<PAGE> 1
Filed Pursuant to Rule 424(b)(5)
File No. 33-42337
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED SEPTEMBER 28, 1998)
$345,831,963
(APPROXIMATE)
CAPSTEAD SECURITIES CORPORATION IV
COLLATERALIZED MORTGAGE OBLIGATIONS, SERIES 1998-3
---------------------
The Collateralized Mortgage Obligations, Series 1998-3 (collectively, the
"BONDS") consist of Class A Bonds, Class AX Bonds and Class R Bonds, all of
which are being offered for sale hereunder. The original principal amount of one
or more Classes of Bonds may be increased or decreased by up to 10% prior to
their issuance, depending on the Mortgage Loans (as defined below) actually
included in the Mortgage Pool (as defined below) and may be adjusted as
necessary to obtain the required ratings on the Bonds. It is a condition to the
issuance of the Class A Bonds, the Class AX Bonds and the Class R Bonds that
they be rated "AAAr" by Standard & Poor's Ratings Services ("S&P") and "AAA" by
Duff & Phelps Credit Rating Co. ("DCR" and, together with S&P, the "RATING
AGENCIES").
(Cover continued on next page)
THE BONDS WILL BE NONRECOURSE OBLIGATIONS SOLELY OF THE ISSUER AND DO NOT
REPRESENT AN OBLIGATION OF OR INTEREST IN THE ADMINISTRATORS, THE UNDERWRITER OR
ANY OF THEIR RESPECTIVE AFFILIATES. THE BONDS ARE NOT INSURED OR GUARANTEED BY
ANY GOVERNMENTAL ENTITY, THE ISSUER, THE ADMINISTRATORS, THE INDENTURE TRUSTEE,
THE UNDERWRITER OR ANY OF THEIR RESPECTIVE AFFILIATES, OR ANY OTHER PERSON.
---------------------
THESE BONDS 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.
---------------------
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE FACTORS SET
FORTH UNDER "RISK FACTORS" COMMENCING AT PAGE S-15 OF THIS PROSPECTUS SUPPLEMENT
AND UNDER "SPECIAL CONSIDERATIONS" AT PAGE 12 OF THE PROSPECTUS.
<TABLE>
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
INITIAL PRINCIPAL
BALANCE(1) BOND INTEREST RATE STATED MATURITY(2)
- -----------------------------------------------------------------------------------------------------------------------
Class A..................................... $345,831,863 Variable(4) February 25, 2025
- -----------------------------------------------------------------------------------------------------------------------
Class AX.................................... (3) Variable(4) February 25, 2025
- -----------------------------------------------------------------------------------------------------------------------
Class R..................................... $100 Variable(4) February 25, 2025
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Approximate, subject to adjustment as described herein.
(2) Determined as set forth under "Summary of Terms -- Maturity of the Bonds."
(3) The Class AX Bonds will be interest-only Bonds. Interest will accrue on the
Class AX Bonds on the Class Notional Balance (as defined herein) thereof
(initially, $345,831,963).
(4) Interest shall accrue from the Closing Date as described under "Description
of the Bonds -- Payment of Interest."
---------------------
The Class A Bonds will be purchased by Greenwich Capital Markets, Inc. (the
"UNDERWRITER") from the Issuer and will be offered by the Underwriter from time
to time in negotiated transactions at varying prices to be determined at the
time of sale. Net proceeds to the Issuer are expected to be approximately
$345,000,000, after deducting expenses payable by the Issuer in connection with
the Bonds and giving effect to the Underwriter's discount, which in the
aggregate are estimated to be $832,000.
The Class A Bonds are offered by the Underwriter when, as and if issued,
delivered to and accepted by the Underwriter and subject to certain other
conditions. It is expected that delivery of the Class A Bonds (the "BOOK ENTRY
BONDS") will be made in book entry form only through the Same Day Funds
Settlement System of The Depository Trust Company ("DTC") on or about September
29, 1998.
GREENWICH CAPITAL LOGO
The date of this Prospectus Supplement is September 28, 1998.
<PAGE> 2
(Cover continued from previous page)
The Bonds will be collateralized by mortgage pass-through certificates
(the "CERTIFICATES") evidencing the beneficial ownership interest in entire
pools (each, a "MORTGAGE POOL") of certain first lien, fixed rate or adjustable
rate mortgage loans secured by one- to four-family residential properties (the
"MORTGAGE LOANS"). Certain of the Mortgage Loans (the "LIBOR LOANS") bear
interest at a rate which is adjustable every six months at a specified margin
over the average of the interbank offered rates for six month U.S. dollar
deposits in the London market (the "LIBOR INDEX") based on quotations of major
banks, in the case of certain of the LIBOR Loans, as published by The Wall
Street Journal, and in the case of the remaining LIBOR Loans, as published by
FNMA. Certain of the Mortgage Loans (the "CMT LOANS") bear interest at a rate
which is adjustable annually at a specified margin over the weekly average
yield on United States Treasury Securities adjusted to a constant maturity of
one year, as made available by the Federal Reserve Board (the "CMT INDEX").
Approximately 32.44% of the Mortgage Loans ("5/25 MORTGAGE LOANS") by Scheduled
Principal Balance (as defined herein) bear interest at a rate which adjusts
once during the life of such Mortgage Loans on a date specified in the related
mortgage note (each, a "5/25 ADJUSTMENT DATE"), as described herein. The
Mortgage Rates of 5/25 Adjustment Loans are adjusted on their respective 5/25
Adjustment Dates by reference to the FNMA posted annual yield (net) for 30-year
standard conventional fixed rate mortgage commitments for delivery within 30
days (priced at par), as published in the Wall Street Journal, or in the event
that such index is no longer available, an index selected by the relevant
Administrator that is based on comparable information (the "FNMA INDEX"). The
Certificates were created by the Pooling and Administration Agreements (the
"POOLING AND ADMINISTRATION AGREEMENTS") described herein.
Proceeds from the Certificates pledged as collateral to secure the
Bonds under the lien of the Indenture (the "TRUST ESTATE") are the sole source
of payments on the Bonds. Neither the Bonds nor the Certificates are insured
or guaranteed by any government agency or instrumentality, the Issuer, the
Administrators, the Indenture Trustee, the Underwriter or any other person or
entity.
Payments in respect of the Bonds will be made on the 25th day of each
month or, if such day is not a business day, the immediately succeeding
business day, commencing in October 1998 (each, a "PAYMENT DATE"). As more
fully described herein under "Description of the Bonds--Payments of Interest",
interest payments on the Bonds will be based on the Current Principal Balance
thereof (or on the Class Notional Balance, in the case of the Class AX Bonds)
and the related Bond Interest Rates. Payments in respect of principal of the
Bonds will be allocated among the two Classes of Bonds entitled to principal as
described under "Description of the Bonds--Payments of Principal" herein.
Each of the Mortgage Loans will have the limited benefit of a mortgage
pool insurance policy (each, a "MORTGAGE POOL INSURANCE POLICY") issued by (i)
General Electric Mortgage Insurance Corporation ("GEMICO"), (ii) PMI Mortgage
Insurance Co. ("PMI") or (iii) United Guaranty Residential Insurance Company
("UGIC", and together with GEMICO and PMI, the "POOL INSURERS"), in each case,
to the extent described herein. In addition, certain of the Mortgage Loans are
covered by primary mortgage insurance. Each Mortgage Loan will also have
either (i) the limited benefit of a Special Hazard Insurance Policy or (ii)
limited rights to assets in a Special Hazard Account (including proceeds under
a Special Hazard Insurance Policy); and each Mortgage Loan will have limited
rights to assets in a Bankruptcy Account, as described herein. Additional
residential mortgage loans, other than the Mortgage Loans evidenced by the
Certificates (the "OTHER MORTGAGE LOANS"), will also have the benefit of
certain of the Mortgage Pool Insurance Policies, and/or will have rights to
assets in certain of the Special Hazard Accounts (including proceeds under the
applicable Special Hazard Insurance Policy) and in certain of the Bankruptcy
Accounts. The Mortgage Loans and the Other Mortgage Loans are referred to
collectively herein as the "POOL INSURED LOANS". In addition, the 1992 PA,
1993 PA and 1992 XIV Certificates will have the limited benefit of a financial
guaranty insurance policy (the "FINANCIAL GUARANTY INSURANCE POLICY") issued by
Financial Security Assurance, Inc. ("FSA"), which also covers certain other
series of mortgage pass-through certificates issued by an affiliate of the
Issuer. See "Description of Insurance, Special Hazard Accounts and Bankruptcy
Accounts".
The yield on each Class of Bonds will depend upon its purchase price,
its interest rate and the timing of principal payments on the Mortgage Loans.
The yield on each Class of Bonds will also be sensitive to the rate and timing
of principal payments on the Mortgage Loans (including, for this purpose,
prepayments and amounts received by virtue of condemnation, insurance or
foreclosure, with respect to the Mortgage Loans), the actual characteristics of
the Mortgage Loans and fluctuations in the level of the applicable LIBOR Index,
the CMT Index and the FNMA Index. The Mortgage Loans are generally subject to
prepayment at any time without penalty. The Mortgage Loan prepayment rates and
the level of the LIBOR Index, the CMT Index and the FNMA Index are each likely
to fluctuate significantly from time to time. Investors should consider the
associated risks, including:
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o THE BONDS MAY NOT BE SUITABLE INVESTMENTS FOR ALL INVESTORS BECAUSE OF
THEIR COMPLEX NATURE. NO INVESTOR SHOULD PURCHASE THE BONDS UNLESS
SUCH INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE PREPAYMENT, YIELD,
LIQUIDITY AND OTHER RISKS ASSOCIATED WITH THE BONDS.
o EACH FORM OF CREDIT ENHANCEMENT WITH RESPECT TO THE MORTGAGE LOANS AND
RELATED MORTGAGED PROPERTIES PROVIDES LIMITED COVERAGE AS TO CERTAIN
TYPES OF LOSSES AND MAY PROVIDE NO COVERAGE AS TO CERTAIN OTHER TYPES
OF LOSSES. THE COVERAGE UNDER CERTAIN FORMS OF CREDIT ENHANCEMENT
WILL BE SUBJECT TO PERIODIC REDUCTION. SATISFACTION OF CERTAIN
CONDITIONS PRECEDENT IS REQUIRED WITH RESPECT TO EACH FORM OF CREDIT
ENHANCEMENT BEFORE COVERAGE IS AVAILABLE FOR A LOSS ON A MORTGAGE LOAN
OR ITS RELATED MORTGAGED PROPERTY. AS DESCRIBED ABOVE, CERTAIN FORMS
OF CREDIT ENHANCEMENT COVER LOSSES WITH RESPECT TO OTHER MORTGAGE
LOANS AND SUCH COVERAGE MAY BE EXPANDED TO COVER MORTGAGE LOANS NOT
CURRENTLY COVERED BY SUCH CREDIT ENHANCEMENT. APPROXIMATELY 58% OF
THE MORTGAGE LOANS (BY SCHEDULED PRINCIPAL BALANCE AS OF THE CUT-OFF
DATE) HAVE THE EXCLUSIVE BENEFIT OF CERTAIN OF THE CREDIT ENHANCEMENT.
