of principal at
any time after default on an underlying mortgage, but not later than (i) thirty
days following foreclosure sale, (ii) thirty days following payment of the claim
by any
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mortgage insurer, or (iii) thirty days following the expiration of any right of
redemption, whichever occurs later, but in any event no later than one year
after demand has been made upon the mortgagor for accelerated payment of
principal. In taking actions regarding the collection of principal after default
on the mortgages underlying FHLMC Certificates, including the timing of demand
for acceleration, FHLMC reserves the right to exercise its judgment in the same
manner as for mortgages which it has purchased but not sold.
In addition to FHLMC's guarantees of timely payment of interest and
ultimate collection of principal, FHLMC guarantees with respect to FHLMC
Certificates representing certain qualifying Mortgage Loans the timely payment
by each mortgagor of the monthly principal scheduled to be paid under the
amortization schedule applicable to each such Mortgage Loan ("Scheduled
Principal"). Servicers of the Mortgage Loans comprising these FHLMC Certificates
are required to pay Scheduled Principal to FHLMC whether or not received from
the mortgagors. FHLMC, in turn, guarantees to pay Scheduled Principal to each
registered holder of such FHLMC Certificates whether or not received from the
servicers. FHLMC monthly payments of Scheduled Principal are computed based upon
the servicer's monthly report to FHLMC of the amount of Scheduled Principal due
to be paid on the related Mortgage Loans. The Prospectus Supplement for each
Series of Bonds collateralized by FHLMC Certificates will set forth the nature
of FHLMC's guarantee with respect to scheduled principal payments on the
Mortgage Loans in the pools represented by such FHLMC Certificates.
The obligations of FHLMC under its guarantees are obligations solely of
FHLMC and are not backed by, or entitled to, the full faith and credit of the
United States. If FHLMC were unable to satisfy such obligations, distributions
to holders of FHLMC Certificates would consist solely of payments and other
recoveries on the underlying Mortgage Loans and, accordingly, monthly
distributions to holders of FHLMC Certificates would be affected by delinquent
payments and defaults on such Mortgage Loans.
NON-AGENCY CERTIFICATES
Each Non-Agency Certificate will evidence an undivided interest in a pool
of Mortgage Loans secured by first liens on single-family (one- to four-unit) or
multi-family (five or more units) residential properties. Non-Agency
Certificates will be issued pursuant to a Pooling and Administration Agreement
among the entity forming such Non-Agency Certificates (the "Owner"), an
administrator (the "Administrator") and a trustee acting under such Pooling and
Administration Agreement (the "Certificate Trustee"). The Mortgage Loans backing
the Non-Agency Certificates will be serviced by one or more loan servicing
institutions (the "Servicers") pursuant to servicing agreements between each
Servicer and the Owner (each a "Servicing Agreement"). All of the Owner's
rights, title and interest in the Servicing Agreements with respect to the
Mortgage Loans will be assigned to the Certificate Trustee. Pursuant to the
Pooling and Administration Agreement, the Servicers of the Mortgage Loans
covered thereby will be required to deposit with the Certificate Trustee all
collections received by such Servicers on the Mortgage Loans (net of a servicing
fee to be retained by the Servicers). Monthly distributions of the principal and
interest (adjusted to the pass-through rate borne by such Non-Agency
Certificate) components of such collections will be made to the Indenture
Trustee for the Bonds for deposit into the Collection Account. The Mortgage
Loans underlying any such Non-Agency Certificates may be covered by (i)
individual policies of primary mortgage insurance insuring against all or a
portion of any foreclosure losses on the particular Mortgage Loans covered
thereby, (ii) a pool insurance policy insuring against foreclosure losses on all
of the Mortgage Loans in the underlying pool up to a specified limit of
liability, (iii) a policy of special hazard insurance insuring against losses
from causes not covered by standard fire and extended coverage policies of
insurance and/or (iv) such other policies of insurance or other forms of support
(including, without limitation, obligations to advance delinquent payments and
overcollateralization) as shall be specified in the Prospectus Supplement for
the Bonds of a Series which are secured by Non-Agency Certificates.
Any default by any insurer under a policy of insurance covering a Mortgage
Loan, any loss or losses in excess of policy limits, any failure by a servicer
or other obligor to make advances in respect of delinquent payments or any loss
occasioned by an uninsured cause will adversely affect distributions to the
Indenture Trustee for the related Series of Bonds and, as a consequence, may
result in there being insufficient funds in
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the related Collection Account with which to make required payments of principal
and interest on the Bonds of such Series.
CERTIFICATES COLLATERALIZING THE BONDS
All of the Certificates securing a Series of Bonds will be registered in
the name of the Indenture Trustee or its nominee or in the name of a financial
intermediary or its nominee acting on behalf of the Indenture Trustee and will
be backed by mortgage pools containing single-family (one- to four-unit) or
multi-family (five or more units) Mortgage Loans. Certificates backed by
graduated payment Mortgage Loans ("GPM Certificates"), "buydown" Mortgage Loans
and adjustable rate Mortgage Loans may be included in the Collateral, as
discussed below. If so provided in the Prospectus Supplement for a Series of
Bonds, the Issuer may deposit cash on an interim basis on the closing date for
such Series in lieu of Certificates not delivered by such date.
All of the Mortgage Loans underlying a Certificate will provide for monthly
payments of principal and interest on a level debt service basis (that is, equal
monthly payments consisting, over the terms of such loans, of decreasing amounts
of interest and increasing amounts of principal), except for the Mortgage Loans
backing any GPM Certificates and for the "buydown" Mortgage Loans or adjustable
rate Mortgage Loans backing any Certificates, for which funds will have been
provided (and deposited into escrow accounts) for application to the payment of
a portion of the borrower's monthly payments during the early years of such
Mortgage Loan. Payments due the registered holders of Certificates backed by
pools containing "buydown" Mortgage Loans will be computed in the same manner as
payments derived from non-"buydown" Certificates and will include amounts to be
collected from both the borrower and the related escrow account. The graduated
payment Mortgage Loans underlying a GPM Certificate will provide for graduated
interest payments which, during the early years of such Mortgage Loans, will be
less than the amount of stated interest on such Mortgage Loans. The interest not
so paid will be added to the principal of such graduated payment Mortgage Loans
and, together with interest thereon, will be paid in subsequent years. Interest
on the adjustable rate Mortgage Loans underlying any Certificate will be subject
to adjustment as described in the related Prospectus Supplement. The obligations
of GNMA and the GNMA Servicers and of FNMA and FHLMC will be the same
irrespective of whether any Agency Certificates securing a Series of Bonds
include GPM, "buydown" or adjustable rate Mortgage Loans.
Each Prospectus Supplement relating to a Series of Bonds will include
information, as of the date of such Prospectus Supplement and to the extent then
known to the Issuer, as to (i) the approximate aggregate principal amount of any
Agency Certificates securing such Series, including a breakdown as between GNMA,
FNMA, FHLMC and GPM Certificates, (ii) the approximate aggregate principal
amount, by type of loan, of the Mortgage Loans evidenced by any Non-Agency
Certificates securing such Series, (iii) the approximate weighted average
remaining term to maturity of such Certificates and (iv) the principal amount
and the approximate weighted average remaining term to maturity of any Agency or
Non-Agency Certificates securing such Series of Bonds that have similar
pass-through rates.
DEPOSITS, SUBSTITUTION AND WITHDRAWAL OF CERTIFICATES
Subject to the limitations set forth in the Standard Indenture Provisions
and to the extent permitted under the Terms Indenture and Prospectus Supplement
for a Series of Bonds, the Issuer may deposit or withdraw Certificates or
substitute new Certificates for Certificates previously pledged as Collateral
for such Series. Following any such deposit, substitution or withdrawal of
Certificates, the Collateral securing such Series will have an aggregate Bond
Value that is at least equal to the aggregate principal amount of the Bonds of
such Series outstanding at the time of substitution.
RESERVE FUNDS
Cash, letters of credit, surety bonds, Eligible Investments or a
combination thereof in the aggregate amount, if any, specified in the related
Prospectus Supplement will be deposited by the Issuer in one or more Reserve
Funds established by the Indenture Trustee on the closing date for such Series
of Bonds if such cash, letters of credit, surety bonds or Eligible Investments
are required to assure timely payment of principal of,
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and interest on, such Series of Bonds or are otherwise required as a condition
to the rating of such Bonds in the category required by the Indenture for such
Series by the nationally recognized statistical rating agency or agencies rating
the Bonds, or if the Issuer determines to so minimize the likelihood of a
special redemption of such Bonds. After the closing date of a Series, one or
more related Reserve Funds may be funded over time through application of all or
a portion of the Spread for such Series, to the extent described in the related
Prospectus Supplement. The Indenture Trustee will invest any cash in any Reserve
Fund in Eligible Investments maturing no later than the dates specified in the
related Prospectus Supplement or Indenture. Eligible Investments include, among
other investments, obligations of the United States and certain agencies
thereof, federal funds, certificates of deposit, commercial paper carrying the
highest rating of the agency or agencies rating the Bonds, time deposits and
bankers acceptances sold by eligible commercial banks, certain repurchase
agreements of United States government securities and guaranteed investment
contracts acceptable to each rating agency rating such Series of Bonds. If a
letter of credit is deposited with the Indenture Trustee, such letter of credit
will be irrevocable, will name the Indenture Trustee, in its capacity as trustee
for the Bondholders, as the sole beneficiary and will be issued by a bank
acceptable to the rating agency or agencies rating such Series of Bonds.
Following each Payment Date for such Series of Bonds, amounts may be withdrawn
from the related Reserve Fund and remitted to the Issuer free from the lien of
the Indenture under the conditions and to the extent specified in the related
Prospectus Supplement. Unless otherwise provided in the related Prospectus
Supplement, any such payment to the Issuer will be made pursuant to a statement
prepared by the Indenture Trustee. Additional information concerning any Reserve
Fund securing a Series of Bonds will be set forth in the related Terms
Indenture.
COLLECTION ACCOUNT
A separate Collection Account will be established by the Indenture Trustee
for each Series of Bonds for receipt of (i) all monthly interest and principal
distributions on the Certificates securing such Series, (ii) the amount of cash,
if any, to be initially deposited therein by the Issuer, (iii) the amount of
cash, if any, withdrawn from any related Reserve Fund, and (iv) the reinvestment
income thereon. The Indenture Trustee will invest the funds in the Collection
Account in Eligible Investments maturing no later than the day preceding the
next Payment Date for the related Series of Bonds. (Standard Indenture
Provision, Sections 8.02) Unless a Default or Event of Default with respect to a
Series of Bonds has occurred and is continuing and unless specified otherwise in
the Prospectus Supplement for a Series of Bonds, amounts remaining in the
related Collection Account following a Payment Date for such Bonds will be
either deposited in a related Reserve Fund if the Prospectus Supplement for such
Series of Bonds so provides, or if not so required, will be promptly paid to the
Issuer and, upon such payment, will be free from the lien of the Indenture.
Unless otherwise provided in the related Prospectus Supplement, any such payment
to the Issuer will be made pursuant to a statement approved by the Indenture
Trustee.
MINIMUM PRINCIPAL PAYMENT AGREEMENT
If provided in the Prospectus Supplement with respect to a Series of Bonds,
the Issuer will enter into an agreement with an institution pursuant to which
such institution will provide such funds as may be necessary to enable the
Issuer to make principal payments on the Bonds of such Series at a minimum rate
set forth in the Prospectus Supplement relating to such Series.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain of the anticipated federal
income tax consequences of the purchase, ownership, and disposition of the
Bonds. The authorities on which this discussion is based are subject to change
or differing interpretations, and any such change or interpretation could apply
retroactively. The discussion reflects the enactment of the Tax Reform Act of
1986 (the "1986 Act"), including, where applicable, the intended meaning
ascribed to the provisions of the 1986 Act by the Conference Committee Report
(the "Committee Report") accompanying the 1986 Act, the Technical and
Miscellaneous Revenue Act of 1988 ("TAMRA") and the Revenue Reconciliation Act
of 1993. The discussion also reflects certain final Treasury regulations
concerning REMICs (the "Final REMIC Regulations"). The discussion below
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does not purport to address federal tax consequences applicable to all
categories of investors, some of which may be subject to special rules.
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 Bonds, particularly with respect to federal income tax changes
effected by the 1986 Act, TAMRA and the Final REMIC Regulations. The Prospectus
Supplement for each Series of Bonds will discuss any special tax consideration
applicable to any Class or Classes of Bonds of such Series, and the discussion
below is qualified by any such discussion in the related Prospectus Supplement.
For purposes of this discussion, (i) the term "Regular Bonds" includes
Non-REMIC Bonds and REMIC Regular Bonds and (ii) the term "REMIC Bonds" includes
REMIC Regular Bonds and Residual Bonds.