OF THE REMAINING APPROXIMATELY 42% OF THE MORTGAGE LOANS, CERTAIN OF
THE CREDIT ENHANCEMENT IS AVAILABLE TO COVER LOSSES WITH RESPECT TO
OTHER MORTGAGE LOANS. TO THE EXTENT CREDIT ENHANCEMENT IS USED TO
COVER LOSSES WITH RESPECT TO OTHER MORTGAGE LOANS, THE AMOUNT OF
COVERAGE AVAILABLE FOR THE MORTGAGE LOANS WILL BE REDUCED.
CONSEQUENTLY, A LOSS ON A MORTGAGE LOAN MAY NOT BE COVERED BY CREDIT
ENHANCEMENT AND, THEREFORE, MAY RESULT IN LOSSES ON THE BONDS. SEE
"DESCRIPTION OF INSURANCE, SPECIAL HAZARD ACCOUNTS AND BANKRUPTCY
ACCOUNTS" HEREIN.
o FASTER THAN ANTICIPATED MORTGAGE LOAN PREPAYMENT RATES CAN REDUCE THE
WEIGHTED AVERAGE LIVES AND, THUS, THE YIELD OF BONDS PURCHASED AT A
PREMIUM (AND, IN THE CASE OF THE CLASS AX BONDS, CAN RESULT IN THE
FAILURE OF AN INVESTOR TO FULLY RECOVER ITS INVESTMENT).
o SLOWER THAN ANTICIPATED MORTGAGE LOAN PREPAYMENT RATES CAN INCREASE
THE WEIGHTED AVERAGE LIVES AND, THUS, REDUCE THE YIELD OF BONDS
PURCHASED AT A DISCOUNT.
o APPROXIMATELY 1.43% OF THE MORTGAGE LOANS (BY SCHEDULED PRINCIPAL
BALANCE AS OF THE CUT-OFF DATE) ARE LIBOR LOANS OR CMT LOANS THAT ARE
CONVERTIBLE AT THE OPTION OF THE RELATED MORTGAGORS INTO FIXED-RATE
MORTGAGE LOANS. PURSUANT TO THE TERMS OF THE RELATED SERVICING
AGREEMENT, THE RELATED SERVICER MAY BE REQUIRED TO REPURCHASE ANY SUCH
MORTGAGE LOAN WITH RESPECT TO WHICH A CONVERSION OPTION IS EXERCISED.
SUCH REPURCHASE WOULD HAVE THE SAME EFFECT AS A PREPAYMENT IN FULL OF
SUCH MORTGAGE LOAN, AND WOULD RESULT IN A COMMENSURATE PREPAYMENT OF
PRINCIPAL ON THE BONDS. IN THE EVENT THAT A SERVICER FAILS (OR IS NOT
REQUIRED TO) PURCHASE A LIBOR LOAN OR A CMT LOAN WITH RESPECT TO WHICH
A CONVERSION OPTION HAS BEEN EXERCISED, AND THE LIBOR INDEX OR THE CMT
INDEX, AS APPLICABLE, PLUS THE RELATED LIBOR GROSS MARGIN OR CMT GROSS
MARGIN (AS SUCH TERMS ARE DEFINED HEREIN), RESPECTIVELY FOR SUCH
MORTGAGE LOAN IS HIGHER THAN THE NEW FIXED RATE FOR SUCH MORTGAGE
LOAN, THE YIELD ON THE BONDS MAY BE LESS THAN WOULD HAVE BEEN THE CASE
IN THE ABSENCE OF SUCH INTEREST RATE CONVERSION.
o THE SERIES 1998-3 REMIC WILL BE SUBJECT TO THE SPECIAL "SINGLE-CLASS
REMIC" RULES WHICH MAY CAUSE ADVERSE INCOME TAX CONSEQUENCES TO
INVESTORS WHO ARE INDIVIDUALS, TRUSTS OR ESTATES. SEE "CERTAIN
FEDERAL INCOME TAX CONSEQUENCES--SPECIAL TAX CONSIDERATIONS APPLICABLE
TO RESIDUAL BONDS--REMIC EXPENSES; SINGLE CLASS REMICS" IN THE
PROSPECTUS.
SEE "CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT
FOR MORE SPECIFIC INFORMATION WITH RESPECT TO THE YIELD AND REINVESTMENT RISKS
ASSOCIATED WITH EACH SPECIFIC TYPE OF BOND. SEE ALSO "RISK FACTORS" HEREIN.
There is currently no secondary market for the Bonds and there can be
no assurance that one will develop. The Underwriter intends to establish a
market in the Class A Bonds but is not obligated to do so. There is no
assurance that any such market, if established, will continue or will provide
investors with a sufficient level of liquidity.
For federal income tax purposes, a real estate mortgage investment
conduit (a "REMIC") election will be made with respect to the Series 1998-3
Bonds. As described more fully herein, the Class A Bonds and the Class AX
Bonds will represent "regular interests" in the Series 1998-3 REMIC, and the
Class R Bonds will represent the residual interest in the Series 1998-3 REMIC.
See "Federal Income Tax Consequences" herein and "Certain Federal Income Tax
Consequences--REMIC Bonds" in the Prospectus.
S-3
<PAGE> 4
The Class R Bonds may not be purchased by Plans (as defined herein),
persons acting on behalf of Plans, or persons using assets of Plans (each of
the foregoing, a "PLAN INVESTOR") and the Class AX may not be transferred to a
Plan Investor, except as described herein. Each purchaser of a Class AX Bond
will be deemed to represent, by virtue of its acquisition thereof, that it is
not a Plan Investor, unless such purchaser provides a Benefit Plan Opinion (as
defined herein) or, in the case of an insurance company, a representation
letter as described herein.
The information set forth herein under "Summary of Terms--The Mortgage
Pool", "Description of the Mortgage Loans" and "The Administrators" is based on
information that has been provided by the Administrators. No representation is
made by the Issuer, the Underwriter, the Indenture Trustee or any of their
respective affiliates as to the accuracy or completeness of the information
provided by the Administrators.
_______________
No person is authorized in connection with this offering to give any
information or to make any representation about the Issuer, the Administrators,
the Indenture Trustee, the Bonds, or any other matter referred to herein, other
than those contained in this Prospectus Supplement or the Prospectus. If any
other information or representation is given or made, such information or
representation may not be relied upon as having been authorized by the Issuer,
the Administrators or the Indenture Trustee. This Prospectus Supplement and
the Prospectus do not constitute an offer to sell or a solicitation of an offer
to buy securities other than the Bonds, or an offer to sell or a solicitation
of an offer to buy securities in any jurisdiction or to any person to whom it
is unlawful to make such offer in such jurisdiction. Neither the delivery of
this Prospectus Supplement or the Prospectus nor any sale hereunder or
thereunder shall, under any circumstances, create any implication that the
information contained herein or therein is correct as of any time subsequent to
their respective dates.
_______________
THE BONDS OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL BE PART OF A
SEPARATE SERIES OF BONDS BEING OFFERED BY THE ISSUER PURSUANT TO ITS PROSPECTUS
DATED SEPTEMBER 28, 1998, OF WHICH THIS PROSPECTUS SUPPLEMENT IS A PART AND
WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS CONTAINS
IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT CONTAINED HEREIN, AND
PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS PROSPECTUS
SUPPLEMENT IN FULL.
_______________
The Issuer will file with the Securities and Exchange Commission (the
"COMMISSION") certain materials relating to the Mortgage Pool and the Bonds on
Form 8-K. Such materials were prepared by the Underwriter for certain
prospective investors, and, unless otherwise specified in such Form 8-K, the
information included in such materials is subject to and is superseded by the
information set forth in this Prospectus Supplement.
_______________
AVAILABLE INFORMATION
The Issuer has filed with the Commission a Registration Statement on
Form S-3 (together with all amendments and exhibits thereto, the "REGISTRATION
STATEMENT") under the Securities Act of 1933, as amended. This Prospectus
Supplement and the related Prospectus, which form a part of the Registration
Statement, omit certain information contained in such Registration Statement in
accordance with the rules and regulations of the Commission. The Registration
Statement can be inspected and copied at the Public Reference Room of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Commission's regional offices at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, Suite
1300, New York, New York 10048. Copies of such information can be obtained at
prescribed rates from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a web site on the Internet that contains reports, proxy
and information statements and other information regarding the Issuer. The
address of such web site is http://www.sec.gov.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Certain documents filed with the Commission by the Issuer are
incorporated by reference herein. See "Incorporation of Certain Documents by
Reference" in the Prospectus. The Issuer will provide, without charge, to any
person to whom this Prospectus Supplement is delivered, upon oral or written
request of such person, a copy of any or
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all of the foregoing financial statements incorporated by reference. Requests
for such copies should be sent to Capstead Securities Corporation IV, CityPlace
Center East, 2711 North Haskell Avenue, Suite 1000, Dallas, Texas 75204,
Attention: Investor Relations, Tel. (214) 874-2500.
FORWARD-LOOKING STATEMENTS
IF AND WHEN INCLUDED IN THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS OR IN DOCUMENTS INCORPORATED HEREIN OR THEREIN BY
REFERENCE, THE WORDS "EXPECTS", "INTENDS", "ANTICIPATES", "ESTIMATES" AND
ANALOGOUS EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. ANY
SUCH STATEMENTS, WHICH MAY INCLUDE STATEMENTS CONTAINED IN "RISK FACTORS", ARE
INHERENTLY SUBJECT TO A VARIETY OF RISKS AND UNCERTAINTIES THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED. SUCH RISKS AND
UNCERTAINTIES INCLUDE, AMONG OTHERS, GENERAL ECONOMIC AND BUSINESS CONDITIONS,
COMPETITION, CHANGES IN POLITICAL, SOCIAL AND ECONOMIC CONDITIONS, REGULATORY
INITIATIVES AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, CUSTOMER PREFERENCES
AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE ISSUER'S CONTROL.
THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS PROSPECTUS
SUPPLEMENT. THE ISSUER EXPRESSLY DISCLAIMS ANY OBLIGATIONS OR UNDERTAKING TO
RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENT
CONTAINED HEREIN TO REFLECT ANY CHANGE IN THE ISSUER'S EXPECTATIONS WITH REGARD
THERETO OR ANY CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH
STATEMENT IS BASED. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
CONTAINED IN ANY SUCH FORWARD LOOKING STATEMENTS AS A RESULT OF THE MATTERS SET
FORTH HEREIN UNDER "SUMMARY OF TERMS--YIELD AND PREPAYMENT CONSIDERATIONS" AND
"YIELD AND PREPAYMENT CONSIDERATIONS" AND ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT.
REPORTS TO BONDHOLDERS
Unaudited monthly and annual reports concerning the Class A Bonds will
be sent by the Indenture Trustee to Cede & Co., as the nominee of DTC and as
the record holder of the Class A Bonds. DTC will supply such reports to
Beneficial Owners of any such Class A Bonds in accordance with its procedures.
S-5
<PAGE> 6
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used herein and not otherwise
defined have the meanings assigned in the Prospectus. See "Index of Significant
Definitions" for the location in the Prospectus of the definitions of certain
capitalized terms.
Title of Bonds . . . . . . . . Collateralized Mortgage Obligations,
Series 1998-3 (the "BONDS").