REMIC BONDS
General
With respect to each Series of Bonds, the Issuer may elect to treat one or
more segregated pools of assets securing such Series of Bonds (each, a "REMIC
Pool") as a REMIC within the meaning of Code Section 860D. The tax consequences
of purchase, ownership and disposition of the Bonds will depend in large part on
whether such an election has been made. Qualification as a REMIC requires
ongoing compliance with certain conditions. With respect to each Series of Bonds
for which the Issuer intends to make a REMIC election, Andrews & Kurth L.L.P.,
counsel to the Issuer, will deliver its opinion generally to the effect that,
assuming (i) the proper making of such an election, (ii) compliance with the
Indenture and certain other documents, and (iii) continuing compliance with the
applicable provisions of the Internal Revenue Code of 1986 (the "Code"), as it
may be amended from time to time, and any applicable Treasury regulations
adopted thereunder, each REMIC Pool will qualify to be a REMIC in which the
REMIC Regular Bonds and the Residual Bonds (if any) comprise the "regular
interests" and "residual interests," respectively. Except as indicated below,
for federal income tax purposes, REMIC Regular Bonds are treated as newly
originated debt instruments issued by the REMIC on the day of their creation and
not as ownership interests in the REMIC or the REMIC's assets. Residual Bonds
are not treated as debt instruments for federal income tax purposes. See
"Special Tax Considerations Applicable to Residual Bonds" below. The Prospectus
Supplement for each such Series of Bonds will indicate whether the Issuer
intends to make a REMIC election for that Series.
In general (i) REMIC Bonds held by a thrift institution taxed as a "mutual
savings bank" or "domestic building and loan association" will be treated as
"qualifying real property loans" within the meaning of Code Section 593(d); (ii)
REMIC Bonds held by a thrift institution taxed as a "domestic building and loan
association" will be treated as assets described in Code Section 7701(a)(19)(C);
(iii) REMIC Bonds held by a real estate investment trust will be treated as
"real estate assets" within the meaning of Code Section 856(c)(5)(A) and (iv)
any amount includible in gross income with respect to REMIC Bonds will be
interest described in Code Section 856(c)(3)(B) to the extent that the REMIC
Bonds are treated as "real estate assets" within the meaning of the Code Section
856(c)(5)(A) in each case, in the same proportion that the assets of the REMIC
Pool would be so treated. However, if at all times 95% or more of the assets
held by the REMIC Pool are assets qualifying under any of the foregoing Code
sections, the REMIC Bonds will be treated entirely as qualifying assets (and the
income will be treated entirely as qualifying income). The Agency Certificates
will be considered qualifying assets under the foregoing Code sections. The
Final REMIC Regulations provide that, for purposes of Code Sections 593(d)(1)
and 856(c)(5)(A), payments of principal and interest on the Certificates that
are reinvested pending distribution to holders of REMIC Bonds constitute
qualifying assets for such entities. Where two REMIC Pools are part of a tiered
structure they will be treated as one REMIC for purposes of the tests described
above respecting asset ownership of more or less than 95%. Reserve assets will
not be considered to be qualifying assets. REMIC Bondholders should be aware
that (i) REMIC Bonds held by a real estate investment trust will not constitute
"Government securities" within the meaning of Code Section 856(c)(5)(A), and
(ii) REMIC Bonds held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(4)(A)(i).
However, REMIC Bonds acquired by another REMIC on its Startup Day (as defined
below) in exchange for regular or residual interests in the REMIC will
constitute "qualified mortgages" within the meaning of Code Section 860G(a)(3).
Notwithstanding the foregoing, however, REMIC income received by a REIT owning a
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residual interest in a REMIC Pool could be treated in part as non-qualifying
REIT income if the REMIC Pool holds Mortgage Loans with respect to which income
is contingent on mortgagor profits or property appreciation. In addition, if the
assets of the REMIC include buy-down Mortgage Loans, it is possible that the
percentage of such assets constituting "qualifying real property loans" or
"loans . . . secured by an interest in real property" for purposes of Code
Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may be required to be
reduced by the amount of the related buy-down funds. REMIC Bonds held by certain
financial institutions will constitute an "evidence of indebtedness" within the
meaning of Code Section 582(c)(1).
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be ongoing
compliance on the part of the REMIC Pool with the requirements set forth in the
Code. The REMIC Pool must fulfill an asset test, which requires that no more
than a de minimis amount of the assets of the REMIC Pool, as of the close of the
third calendar month beginning after the "Startup Day" (which for purposes of
this discussion is the date of issuance of the REMIC Bonds) and at all times
thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The Final REMIC Regulations provide a "safe harbor"
pursuant to which the de minimis requirement will be met if at all times the
aggregate adjusted basis of any nonqualified assets (i.e., assets other than
qualified mortgages and permitted investments) is less than 1% of the aggregate
adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, the REMIC
Pool will not be treated as a REMIC for such year and thereafter. In this event,
the classification of the REMIC Pool for federal income tax purposes is
uncertain. The REMIC Regular Bonds may continue to be treated as debt
instruments for federal income tax purposes, but the REMIC Pool could be treated
as a taxable mortgage pool (a "TMP"). If the REMIC Pool is treated as a TMP, any
residual income of the REMIC Pool (i.e., income from the mortgage loans less
interest and original issue discount expense allocable to the REMIC Regular
Bonds and any administrative expenses of the REMIC Pool) would be subject to
corporate income tax at the REMIC Pool level. On the other hand, the arrangement
may be treated as a separate association taxable as a corporation under Treasury
regulations and the REMIC Regular Bonds may be treated as stock interests
therein, rather than debt instruments. The Code, however, authorizes the
Treasury Department to issue regulations that address situations where failure
to meet one or more of the requirements for REMIC status occurs inadvertently
and in good faith, and disqualification of the REMIC would occur absent
regulatory relief. However, the Committee Report indicates that the relief may
be accompanied by sanctions, such as the imposition of a corporate tax on all or
a portion of the REMIC Pool's income for the period of time in which the
requirements for REMIC status are not satisfied.
NON-REMIC BONDS
With respect to each Series of Bonds for which the Issuer does not make a
REMIC election, no regulations, published rulings, or judicial decisions exist
that discuss the characterization for federal income tax purposes of securities
with terms substantially the same as the Non-REMIC Bonds. Andrews & Kurth
L.L.P., as counsel to the Issuer, however, will deliver their opinion that the
Non-REMIC Bonds will be treated for federal income tax purposes as indebtedness,
and not as an ownership interest in the Collateral, or as an equity interest in
the Issuer or in a separate association taxable as a corporation.
For federal income tax purposes, (i) Non-REMIC Bonds held by a thrift
institution taxed as a "mutual savings bank" or "domestic building and loan
association" will not represent interests in "qualifying real property loans"
within the meaning of Code Section 593(d)(1); (ii) Non-REMIC Bonds held by a
thrift institution taxed as a domestic building and loan association will not
constitute "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v); (iii) interest on Non-REMIC Bonds
held by a real estate investment trust will not be treated as "interest on
obligations secured by mortgages on real property or on interests in real
property" within the meaning of Code Section 856(c)(3)(B); (iv) Non-REMIC Bonds
held by a real estate investment trust will not constitute "real estate assets"
or "Government securities" within the meaning of Code Section 856(c)(5)(A); and
(v) Non-
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REMIC Bonds held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(4)(A)(i).
TAXATION OF REGULAR BONDS
General
The discussion under this caption, "Taxation of Regular Bonds," applies
only to Regular Bonds and not to Residual Bonds. In general, interest paid or
accrued, original issue discount, and market discount on a Bond will be treated
as ordinary income to the Bondholder, and principal payments on a Bond will be
treated as a return of capital to the extent of the Bondholder's basis in the
Bond allocable thereto. A Bondholder must use the accrual method of accounting
with regard to REMIC Bonds, regardless of the method of accounting otherwise
used by such Bondholder.
Original Issue Discount
All Compound Interest Bonds will, and certain of the other Bonds may, be
issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class of Bonds issued with original issue discount
generally must include original issue discount in gross income for federal
income tax purposes as it accrues, in accordance with a constant interest method
based on a compounding of interest, in advance of receipt of the cash or a
portion of the cash attributable to such income. Based in part on Treasury
regulations issued January 27, 1994 under Code Sections 1271 through 1273 and
1275 (the "OID Regulations"), and in part on the provisions of the 1986 Act, the
Issuer anticipates that the amount of original issue discount required to be
included in a Bondholder's income in any taxable year will be computed in a
manner substantially as described below. In general the OID Regulations apply to
debt instruments issued on or after April 4, 1994, except that taxpayers may
rely on the OID Regulations for debt instruments issued after December 21, 1992.
Bondholders should be aware, however, that the OID Regulations either do not
address, or are subject to varying interpretations with regard to, several
issues relevant to obligations, such as the Bonds, that are subject to
prepayment. The 1986 Act requires the amount and rate of accrual of original
issue discount to be calculated based on a reasonable assumed prepayment rate
for the mortgages backing the Certificates securing the Bonds (the "Prepayment
Assumption") and provides for adjusting the amount and rate of accrual of such
discount where the actual prepayment rate differs from the Prepayment
Assumption. The Committee Report indicates that the regulations will require
that the Prepayment Assumption be the prepayment assumption that is used in
determining the initial offering price of such Bonds. The Prospectus Supplement
for each Series of such Bonds will specify the Prepayment Assumption determined
by the Issuer for the purposes of determining the amount and rate of accrual of
original issue discount. No representation is made that the Certificates will
prepay at the Prepayment Assumption or at any other rate. Moreover, the OID
Regulations include an anti-abuse rule allowing the Internal Revenue Service to
apply or depart from the OID Regulations where necessary or appropriate to
ensure a reasonable tax result in light of the applicable statutory provisions.
A tax result will not be considered unreasonable under the anti-abuse rule in
the absence of a substantial effect on the present value of a taxpayer's tax
liability. Investors are advised to consult their own tax advisors as to the
discussion herein and the appropriate method for reporting interest and original
issue discount with respect to the Regular Bonds.
Under the OID Regulations, each Bond (except to the extent described below
with respect to a Regular Bond on which distributions of principal are made in a
single installment or upon an earlier distribution by lot of a specified
principal amount upon the request of a Bondholder or by random lot (a "Retail
Class Bond")) will be treated as a single installment obligation issued with an
amount of original issue discount equal to the excess of its stated redemption
price at maturity over its issue price. The issue price of a Bond is the price
at which a substantial amount of Bonds of that Class are first sold (other than
to bond houses, brokers, underwriters or wholesalers). Unless specified
otherwise in the Prospectus Supplement, the Issuer will determine original issue
discount by including the amount paid by an initial Bondholder for accrued
interest that relates to a period prior to the issue date of the Bond in the
issue price of a Bond and will include in the stated redemption price at
maturity any interest paid on the first Payment Date to the extent such interest
is attributable to a period in excess of the number of days between the issue
date and such first Payment Date.
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The stated redemption price at maturity of a Bond always includes the original
principal amount of the Bond, but generally will not include payments of stated
interest if such interest payments constitute "qualified stated interest." Under
the OID Regulations, qualified stated interest generally means stated interest
that is unconditionally payable in cash or in property (other than debt
instruments of the issuer), or that will be constructively received, at least
annually at a single fixed rate. Special rules apply for variable rate Bonds as
described below. Any stated interest in excess of the qualified stated interest
is included in the stated redemption price at maturity. If the amount of
original issue discount is "de minimis" as described below, the amount of
original issue discount is treated as zero, and all stated interest is treated
as qualified stated interest. Payments of interest on Bonds with respect to
which deferred interest will accrue may not constitute qualified stated
interest, in which case the stated redemption price at maturity of such Bonds
includes all payments of interest as well as principal thereon. Moreover, if the
interval between the issue date and the first Payment Date on a Bond is longer
than the interval between subsequent Payment Dates (and interest paid on the
first Payment Date is less than would have been earned if the stated interest
rate were applied to outstanding principal during each day in such interval),
the stated interest distributions on such Bond technically do not constitute
qualified stated interest. The OID Regulations provide that in such case a
special rule, applying solely for the purpose of determining whether original
issue discount is de minimis, provides that the interest shortfall for the long
first period (i.e., the interest that would have been earned if interest had
been paid on the first Payment Date for each day the Bond was outstanding) is
treated as original issue discount assuming the stated interest would otherwise
be qualified stated interest. Also in such case the stated redemption price at
maturity is treated as equal to the issue price plus the greater of the amount
of foregone interest or the excess, if any, of the Bond's stated principal
amount over its issue price. The OID Regulations indicate that all interest on a
long first period Bond that is issued with non-de minimis original issue
discount will be included in the Bond's stated redemption price at maturity.
Bondholders should consult their own tax advisors to determine the issue price
and the stated redemption price at maturity of a Bond.