Issuer . . . . . . . . . . . . Capstead Securities Corporation IV (the
"ISSUER"). See "The Issuer" in the
Prospectus.
Offered Bonds . . . . . . . . . Collateralized Mortgage Obligations,
Series 1998-3 in the Classes and
approximate original principal amounts
("ORIGINAL PRINCIPAL AMOUNTS") (or, in
the case of the Class AX Bonds, the
original Class Notional Balance),
subject to adjustment as described
herein, specified on the cover page of
this Prospectus Supplement. The
aggregate Original Principal Amounts of
the Bonds as of the Closing Date will
not be less than approximately
$311,248,767 nor more than
approximately $380,415,159. The Class
AX Bonds and the Class R Bonds are not
being underwritten by the Underwriter
but are being sold by the Issuer to
Capstead Mortgage Corporation, the
parent of the Issuer, upon issuance.
The Bonds are sometimes referred to
herein with the following designations:
<TABLE>
<CAPTION>
DESIGNATION CLASSES
----------- -------
<S> <C>
REMIC Regular Bonds Class A Bonds and
Class AX Bonds
Residual Bonds Class R Bonds
Book Entry Bonds Class A Bonds
</TABLE>
The Class A Bonds are "Book Entry Bonds"
as defined in the Prospectus, and such
Class 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"). Beneficial interests in the
Book Entry Bonds will be held by
beneficial owners of such Class of
Bonds ("BENEFICIAL OWNERS") through the
book-entry facilities of the Clearing
Agency, as described herein, in
denominations of $25,000, and in
increments of $1 in excess thereof.
Beneficial Owners will not receive
registered definitive certificates
representing their interests in the
Book Entry 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.
The Class AX Bonds and the Class R Bonds
will be issued in registered definitive
certificates ("DEFINITIVE BONDS") in
the following minimum denominations:
(i) Class AX Bonds, $100,000 of
Notional Amount and increments of $1
Notional Amount in excess thereof; and
(ii) Class R Bonds, $100 of Original
Principal Amount; except that one Class
AX Bond may be issued in a different
denomination. See "Description of the
Bonds--General" in the Prospectus.
Administrators . . . . . . . . Capstead Mortgage Corporation, a
Maryland corporation ("CMC"), will act
as Administrator with respect to
approximately 43% of the Mortgage
S-6
<PAGE> 7
Loans; First Nationwide Mortgage
Corporation, a Delaware corporation
("FNMC"), will act as Administrator
with respect to approximately 13% of
the Mortgage Loans; and GE Capital
Mortgage Services, Inc., a New
Jersey corporation ("GE"), will act
as Administrator with respect to
approximately 44% of the Mortgage
Loans, in each case, such percentage
is determined by Scheduled Principal
Balance as of the Cut-off Date.
Indenture Trustee . . . . . . . Chase Bank of Texas, National
Association, as trustee under the
Indenture (the "INDENTURE TRUSTEE").
Cut-off Date . . . . . . . . . September 1, 1998 (the "CUT-OFF DATE").
Closing Date . . . . . . . . . On or about September 29, 1998 (the
"CLOSING DATE").
Record Date . . . . . . . . . . The Record Date for the Bonds for each
Payment Date (as defined herein)
will be the last day of the month
preceding the month in which such
Payment Date occurs.
Payment Date . . . . . . . . . The 25th day of each month or, if such
25th day is not a business day, on
the next succeeding business day,
commencing in October 1998 (each, a
"PAYMENT DATE").
Description of the Bonds . . . The Bonds will be issued pursuant to an
Indenture and the related Series
Supplement to be dated as of the
Cut-off Date, as supplemented by the
Series 1998-3 Series Supplement to
be dated as of the Cut-off Date,
(collectively, the "INDENTURE"),
between the Issuer and the Indenture
Trustee. See "Description of the
Bonds" herein.
Interest . . . . . . . . . . . Interest will accrue on the Bonds at the
applicable Bond Interest Rate as
described herein under "Description
of the Bonds--Payments of Interest".
Interest will accrue on the Bonds during
the period commencing on the
previous Payment Date (or in the
case of the first Payment Date, the
Closing Date) and ending on the day
prior to the related Payment Date
(each, an "INTEREST ACCRUAL
PERIOD"). On each Payment Date, the
amount of interest payable on the
Bonds (the "ACCRUED BOND INTEREST")
will equal interest for the number
of days in the related Interest
Accrual Period at the applicable
Bond Interest Rate on the Class
Current Principal Balance thereof
(or, in the case of the Class AX
Bonds, the Class Notional Balance)
immediately prior to such Payment
Date, calculated on the basis of a
360-day year, less any Net Interest
Shortfall allocated thereto on such
date. The "CLASS NOTIONAL BALANCE"
of the Class AX Bonds for any
Payment Date will equal the Class
Current Principal Balances of the
Class A Bonds and the Class R Bonds
as of such date.
The Bond Interest Rate on the Class A
Bonds for each Interest Accrual
Period (the "CLASS A BOND INTEREST
RATE") will be a per annum rate
equal to One-Month LIBOR (calculated
as described herein) plus the Margin
for such date, but in no event
greater than the lesser of (x) the
Net WAC for such date and (y) 8.50%
per annum. The "MARGIN" for each
Payment Date occurring through and
including the Initial Call Date (as
defined herein), is equal to 0.18%;
as to each Payment Date thereafter,
the Margin will equal 0.36%. To the
extent of amounts on deposit in the
Reserve Fund see "Description of the
Bonds--Reserve Fund" herein. The
Class A Bonds will also be entitled,
as described herein, to receive
amounts in respect of Basis Risk
Shortfalls (as defined herein). On
each Payment Date, the "BASIS RISK
SHORTFALL" will equal the sum of (i)
the excess of (x) the interest that
would have accrued on the Class A
Bonds during the
S-7
<PAGE> 8
preceding Interest Accrual Period,
calculated at a per annum interest
rate equal to the lesser of 8.50% and
One-Month LIBOR plus the Margin for
such Interest Accrual Period over (y)
interest that would have accrued on
the Class A Bonds during the preceding
Interest Accrual Period at the Net WAC
(as defined herein) for such Payment
Date and (ii) the amount of any Basis
Risk Shortfalls from prior Payment
Dates remaining unpaid to the Class A
Bondholders.
The Bond Interest Rate on the Class AX
Bonds for each Interest Accrual
Period (the "CLASS AX BOND INTEREST
RATE") will be a per annum rate
equal to the excess of (x) the Net
WAC for such date over (y) the Class
A Bond Interest Rate for such
Interest Accrual Period. In the
event of Basis Risk Shortfalls with
respect to the Class A Bonds,
interest otherwise payable to the
Class AX Bonds will be deposited
into the Reserve Fund to cover such
shortfalls. See "Description of the
Bonds--Payment of Interest".
The Bond Interest Rate on the Class R
Bonds (the "CLASS R BOND INTEREST
RATE") will be equal to the Class A
Bond Interest Rate.
The Net WAC on any Payment Date will
equal the weighted average (by
principal balance) of the interest
rates of the Certificates for such
date, less the Indenture Trustee's
Fee Rate. The Indenture Trustee
Rate is equal to 1/12th of 0.00385%.
Class A Principal Payments . . Principal will be paid monthly on each
Payment Date on the Class A Bonds in
an amount equal to the aggregate
amount of distributions of principal
received on or in respect of the
Certificates on the distribution
date (as defined herein) under the
Pooling and Administration
Agreements (a "CERTIFICATE
DISTRIBUTION DATE") immediately
preceding such Payment Date as
reduced on the first Payment Date by
$100 payable to the Class R Bonds.
See "Description of the
Bonds--Payments of Principal"
herein.
S-8
<PAGE> 9
Description of the
Certificates . . . . . . . . . Each Certificate evidences a 100%
interest in a whole pool of fixed
rate and/or adjustable rate
conventional mortgage loans secured
by one- to four-family residential
properties (each, a "MORTGAGE
LOAN"). The following table sets
forth certain information with
respect to the Certificates:
<TABLE>
<S> <C> <C>
Certificate Group Administrator (1) Pool Insurer (2)
----------------- ----------------- ----------------
1991-VI GE GEMICO
1991-VII GE GEMICO
1992-V GE GEMICO
1992-VI GE GEMICO
1992-VII GE GEMICO
1992-VIII GE GEMICO
1992-IX CMC GEMICO
1992-X GE GEMICO
1992-XIV GE/FNMC GEMICO/PMI
1991-B GE GEMICO
1991-E GE GEMICO
1992-PA FNMC PMI
1992-GA CMC GEMICO
1993-PA CMC PMI
1994-UA CMC UGIC
1994-GA CMC GEMICO
</TABLE>
(1) See "Pooling, Administration and
Servicing--Certain Matters Regarding
the Administrators" herein.
(2) See "Description of Insurance,
Special Hazard Accounts and
Bankruptcy Accounts" herein.
Effective September 1, 1998, the Issuer
succeeded to all of the rights and
obligations as sponsor under each of
the Pooling and Administration
Agreements with respect to the
Certificates (in such capacity, the
"SPONSOR").
The Mortgage Loans . . . . . . All of the Mortgage Loans will be either
fixed rate or adjustable rate,
conventional mortgage loans secured
by first liens on one- to
four-family residential properties.
The Mortgage Loans are fully
amortizing. The Mortgage Loans will
have original terms to maturity of
not more than 30 years. See
"Description of the Mortgage Loans
and the Mortgaged Properties"
herein. Approximately 1.43% of the
Mortgage Loans (in each case by
Scheduled Principal Balance as of
the Cut-off Date) contain a
conversion option, pursuant to which
the related Mortgagor may, after the
satisfaction of certain conditions,
elect to convert the rate of
interest borne by such Mortgage Loan
to a fixed rate of interest.
Pursuant to the terms of the related
Servicing Agreement, the related
Servicer may be required to
repurchase any such Mortgage Loan
with respect to which a conversion
option is exercised. See "Certain
Prepayment and Yield
Considerations--Yield Considerations
Relating to Interest Rate
Conversions" herein.
Advances . . . . . . . . . . . Each Servicer will be obligated to make
advances with respect to delinquent
monthly payments on the Mortgage
Loans serviced by it to the extent
such advances are, in its judgment,
recoverable to the extent described
herein. The Administrators will be
obligated to make advances only to
the extent that a Servicer would be
obligated to make such advances but
fails to do so. See "Pooling,
Administration and
Servicing--Advances" herein.
S-9
<PAGE> 10
Credit Enhancement . . . . . . Each Mortgage Loan will have the limited
benefit of a Mortgage Pool Insurance
Policy as described herein. Each
Mortgage Loan will also have either
(i) the limited benefit of a Special
Hazard Insurance Policy or (ii)
limited rights to assets in a
Special Hazard Account (including
proceeds under a Special Hazard
Insurance Policy); and each Mortgage
Loan will have limited rights to
assets in a Bankruptcy Account. In
addition, the Series 1992-PA,
1993-PA and 1992- XIV Certificates
will have the limited benefit of a
financial guaranty insurance policy
(the "FINANCIAL GUARANTY INSURANCE
POLICY") issued by Financial
Security Assurance, Inc. ("FSA"),
which also covers certain other
series of mortgage pass-through
certificates issued by an affiliate
of the Issuer. EACH FORM OF CREDIT
ENHANCEMENT WITH RESPECT TO THE
MORTGAGE LOANS AND RELATED MORTGAGED
PROPERTIES PROVIDES ONLY LIMITED
COVERAGE AS TO CERTAIN TYPES OF
LOSSES AND MAY PROVIDE NO COVERAGE
AS TO CERTAIN OTHER TYPES OF LOSSES.
MOREOVER, THE COVERAGE UNDER CERTAIN
FORMS OF CREDIT ENHANCEMENT WILL BE
SUBJECT TO PERIODIC REDUCTION.
SATISFACTION OF CERTAIN CONDITIONS
PRECEDENT IS REQUIRED WITH RESPECT
TO EACH FORM OF CREDIT ENHANCEMENT
BEFORE COVERAGE IS AVAILABLE FOR A
LOSS ON A MORTGAGE LOAN OR ITS
RELATED MORTGAGED PROPERTY. THE
OTHER MORTGAGE LOANS WILL ALSO HAVE
THE BENEFIT OF CERTAIN OF THE
MORTGAGE POOL INSURANCE POLICIES
AND/OR WILL HAVE RIGHTS TO ASSETS IN
CERTAIN OF THE SPECIAL HAZARD
ACCOUNTS (INCLUDING PROCEEDS UNDER
THE APPLICABLE SPECIAL HAZARD
INSURANCE POLICY) AND IN CERTAIN OF
THE BANKRUPTCY ACCOUNTS. See
"Description of Insurance, Special
Hazard Accounts and Bankruptcy
Accounts" herein for a description
of the specific coverage available
under each of the Mortgage Pool
Insurance Policies, the Special
Hazard Accounts and the Bankruptcy
Accounts.
Certain Investment, Prepayment
and Yield Considerations . . The yield to investors of the Bonds will
be sensitive in varying degrees to
the rate and timing of principal
payments (including prepayments) on
the Mortgage Loans, which can
generally be prepaid at any time
without penalty. All investors
should consider carefully the
associated risks including, in the
case of any Bonds purchased at a
discount, the risk that a slower
than anticipated rate of principal
prepayments on the Mortgage Loans
could result in an actual yield to
investors that is lower than the
anticipated yield and, in the case
of any Bonds purchased at a premium,
the risk that a faster than
anticipated rate of principal
prepayments on the Mortgage Loans
could result in an actual yield to
investors that is lower than the
anticipated yield (or, in the case
of the Class AX Bonds, the failure
of such investor to fully recover
its investment).
The yield on the Bonds will be sensitive
to (i) fluctuations in the levels of
the LIBOR Indices used to determine
the interest rates on the LIBOR
Loans and (ii) fluctuations in the
levels of the CMT Index used to
determine the interest rates on the
CMT Loans and (iii) the level of the
FNMA Index used to adjust the 5/25
Mortgage Loans on the 5/25
Adjustment Dates. In addition, the
Bond Interest Rate on the Class A
Bonds as to any Payment Date,
although based on LIBOR, is subject
to an interest rate ceiling equal to
the lesser of the Net WAC and 8.50%
per annum. Based upon the payment
performance of the Mortgage Loans
underlying the Certificates, the Net
WAC may either increase or decrease,
independently of, and in some case
inversely to, fluctuations in LIBOR,
resulting in Basis Risk Shortfalls
with respect to the interest payable
on the Class A Bonds. Although such
Basis Risk Shortfalls will be
payable on future Payment
S-10
<PAGE> 11
Dates from amounts on deposit in the
Reserve Fund, there can be no
assurance that amounts on deposit in
the Reserve Fund will be sufficient
to cover Basis Risk Shortfalls on any
future Payment Dates. See
"Description of the Bonds--Payments
of Interest."
The yield to investors on the Class AX
Bonds will be extremely sensitive to
the rate and timing of principal
payments (including principal
prepayments, defaults and
liquidations) on the Mortgage Loans,
which rate and timing of payments
may fluctuate significantly over
time. A rapid rate of principal
payments on the Mortgage Loans could
result in the failure of the
investors in the Class AX Bonds to
recover their initial investment.
In addition, in the event of Basis
Risk Shortfalls with respect to the
Class A Bonds (or a Reserve Fund
Deficiency (as defined herein)),
interest payable with respect to the
Class AX Bonds will not be paid to
Class AX Bondholders, but instead
will be deposited into the Reserve
Fund to cover such Basis Risk
Shortfalls (or Reserve Fund
Deficiency). Such interest payments
will be subsequently recovered by
the Class AX Bondholders only to the
extent that amounts on deposit in
the Reserve Fund exceed the Reserve
Fund Requirement. See "Description
of the Bonds--Reserve Fund."
AS DESCRIBED HEREIN, APPROXIMATELY 1.83%
OF THE MORTGAGE LOANS WERE
DELINQUENT BETWEEN 30 AND 59 DAYS;
APPROXIMATELY 0.49% OF THE MORTGAGE
LOANS WERE DELINQUENT BETWEEN 60 AND
89 DAYS; APPROXIMATELY 0.57% OF THE
MORTGAGE LOANS WERE DELINQUENT IN
EXCESS OF 90 DAYS (IN EACH CASE AS
CALCULATED BY SCHEDULED PRINCIPAL
BALANCE) AS OF SEPTEMBER 1, 1998.
IN ADDITION, APPROXIMATELY 3.34% (BY
SCHEDULED PRINCIPAL BALANCE) OF THE
MORTGAGE LOANS WERE IN FORECLOSURE
OR CONSTITUTED REAL ESTATE OWNED AS
OF SEPTEMBER 1, 1998. SEE "RISK
FACTORS" HEREIN.
With respect to the Mortgage Loans and
the Certificates, principal payments
in full may reduce the amount of
interest available for payment to the
Bondholders in the following month
from the amount which would have been
available in the absence of such
prepayments. However, the Servicers
are required to pay Compensating
Interest payments in respect of such
shortfalls. See "Description of the
Bonds--Net Interest Shortfalls."
Approximately 1.43% of the Mortgage
Loans (by Scheduled Principal
Balance as of the Cut-off Date) are
LIBOR Loans or CMT Loans convertible
at the option of the related
Mortgagors into fixed rate mortgage
loans. Pursuant to the terms of the
related Servicing Agreement, the
related Servicer may be required to
repurchase any such Mortgage Loan
with respect to which a conversion
option is exercised. Such
repurchase would have the same
effect as a prepayment in full of
such Mortgage Loan and would result
in a commensurate prepayment of
principal on the Bonds. In the
event that a Servicer fails (or is
not required) to purchase a LIBOR
Loan or a CMT Loan with respect to
which a conversion option has been
exercised, and the LIBOR Index or
the CMT Index, as applicable, plus
the related LIBOR Gross Margin or
CMT Gross Margin, respectively, for
such Mortgage Loan is higher than
the new fixed rate for such Mortgage
Loan, the yield on the Bonds may be
less than would have been the case
in the absence of such interest rate
conversion.
S-11
<PAGE> 12
THE FOREGOING PARAGRAPHS ARE QUALIFIED
IN THEIR ENTIRETY BY REFERENCE TO
THE DETAILED INFORMATION APPEARING
ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT, PARTICULARLY UNDER
"CERTAIN PREPAYMENT AND YIELD
CONSIDERATIONS," WHICH PROVIDES A
MORE DETAILED DISCUSSION OF VARIOUS
FACTORS AFFECTING YIELDS ON THE
BONDS. NO INVESTMENT SHOULD BE MADE
IN THE BONDS UNLESS AN INVESTOR HAS
CONSIDERED CAREFULLY THE ASSOCIATED
RISKS OF INVESTING IN SUCH BONDS AS
DISCUSSED UNDER "CERTAIN PREPAYMENT
AND YIELD CONSIDERATIONS" HEREIN.
Liquidity . . . . . . . . . . . There is currently no secondary market
for the Bonds, and there can be no
assurance that one will develop.
The Underwriter intends to establish
a market in the Class A Bonds, but
it is not obligated to do so. There
is no assurance that any such
market, if established, will
continue or will provide investors
with a sufficient level of
liquidity. Each Bondholder will
receive monthly reports pertaining
to the Bonds as described under
"Indenture--Reports by Indenture
Trustee to Bondholders" in the
Prospectus. There are a limited
number of sources which provide
certain information about
collateralized mortgage obligations
in the secondary market, and there
can be no assurance that any of
these sources will provide
information about the Bonds.
Investors should consider the effect
of limited information on the
liquidity of the Bonds.
Maturity of the Bonds . . . . . The Stated Maturity for each Class of
Bonds will be the second Payment
Date following the maturity date of
the latest maturing Mortgage Loan
underlying any Certificate, assuming
that scheduled payments of principal
and interest are timely received and
that no prepayments are made with
respect to such Mortgage Loan. The
rate of payments (including
prepayments) on the Certificates
will depend on the characteristics
of 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 payment experience.
Accordingly, the actual maturity of
each Class of Bonds could occur
significantly earlier than its
Stated Maturity. See "Description
of the Bonds--Weighted Average Life
of the Bonds" in this Prospectus
Supplement and "Description of the
Bonds--Maturity of the Bonds" in the
Prospectus.
Optional Redemption . . . . . The Bonds may be redeemed in whole, but
not in part, at the Issuer's option
on any Payment Date on or after the
earlier of: (i) the Payment Date
occurring in March 2001 (the
"INITIAL CALL DATE") or (ii) each
Payment Date on or after the date
the Class Current Principal Balance
of the Class A Bonds is less than
25% of the Original Principal Amount
thereof (any such Payment Date is
referred to herein as an "OPTIONAL
REDEMPTION DATE"). To effect any
such optional redemption the Issuer
will be required to deposit into the
Collection Account an amount (the
"REDEMPTION PRICE") equal to the sum
of the outstanding aggregate Class
Current Principal Balance of the
Bonds on such Payment Date (after
giving effect to principal payments
otherwise made on or prior to such
date) plus accrued and unpaid
interest thereon at the applicable
Bond Interest Rate through the
Optional Redemption Date. See
"Description of the Bonds--Optional
Redemption" herein and in the
Prospectus. In the event that the
Issuer's option to redeem the Bonds
is not exercised on the Initial Call
Date, the Margin for each subsequent
Payment Date will be increased to
0.36%.
Federal Income Tax
Consequences . . . . . . . . For federal income tax purposes, an
election will be made to treat the
segregated pool of assets securing
the Bonds as a real estate mortgage
investment conduit (a "REMIC").
Upon the issuance of the Bonds,
Andrews & Kurth L.L.P., counsel to
the Issuer, will deliver its opinion
generally to the effect that,
assuming compliance with all
provisions of the
S-12
<PAGE> 13
Indenture and the Pooling and
Administration Agreements, for
federal income tax purposes, the
Series 1998-3 REMIC will qualify as a
REMIC within the meaning of Sections
860A through 860G of the Internal
Revenue Code of 1986 (the "CODE").