Under a "de minimis" rule, original issue discount will be considered to be
zero, however, if it equals less than 0.25% of the stated redemption price at
maturity of the Bond multiplied by its weighted average maturity, computed, for
this purpose, as the sum of the amounts determined by multiplying (i) the number
of full years (rounding down for partial years) from the issue date until each
payment (included in the stated redemption price at maturity) is scheduled to be
made by (ii) a fraction, the numerator of which is the amount of each payment
included in the stated redemption price at maturity of the Bond and the
denominator of which is the Bond's stated redemption price at maturity. Although
presently unclear, it appears that the schedule of such payments should be
determined in accordance with the Prepayment Assumption. In addition, if the
original issue discount is de minimis, all stated interest (including stated
interest that would otherwise be treated as original issue discount) is treated
as qualified stated interest. Unless the holder of a Bond elects to accrue all
discount under a constant yield to maturity method, as described below, the
holder of a debt instrument includes any de minimis original issue discount in
income as capital gain recognized on retirement of the Bond pro rata as stated
principal payments are received. If a subsequent holder of a Bond issued with de
minimis original issue discount purchases the Bond at a premium, the subsequent
holder does not include any original issue discount in income. If a subsequent
holder purchases such Bond at a discount, all discount is reported as market
discount, as described below.
Generally, a Bondholder must include in gross income the sum of the "daily
portions", as defined below, of the original issue discount that accrues on the
Bond for each day the Bondholder holds the Bond, including the purchase date but
excluding the disposition date. In the case of an original Bondholder, the daily
portions of original issue discount will be determined for each Bond by
calculating the portion of original issue discount that accrues during each
successive "accrual period" (or shorter period from the date of original issue).
The Issuer will treat an "accrual period" as the interval that ends on the day
before a Payment Date and begins on the day after the end of the immediately
preceding accrual period (or on the issue date in the case of the first accrual
period). The original issue discount accruing in a full accrual period would be
the excess, if any, of (i) the sum of (a) the present value of all of the
remaining payments to be made on the Bond as of the end of that accrual period
and (b) the payments made on the Bond during the accrual period that are
included in the Bond's stated redemption price at maturity, over (ii) the
adjusted issue price of the Bond at the beginning of the accrual period. The
present value of the remaining payments referred to in the preceding sentence is
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calculated based on (i) the yield to maturity of the Bonds as of the issue date
giving effect to the Prepayment Assumption, (ii) events (including actual
prepayments) that have occurred prior to the end of the accrual period and (iii)
the Prepayment Assumption. The effect of these rules is to adjust the rate of
original issue discount accrual to correspond to the actual prepayment
experience. For these purposes, the adjusted issue price of a Bond at the
beginning of any accrual period equals the issue price of the Bond, increased by
the aggregate amount of original issue discount with respect to the Bond that
accrued in all prior such periods and reduced by the amount of payments included
in the Bond's stated redemption price at maturity made on the Bond in such prior
periods. The original issue discount accruing during an accrual period will be
divided by the number of days in the period to determine the daily portion of
original issue discount for each day in the period. With respect to an initial
accrual period shorter than a full accrual period, the daily portions of
original issue discount must be determined using a reasonable method. Under the
method described above, the daily portions of original issue discount required
to be included in income by a holder of Regular Bonds generally will increase to
take into account prepayments on the Regular Bonds as a result of prepayments on
Mortgage Loans or that exceed the Prepayment Assumption, and generally will
decrease (but not below zero for any period) if the prepayments are slower than
the Prepayment Assumption. To the extent specified in the applicable Prospectus
Supplement, an increase in prepayments on the Mortgage Loans with respect to a
series of Regular Bonds can result in both a change in the priority of principal
payments with respect to certain classes of Regular Bonds and either an increase
or decrease in the daily portions of original issue discount with respect to
such Regular Bonds.
In the case of a Retail Class Bond, the yield to maturity of such Bond will
be determined based upon the anticipated payment characteristics of the Class as
a whole under the Prepayment Assumption. In general, the original issue discount
accruing on each Retail Class Bond in a full accrual period would be its
allocable share of the original issue discount with respect to the entire Class,
as determined in accordance with the preceding paragraph. However, in the case
of a payment of the entire principal amount of any Retail Class Bond (or portion
thereof), (a) the remaining unaccrued original issue discount allocable to such
Bond (or to such portion) will accrue at the time of such payment, and (b) the
accrual of original issue discount allocable to each remaining Bond of such
Class (or the remaining principal amount of a Retail Class Bond after a payment
in reduction of a portion of its principal amount has been received) will be
adjusted by reducing the present value of the remaining payments on such Class
and the adjusted issue price of such Class to the extent attributable to the
portion of the principal amount thereof that was paid.
A subsequent holder of a Compound Interest Bond or any other Bond issued
with original issue discount who purchases the Bond at a cost less than the
remaining stated redemption price at maturity will also be required to include
in gross income the sum of the daily portions of original issue discount on the
Bond. In computing the daily portions of original issue discount for a
subsequent purchaser (as well as an initial purchaser who purchases a Bond at a
price higher than the issue price but less than the stated redemption price at
maturity), however, the daily portion is reduced by the amount that would be the
daily portion for such day (computed in accordance with the rules set forth
above) multiplied by a fraction, the numerator of which is the amount, if any,
by which the price paid by such holder for the Bond exceeds the excess of (i)
the sum of its issue price and the aggregate amount of original issue discount
that would have been includible in the gross income of an original Bondholder
who purchased the Bond at its issue price (computed under the preceding
paragraphs and without regard to any adjustment under this paragraph) over (ii)
the amount of prior payments included in the stated redemption price at maturity
of the Bond, and the denominator of which is the sum of the daily portions for
the Bond for all days beginning on the date after the purchase date and ending
on the date on which such Bond is expected to mature under the Prepayment
Assumption. Alternatively, such a subsequent holder may accrue original issue
discount by treating the purchase as a purchase at original issuance and
applying the constant yield to maturity method.
The OID Regulations provide that a holder that acquires a Bond on or after
April 4, 1994 may elect to include in gross income all stated interest, original
issue discount, de minimis original issue discount, market discount (as
described below under "Market Discount"), de minimis market discount and
unstated interest (as adjusted for any amortizable bond premium or acquisition
premium) currently as it accrues using the constant yield to maturity method. If
such an election were made with respect to a Bond with market discount, the
Bondholder would be deemed to have made an election to include in income
currently market discount
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with respect to all other debt instruments having market discount that such
Bondholder acquires during the year of the election or thereafter. Similarly, a
Bondholder that makes this election for a Bond that is acquired at a premium
will be deemed to have made an election to amortize bond premium with respect to
all debt instruments having amortizable bond premium that such Bondholder owns
or acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Bond cannot be revoked without the consent of the
Internal Revenue Service (the "IRS").
One or more classes of Bonds may provide for interest based on a variable
rate. The OID Regulations provide special rules for variable rate instruments
that meet four requirements. First, the issue price must not exceed the
principal payments by more than the lesser of (i) 1.5% of the product of the
noncontingent principal payments and the weighted average maturity or (ii) 15%
of the noncontingent principal payments. Second, the instrument must provide for
stated interest (compounded or paid at least annually) at (i) one or more
qualified floating rates, (ii) a single fixed rate and a single objective rate
that is a qualified inverse floating rate, (iii) a single fixed rate and one or
more qualified floating rates; or (iv) a single objective rate. Third, the
instrument must provide that each qualified floating rate or objective rate in
effect during the term of the Bond is set at a current value of that rate (one
occurring in the interval beginning three months before and ending one year
after the rate is first in effect on the Bond). Fourth, the debt instrument must
not provide for contingent principal payments. If interest on a Bond is stated
at a fixed rate for an initial period of less than 1 year followed by a variable
rate that is either a qualified floating rate or an objective rate and the value
of the variable rate on the issue date is intended to approximate the fixed
rate, the fixed rate and the variable rate together constitute a single
qualified floating rate or objective rate. A 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 in the Bond's currency
denomination. A multiple of a qualified floating rate is not a qualified
floating rate unless it is a rate equal to (i) the product of a qualified
floating rate as described in the previous sentence and a positive number not
greater than 1.35 (but greater than 0.65 for instruments issued on or after
August 13, 1996), or (ii) a product described in (i) increased or decreased by a
fixed rate. A variable rate is not a qualified floating rate if it is subject to
a cap, floor or a restriction on the amount of increase or decrease in stated
interest rate (governor) unless: (i) the cap, floor or governor is fixed
throughout the Bond's term, (ii) the cap or floor is not reasonably expected to
cause the yield on the Bond to be significantly less or more, respectively, that
the expected yield without the cap or floor, or (iii) the governor is not
reasonably expected to cause the yield to be significantly more or less than the
expected yield without the governor. Before August 13, 1996, an objective rate
is a rate that is determined using a single fixed formula and is based on (i)
the yield or changes in price of actively traded personal property, (ii) one or
more qualified floating rates, (iii) a rate that would be a qualified rate if
the Bond were denominated in another currency or (iv) a combination of such
rates. For instruments issued on or after August 13, 1996, 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.
An objective rate is a qualified inverse floating rate if the rate is equal to a
fixed rate minus a qualified floating rate in which the variations of such rate
can reasonably be expected to inversely reflect contemporaneous variations in
the qualified floating rate. However, a variable rate is not an objective rate
if it is reasonably expected that the average value of the rate during the first
half of the Bond's term will be significantly less or greater than the average
value of the rate during the final half of the Bond's term.
If a variable rate Bond provides for stated interest at a single qualified
floating rate or objective rate that is unconditionally payable in cash or
property at least annually (i) all stated interest is qualified stated interest,
(ii) the amount of qualified stated interest and original issue discount, if
any, that accrues is determined as if the Bond had a fixed rate equal to (A) in
the case of a qualified floating rate or qualified inverse floating rate, the
value on the issue date of the qualified floating rate or qualified inverse
floating rate or (B) in the case of any other objective rate, a fixed rate that
reflects the yield that is reasonably expected for the Bond and (iii) the
qualified stated interest that accrues is adjusted for the interest actually
paid. If a variable rate Bond is not described in the previous sentence, the
Bond is treated as a fixed rate Bond with a fixed rate substitute or substitutes
equal to the value of qualified floating rates or qualified inverse floating
rate at the date of issue or, in the case of a Bond having an objective rate at
a fixed rate that reflects the yield reasonably expected for the Bond. Qualified
stated interest or original issue discount allocable to an accrual period is
adjusted to reflect differences in the interest actually accrued or paid
compared to the interest accrued or paid at the fixed rate
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substitute. If a variable rate Bond provides for stated interest either at one
or more qualified floating rates or at a qualified inverse floating rate and
also provides for interest at an initial fixed rate that is not intended to
approximate the related floating rate or is fixed for a period of one year or
more, original issue discount is determined as described in the previous two
sentences except that the Bond is treated as if it provided for a qualified
floating rate or qualified inverse floating rate, as applicable, rather than a
fixed rate. The substitute rate must be one such that the fair market value of
the Bond would be approximately the same as the fair market value of the
hypothetical bond.
Under the OID Regulations a variable rate Bond not qualifying for treatment
under the variable rate rules described above is subject to the contingent
payment rules. Treasury regulations dealing with contingent payment debt
obligations were issued June 11, 1996 (the "Contingent Debt Regulations"), and
are generally effective August 13, 1996. The Contingent Debt Regulations by
their terms do not apply to REMIC regular interests. However, the following
paragraph describes the applicable Contingent Debt Regulations as a method that
may be considered reasonable.
The Contingent Debt Regulations apply a "noncontingent bond method" to a
debt instrument that is publicly traded or that is issued for cash or publicly
traded property. Under the noncontingent bond method, the issuer is required to
determine the comparable yield for the instrument and to construct a projected
payment schedule for the debt instrument consisting of all noncontingent
payments and a projected amount for each contingent payment. The issuer is
required to determine interest expense, and a holder is required to determine
interest income, according to the projected payment schedule formulated by the
issuer. Interest generally is accrued under the noncontingent bond method
according to generally applicable rules of the OID Regulations as described
above. Adjustments in the instrument's issue price and the holder's basis are
determined as if the projected payment schedule were the actual payment schedule
for the instrument. If the actual amount of a contingent payment differs from
the projected amount of the payment, adjustments to interest accrual are
generally taken into account at the time the payment is made in order to reflect
this difference. Gain or loss recognized by a holder on the sale, exchange, or
retirement of the instrument generally will be treated as interest income or
ordinary loss to the holder. A loss will be treated as ordinary, however, only
up to the amount of the holder's total interest inclusions with respect to the
instrument that were not offset by previous adjustments. Any additional loss
generally will be a capital loss. Investors are urged to consult their tax
advisors as to the proper accrual of original issue discount (including stated
interest) on the Regular Bonds, including Regular Bonds which may be subject to
the contingent payment rules.
Although unclear at present, the Issuer intends to treat Bonds bearing an
interest rate that is a weighted average of the net interest rates on the
mortgage loans underlying the Certificates (the "Mortgage Loans") as having
qualified stated interest if the Mortgage Loans are adjustable rate mortgage
loans. In such case, the applicable index used to compute interest on the
Mortgage Loans in effect on the issue date (or possibly the pricing 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. If the Bond
interest rate for one or more periods is less than it would be based upon the
fully indexed rate, the excess of the interest payments projected at the assumed
index over interest projected at such initial rate will be tested under the de
minimis rules as described above. Adjustments will be made in each accrual
period either increasing or decreasing the amount of ordinary income reportable
to reflect the actual Bond interest rate on the Bonds. It is possible, however,
that the IRS may treat some or all of the interest on Bonds with a weighted
average rate as taxable under the rules relating to obligations providing for
contingent payments. Such treatment may affect the timing of income accruals on
such Bonds.