For federal income tax purposes, the
Class A Bonds and the Class AX Bonds
will represent the "regular
interests" in the Series 1998-3
REMIC, and the Class R Bonds will
represent the "residual interest" in
the Series 1998-3 REMIC. In addition,
for federal income tax purposes, the
Class A Bonds will represent an
undivided beneficial ownership
interest in an interest rate cap
contract that reflects the right to
receive the Basis Risk Shortfall.
Because the Class A Bonds and the Class
AX Bonds will be considered REMIC
regular interests, they will be
taxable debt obligations under the
Code, and interest paid or accrued
on such Bonds, including any
original issue discount, will be
taxable to the holders of such Bonds
in accordance with the accrual
method of accounting, regardless of
such Bondholder's usual method of
accounting. It is expected that the
Class AX Bonds will be, and the
Class A Bonds may be, treated as
having been issued with original
issue discount for federal income
tax purposes. In addition, it is
possible that the Internal Revenue
Service could treat a portion of the
additional interest that would
become payable on the Class A Bonds
after the Optional Redemption Date
as a result of the Issuer's election
not to redeem the Bonds as
reportable under the original issue
discount rules. See "Certain
Federal Income Tax
Consequences--REMIC Bonds--Taxation
of Regular Bonds--Original Issue
Discount" in the Prospectus. The
prepayment assumption that should be
used in determining the rate of
accrual of original issue discount,
if any, with respect to the Bonds is
40% of CPR (as defined herein).
However, no representation is made
herein as to the rate at which
prepayments actually will occur.
See "Certain Prepayment and Yield
Considerations" herein.
For federal income tax purposes, the
Bonds, other than the portion of the
Class A Bonds allocable to the
interest rate cap contract,
generally will be treated as
"regular or residual interests in a
REMIC" for domestic building and
loan associations and as "real
estate assets" for real estate
investment trusts ("REITS"), subject
to the described in "Certain
Federal Income Tax Consequences" in
the Prospectus. Similarly, interest
on the Bonds will be considered
"interest on obligations secured by
mortgages on real property" for
REITs, subject to the limitations
described in "Certain Federal Income
Tax Consequences" in the Prospectus.
For further information regarding the
federal income tax consequences of
investing in the Bonds see "Federal
Income Tax Consequences" in this
Prospectus Supplement and "Certain
Federal Income Tax Consequences" in
the Prospectus.
Federal Income Tax Aspects
of Residual Bonds . . . . . For a discussion of certain tax matters
regarding the Class R Bonds, see
"Federal Income Tax Consequences" in
this Prospectus Supplement and
"Certain Federal Income Tax
Consequences" in the Prospectus.
Restriction on Purchase and Transfer
of Residual Bonds . . . . . For a discussion of restrictions on the
purchase and transfer of the Class R
Bonds, see "Certain Federal Income
Tax Consequences--Special Tax
Considerations Applicable to
Residual Bonds--Restrictions on
Transfer of a Residual Bond" in the
Prospectus.
S-13
<PAGE> 14
ERISA Considerations . . . . . For a discussion of certain ERISA
considerations, see "ERISA
Considerations" in this Prospectus
Supplement and in the Prospectus.
Legal Investment . . . . . . . The Bonds offered hereby will constitute
"mortgage related securities" for
purposes of the Secondary Mortgage
Market Enhancement Act of 1984
("SMMEA"). However, institutions
whose investment activities are
subject to legal investment laws and
regulations or review by regulatory
authority may be subject to
restrictions on investment in the
Bonds. See "Legal Investment" in
the Prospectus.
Bond Rating . . . . . . . . . It is a condition to the issuance of the
Class A Bonds, Class AX Bonds and
Class R Bonds that they be rated
"AAAr" by Standard & Poor's Ratings
Services ("S&P") and "AAA" by Duff &
Phelps Credit Rating Co. ("DCR" and,
together with S&P, the "RATING
AGENCIES"). In assigning its
ratings, neither S&P nor DCR
expresses an opinion with respect to
a Servicer's repurchase obligation
(or lack thereof) in the event a
Mortgagor elects to convert a
Mortgage Loan from adjustable rate
mortgage loan to a fixed rate
mortgage loan. Investors should be
aware that there could be some
variability in expected returns in
the event of a failure on the part
of a Servicer to repurchase
converted Mortgage Loans. The "r"
component of the S&P rating is
attached to highlight derivative,
hybrid and certain other obligations
that S&P believes may experience
high volatility or high variability
in expected returns due to noncredit
risks. See "Bond Ratings" in this
Prospectus Supplement.
S-14
<PAGE> 15
RISK FACTORS
Prospective investors in the Bonds should consider the following risk
factors (as well as the factors set forth under the caption "Risk Factors" in
the Prospectus) in connection with the purchase of a Bond. These factors are
intended to identify the significant sources of risk affecting an investment in
the Bonds. Unless the context otherwise indicates, any numerical or
statistical information presented is based upon the characteristics of the
Mortgage Loans as of the Cut-off Date.
ADEQUACY OF CREDIT ENHANCEMENT
Each form of credit enhancement with respect to the Mortgage Loans and
related Mortgaged Properties provides only limited coverage as to certain types
of losses and may provide no coverage as to certain other types of losses.
Moreover, the coverage under certain credit enhancement will be subject to
periodic reduction. Satisfaction of certain conditions precedent is required
with respect to each form of credit enhancement before coverage is available
for a loss on a Mortgage Loan or its related Mortgaged Property. The Other
Mortgage Loans will also have the benefit of certain of the Mortgage Pool
Insurance Policies and/or will have rights to assets in the Special Hazard
Accounts (including proceeds under the applicable Special Hazard Insurance
Policy) and in the Bankruptcy Accounts. In addition, coverage under certain of
the foregoing forms of credit enhancement may subsequently be expanded to cover
residential mortgage loans not currently covered by such credit enhancement.
Approximately 58% of the Mortgage Loans (by Scheduled Principal Balance as of
the Cut-off Date) have the exclusive benefit of certain of the credit
enhancement. Of the remaining approximately 42% of the Mortgage Loans, certain
of the credit enhancement is available to cover losses with respect to Other
Mortgage Loans. TO THE EXTENT CREDIT ENHANCEMENT IS USED TO COVER LOSSES WITH
RESPECT TO THE OTHER MORTGAGE LOANS, THE AMOUNT OF COVERAGE AVAILABLE FOR THE
MORTGAGE LOANS WILL BE REDUCED. CONSEQUENTLY, A LOSS ON A MORTGAGE LOAN MAY
NOT BE COVERED BY CREDIT ENHANCEMENT AND, THEREFORE, MAY RESULT IN LOSSES ON
THE RELATED CERTIFICATES AND CONSEQUENTLY THE BONDS. SEE "DESCRIPTION OF
INSURANCE, SPECIAL HAZARD ACCOUNTS AND BANKRUPTCY ACCOUNTS".
DELINQUENT MORTGAGE LOANS
As described herein, approximately 1.83% of the Mortgage Loans were
delinquent between 30 and 59 days; approximately 0.49% of the Mortgage Loans
were delinquent between 60 and 89 days; approximately 0.57% of the Mortgage
Loans were delinquent in excess of 90 days (in each case as calculated by
Scheduled Principal Balance) as of September 1, 1998. In addition,
approximately 3.34% (by Scheduled Principal Balance) of the Mortgage Loans were
in foreclosure or constituted real estate owned as of September 1, 1998.
Investors should consider the risk that inclusion of such Mortgage Loans in the
segregated pool of assets securing the Bonds may affect the rate of prepayments
and Loan losses on the Mortgage Loans. In the event that Loan losses are not
covered by the limited credit enhancement described herein, yields to
Bondholders would be adversely affected.
GEOGRAPHIC CONCENTRATION
Approximately 76.3% of the Mortgage Loans (by Scheduled Principal
Balance as of the Cut-off Date) are secured by mortgaged properties ("MORTGAGED
PROPERTIES") located in the State of California. Because of the relative lack
of geographic diversity of the Mortgage Loans, losses on the Mortgage Loans may
be higher than would be the case if the Mortgage Loans were more diversified.
Certain of the Mortgaged Properties may be more susceptible to certain types of
special hazards, such as earthquakes, landslides, fires, mudflows and other
hazards, than residential properties located in other parts of the country. To
the extent that any of the Mortgaged Properties may be the subject of damage
caused by insured hazards, and insurance proceeds (not required to be applied
to repair of the related Mortgaged Properties) are received by the Issuer in
respect of such damage, such proceeds will be paid to the Class A Bondholders
in advance of the scheduled receipt thereof and the effective yield to Class A
Bondholders and the Class AX Bondholders may be adversely affected. In
addition, the economy of the State of California may be adversely affected to a
greater degree than the overall economy of the country by certain regional
developments.
ADDITIONAL EFFECT OF PREPAYMENTS ON YIELD
The extent to which the yield to maturity of a Class A Bond may vary
from the anticipated yield will depend upon the degree to which it is purchased
at a premium or discount, and the degree to which the timing of payments to
holders thereof is sensitive to scheduled payments, prepayments, liquidations,
defaults and purchases of Mortgage Loans. In the case of any Class A Bond
purchased at a discount, an investor should consider the risk that a slower
than
S-15
<PAGE> 16
anticipated rate of principal payments to the holders of the Class A Bonds
(including without limitation principal prepayments on the Mortgage Loans)
could result in an actual yield to such investor that is lower than the
anticipated yield and, in the case of any Class A Bond purchased at a premium,
the risk that a faster than anticipated rate of principal payments to the
holders of the Class A Bonds (including without limitation principal
prepayments on the Mortgage Loans) could result in an actual yield to such
investor that is lower than the anticipated yield. In the event that
significant payments in reduction of the Class Current Principal Balance of the
Class A Bonds are made to holders of such Class as a result of excessive
prepayments, liquidations, repurchases and purchases of the Mortgage Loans,
there can be no assurance that holders of the Class A Bonds will be able to
reinvest such payments in a comparable alternative investment having a
comparable yield. See "Certain Prepayment and Yield Considerations" in this
Prospectus Supplement.
The yield to investors on the Class AX Bonds will be extremely sensitive to the
rate and timing of principal payments (including principal prepayments,
defaults and liquidations) on the Mortgage Loans, which rate and timing of
payments may fluctuate significantly over time. A rapid rate of principal
payments on the Mortgage Loans could result in the failure of the investors in
the Class AX Bonds to recover their initial investment. In addition, in the
event of Basis Risk Shortfalls with respect to the Class A Bonds (or a Reserve
Fund Deficiency (as defined herein)), interest payable with respect to the
Class AX Bonds will not be paid to Class AX Bondholders, but instead will be
deposited into the Reserve Fund to cover such Basis Risk Shortfalls (or Reserve
Fund Deficiency). Such interest payments will be subsequently recovered by the
Class AX Bondholders only to the extent that amounts on deposit in the Reserve
Fund exceed the Reserve Fund Requirement. (See "Description of the
Bonds--Reserve Fund." in this Prospectus Supplement.
CERTAIN LEGAL CONSIDERATIONS
In the event of the bankruptcy or insolvency of an affiliate of the
Issuer, it is possible that a creditor, receiver, trustee in bankruptcy or
other party in interest may claim that the transactions through which the
Issuer acquired the Certificates were pledges of the Certificates rather than a
true sale and that, accordingly, the Certificates should be part of such
affiliate's bankruptcy estate. The transactions have been structured applying
principles such that following the bankruptcy of such an affiliate, a court, in
a proceeding considering the transfers of the Certificates from such affiliate
to the Issuer, should treat the transfers of such Certificates as a true sale
and, therefore, that the Certificates should not be part of such affiliate's
bankruptcy estate. The Issuer and any such affiliate will treat transfers of
the Certificates as sales for tax and accounting purposes, but such treatment
will not preclude a creditor, receiver, trustee in bankruptcy or other party in
interest of any such affiliate from pursuing such claim. If such transactions
are determined to be sales to the Issuer, the Certificates would not be part of
any such affiliate's bankruptcy estate and would not be available for
distribution to any such affiliate's creditors or equity security holders.
Additionally, in the event of the bankruptcy or insolvency of one of
the Issuer's affiliates, a creditor, receiver, trustee in bankruptcy or other
party in interest may seek a court order consolidating the assets and
liabilities of the Issuer with the estate of such affiliate ("substantive
consolidation") with the result that their combined estate would be made
subject to their combined liabilities. Substantive consolidation may have an
adverse impact on Bondholders. The transactions have been structured applying
principles such that following the bankruptcy of an affiliate of the Issuer, a
court, upon motion of a creditor, receiver, trustee in bankruptcy or other
party in interest, should not consolidate the assets and liabilities of the
Issuer and such affiliate on the basis of legal theories regarding substantive
consolidation previously recognized by courts of competent jurisdiction in
bankruptcy proceedings. The foregoing statement is based on and subject to a
number of assumptions concerning facts and circumstances that have been noted,
cited or acknowledged by courts adjudicating similar claims in prior cases and
certain other assumptions regarding the separate corporate identities of the
Issuer and its affiliates, many of which relate to the manner in which the
Issuer and its affiliates have conducted and will conduct their respective
businesses.
If either of the foregoing positions is argued before a court, such
argument could, even if ultimately unsuccessful, prevent timely payments of
amounts due on the Bonds, and could result, if ultimately successful, in
payment of reduced amounts on the Bonds.
BASIS RISK SHORTFALLS
Basis Risk Shortfalls may occur with respect to the Class A Bonds as a
result of the applicability of the Net WAC limitation on the Bond Interest
Rate. Although amounts on deposit in the Reserve Fund are available to cover
Basis Risk Shortfalls with respect to the Class A Bonds, no assurance can be
given that amounts on deposit in the Reserve Fund will be sufficient to cover
all such shortfalls, in which case the amount of interest paid on the Class A
Bonds will be reduced. See "Description of Bonds--Payments of Interest" and
"--The Reserve Fund".
S-16
<PAGE> 17
5/25 MORTGAGE LOANS
The initial Mortgage Rate on each 5/25 Mortgage Loan has been or will
be adjusted once on the related 5/25 Adjustment Date. In the event that the
adjusted Mortgage Rate on and after the related 5/25 Adjustment Date is below
the then prevailing mortgage rates for similar loans, the related Mortgagors of
the 5/25 Mortgage Loans may not be as likely to refinance such Mortgage Loans,
which may result in a decrease in the rate of prepayment of such Mortgage
Loans. Conversely, in the event that the adjusted Mortgage Rate on and after
the related 5/25 Adjustment Date is greater than the then prevailing mortgage
rates for similar loans, the Mortgagors of such 5/25 Mortgage Loans may be more
likely to refinance such Mortgage Loans, which may result in an increase in the
rate of prepayment of such Mortgage Loans. If the adjusted Mortgage Rate is
higher than the initial Mortgage Rate, the repayment of the 5/25 Mortgage Loans
will be dependent on the ability of the related Mortgagors to make larger
monthly payments following the adjustment of the Mortgage Rate. Therefore, the
rate of default on the 5/25 Mortgage Loans may be greater than that on other
Mortgage Loans. To the extent that coverage under the credit enhancement
described herein is insufficient to cover any such defaults, a loss to the
Bondholders may result.
DESCRIPTION OF THE BONDS
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 and
the Series Supplement to the Indenture relating to the Bonds offered hereby.
PAYMENTS OF INTEREST
Interest on each Class of Bonds will be payable monthly on each
Payment Date, commencing in October 1998. Interest will accrue on the Bonds at
the variable rate per annum described herein (the "BOND INTEREST RATE") during
each period commencing on the previous Payment Date (or in the case of the
first Payment Date, the Closing Date) and ending on the day prior to the
related Payment Date (each, an "INTEREST ACCRUAL PERIOD"). On each Payment
Date, the amount of interest payable on the Bonds (the "ACCRUED BOND INTEREST")
will equal interest for the related Interest Accrual Period at the applicable
Bond Interest Rate on the Class Current Principal Balance (or in the case of
the Class AX Bonds, the Class Notional Balance) of such Class immediately prior
to such Payment Date, calculated on the basis of a 360-day year, less any Net
Interest Shortfall allocated thereto on such date. See "Description of the
Bonds--Payments of Interest" in the Prospectus.
The Bond Interest Rate on the Class A Bonds for each Interest Accrual
Period (the "CLASS A BOND INTEREST RATE") will be a per annum rate equal to
One-Month LIBOR (calculated as described herein) plus the Margin for such date,
but in no event greater than the lesser of (x) the Net WAC for such date and
(y) 8.50% per annum. The "MARGIN" for each Payment Date occurring through and
including the Initial Call Date, is equal to 0.18%; as to each Payment Date
thereafter, the Margin will equal 0.36%. To the extent of amounts on deposit
in the Reserve Fund (see "The Reserve Fund" below), the Class A Bonds will also
be entitled to receive amounts in respect of Basis Risk Shortfalls as described
herein. On each Payment Date, the "BASIS RISK SHORTFALL" will equal the sum of
(i) the excess of (x) the interest that would have accrued on the Class A Bonds
during the preceding Interest Accrual Period, calculated at a per annum
interest rate equal to the lesser of 8.50% and One Month LIBOR plus the Margin
for such Interest Accrual Period over (y) interest that would have accrued on
the Class A Bonds during the preceding Interest Accrual Period at the Net WAC
for such Payment Date and (ii) the amount of any Basis Risk Shortfalls from
prior Payment Dates remaining unpaid to the Class A Bondholders.
The Bond Interest Rate on the Class AX Bonds for each Interest Accrual
Period (the "CLASS AX BOND INTEREST RATE") will be a per annum rate equal to
the excess (if any) of (x) the Net WAC for such date over (y) the Class A Bond
Interest Rate for such Interest Accrual Period.
The Bond Interest Rate on the Class R Bonds (the "CLASS R BOND
INTEREST RATE") will be equal to the Class A Bond Interest Rate.
The "NET WAC" on each Payment Date is equal to the weighted average
(by principal balance) of the interest rates of the Certificates for such date
less the Indenture Trustee's Fee Rate. The "INDENTURE TRUSTEE'S FEE RATE" is a
rate equal to 1/12th of 0.00385%.
S-17
<PAGE> 18
NET INTEREST SHORTFALLS
As to any Payment Date, the aggregate of (i) Interest Shortfalls and
(ii) Relief Act Shortfalls (collectively referred to as "NET INTEREST
SHORTFALLS") will reduce the amount of cash available to pay interest on and
principal of the Bonds. The aggregate of Net Interest Shortfalls will be
allocated between the Class A and Class AX Bonds in proportion to the amount of
Accrued Bond Interest that would have accrued in the absence of such Net
Interest Shortfalls.
A "RELIEF ACT SHORTFALL" means, with respect to any Payment Date and
any Mortgage Loan that is subject to the Relief Act (as defined in the
Prospectus), a shortfall in interest collections resulting from the application
of the Relief Act to such Mortgage Loan.
As used herein, "INTEREST SHORTFALL" means, with respect to any
Payment Date and with respect to each Mortgage Loan for which a Principal
Prepayment (as defined below) is paid on such Payment Date, the excess of one
month's interest on such Mortgage Loan at the applicable Net Mortgage Rate
thereon over the amount of interest actually paid by the Mortgagor (and, to the
extent described herein, by the applicable Servicer in the case of a
Compensating Interest (as defined below) payment with respect to such
prepayment of principal) on such Mortgage Loan, computed at the applicable Net
Mortgage Rate. For this purpose, the "NET MORTGAGE RATE" is calculated by
deducting from the mortgage rate borne by such Mortgage Loan (the "MORTGAGE
RATE"), as of the beginning of such Interest Accrual Period, the sum of (1) the
applicable fee rate of the Servicer, (2) the fee rates of the Administrator and
the Certificate Trustee under the applicable Pooling and Administration
Agreement, as described herein, (3) premiums for the applicable Mortgage Pool
Insurance Policy and the Special Hazard Insurance Policy described herein, in
each case expressed as a percentage and (4) the Indenture Trustee's Fee Rate.
No Interest Shortfalls are expected with respect to partial prepayments of
principal since partial prepayments are generally applied either (i) as of the
beginning of the calendar month following their receipt in accordance with the
terms of the related Mortgage Note or (ii) as of the beginning of the calendar
month of their receipt and remitted by the applicable Servicer with one month's
worth of Compensating Interest (as described herein). A "PRINCIPAL PREPAYMENT"
means any Mortgagor payment or other recovery of principal on a Mortgage Loan
which is not applied by the applicable Servicer during the month of receipt to
a scheduled payment under the Mortgage Loan and the portion of any Insurance
Proceeds, Liquidation Proceeds or other collections representing similar
payments.
"COMPENSATING INTEREST" means interest, at the rate specified under
the applicable Servicing Agreement, remitted to the applicable Certificate
Trustee by a Servicer with respect to a Principal Prepayment for the period
from the date of the prepayment through the last day of the month in which such
prepayment is made. On each Payment Date, Compensating Interest payments by
each Servicer with respect to Principal Prepayments will be available to make
payments on the Bonds (and to pay fees of the Administrator, the Certificate
Trustee and the Indenture Trustee), only to the extent such Compensating
Interest Payments do not exceed the servicing fee actually collected by such
Servicer with respect to payments on the Mortgage Loans remitted to the
Certificate Trustee on the related Remittance Date.
CALCULATION OF ONE-MONTH LIBOR
On the second Business Day preceding each Interest Accrual Period
until the Class Current Principal Balance of the Class A Bonds has been reduced
to zero, (each such date, an "LIBOR DETERMINATION DATE"), the Indenture Trustee
will determine One-Month LIBOR (as defined below) for such Interest Accrual
Period; provided, however, that One-Month LIBOR for the initial Interest
Accrual Period will be 5.387%.
"ONE-MONTH LIBOR" means, the London Interbank Offered Rate for
one-month United States dollar-denominated deposits determined in accordance
with the following provisions:
(i) The Indenture Trustee will request each of the
designated reference banks meeting the criteria set forth herein (the
"REFERENCE BANKS") to inform the Indenture Trustee of the quotation
offered by its principal London office for making one-month United
States dollar deposits in leading banks in the London interbank
market, as of 11:00 a.m. (London time) on such LIBOR Determination
Date. (For purposes of calculating One-Month LIBOR, "business day"
means a day on which banks are open for dealing in foreign currency
and exchange in London and New York City.) In lieu of making a
request of the Reference Banks, the Indenture Trustee may rely on the
quotations for those Reference Banks that appear at such time on the
Reuters Screen LIBO Page (as defined in the International Swap Dealers
Association Inc. Code of Standard Wording, Assumptions and Provisions
for Swaps, 1986 Edition), to the extent available.