It is not clear how income should be accrued with respect to Regular Bonds
issued at a significant premium and to REMIC Regular Bonds the payments on which
consist primarily of a specified portion of the interest payments on qualified
mortgages held by the REMIC ("Premium REMIC Regular Bonds"). One method of
income accrual would be to treat the Premium REMIC Regular Bond as a Bond having
qualified stated interest purchased at a premium equal to the excess of the
price paid by such holder for the Premium REMIC Regular Bond over its stated
principal amount. Under this approach, a holder would be entitled to amortize
such premium only if it has in effect an election under Section 171 of the Code
with respect to all bonds held by such holder, as described below.
Alternatively, all of the income derived from a Premium
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REMIC Regular Bond could be reported as original issue discount by treating all
future payments under the Prepayment Assumption as fixed payments, in which case
the amount and rate of accrual of original issue discount would be computed by
treating the Premium REMIC Regular Bond as a Bond which has no qualified stated
interest, as described above. Finally, the IRS could assert that the Premium
REMIC Regular Bonds should be taxable under the contingent payment rules
governing bonds issued with contingent payments.
Premium
A Bond purchased at a cost greater than its remaining stated redemption
price at maturity generally is considered to be purchased at a premium. Under
the 1986 Act, if the Bondholder holds such Bond as a "capital asset" within the
meaning of Code Section 1221, the Bondholder may elect to amortize such premium
under the constant interest method. The Committee Report indicates a
Congressional intent that the same rules that will apply to the accrual of
market discount on installment obligations will also apply in amortizing bond
premium on installment obligations such as the Bonds, although it is unclear
whether the alternatives to the constant interest method described under "Market
Discount" are available. Except as provided in Treasury regulations yet to be
issued, such amortizable bond premium is to be applied against (and operate to
reduce) the amount of interest payments on the Bonds. This election, once made,
applies to all taxable obligations held by the taxpayer at the beginning of the
first taxable year to which such election applies and to all taxable debt
obligations thereafter acquired and is binding on such taxpayer in all
subsequent years. Purchasers who pay a premium for their Regular Bonds should
consult their tax advisors regarding the election to amortize premium and the
method to be employed.
Sale or Redemption
If a Bondholder sells or exchanges a Bond, the Bondholder will recognize
gain or loss equal to the difference, if any, between the amount received and
his adjusted basis in the Bond. The adjusted basis of a Bond generally will
equal the cost of the Bond to the seller, increased by any original issue
discount and market discount included in the seller's gross income with respect
to the Bond and reduced by the portion of the basis in the Bond allocable to
payments on the Bond previously received by the seller and by any amortized
premium.
Except as provided in this paragraph, above under "Original Issue Discount"
and under "Market Discount" below, any such gain or loss will be capital gain or
loss provided the Bond is held as a "capital asset" within the meaning of Code
Section 1221. If the holder of a REMIC Bond or Regular Bond is a bank, thrift,
or similar institution described in Section 582 of the Code, any gain or loss on
the sale or exchange of such REMIC Bond or Regular Bond will be treated as
ordinary income or loss. In the case of other types of holders, gain from the
disposition of a Regular Bond that otherwise would be capital gain will be
treated as ordinary income (i) if a Regular Bond is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Bondholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
under Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a non-corporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) in the case of a REMIC
Regular Bond, to the extent that the amount actually includible in income with
respect to the REMIC Regular Bond by the Bondholder during his holding period is
less than the amount that would have been includible in income if the yield on
that Bond during the holding period had been 110% of a specified U.S. Treasury
borrowing rate as of the date that the Bondholder acquired the REMIC Regular
Bond. Although the legislative history to the 1986 Act indicates that the
portion of the gain from disposition of a REMIC Regular Bond that will be
recharacterized as ordinary income is limited to the amount of original issue
discount (if any) on the REMIC Regular Bond that was not previously includible
in income, the applicable Code provision contains no such limitation. In the
case of a Regular Bond subject to the Contingent Debt Regulations as described
above under "Original Issue Discount," any gain on the sale or exchange of such
Bond is treated as interest income.
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Market Discount
A purchaser of a Bond also may be subject to the market discount provisions
of Code Sections 1276 through 1278. Under these provisions and the rules set
forth in the OID Regulations with respect to original issue discount, "market
discount" equals the amount by which the purchaser's basis in the Bond (i) is
exceeded by the stated redemption price at maturity of the Bond, or (ii) in the
case of a Bond having original issue discount, is exceeded by the sum of the
issue price of such Bond plus any original issue discount that would have
previously accrued thereon if held by an original Bondholder who purchased the
Bond at its issue price, in either case less any prior payment that was included
in the stated redemption price at maturity of the Bond. Such purchaser generally
will be required to recognize accrued market discount as ordinary income as
payments includible in the stated redemption price at maturity of such Bond are
received, in an amount not exceeding any such payment. The computation of the
accrual of market discount on debt instruments the principal of which is payable
in more than one installment is to be provided by Treasury regulations and
should take into account the Prepayment Assumption. Until such time that the
regulations are issued, the Committee Report provides holders may elect to
accrue market discount for a Bond either (i) on the basis of a constant interest
rate or, (ii) for those Bonds that have original issue discount, in the
proportion that the original issue discount accrued for the relevant period
bears to the sum of the original issue discount for such period plus the
remaining original issue discount as of the end of such period, and, for those
Bonds that have no original issue discount, in the proportion that the amount of
the stated interest paid in the accrual period bears to the total amount of
stated interest remaining to be paid on the Bond as of the beginning of the
accrual period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Bond as ordinary income to the
extent of the market discount accrued to the date of disposition under one of
the foregoing methods, less any accrued market discount previously reported as
ordinary income as partial payments in reduction of the stated redemption price
at maturity of such Bond were received. Such purchaser also will be required to
defer the interest deductions (to the extent they exceed the sum of the interest
income (including original issue discount) on the Bond for such year)
attributable to any indebtedness incurred or continued to purchase or carry the
Bond. However, the amount of the net interest expense that must be deferred in a
taxable year may not exceed the amount of market discount accrued on the Bond
for the days in such year that such purchaser held such Bond. Any 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 Regular Bond is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the holder may elect to include such market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter, in which case the interest
deferral rule will not apply. In Revenue Procedure 92-67, the IRS set forth
procedures for taxpayers (1) electing under Section 1278(b) of the Code to
include market discount in income currently, (2) electing under rules of Section
1276(b) of the Code to use a constant interest rate to determine accrued market
discount on a bond where the holder of the bond is required to determine the
amount of accrued market discount at a time prior to the holder's disposition of
the bond, and (3) requesting consent to revoke an election under Section 1278(b)
of the Code. Market discount with respect to a Bond will be considered to be
zero if the amount allocable to the Bond is less than 0.25% of the remaining
stated redemption price at maturity of such Bond times the weighted average
maturity of the Bond (determined as described above under "Original Issue
Discount") remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules, as well as the advisability of making any of the elections
discussed above.
Taxation of Certain Foreign Investors
Generally, payments of interest (including any payment with respect to
accrued original issue discount) on the Bonds to a Bondholder who is a
nonresident alien individual, foreign corporation or other non-United States
person ("foreign person") not engaged in a trade or business within the United
States, will not be subject to federal income or withholding tax if (i) such
Bondholder does not actually or constructively own 10 percent or more of the
combined voting power of all classes of equity in the Issuer (which may include
the beneficial owners of the Issuer), (ii) such Bondholder is not a controlled
foreign corporation (within the meaning of Code Section 957) related to the
Issuer, and (iii) such Bondholder complies with applicable
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identification and certification requirements. If such identification and
certification requirements are not satisfied and the interest on the Bonds is
not effectively connected with the conduct of a trade or business within the
United States by such foreign person, a 30 percent withholding tax will apply,
unless reduced or eliminated pursuant to an applicable tax treaty. Payments on
REMIC Regular Bonds may subject a foreign person to U.S. federal income and
withholding tax where such foreign person also owns, actually or constructively,
Residual Bonds which are residual interests in the same REMIC, notwithstanding
compliance with the certification requirements discussed above.
If a tax is withheld by the withholding agent, the Bondholder would be
entitled to a refund of such tax if such Bondholder can prove it is a foreign
person and it is not a 10 percent shareholder of the Issuer or a controlled
foreign corporation related to the Issuer. A Bondholder may be required to file
a U.S. federal income tax return to obtain a refund. Foreign investors should
consult their tax advisors regarding the potential imposition of the 30 percent
withholding tax.
Back-up Withholding and Information Reporting
Payments of interest, original issue discount, or other reportable payments
(including, under certain circumstances, principal payments) made on the Bonds,
and proceeds from the sale, including redemption, of the Bonds to or through
certain brokers, including the Indenture Trustee, may be subject to a "back-up"
withholding tax of 31% of reportable payments unless a Bondholder complies with
certain reporting and/or certification procedures. Any amount so withheld from
payments on the Bonds would be refunded or allowed as a credit against a
Bondholder's federal income tax.
To the extent required by law, reports of accrued interest, in the case of
each Series of Bonds for which a REMIC election is made, and interest paid for
each other Series of Bonds and original issue discount will be made annually to
the Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Bonds or beneficial owners who own Bonds through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Bonds (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 Internal Revenue Service Publication 938 with respect
to a particular Series of Bonds. Holders through nominees must request such
information from the nominee. Treasury regulations provide that information
necessary to compute the accrual of any market discount on the Bonds must be
furnished for calendar years beginning after 1989.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL BONDS
Allocation of the Income of the REMIC
Generally, the REMIC will not be subject to federal income tax except with
respect to income from prohibited transactions and with respect to certain
contributions to the REMIC after the Startup Day (see "Taxes on Prohibited
Transactions, Foreclosure Income and Certain Contributions" below). Instead,
each original Residual Bondholder will report on its federal income tax return,
as ordinary income, its share of the REMIC's taxable income for each day during
the taxable year on which such Residual Bondholder owns any Residual Bonds. The
REMIC's taxable income for each day will be determined by allocating the REMIC's
taxable income for each calendar quarter ratably to each day in the quarter.
Such a Residual Bondholder's share of the REMIC's taxable income for each day
will be based on the portion of the outstanding Residual Bonds that such
Residual Bondholder owns on that day. The REMIC's taxable income will be
determined under an accrual method and will be taxable to the Residual
Bondholders without regard to the timing or amounts of cash distributions by the
REMIC. As residual interests, the Residual Bonds will be subject to tax rules,
described below, that differ from those that would apply if the Residual Bonds
were treated for federal income tax purposes as direct ownership interests in
the Certificates, or as debt instruments issued by the REMIC. Under certain
REMIC structures, a Residual Bondholder may be required to include taxable
income from the Residual Bond in excess of the cash distributed with respect to
one or more taxable years. For
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example, a structure where principal distributions are made serially on regular
interests (that is, a fast-pay, slow-pay structure) may generate such a
mismatching of income and cash distributions (that is, "phantom income"). This
mismatching may be caused by the use of certain tax accounting methods by the
REMIC, variations in the prepayment rate of the Mortgage Loans underlying the
Certificates and certain other factors. Consequently, Residual Bondholders must
have sufficient other sources of cash to pay any federal, state or local income
taxes due as a result of such mismatching or unrelated deductions against which
to offset such income. Additionally, as noted in the subsequent paragraph, a
purchaser of a Residual Bond may not be entitled to an adjustment in the amount
of income allocable to the Residual Bond for the difference between the adjusted
basis that the Residual Bond would have had in the hands of an original Residual
Bondholder and the purchase price unless Treasury regulations are issued that
permit such an adjustment. Depending upon the structure of a particular
transaction, the aforementioned factors may significantly reduce the after-tax
yield of a Residual Bond to a Residual Bondholder. Investors should consult
their own tax advisors concerning the federal income tax treatment of a Residual
Bond and the impact of such tax treatment on the after-tax yield of a Residual
Bond.
A subsequent Residual Bondholder also will report on its federal income tax
return amounts representing a daily share of the REMIC's taxable income for each
day that such Residual Bondholder owns such Residual Bond. Those daily amounts
generally would equal the amounts that would have been reported for the same
days by an original Residual Bondholder, as described above. The initial
adjusted basis of a subsequent Residual Bondholder or a Residual Bondholder who
purchases a Residual Bond at other than the issue price (defined below under
"Excess Inclusions") may be greater than such Residual Bondholder's allocable
share of the REMIC's basis in its assets, calculated as described below under
"Taxable Income of the REMIC Attributable to Residual Bonds." Consequently such
Residual Bondholder's basis may not be fully recovered by amortization of
premium or reduction of market discount income with respect to the Mortgage
Loans underlying the Certificates, and such Residual Bondholder may, therefore,
have unrecovered basis on the termination of the REMIC. Such loss may be
ordinary loss or capital loss. See "Sales of Residual Bonds," below. The
legislative history of the 1986 Act indicates that certain adjustments may be
appropriate to reduce (or increase) the income of a subsequent holder of a
Residual Bond that purchased such Residual Bond at a price greater than (or less
than) the adjusted basis (as defined below in "Sales of Residual Bonds") such
Residual Bond would have in the hands of an original Residual Bondholder. It is
not clear, however, whether such adjustments will in fact be permitted or
required and, if so, how they would be made. The Final REMIC Regulations do not
provide for an adjustment.