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<PAGE> 19
(ii) If on any LIBOR Determination Date two or more
Reference Banks provide such offered quotations, One-Month LIBOR for
the next Interest Accrual Period shall be the arithmetic mean of such
offered quotations (rounded upwards if necessary to the nearest whole
multiple of 1/32%).
(iii) If on any LIBOR Determination Date only one or none
of the Reference Banks provides such offered quotations, One-Month
LIBOR for the next Interest Accrual Period shall be whichever is the
higher of (i) One-Month LIBOR as determined on the previous LIBOR
Determination Date or (ii) the Reserve Interest Rate.
(iv) If on any LIBOR Determination Date (except for the
first LIBOR Determination Date), the Indenture Trustee is required but
is unable to determine the Reserve Interest Rate in the manner
provided below, One-Month LIBOR shall be the One-Month LIBOR for the
immediately preceding LIBOR Determination Date.
The "RESERVE INTEREST RATE" shall be the rate per annum which the
Indenture Trustee determines to be either (i) the arithmetic mean (rounded
upwards if necessary to the nearest whole multiple of 1/32%) of the one-month
United States dollar lending rates that New York City banks selected by the
Indenture Trustee are quoting, on the relevant LIBOR Determination Date, to the
principal London offices of at least two of the Reference Banks to which such
quotations are, in the opinion of the Indenture Trustee, being so made, or (ii)
in the event that the Indenture Trustee can determine no such arithmetic mean,
the lowest one-month United States dollar lending rate which New York City
banks selected by the Indenture Trustee are quoting on such LIBOR Determination
Date to leading European banks.
Each Reference Bank shall (i) be a leading bank engaged in
transactions in Eurodollar deposits in the international Eurocurrency market,
(ii) not control, be controlled by, or be under common control with the
Indenture Trustee, and (iii) have an established place of business in London.
If any such Reference Bank should be unwilling or unable to act as such or if
the Indenture Trustee should terminate the appointment of any such Reference
Bank, the Indenture Trustee will promptly appoint another leading bank meeting
the criteria specified above.
The establishment of One-Month LIBOR on each LIBOR Determination Date
by the Indenture Trustee and the Indenture Trustee's calculation of the rate of
interest applicable to the Class A Bonds for the related Interest Accrual
Period shall (in the absence of manifest error) be final and binding.
PAYMENTS OF PRINCIPAL
Except to the extent described herein, principal will be payable
monthly on each Payment Date on the Class A Bonds and the Class R Bonds in an
aggregate amount equal to the Principal Distribution Amount for such Payment
Date. The "PRINCIPAL DISTRIBUTION AMOUNT" on each Payment Date will be equal
to the lesser of (A) (i) the excess of all amounts on deposit in the Collection
Account as of such Payment Date, over (ii) the Accrued Bond Interest on the
Bonds for such Payment Date and the fee to be paid to the Indenture Trustee;
and (B) the sum, without duplication, of (i) each scheduled payment of
principal in respect of the Mortgage Loans collected or advanced by the
applicable Servicer in the related Due Period and received by the applicable
Administrator on the related Remittance Date, (ii) all partial and full
principal prepayments collected by the applicable Servicer during such related
Due Period and received by the applicable Administrator on the related
Remittance Date, (iii) the principal portion of all Liquidation Proceeds and
Insurance Proceeds collected by the Servicer during the related Due Period and
received by the applicable Administrator on the related Remittance Date, (iv)
that portion of the purchase price of any repurchased Mortgage Loan which
represents principal and is received by the applicable Administrator on the
related Remittance Date, and (v) the proceeds received by the Indenture Trustee
upon a liquidation of the Trust Estate (to the extent such proceeds relate to
principal). Payments of principal will be made on the Bonds (other than the
Class AX Bonds) as described under "Priority of Payments" below.
PRIORITY OF PAYMENTS
Prior to the acceleration, if any, of the Bonds because of an Event of
Default, on each Payment Date funds on deposit in the Collection Account, after
payment of the fee payable to the Indenture Trustee on such Payment Date
calculated at the Indenture Trustee's Fee Rate, will be applied to payments of
interest on and principal of the Bonds in the following priority and amounts:
"first, to the Bonds, pro rata, the Accrued Bond Interest thereon for
such Payment Date; provided, however, that if on such Payment Date a
Basis Risk Shortfall or Reserve Fund Deficiency (as defined at
"Reserve Fund"
S-19
<PAGE> 20
below) exists, the amount otherwise payable to the Class AX Bonds
pursuant to this clause will be reduced by an amount (the "Reserve
Fund Deposit") equal to the lesser of (x) the sum of such Reserve Fund
Deficiency and Basis Risk Shortfall and (y) either, in the event that
a Basis Risk Shortfall exists, Accrued Bond Interest on the Class AX
Bonds for such date or, in the event that a Reserve Fund Deficiency
exists and a Basis Risk Shortfall does not exist for such date, 50% of
Accrued Bond Interest on the Class AX Bonds for such date, and such
Reserve Fund Deposit will be deposited into the Reserve Fund on such
Payment Date and be applied as described at "The Reserve Fund" below;
and provided further that any shortfall in available amounts (other
than as described in the preceding proviso) will be allocated among
such Classes in proportion to the amount of Accrued Bond Interest
otherwise payable thereon."
second, to the Bonds, any Accrued Bond Interest thereon remaining
unpaid from previous Payment Dates, with any shortfall in available
amounts being allocated among such Classes in proportion to the amount
of such Accrued Bond Interest remaining unpaid for each such Class for
such Payment Date; provided, however, that any such unpaid amounts
with respect to the Class AX Bonds to the extent they represent
amounts that would have been deposited in the Reserve Fund in respect
of Basis Risk Shortfalls or Reserve Fund Deficiencies on previous
Payment Dates will not be payable to the Class AX Bonds but will
instead be deposited in the Reserve Fund;
third, to the extent of distributions received on the Certificates
attributable to principal, to the Class R Bonds in reduction of the
Class Current Principal Balance thereof, until the Class Current
Principal Balance thereof has been reduced to zero;
fourth, to the extent of distributions received on the Certificates
attributable to principal, to the Class A Bonds in reduction of the
Class Current Principal Balance thereof, until the Class Current
Principal Balance thereof has been reduced to zero, and
fifth, any remaining amounts will be paid to the Class R Bonds.
In addition to the amounts payable to the Class A Bonds pursuant to
priorities first, second and fourth above, the Class A Bonds are subject to
additional payments of interest on any Payment Date as to which a Basis Risk
Shortfall exists as described at "The Reserve Fund" below.
No Accrued Bond Interest shall be payable under priorities first or
second with respect to any Class of Bonds after the Payment Date on which the
Current Class Principal Balance or Class Notional Balance thereof has been
reduced to zero.
With respect to any Bond (other than a Class AX Bond) and as of any
Payment Date, the "CURRENT PRINCIPAL BALANCE" equals the initial principal
amount of such Bond as of the Closing Date, as reduced by all amounts paid on
previous Payment Dates on such Bond with respect to principal, and the "CLASS
CURRENT PRINCIPAL BALANCE" is the aggregate of the Current Principal Balances
of all Bonds of such class on said date. The "CLASS NOTIONAL BALANCE" of the
Class AX Bonds for any Payment Date will equal the Class Current Principal
Balances of the Class A Bonds and the Class R Bonds as of such date.
On each Payment Date after an Event of Default pursuant to the
Indenture (see "The Indenture--Events of Default" in the Prospectus) causing an
acceleration of the Bonds, (i) Accrued Bond Interest on each Class of Bonds
shall be paid pro rata in accordance with the amount of unpaid Accrued Bond
Interest on each such Class of Bonds from all available funds in the Collection
Account and (ii) payments of principal on each outstanding Class A or Class R
Bond shall be paid pro rata out of remaining available funds in the Collection
Account until the Class Current Principal Balance thereof has been reduced to
zero.
RESERVE FUND
The Indenture Trustee will establish and maintain a segregated trust
account (the "RESERVE FUND") for the benefit of Bondholders. On the Closing
date, the Issuer will make an initial deposit to the Reserve Fund of $5,000.
On each Payment Date, the Indenture Trustee is required to transfer for deposit
to the Reserve Fund the amounts described in priorities first and second under
"Priority of Payments." To the extent that a Basis Risk Shortfall exists on
any Payment Date, subject to the sufficiency of funds then on deposit in the
Reserve Fund, the Trustee will withdraw from the Reserve Fund and pay such
amount to the Class A Bondholders on such Payment Date along with the amounts
otherwise payable as described under "--Priority of Payments" above.
S-20
<PAGE> 21
A "Reserve Fund Deficiency" as to any Payment Date equals the excess
of (x) the Reserve Fund Requirement for such date over (y) the amount on
deposit in the Reserve Fund on such date. For this purpose, the "RESERVE FUND
REQUIREMENT" as to any Payment Date equals $5,000; provided, however, that if
on any Payment Date the Net WAC for such date exceeds LIBOR plus the applicable
Margin by less than 0.25%, the Reserve Fund Requirement for such date will
equal the product of 0.50% and the Class Current Principal Balance of the Class
A Bonds for such date.
If on any Payment Date amounts on deposit in the Reserve Fund exceed the
Reserve Fund Requirement for such date, such excess shall be paid to the Class
AX Bondholders on such Payment Date together with amounts otherwise payable to
the Class AX Bondholders under "Priority of Payments" above. Upon retirement of
the Class A Bonds, any amounts on deposit in the Reserve Fund shall be released
to the Class AX Bondholders.
OPTIONAL REDEMPTION
The Bonds may be redeemed in whole, but not in part, at the Issuer's
option on any Payment Date on or after the earlier of: (i) the Payment Date
occurring in March 2001 (the "INITIAL CALL DATE") or (ii) each Payment Date on
or after the date the Class Current Principal Balance of the Class A Bonds is
less than 25% of the Original Principal Amount thereof. To effect any such
optional redemption the Issuer will be required to deposit into the Collection
Account an amount (the "REDEMPTION PRICE") equal to the sum of the outstanding
aggregate Class Current Principal Balance of the Bonds on such Payment Date
(after giving effect to principal payments otherwise made on or prior to such
date) plus accrued and unpaid interest thereon at the applicable Bond Interest
Rate through the Optional Redemption Date. In the event that the Issuer's
option to redeem the Bonds is not exercised on the Initial Call Date, the
Margin for each subsequent Payment Date will be increased to 0.36%.
WEIGHTED AVERAGE LIFE OF THE BONDS
The following information is given solely to illustrate the effect of
prepayments of the Mortgage Loans on the estimated weighted average life of the
Bonds under certain stated assumptions and is not a prediction of the
prepayment rate that might actually be experienced by the Mortgage Loans.
Weighted average life refers to the average amount of time that will elapse
from the date of delivery of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of the
Bonds will be influenced by the rate at which principal of the Mortgage Loans
is paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes reductions of principal resulting
from unscheduled full or partial prepayments, refinancings, liquidations and
write-offs due to defaults, casualties or other dispositions and repurchases by
or on behalf of the Issuer).