Taxable Income of the REMIC Attributable to Residual Bonds
REMIC taxable income generally means the REMIC's gross income, including
interest, original issue discount income, and market discount income, if any, on
the Mortgage Loans, plus income on reinvestment of cash flows and reserve
assets, minus deductions, including interest and original issue discount expense
on the REMIC Regular Bonds, servicing fees and other administrative expenses of
the REMIC and amortization or deduction of any premium with respect to the
Mortgage Loans. Special rules apply in certain cases for non-interest expenses
as described below in "Non-Interest Expenses of the REMIC."
For purposes of determining its taxable income, the REMIC will have an
initial aggregate tax basis in its assets equal to the sum of the issue prices
of the REMIC Regular Bonds and the Residual Bonds. Such aggregate basis will be
allocated among the portion of the Mortgage Loans underlying the Certificates
deemed to be owned by the REMIC and other assets of the REMIC in proportion to
their respective fair market values. The issue price of the Residual Bonds and
the REMIC Regular Bonds, in each case, will be the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of such
Residual Bonds or REMIC Regular Bonds are sold. A Mortgage Loan will be deemed
to have been acquired with discount or premium to the extent that the REMIC's
basis therein is less than or greater than its principal balance, respectively.
Any such discount (whether market discount or original issue discount) will be
includible in the income of the REMIC as it accrues, in advance of the receipt
of cash attributable to such income, under a method similar to the method
described above for accruing original issue discount on the Regular Bonds. The
REMIC expects to elect under Code Section 171 to amortize any premium on the
Mortgage Loans. Premium on any Mortgage Loan to which such election applies
would be amortized under a
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constant yield method. It is not clear whether the yield of a Mortgage Loan
would be calculated for this purpose based on scheduled payments or taking
account of the Prepayment Assumption. Such an election would not apply to any
Mortgage Loan originated on or before September 27, 1985. Instead, premium on
such a Mortgage Loan may be allocated among the principal payments thereon and
should be deductible by the REMIC as those payments become due.
The REMIC will be allowed a deduction for accrued interest including
original issue discount on the REMIC Regular Bonds, regardless of whether the
original issue discount on the REMIC Regular Bonds is considered to be de
minimis. The amount and method of accrual of original issue discount will be
calculated for this purpose in the same manner as described above (see "Certain
Federal Income Tax Consequences -- Taxation of Regular Bonds -- Original Issue
Discount") for inclusion of original issue discount on the REMIC Regular Bonds
(except that the adjustments for a subsequent holder of the REMIC Regular Bonds
will not apply).
A Residual Bondholder will not be permitted to amortize the cost of its
Residual Bonds as an offset to its share of the REMIC's taxable income. However,
that taxable income will not include cash received by the REMIC that represents
a recovery of the REMIC's basis in its assets, and, as described above, the
issue price of the Residual Bonds will be added to the issue price of the REMIC
Regular Bonds in determining the REMIC's initial basis in its assets. Such
recovery of basis by the REMIC will have the effect of amortization of the issue
price of the Residual Bonds over their life. Possible adjustments to income of a
subsequent holder of a Residual Bond to reflect any difference between the
actual cost of such Residual Bond to such holder and the adjusted basis such
Residual Bond would have in the hands of an original Residual Bondholder are
further discussed in "Allocation of the Income of the REMIC" above.
Net Losses of the REMIC
The REMIC will have a net loss for any calendar quarter in which its
deductions exceed its gross income. Such net loss would be allocated among the
Residual Bondholders in the same manner as taxable income of the REMIC. The net
loss allocable to any Residual Bond will not be deductible by the holder to the
extent that such net loss exceeds such holder's adjusted basis in such Residual
Bond. Any net loss that is not currently deductible by reason of this limitation
may be used by such Residual Bondholder to offset its share of the REMIC's
taxable income in future periods (but not otherwise). The ability of Residual
Bondholders that are individuals or closely held corporations to deduct net
losses may be subject to additional limitations under the Code.
Non-Interest Expenses of the REMIC
All or a portion of the REMIC's servicing, administrative and other
non-interest expenses will be allocated as a separate item to Residual
Bondholders that are "pass-through interest holders". Such a holder would be
required to add its allocable share, if any, of such expenses to its gross
income and to treat the same amount as an item of investment expense. An
individual, a trust or an estate would generally be allowed a deduction for such
an expense item only as a miscellaneous itemized deduction subject to the
limitations under Code section 67. That section allows such deductions only to
the extent that in the aggregate all such expenses exceed two percent of an
individual's adjusted gross income. In addition, in the case of Residual
Bondholders who are individuals, certain otherwise allowable itemized deductions
will be reduced, but not by more than 80%, by an amount equal to 3% of the
Residual Bondholder's adjusted gross income in excess of a statutorily defined
threshold ($111,800 for 1994 and adjusted yearly for inflation ($55,900 for 1994
and adjusted yearly for inflation, in the case of a married individual filing a
separate return)). The REMIC is required to report to each pass-through interest
holder and to the IRS such holder's allocable share, if any, of the REMIC's
non-interest expenses. The term "pass-through interest holder" generally refers
to individuals, entities taxed as individuals and certain pass-through entities,
but does not include real estate investment trusts. Residual Bondholders that
are "pass-through interest holders" should consult their own tax advisors about
the impact of these rules on an investment in the Residual Bonds. Finally,
non-interest expenses of a REMIC are not deductible by noncorporate taxpayers
for alternative minimum tax purposes.
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Excess Inclusions
A portion of the income allocable to a Residual Bond (referred to in the
Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss carryovers
of a Residual Bondholder, (ii) will, as described under "Tax-Exempt Investors"
below, be treated as "unrelated business taxable income" within the meaning of
Code Section 512 if the Residual Bondholder is a pension fund or any other
organization that is subject to tax only on its unrelated business taxable
income and (iii) is not eligible for any reduction in the rate of withholding
tax in the case of a Residual Bondholder that is a foreign investor, as further
discussed in "Foreign Investors" below. Except as discussed below with respect
to excess inclusions from Residual Bonds without "significant value," this
general rule does not apply to thrift institutions to which Code Section 593
applies. For this purpose a thrift institution and its qualified subsidiary are
considered a single corporation. A qualified subsidiary is one all of the stock
of which, and substantially all of the debt of which, is held by the thrift
institution and which is organized and operated exclusively in connection with
the organization and operation of one or more REMIC's. Except in the case of a
thrift institution (including qualified subsidiaries) members of an affiliated
group are treated as one corporation for purposes of applying the limitations on
offset of excess inclusion income.
Except as discussed in the following paragraph with respect to excess
inclusions from Residual Bonds without "significant value," for any Residual
Bondholder, the excess inclusion for any calendar quarter is the excess, if any,
of (i) the income of such Residual Bondholder for that calendar quarter from its
Residual Bond, over (ii) the sum of the "daily accruals" (as defined below) for
all days during the calendar quarter on which the Residual Bondholder holds such
Residual Bond. For this purpose, the daily accruals with respect to a Residual
Bond are determined by allocating to each day in the calendar quarter its
ratable portion of the product of the "adjusted issue price" (as defined below)
of the Residual Bond at the beginning of the calendar quarter and 120 percent of
the "Federal long-term rate" in effect at the time the Residual Bond is issued.
For this purpose, the "adjusted issue price" of a Residual Bond at the beginning
of any calendar quarter equals the issue price of the Residual Bond (adjusted
for contributions), increased by the amount of daily accruals for all prior
quarters, and decreased (but not below zero) by the aggregate amount of payments
made on the Residual Bond before the beginning of such quarter. The Federal
long-term rate is an average of current yields on Treasury securities with a
remaining term of greater than nine years, computed and published monthly by the
IRS.
The Code provides that to the extent provided in regulations, as an
exception to the general rule described above, the entire amount of income
accruing on a Residual Bond will be treated as an excess inclusion if the
Residual Bonds in the aggregate are considered not to have "significant value".
The Treasury Department has not yet provided regulations in this respect and the
Final REMIC Regulations have not adopted this rule. However, the exception from
the excess inclusion rules applicable to thrift institutions does not apply if
the Residual Bonds do not have significant value. Under the Final REMIC
Regulations, the Residual Bonds will have significant value if: (i) the
aggregate of the issue prices of the Residual Bonds is at least two percent of
the aggregate of the issue prices of all Regular REMIC Bonds and Residual Bonds
in the REMIC and (ii) the anticipated weighted average life of the Residual
Bonds is at least 20 percent of the REMIC's anticipated weighted average life
based on the prepayment and reinvestment assumptions used in pricing the
transaction and any required or permitted clean up calls and any required
qualified liquidation. Although not entirely clear, the Final REMIC Regulations
indicate that the significant value determination is made only on the Startup
Day. The anticipated weighted average life of a Residual Bond with a principal
balance and a market rate of interest is computed by multiplying the amount of
each expected principal payment by the number of years (or fractions thereof)
from the Startup Day, adding these sums and dividing by the total principal
expected to be paid on such Residual Bond based on the relevant prepayment
assumption and expected reinvestment income. The anticipated weighted average
life of a Residual Bond with either no specified principal balance or a
principal balance and rights to interest payments disproportionate to such
principal balance, would be computed under the formula described above but would
include all payments expected on
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the Residual Bond instead of only the principal payments. The anticipated
weighted average life of a REMIC is a weighted average of the anticipated
weighted average lives of all classes of interests in the REMIC.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a real estate investment trust (a "REIT") which owns a Residual Bond are
to be designated as excess inclusions in an amount corresponding to the Residual
Bond's allocable share of the excess inclusions. Similar rules apply in the case
of regulated investment companies, common trust funds and cooperatives. Thus,
investors in such entities which own a Residual Bond will be subject to the
limitations on excess inclusions described above. The Final REMIC Regulations do
not provide guidance on this issue.
There is imposed a tax at the highest corporate rate with respect to the
present value of the total anticipated excess inclusion income on the transfer
of any residual interest, such as a Residual Bond, to a Disqualified
Organization (as defined below). Such tax is generally imposed on the transferor
of the residual interest, except that where such transfer is through an agent
for a Disqualified Organization, the tax is instead imposed on such agent.
However, a transferor of a residual interest is in no event liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization, and as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Furthermore, the Treasury Department may waive the tax on
transfers if the Disqualified Organization promptly disposes of the residual
interest and the transferor (or agent) pays the tax on the excess inclusion
income for the period during which the Disqualified Organization held the
residual interest. A Disqualified Organization means (i) the United States, any
State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, (ii) any organization (other than a farmer's cooperative described in
Section 521 of the Code) that is exempt from the tax imposed by Chapter 1 of the
code and not subject to the tax imposed by Section 511 of the Code; (iii) any
rural electric or telephone cooperative described in Section 1381(a)(2)(C) of
the Code; or (iv) any other person whose holding of the residual interests of
the REMIC may cause the REMIC to incur a liability for any tax imposed under the
Code that would not otherwise be imposed but for the purchase or transfer of the
residual interests to such person. For purposes of clause (i) of the previous
sentence, a corporation shall not be treated as an instrumentality of the United
States or of any State or political subdivision thereof, if (i) all of the
activities of such corporation are subject to the tax imposed by Chapter 1 of
the Code, and (ii) a majority of the board of directors of such corporation is
not selected by the United States or any State or political subdivision thereof
(except that this clause (ii) shall not apply to the Federal Home Loan Mortgage
Corporation).
In addition to the tax on transfers, a partnership, trust, estate,
regulated investment company, real estate investment trust, common trust fund,
or cooperative (a "Pass-Through Entity") that holds a residual interest is
subject to tax at the highest corporate rate on the allocable portion of excess
inclusion income of a Disqualified Organization that owns an equity interest in
such an entity. The Pass-Through Entity would not be liable for such tax if it
has received an affidavit from such record holder that (i) states under penalty
of perjury that it is not a Disqualified Organization or (ii) furnishes a social
security number and states under penalties of perjury that the social security
number is that of the transferee, provided that during the period such person is
the record holder of the Residual Bond, the Pass-Through Entity does not have
actual knowledge that such affidavit is false. The Indenture and/or the
agreements governing the Trusts with respect to a Series will provide for
reasonable arrangements designed to ensure that Residual Bonds are not held by
Disqualified Organizations and for the furnishing of information to residual
holders to compute the foregoing taxes.
Mark to Market Rules
Under IRS temporary regulations, a "negative value" REMIC residual interest
is not a security for purposes of the mark-to-market rules under the Code. A
negative value REMIC residual interest is a REMIC residual interest whose
present value of anticipated tax liabilities exceeds the present value of the
expected future distributions, as determined on the date of acquisition of the
REMIC residual interest. For purposes of the temporary regulations, the present
value of anticipated tax liabilities is determined net of any anticipated tax
savings associated with holding the residual interest as the REMIC generates
losses. It is possible that a
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Residual Bond may constitute a negative value REMIC residual interest. Such
temporary regulations provide the IRS with the authority to treat any Residual
Bond having substantially the same economic effect as a "negative value"
residual interest as a "negative value" residual interest. The IRS may also
issue final regulations which may retroactively treat a REMIC residual interest
as a "negative value" REMIC residual interest. The IRS has issued proposed
regulations that provide that all REMIC residual interests are not considered
securities for purposes of the mark-to-market rules.
Payments
Any payment made on a Residual Bond to a Residual Bondholder will be
treated as a non-taxable return of capital to the extent it does not exceed the
Residual Bondholder's adjusted basis in such Residual Bond. To the extent a
distribution exceeds such adjusted basis, it will be treated as gain from the
sale of the Residual Bond.
Sales of Residual Bonds
If a Residual Bond is sold, the seller will recognize gain or loss equal to
the difference between the amount realized in the sale and its adjusted basis in
the Residual Bond (except that the recognition of loss may be limited under the
"wash sale" rules described below). A holder's adjusted basis in a Residual Bond
generally equals the cost of such Residual Bond to such Residual Bondholder,
increased by the taxable income of the REMIC that was included in the income of
such Residual Bondholder with respect to such Residual Bond, and decreased (but
not below zero) first by the distributions received thereon by such Residual
Bondholder, and second by the net losses that have been allowed as deductions to
such Residual Bondholder with respect to such Residual Bond. In general, any
such gain or loss will be capital gain or loss provided the Residual Bond is
held as a capital asset. However, Residual Bonds will be "evidences of
indebtedness" within the meaning of Code Section 582(c)(1), so that gain or loss
recognized from sale of a Residual Bond by a bank or thrift institution to which
such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the seller
of a Residual Bond reacquires such Residual Bond, or acquires any other Residual
Bond, any residual interest in another REMIC or comparable interest in a
"taxable mortgage pool" (as defined in Code Section 7701(i)) during the period
beginning six months before, and ending six months after, the date of such sale,
such sale will be subject to the "wash sale" rules of Code Section 1091. In that
event, any loss realized by the Residual Bondholder on the sale will not be
deductible, but, instead, will increase such Residual Bondholder's adjusted
basis in the newly acquired asset.
Taxes on Prohibited Transactions, Foreclosure Income and Certain Contributions
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions". Prohibited transactions generally
include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC or
(d) a qualified (complete) liquidation, (ii) the receipt of income from assets
that are not the type of mortgages or investments that the REMIC is permitted to
hold, (iii) the receipt of compensation for services or (iv) the receipt of gain
from disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction to
sell REMIC property to prevent a default on Regular Bonds as a result of a
default on qualified mortgages or to facilitate a clean-up call (generally, an
optional termination to save administrative costs when no more than a small
percentage of the Bonds is outstanding). The Final REMIC Regulations indicate
that the 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 or encumbrance
clause or the conversion of an interest rate by a mortgagor pursuant to the
terms of a convertible adjustable rate Mortgage Loan. Final REMIC Regulations
also provide that the modification of mortgage loans underlying pass-through
certificates will not be treated as a modification of the
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pass-through certificates, provided that the trust issuing the pass-through
certificates was not created to avoid prohibited transaction rules.
The REMIC must pay a tax at the highest corporate rate on its net income
from foreclosure property. In general, net income from foreclosure property
means gain from the disposition of foreclosure property that is considered held
for sale to customers in the ordinary course of a trade or business (i.e.,
"dealer property") and other income from foreclosure property that is not real
property rents, interest from mortgages, gains from non-dealer property or real
property tax refunds, less the related expenses. In the usual circumstances it
is not expected that the REMIC will have significant net income from foreclosure
property.
The REMIC will also be subject to a tax equal to 100 percent of any amount
contributed to the REMIC after the Startup Day, except for cash contributions
(i) to facilitate a clean-up call or qualified liquidation, (ii) in the nature
of a guarantee, (iii) within 3 months after the Startup Day, or (iv) by a holder
of a residual interest in the REMIC to a qualified reserve fund.
In the event that the REMIC is subject to the tax on prohibited
transactions, foreclosure income or non-exempt contributions, such tax would be
borne by the Residual Bondholders to the extent of distributions remaining on
the Residual Bonds.
Termination
The REMIC will terminate shortly following the retirement of the
Certificates. If a Residual Bondholder's adjusted basis in its Residual Bond
exceeds the amount of cash distributed to such Residual Bondholder in final
liquidation of its interest, then, although the matter is not entirely free from
doubt, it would appear that the Residual Bondholder is entitled to a loss equal
to the amount of such excess. It is unclear whether such a loss, if allowed,
will be a capital loss or an ordinary loss.
Administrative Matters
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and the Residual Bondholders will be treated as
the partners thereof. The REMIC will file an annual federal income tax return on
Form 1066 and must maintain its books on a calendar year basis.
The Internal Revenue Service's Form 1066 has an accompanying Schedule Q,
Quarterly Notice to Residual Interest Holders of REMIC Taxable Income or Net
Loss Allocation. The Final REMIC Regulations generally require that Schedule Q
be furnished by the REMIC to each Residual Bondholder within one month of the
close of each calendar quarter in which the REMIC is in existence. Under
proposed REMIC regulations this date generally would be extended to the
forty-first day after the close of each calendar quarter. If a Residual Bond is
held by a nominee, the nominee must furnish Schedule Q to the person for whom it
is nominee within 30 days after receiving the information.
Treasury regulations provide that a holder of a Residual Bond is not
required to treat items on its return consistently with their treatment on the
REMIC's return if a holder owns 100% of the Residual Bonds for the entire
calendar year. Otherwise, each holder of a Residual Bond is required to treat
items on its return consistently with their treatment on the REMIC's return,
unless the holder of a Residual Bond either files a statement identifying the
inconsistency or establishes that the inconsistency resulted from incorrect
information received from the REMIC. The IRS may assert a deficiency resulting
from a failure to comply with the consistency requirement without instituting an
administrative proceeding at the REMIC level. Any person that holds a Residual
Bond as a nominee for another person may be required to furnish the REMIC, in a
manner to be provided in Treasury regulations, with the name and address of such
person and other information.
Foreign Investors
Payments to Residual Bondholders who are foreign persons will generally be
treated as interest for purposes of the 30% (or lower treaty rate) United States
withholding tax. Under temporary Treasury Regulations, such income (to the
extent that it is not excess inclusion income) may qualify for exemption
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from United States withholding tax as "portfolio interest" provided that (i) the
Certificates which constitute the assets of the REMIC would be eligible for such
exemption and (ii) the conditions described under "Taxation of Regular
Bonds -- Taxation of Certain Foreign Investors" are met, but only to the extent
that the Mortgage Loans underlying the Certificates, that are "pass-through
certificates," were issued after July 18, 1984. Generally, uncertificated
regular interests in another REMIC will not constitute assets eligible for such
exemption. To the extent that a payment represents a portion of REMIC taxable
income that constitutes excess inclusion income, a Residual Bondholder will not
be entitled to an exemption from or reduction of the 30% (or lower treaty rate)
withholding tax rule. If the payments are subject to United States withholding
tax, they generally will be taken into account for withholding tax purposes only
when paid or distributed (or when the REMIC Residual Bond is disposed of). The
Treasury has statutory authority, however, to promulgate regulations which would
require such amounts to be taken into account at an earlier time in order to
prevent the avoidance of tax. Such regulations could, for example, require
withholding prior to the distribution of cash in the case of Residual Bonds that
do not have significant value. See "Excess Inclusions" above and "Restrictions
on Transfer of a Residual Bond" below.
Restrictions on Transfer of a Residual Bond
The Residual Bonds will be subject to certain restrictions on transfer for
federal income tax purposes. First, Residual Bonds may not be transferred to a
Disqualified Organization, as described in "Excess Inclusions." The Indenture
with respect to a series of REMIC Bonds will provide that neither legal title
nor beneficial interest in a Residual Bond may be transferred or registered
unless (i) the proposed transferee provides to the Issuer and the Indenture
Trustee an affidavit to the effect that such transferee is not a Disqualified
Organization, is not purchasing such Residual Bonds on behalf of a Disqualified
Organization (i.e., as a broker, nominee or middleman thereof) and is not an
entity that holds REMIC residual securities as nominee to facilitate the
clearance and settlement of such securities through electronic book-entry
changes in accounts of participating organizations and (ii) the transferor
provides a statement in writing to the Issuer and the Indenture Trustee that it
has no actual knowledge that such affidavit is false. Moreover, the Indenture
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Bond with respect to a series will bear a
legend referring to such restrictions on transfer, and each Residual Bondholder
will be deemed to have agreed, as a condition of ownership thereof, to any
amendments to the Indenture required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions.
Second, the Final REMIC Regulation provide that the transfer of a residual
interest that has tax avoidance potential is disregarded for all federal income
tax purposes if the transferee is a foreign person. This rule does not apply to
income from a residual interest that is effectively connected to the residual
holder's United States trade or business (in which case the residual holder is
treated like a U.S. person). A proposed transfer has tax avoidance potential
unless at the time the residual interest is transferred the transferor
reasonably expects that, for each excess inclusion, (i) the REMIC will
distribute to the transferee residual interest holder an amount that will equal
at least 30% of the excess inclusions and (ii) that each such amount will be
distributed at or after the time at which the excess inclusion accrues and not
later than the close of the calendar year following the calendar year of
accrual. In order to prevent a foreign person from transferring a residual
interest of the type described in this paragraph to a U.S. person shortly before
any tax is due, the Final REMIC Regulations provide that if the transfer has the
effect of allowing the foreign person to avoid tax on accrued excess inclusions,
the transfer is disregarded. The foreign person continues to be treated as owner
of the residual interest for withholding tax purposes. To the extent provided in
the Prospectus Supplement, the Issuer may restrict the transfer of a Residual
Bond to a foreign person.
The Final REMIC Regulations would also disregard certain transfers of
residual interests, such that the transferor would continue to be treated as the
owner of the residual interest and thus would continue to be subject to tax on
its allocable portion of the net income of the REMIC. Under the Final REMIC
Regulations, a transfer of a "noneconomic residual interest" (as defined below)
is disregarded for all federal income tax purposes unless no significant purpose
of the transfer is to impede the assessment or collection of tax. A residual
interest in a REMIC (including a residual interest with positive value at
issuance) is a "noneconomic residual interest" unless, at the time of the
transfer, (i) the present value of the expected future distributions
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on the residual interest at least equals the product of the present value of the
anticipated excess inclusions and the highest corporate income tax rate in
effect for the year in which the transfer occurs, and (ii) the transferor
reasonably expects that the transferee will receive distributions from the REMIC
at or after the time at which taxes accrue on the anticipated excess inclusions
in an amount sufficient to satisfy the accrued taxes. The anticipated excess
inclusions must be determined based on (i) events that have occurred up to the
time of the transfer and (ii) the prepayment and reinvestment assumptions
adopted under Section 1272(a)(6) of the Code, or that would have been adopted
under the section had the regular interests of the REMIC been issued with
original issue discount. A significant purpose to impede the assessment or
collection of tax exists if the transferor, at the time of the transfer, either
knew or should have known (had "improper knowledge") that the transferee would
be unwilling or unable to pay taxes due on its share of the taxable income of
the REMIC. Under the Final REMIC Regulations, a transferor is presumed not to
have improper knowledge if (i) the transferor conducted, at the time of the
transfer, a reasonable investigation of the financial condition of the
transferee and, as a result of the investigation, the transferor found that the
transferee had historically paid its debts as they came due and found no
significant evidence to indicate that the transferee will not continue to pay
its debts as they come due in the future; and (ii) the transferee represents to
the transferor that it understands that, as the holder of the noneconomic
residual interest, the transferee may incur tax liabilities in excess of any
cash flows generated by the residual interest and that the transferee intends to
pay taxes associated with holding of the residual interest as they become due.
The Indenture will require the transferee of a Residual Bond to state as part of
the affidavit described above with respect to Disqualified Organizations that
such transferee (i) has historically paid its debts as they come due, (ii)
intends to continue to pay its debts as they come due in the future, (iii)
understands that, as the holder of a noneconomic Residual Bond, it may incur tax
liabilities in excess of any cash flows generated by the Residual Bond, and (iv)
intends to pay any and all taxes associated with holding the Residual Bond as
they become due. The transferor must have no reason to believe that such
statement is untrue.
If a Residual Bond has negative value, it is not clear whether its issue
price would be considered to be zero or such negative amount for purposes of
determining the REMIC's basis in its assets. The Final REMIC Regulations do not
address whether residual interests could have a negative basis and a negative
issue price. The Issuer does not intend to treat a class of Residual Bonds as
having a value of less than zero for purposes of determining the bases of assets
in the related REMIC Pool. The federal income tax consequences of any
consideration paid to a transferee on a transfer of a Residual Bond are unclear;
any transferee receiving such consideration should consult its tax advisors.
Tax-Exempt Investors
A qualified pension fund or other entity that is exempt from federal income
taxation (a "Tax-Exempt Investor") under Code Section 501 nonetheless will be
subject to tax on its income that is "unrelated business taxable income"
("UBTI") within the meaning of Code Section 512. Net income attributable to a
Residual Bond beneficially owned by a Tax-Exempt Investor will be considered
UBTI and thus will be subject to federal income tax, to the extent that any such
income is considered an excess inclusion. See "Excess Inclusions" above.
LEGAL INVESTMENT MATTERS
Unless otherwise specified in the related Prospectus Supplement, the Bonds
of each Series offered by this Prospectus and the related Prospectus Supplement
will constitute "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 established for such Bonds by at least
one nationally recognized statistical rating organization. As "mortgage related
securities," such Bonds will constitute legal investments for persons, trusts,
corporations, partnerships, associations, business trusts and business entities
(including but not limited to state-chartered savings banks, commercial banks,
savings and loan associations and insurance companies, as well as trustees and
state government employee retirement systems) created pursuant to or existing
under the laws of the United States or any State (including the District of
Columbia and Puerto Rico) whose authorized investments are subject to State
regulation to the same extent that, under applicable law, obligations issued by
or guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof
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constitute legal investments for such entities. Pursuant to SMMEA, Alaska,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Louisiana, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York,
North Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia each
enacted legislation prior to the October 4, 1991 deadline for such enactments,
limiting to varying extents the ability of certain entities (in particular,
insurance companies) to invest in "mortgage related securities," in most cases
by requiring the affected investors to rely upon existing state law, and not
SMMEA. Accordingly, the investors affected by such legislation will be
authorized to invest in the Bonds only to the extent provided in such
legislation.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain Classes of the Bonds. Any financial
institution which is subject to the jurisdiction of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the National Credit Union Administration ("NCUA") or other federal or
state agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing the Bonds. The Federal Financial
Institutions Examination Council, for example, has issued a Supervisory Policy
Statement on Securities Activities effective February 10, 1992 (the "Policy
Statement"). The Policy Statement has been adopted by the Comptroller of the
Currency, the Federal Reserve Board, the FDIC; the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement prohibits depository institutions from investing
in certain "high-risk mortgage securities" (including securities such as certain
Classes of Bonds), except under limited circumstances, and sets forth certain
investment practices deemed to be unsuitable for regulated institutions. The
NCUA issued final regulations effective December 2, 1991 that restrict and in
some instances prohibit the investment by federal credit unions in certain types
of mortgage related securities.
Notwithstanding SMMEA, there may be other restrictions on the ability of
certain investors, including depository institutions, either to purchase Bonds
or to purchase Bonds representing more than a specified percentage of the
investors' assets.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying" or in securities that are issued in book-entry form.
If specified in the related Prospectus Supplement, other Classes of Bonds
offered pursuant to this Prospectus will not constitute "mortgage related
securities" under SMMEA. The appropriate characterization of those Bonds under
various legal investment restrictions, and thus the ability of investors subject
to these restrictions to purchase the Bonds, may be subject to significant
interpretive uncertainties. No representation is made as to the proper
characterization of Bonds not qualifying as "mortgage related securities" for
legal instrument or financial institution regulatory purposes, or as to the
ability of particular investors to purchase such Bonds under applicable legal
investment restrictions. The uncertainties described above (and any unfavorable
future determination concerning legal investment or financial institution
regulatory characteristics of such Bonds) may adversely affect the liquidity of
such Bonds.
Investors should consult their own legal advisors in determining whether
and to what extent the Bonds constitute legal investments for such investors.
ERISA MATTERS
Under certain circumstances, certain affiliates of the Issuer, certain
affiliates of any underwriter or any underwriter of the Bonds may be or may
become a "party in interest" within the meaning of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or a "disqualified person"
within the meaning of the Code with respect to an individual retirement account
or an employee benefit plan subject to such statutes (a "Plan"). In that case
the acquisition or holding of Bonds by or on behalf of such a Plan may
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constitute a "prohibited transaction" within the meaning of ERISA and the Code.
However, certain administrative exemptions from the prohibited transaction rules
could be applicable depending in part on the type and circumstances of the Plan
fiduciary making the decision to acquire a Bond. Included among these exemptions
are: Prohibited Transaction Class Exemption ("PTCE") 90-1, regarding investments
by insurance company pooled separate accounts; PTCE 91-38, regarding investments
by bank collective investment funds; or PTCE 84-14, regarding transactions
effected by a "qualified professional asset manager". Employee benefit plans
which are governmental plans (as defined in section 3(32) of ERISA), and certain
church plans (as defined in section 3(33) of ERISA) are not subject to ERISA
requirements.
Under regulations of the U.S. Department of Labor concerning the definition
of the term "plan assets" for purposes of ERISA (the "Regulations"), the
purchase by a Plan of certain types of Bonds, such as a Bond which is or is
intended to be a Residual Bond or a Bond which might be characterized as an
"equity interest" (as defined in the Regulations) in the Issuer of the related
Series of Bonds, or in the collateral securing such Series of Bonds, could
result in findings of ERISA prohibited transactions in the operation of the
Issuer, other direct or indirect prohibited transactions or improper delegation
of investment management responsibility by the Plan fiduciary choosing to invest
in such Bond. Statutory exemptions, or the ERISA prohibited transaction
exemptions referred to in the prior paragraph, or other such administrative
exemptions, might or might not be applicable in such circumstances. For these
reasons as described in the related Prospectus Supplement, certain Plans and
other persons may be prohibited from investing in one or more Classes, or in an
entire Series, of Bonds.
Due to the complexity of these rules and the penalties imposed upon persons
involved in prohibited transactions, it is particularly important that potential
Plan investors consult with their counsel regarding the consequences under ERISA
of their acquisition and ownership of Bonds.
THE INDENTURE
The following summaries describe certain provisions of the Indenture not
described elsewhere in this Prospectus. The summaries do not purport to be
complete and are qualified in their entirety by reference to the provisions of
the Indenture. Where particular provisions or terms used in the Indenture are
referred to, the actual provisions (including definitions of terms) are
incorporated by reference as part of such summaries.
MODIFICATION OF INDENTURE
Unless otherwise specified in the related Prospectus Supplement, with the
consent of the holders of not less than two-thirds of the then aggregate
principal amount of the outstanding Bonds of any Series issued under an
Indenture, the Indenture Trustee and the Issuer may execute a supplemental
indenture to add provisions to, or change in any manner or eliminate any
provisions of, the Indenture with respect to such Series or modify (except as
provided below) in any manner the rights of the holders of such Bonds.
Without the consent of the holder of each outstanding Bond of such Series
affected thereby, however, no supplemental indenture shall (a) change the Stated
Maturity of the principal of, or any installment of interest on, any Bond of
such Series or reduce the principal amount thereof, the interest rate specified
thereon (except as provided in the related Terms Indenture with respect to any
Class of Floating Interest Rate Bonds), the redemption price with respect
thereto or the earliest date on which any Bonds of such Series may be redeemed
at the option of the Issuer, or change any place of payment where, or the coin
or currency in which, any Bond of such Series or any interest thereon is
payable, or impair the right to institute suit for the enforcement of certain
provisions of the Indenture regarding payment, (b) reduce the percentage of the
aggregate principal amount of the outstanding Bonds of such Series, the consent
of the holders of which is required for any such supplemental indenture, or the
consent of the holders of which is required for any waiver of compliance with
certain provisions of the Indenture or of certain defaults thereunder and their
consequences as provided for in the Indenture, (c) modify the provisions of the
Indenture specifying the circumstances under which such a supplemental indenture
may not change the provisions of the Indenture without the consent of the
holders of each outstanding Bond of such Series affected thereby, or the
provisions of the Indenture with respect to certain remedies available in an
Event of Default (as described below), except to increase any percentage
specified therein or to provide that certain other provisions of the Indenture
cannot be modified or waived
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without the consent of the holder of each outstanding Bond affected thereby, (d)
modify or alter the provisions of the Indenture regarding the voting of Bonds
held by the Issuer or an affiliate of the Issuer, (e) permit the creation of any
lien ranking prior to or on a parity with the lien of the Indenture with respect
to any part of the property subject to a lien under the Indenture or terminate
the lien of the Indenture on any property at any time subject thereto or deprive
the holder of any Bond of such Series of the security afforded by the lien of
the Indenture, or (f) modify any of the provisions of the Indenture in such
manner as to affect the rights of the holders of Bonds of such Series to the
benefits of any provisions for the redemption at the request of Bondholders of
Bonds of such Series contained therein. (Standard Indenture Provisions, Section
9.02)
Each Issuer and the respective Indenture Trustee may also enter into
supplemental indentures, without obtaining the consent of Bondholders of such
Series, to cure ambiguities or make minor corrections, to provide
for the issuance of Bonds in bearer or registered form or for the conversion of
any outstanding Bonds to or from bearer form and to do such other things as
would not adversely affect the interests of the Bondholders of such Series.
(Standard Indenture Provisions, Section 9.01)
EVENTS OF DEFAULT
An Event of Default with respect to any Series of the Bonds is defined in
the respective Indenture and Series Supplement under which such Bonds are issued
as being: (a) a default in the payment of principal of any Bond of any Series or
a default for ten days or more in the payment of any interest on any Bond of
such Series; (b) a default in the observance of certain negative covenants in
the Indenture or in the observance of certain covenants relating to redemptions
of Bonds of such Series; (c) a default in the observance of any other covenant
of the Indenture, and the continuation of any such default for a period of sixty
days after notice to the Issuer by the Indenture Trustee or to the Issuer and
the Indenture Trustee by the holders of at least 25% in principal amount of the
Bonds of such Series then outstanding; (d) any representation or warranty made
by the Issuer in the Indenture or in any certificate delivered pursuant thereto
having been incorrect in a material respect as of the time made, and the
circumstance in respect of which such representation or warranty is incorrect
not having been cured within thirty days after notice thereof is given to the
Issuer by the Indenture Trustee or by the holders of at least 25% in principal
amount of the Bonds of such Series then outstanding; or (e) certain events of
bankruptcy, insolvency, receivership or reorganization of the Issuer. (Standard
Indenture Provisions, Section 5.01)
RIGHTS UPON EVENT OF DEFAULT
In case an Event of Default should occur and be continuing with respect to
a Series of Bonds, the Indenture Trustee may, and on request of holders of more
than 50% in principal amount of the Bonds of such Series then outstanding shall,
declare the principal of such Series of Bonds to be due and payable. Such
declaration may under certain circumstances be rescinded by the holders of a
majority in principal amount of the Bonds of such Series then outstanding.
(Standard Indenture Provisions, Section 5.02)
An Event of Default with respect to one Series of Bonds will not
necessarily be an Event of Default with respect to any other Series of Bonds.
If, following an Event of Default, unless specified otherwise in the
related Series Supplement, a Series of Bonds has been declared to be due and
payable, the Indenture Trustee may, in its discretion (provided that, unless the
Event of Default relates to a default in payment of principal or interest,
certain conditions must be met and further provided that the holders of the
Bonds of such Series have not directed the Trustee to sell the Collateral),
refrain from selling the Collateral for such Series and continue to apply all
amounts received on the Collateral to payments due on the Bonds of such Series
in accordance with their terms, notwithstanding the acceleration of the maturity
of such Bonds. If, however, the Indenture Trustee refrains from selling the
Collateral for such Series and collections in respect of such Collateral are
determined to be insufficient to make all scheduled payments on Bonds of such
Series, then, unless specified otherwise in the related Series Supplement,
payments will be made on the Bonds in the same manner as described in the next
sentence with regard to instances in which the Collateral is sold. (Standard
Indenture Provisions, Section 5.05) In addition, upon an Event of Default the
Indenture Trustee may, in its discretion (provided that, unless the Event of
Default relates to a default in payment of principal or interest, the Trustee
must receive the consent of the
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holders of all outstanding Bonds of such Series, and certain other conditions
must be met), sell the Collateral for such Series, in which event the Bonds of
such Series will be payable pro rata (except to the extent provided otherwise in
the related Series Supplement), without regard to their Stated Maturities, out
of the collections on, or the proceeds from the sale of, such Collateral and any
overdue installments of interest on the Bonds (except to the extent provided
otherwise in the related Series Supplement), will, to the extent permitted by
applicable law, bear interest at the highest stated interest rate borne by any
Bond of such Series. (Standard Indenture Provisions, Sections 5.08 and 5.18)
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee, in case an Event of Default shall occur and be continuing,
the Indenture Trustee shall be under no obligation to exercise any of the rights
or powers under the Indenture at the request or direction of any of the holders
of Bonds, unless such holders have offered to the Indenture Trustee reasonable
security or indemnity satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in compliance with such request or
direction. (Standard Indenture Provisions, Section 6.03) Subject to such
provisions for indemnification and certain limitation contained in the
Indenture, the holders of a majority in principal amount of the outstanding
Bonds of a Series shall have the right to direct the time, method, and place of
conducting any proceeding or any remedy available to the Indenture Trustee or
exercising any trust or power conferred on the Indenture Trustee with respect to
the Bonds of such Series; and the holders of a majority in principal amount of
the Bonds of a Series then outstanding may, in certain cases, waive any default
with respect thereto, except a default in the payment of principal or interest
or a default in respect of a covenant or provision of the Indenture that cannot
be modified without the waiver or consent of the holder of each outstanding Bond
affected thereby. (Standard Indenture Provisions, Sections 5.14 and 5.15)
LIST OF BONDHOLDERS
Three or more holders of the Bonds of any Series (each of whom has owned a
Bond of such Series for at least six months) may, by written request to the
Indenture Trustee, obtain access to the list of all Bondholders maintained by
the Indenture Trustee for the purpose of communicating with other Bondholders
with respect to their rights under the Indenture. The Indenture Trustee may
elect not to afford the requesting Bondholders access to the list of Bondholders
if it agrees to mail the desired communication or proxy, on behalf of the
requesting Bondholders, to all Bondholders. (Standard Indenture Provisions,
Section 7.02)
ISSUER'S ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Indenture Trustee a
written statement as to the fulfillment of its obligations under the Indenture.
(Standard Indenture Provisions, Section 3.10)
INDENTURE TRUSTEE'S ANNUAL REPORT
Except to the extent provided otherwise in the related Series Supplement,
the Indenture Trustee will be required to mail each year to all Bondholders a
brief report relating to its eligibility and qualifications to continue as the
Indenture Trustee under the Indenture, any amounts advanced by it under the
Indenture, the amount, interest rate and maturity date of certain indebtedness
owing by the Issuer to it in the Indenture Trustees's individual capacity, the
property and funds physically held by the Indenture Trustee as such, any
release, or release and substitution, of property subject to the lien of the
Indenture which has not been previously reported, any additional Series of
Indenture Bonds not previously reported and any action taken by it which
materially affects the Bonds and which has not been previously reported.
(Standard Indenture Provisions, Section 7.03)
SATISFACTION AND DISCHARGE OF INDENTURE
The Indenture will be discharged with respect to the Collateral securing
the Bonds of a Series upon the delivery to the Indenture Trustee for
cancellation of all of the Bonds of such Series or, with certain limitations,
upon deposit with the Indenture Trustee of funds sufficient for the payment in
full of all of the Bonds of such Series. (Standard Indenture Provisions, Section
4.01)
53
<PAGE> 72
THE INDENTURE TRUSTEE
The Indenture Trustee for each Series of Bonds will be specified in the
related Prospectus Supplements. Pursuant to the TIA, the Trustee will have a
"conflicting interest" if any Event of Default occurs with respect to one or
more Classes of Special Allocation Bonds issued under the Indenture. In such
event, the Trustee may be required to resign its trusteeship with respect to one
or more Classes of such Special Allocation Bonds and a successor Trustee would
be appointed for such Classes.
REPORTS BY INDENTURE TRUSTEE TO BONDHOLDERS
On each Principal Payment Date or Special Redemption Date, the Indenture
Trustee will send a report to each Bondholder setting forth the amount of such
payment representing interest, the amount thereof, if any, representing
principal and the outstanding principal amount of an Individual Bond of each
Class (the aggregate principal amount of the Bonds of each Class in the case of
holders of Bonds on which payments of interest only are then being made) after
giving effect to the payments made on such Principal Payment Date or Special
Redemption Date. (Standard Indenture Provisions, Section 8.07)
LIMITATION ON SUITS
No Holder of a Bond of any Series will have any right to institute any
Proceedings with respect to the Indenture unless (1) such Holder has previously
given written notice to the Indenture Trustee of a continuing Event of Default
with respect to such Series; (2) the holders of at least 25% in principal amount
of the Bonds of such Series then outstanding have made written request to the
Indenture Trustee to institute Proceedings in respect of such Event of Default
in its own name as Indenture Trustee; (3) such holders have offered to the
Indenture Trustee reasonable indemnity satisfactory to it against the costs,
expenses and liabilities to be incurred in compliance with such request; (4) for
60 days after its receipt of such notice, request and offer of indemnity the
Indenture Trustee has failed to institute any such Proceedings; and (5) no
direction inconsistent with such written request has been given to the Indenture
Trustee during such 60-day period by the holders of at least 50% in principal
amount of the Bonds of such Series then outstanding. (Standard Indenture
Provisions, Section 5.09)
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby either directly or to any one
or more underwriters or groups of underwriters for public offering by them. It
is currently anticipated that EVEREN Securities, Inc., will act as the
underwriter, or, if more than one underwriter, as an underwriter, for each
Series of Bonds. The Prospectus Supplement with respect to each Series of Bonds
will set forth the terms of the offering of such Series of Bonds and each Class
within such Series, including the name or names of the underwriters, the
proceeds to and their intended use by the Issuer, and, in the case of an
underwritten public offering, either the initial public offering price, the
discounts and commissions to the underwriters and any discounts or concessions
allowed or reallowed to certain dealers, or the method by which the price at
which the underwriters will sell the Bonds will be determined.
The obligations of any underwriters will be subject to certain conditions
precedent, and such underwriters will be obligated to purchase all of the Series
of Bonds described in the Prospectus Supplement with respect to such Series if
any such Bonds are purchased. The Bonds may be acquired by the underwriters for
their own account and 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. If the Bonds of a
Series are offered other than through underwriters, the related Prospectus
Supplement will contain information regarding the nature of such offering and
any agreements to be entered into between the Issuer and the purchasers of the
Bonds of such Series.
The place and time of delivery for the Series of Bonds in respect of which
this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
54
<PAGE> 73
LEGAL MATTERS
Certain legal matters in connection with the Bonds will be passed upon for
the Issuer by Andrews & Kurth L.L.P., Dallas, Texas. Andrews & Kurth L.L.P. has
also delivered its opinion to the Issuer as to certain federal income tax
consequences with respect to the Bonds.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a part
and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates prescribed
by the Commission upon request to the Commission and inspected, without charge,
at the offices of the Commission.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's Information Statement and most recent Supplement thereto and any
quarterly report made available by FHLMC can be obtained by writing or calling
FHLMC's Investor Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia
22102 (800/336-FMPC). The Issuer did not participate in the preparation of
FHLMC's Offering Circular, Information Statement or any Supplement thereto or
any such quarterly report.
Copies of FNMA's most recent Prospectus for FNMA Certificates and FNMA's
annual report and quarterly financial statements as well as other financial
information are available from the Vice President for Investor Relations of
FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202-537-7115). The
Issuer did not participate in the preparation of FNMA's Prospectus or any such
report, financial statement or other financial information.
55
<PAGE> 74
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
1986 Act...................................................................................31
Administrator..............................................................................29
Agency Certificates.........................................................................4
Assumed Reinvestment Rate..........................................................Cover Page
Basic Principal Payment.................................................................6, 22
Beneficial Owners..........................................................................11
Bondholders................................................................................11
Bonds.......................................................................Cover Page, 4, 13
Bond Value..............................................................................6, 22
Bond Value Group...........................................................................22
Book Entry Bonds............................................................................6
Certificate Trustee........................................................................29
Certificates................................................................................4
Certificates of Beneficial Ownership.......................................................13
Clearing Agency............................................................................10
Clearing Agency Participants...............................................................11
Code...................................................................................11, 32
Collateral..............................................................................9, 25
Collection Account..........................................................................9
Commission..................................................................................3
Committee Report...........................................................................31
Companion Bonds............................................................................20
Compound Interest Bonds.................................................................4, 20
Conventional Loans.........................................................................23
Deposit Trust Agreement....................................................................13
Due Period..............................................................................6, 22
ERISA......................................................................................50
EVEREN Capital..........................................................................5, 16
EVEREN Holdings.........................................................................5, 16
EVEREN Mortgage.........................................................................5, 16
EVEREN Securities..........................................................................17
FDIC.......................................................................................50
FHA Loans..................................................................................23
FHLMC.......................................................................... Cover Page, 4
FHLMC Act..................................................................................28
FHLMC Certificates..............................................................Cover Page, 4
Final REMIC Regulations....................................................................31
Floating Interest Rate..................................................................5, 22
Floating Interest Rate Bonds...............................................................22
Floating Interest Rate Payment Date.........................................................8
Floating Interest Rate Period...........................................................8, 22
FmHA Loans.................................................................................23
FNMA............................................................................Cover Page, 4
FNMA Certificates...............................................................Cover Page, 4
Gateway.............................................................................5, 13, 16
GNMA............................................................................Cover Page, 4
GNMA Certificates...............................................................Cover Page, 4
GNMA Servicer..............................................................................26
GPM Certificates...........................................................................30
Guaranty Agreement.........................................................................27
</TABLE>
56
<PAGE> 75
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Holders....................................................................................11
Housing Act................................................................................26
Indenture...............................................................................4, 20
Indenture Trustee...........................................................................4
Initial Depositor......................................................................13, 19
Interest Accrual Period.....................................................................5
IRS........................................................................................37
Issuer..................................................................Cover Page, 5, 13, 16
Lovett.....................................................................................17
Management Agreement.......................................................................19
Manager....................................................................................19
Maximum Floating Interest Rate..........................................................8, 22
Minimum Floating Interest Rate.............................................................22
Mortgage Loans..........................................................................7, 38
NCUA.......................................................................................50
Non-Agency Certificates.........................................................Cover Page, 4
Non-Priority Bonds.........................................................................14
Non-REMIC Bonds............................................................................11
OID Regulations............................................................................34
Optional Floating Interest Rate Bond Redemption.........................................8, 24
OTS........................................................................................50
Owner......................................................................................29
Pass-Through Entity........................................................................45
Payment Date................................................................................5
Plan.......................................................................................50
Policy Statement...........................................................................50
Premium REMIC Regular Bonds................................................................38
Prepayment Assumption......................................................................34
Principal Payment Date......................................................................6
Priority Bonds.............................................................................14
PTC........................................................................................27
PTCE.......................................................................................51
Registration Statement......................................................................3
Regular Bonds..........................................................................11, 32
Regulations................................................................................51
REIT.......................................................................................45
REMIC..............................................................................Cover Page
REMIC Bonds....................................................................Cover Page, 32
REMIC Pool.................................................................................32
REMIC Regular Bonds................................................................Cover Page
Reserve Funds..............................................................................10
Residual Bondholders.......................................................................15
Residual Bonds.....................................................................Cover Page
Retail Class Bond..........................................................................34
Servicing Agreement........................................................................29
Servicers..................................................................................29
Scheduled Amortization Amount...............................................................7
Scheduled Amortization Bonds............................................................7, 20
Scheduled Principal........................................................................29
SMMEA..................................................................................11, 49
Special Allocation Bonds...................................................................21
</TABLE>
57
<PAGE> 76
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Special Redemption Date.................................................................8, 24
Spread..................................................................................7, 23
Standard Indenture Provisions...............................................................4
TAMRA......................................................................................31
Tax Exempt Investor........................................................................49
Terms Indenture.............................................................................4
Time-Out Period.........................................................................9, 25
TMP........................................................................................33
Trust...............................................................................5, 13, 16
Trust Issuer............................................................................5, 13
UBTI.......................................................................................49
Underwood..................................................................................17
VA Loans...................................................................................23
</TABLE>
58
<PAGE> 77
================================================================================
NO DEALER, SALESMAN, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE
OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE ISSUER, ANY AFFILIATE OF THE ISSUER OR
ANY UNDERWRITER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE SECURITIES OFFERED HEREBY IN ANY STATE TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH STATE. THE DELIVERY OF THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DOES NOT IMPLY THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Terms of the Bonds............................... S- 3
Description of the Certificates.................. S- 9
Description of Book Entry Procedures............. S-10
Description of the Bonds......................... S-12
Prepayment of the Bonds -- The Effects of
Interest Rate Changes and Other Factors........ S-15
The Issuer....................................... S-17
Underwriting..................................... S-17
Legal Matters.................................... S-18
Bond Rating...................................... S-18
Additional Bonds Which May Be Offered............ S-18
PROSPECTUS
Prospectus Supplement............................ 2
Available Information............................ 3
Summary of Terms................................. 4
Introduction..................................... 13
Special Considerations........................... 13
The Issuer....................................... 16
Transactions with EVEREN Mortgage
Group, Inc. ................................... 20
Use of Proceeds.................................. 20
Description of the Bonds......................... 20
Security for the Bonds........................... 25
Certain Federal Income Tax Consequences.......... 31
Legal Investment Matters......................... 49
ERISA Matters.................................... 50
The Indenture.................................... 51
Plan of Distribution............................. 54
Legal Matters.................................... 55
Additional Information........................... 55
Index of Defined Terms........................... 56
</TABLE>
================================================================================
================================================================================
$9,422,000
GATEWAY MORTGAGE
ACCEPTANCE CORPORATION
7.05% COLLATERALIZED MORTGAGE
OBLIGATIONS, SERIES 1996A
DUE JULY 31, 2027
---------------------
PROSPECTUS SUPPLEMENT
---------------------
EVEREN SECURITIES, INC.
J.C. BRADFORD & CO.
RAYMOND JAMES & ASSOCIATES, INC.
JUNE 18, 1996
================================================================================