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement is a
Constant Prepayment Rate ("CPR"). The CPR represents an assumed constant
annual rate of prepayment each month, expressed as a per annum percentage of
the Scheduled Principal Balance of the pool of mortgage loans for that month.
As used in the following tables, the column headed "0%" assumes that none of
the Mortgage Loans is prepaid before maturity. The Issuer makes no
representations about the appropriateness of the CPR model.
Modeling Assumptions. For purposes of preparing the tables below, the
following assumptions (the "MODELING ASSUMPTIONS") have been made.
(i) all scheduled principal payments on the Mortgage Loans are
timely received on the first day of each calendar month,
commencing on October 1, 1998, and no delinquencies or
losses occur on such Mortgage Loans;
(ii) the scheduled payments on the Mortgage Loans have been
calculated on the outstanding principal balance (prior to
giving effect to prepayments), the Mortgage Rate and the
remaining term to stated maturity such that the Mortgage
Loans will fully amortize by their remaining term to
stated maturity;
(iii) all scheduled payments of interest and principal have been
made through the Cut-off Date;
(iv) the Mortgage Loans prepay monthly at the specified
percentages of CPR and no optional redemption of the Bonds
occurs (except as indicated in the tables);
S-21
<PAGE> 22
(v) prepayments include 30 days of interest thereon;
(vi) the Bonds are issued on September 29, 1998 and each year
will consist of 360 days;
(vii) cash payments are received by the Bondholders on the 25th
day of each month, commencing in October 1998;
(viii) the Net Mortgage Rate for the Mortgage Loans is equal to
the applicable Mortgage Rate, less the applicable
Servicing Fee, the applicable Administrator's Fee, the
applicable Certificate Trustee's Fee, the premium for the
applicable Mortgage Pool Insurance Policy, the premium for
the applicable Special Hazard Insurance Policy and the
Indenture Trustee's Fee;
(ix) the levels of one-month LIBOR, six-month LIBOR, one-year
CMT and the FNMA Index remain constant at 5.387%, 5.250%,
4.490% and 6.580%, respectively;
(x) no reinvestment income from any Pledged account is earned
and available for payment; and
(xi) Mortgage Loan 1 in the table under paragraph (xiv) below
is a 5/25 Mortgage Loan which has passed its 5/25
Adjustment Date; Mortgage Loans 2 and 3 are fixed rate
Mortgage Loans; Mortgage Loans 4 through 6 are 5/25
Mortgage Loans, which have not passed their 5/25
Adjustment Dates; Mortgage Loans 7 through 12 are LIBOR
Loans; and Mortgage Loans 13 through 24 are CMT Loans;
(xii) the Mortgage Rate for each LIBOR Loan, CMT Loan and 5/25
Loan will be adjusted on its next rate adjustment date
(where applicable) to equal the sum of (a) the applicable
index and (b) the respective Gross Margin (such sum being
subject to the applicable Periodic Rate Cap, Life Rate
Floor and Life Rate Cap, as specified in the table under
paragraph (XIV) (below));
(xiii) for the purposes of calculating the pre-tax yields to
maturity of the Class AX Bonds, the Class AX Bond Interest
Rate will be a per annum rate equal to the excess of (x)
the Net WAC of the 24 Mortgage Loans in the table under
paragraph (xiv) (below), over (y) the Class A Bond
Interest Rate for the relevant Interest Accrual Period.
(xiv) the Mortgage Loans consist of 24 Mortgage Loans having the
following characteristics:
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<PAGE> 23
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Original Remaining
Cut-off Date Term Term to Months Periodic Life Life
Aggregate to Maturity Maturity Gross Next Rate Rate Rate Rate
Principal Balance Mortgage Rate Net WAC (months) (months) Margin Adjustment Cap Floor Cap
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 $ 63,858,117.17 9.1822% 8.4278% 360 290 0.0000% N/A N/A N/A N/A
2 102,970,738.56 9.4110 8.8498 360 281 0.0000 N/A N/A N/A N/A
3 13,298,382.44 8.8970 8.3956 180 102 0.0000 N/A N/A N/A N/A
4 21,540,396.66 6.7150 6.0171 360 301 1.7500 3 8.0000% 0.0000% 14.7150%
5 9,250,825.13 6.7450 6.0301 360 306 1.7725 6 8.0000 0.0000 14.3879
6 17,528,177.30 7.4051 6.6614 360 307 1.7644 9 8.0000 0.0000 15.3943
7 8,166,035.24 8.3949 7.5947 360 283 2.7699 1 1.0000 5.6336 12.5523
8 7,206,541.70 8.3593 7.5598 360 283 2.7459 2 0.9944 5.1110 12.5064
9 6,920,027.75 8.5244 7.6995 360 285 2.7740 3 1.0498 4.4414 12.4414
10 14,410,975.68 8.5652 7.7535 360 286 2.8161 4 1.0000 4.4380 12.4070
11 12,586,321.57 8.6129 7.7997 360 287 2.8711 5 1.0000 4.2198 12.2198
12 2,983,887.01 8.5517 7.7356 360 286 2.8349 6 1.0000 4.0369 12.0369
13 4,659,193.61 7.9746 7.2131 360 295 2.8402 1 2.0000 3.6542 11.9800
14 4,666,348.22 8.2072 7.4689 360 293 2.7883 2 2.0000 3.8007 12.1255
15 5,044,859.09 7.9804 7.2525 360 294 2.7510 3 1.8369 4.4303 12.3276
16 2,183,401.79 7.6825 6.8430 360 304 2.7500 4 2.0000 3.7110 11.3170
17 2,722,464.93 7.5557 6.7692 360 292 2.7571 5 1.8663 4.6144 11.9162
18 5,254,490.11 7.3126 6.5592 360 299 2.7858 6 2.0000 4.5172 12.2886
19 15,343,813.94 7.8286 7.0271 360 291 2.7739 7 1.9847 4.9564 12.5228
20 6,528,087.40 8.0684 7.2483 360 295 2.7893 8 2.0000 4.4800 12.6340
21 6,651,174.82 8.1229 7.3068 360 295 2.8468 9 2.0000 4.1893 12.7509
22 3,755,851.48 8.2599 7.4171 360 294 2.8531 10 2.0000 4.9997 12.9470
23 3,643,306.61 8.1672 7.3940 360 292 2.8473 11 2.0000 4.6110 12.6944
24 4,658,545.11 8.2495 7.4696 351 288 2.8249 14 2.0000 4.3769 12.2668
</TABLE>
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<PAGE> 24
The following tables indicate, at the specified CPR percentages, the
percentages of the Original Principal Amount of the Class A Bonds on each of
the specified Payment Dates and the corresponding weighted average life of the
Class A Bonds.
PERCENT OF ORIGINAL PRINCIPAL AMOUNT OUTSTANDING AT THE FOLLOWING CPR
PERCENTAGES
<TABLE>
<CAPTION>
Date 0% 20% 40% 50% 60%
-------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Initial 100% 100% 100% 100% 100%
Percentage
Sep-1999 98% 79% 59% 49% 39%
Sep-2000 97% 62% 35% 24% 15%
Sep-2001 95% 49% 20% 12% 6%
Sep-2002 93% 38% 12% 6% 2%
Sep-2003 91% 30% 7% 3% 1%
Sep-2004 88% 23% 4% 1% 0%
Sep-2005 86% 18% 2% 1% 0%
Sep-2006 83% 14% 1% 0% 0%
Sep-2007 80% 11% 1% 0% 0%
Sep-2008 77% 8% 0% 0% 0%
Sep-2009 74% 6% 0% 0% 0%
Sep-2010 71% 5% 0% 0% 0%
Sep-2011 67% 4% 0% 0% 0%
Sep-2012 64% 3% 0% 0% 0%
Sep-2013 59% 2% 0% 0% 0%
Sep-2014 55% 2% 0% 0% 0%
Sep-2015 50% 1% 0% 0% 0%
Sep-2016 45% 1% 0% 0% 0%
Sep-2017 39% 1% 0% 0% 0%
Sep-2018 32% 0% 0% 0% 0%
Sep-2019 25% 0% 0% 0% 0%
Sep-2020 18% 0% 0% 0% 0%
Sep-2021 10% 0% 0% 0% 0%
Sep-2022 3% 0% 0% 0% 0%
Sep-2023 0% 0% 0% 0% 0%
Sep-2024 0% 0% 0% 0% 0%
Sep-2025 0% 0% 0% 0% 0%
Sep-2026 0% 0% 0% 0% 0%
Sep-2027 0% 0% 0% 0% 0%
Weighted
Average Life
(Years to
Maturity) 15.52 4.07 1.92 1.44 1.10
Weighted
Average
Life (Years
to
Initial 2.44 1.89 1.41 1.19 1.00
Call Date)
</TABLE>
These tables have been prepared based on the Modeling Assumptions
(including the assumptions regarding the characteristics and performance of the
Mortgage Loans which may differ from the actual characteristics and performance
thereof) and should be read in conjunction therewith.
S-24
<PAGE> 25
CERTAIN PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The yield to maturity of the Bonds will be affected by the rate and
timing of payments of principal on the Certificates which, in turn, will be
affected by the rate and timing of payments of principal on the Mortgage Loans
(including, for this purpose, prepayments and amounts received by virtue of
condemnation, insurance or foreclosure with respect to the Mortgage Loans) and
the amount and timing of Mortgagor delinquencies and defaults. Such yield may
be adversely affected by a higher or lower than anticipated rate of principal
payments on the Mortgage Loans. The rate of principal payments on the Mortgage
Loans will in turn be affected by the amortization schedules of the Mortgage
Loans, the rate and timing of principal prepayments thereon by the Mortgagors,
liquidations of defaulted Mortgage Loans and purchases thereof due to certain
breaches of representations and warranties. The timing of changes in the rate
of prepayments, liquidations and repurchases of the Mortgage Loans, and the
timing of defaults, could significantly affect the yield to an investor, even
if the average rate of principal payments experienced over time is consistent
with an investor's expectation. Because the rate and timing of principal
payments on the Mortgage Loans will depend on future events and on a variety of
factors (as described more fully herein), no assurance can be given as to such
rate or the timing of principal prepayments on the Class A Bonds.
Principal prepayments may be influenced by a variety of economic,
geographic, social and other factors. The rate of defaults on the Mortgage
Loans will also affect the rate and timing of principal payments on the
Mortgage Loans. In general, defaults on mortgage loans are expected to occur
with greater frequency in their early years. The rate of default on Mortgage
Loans which are equity refinance or limited documentation mortgage loans, and
on Mortgage Loans with high loan-to-value ratios, may be higher than for other
types of Mortgage Loans. Prepayments, liquidations and purchases of the
Mortgage Loans may result in payments to Bondholders of principal amounts which
would otherwise be distributed over the remaining terms of such Mortgage Loans.
Furthermore, the rate and timing of prepayments, defaults and liquidations on
the Mortgage Loans will be affected by the general economic conditions in the
region of the country in which the related Mortgaged Properties are located.
The risk of delinquencies, loss and involuntary prepayments resulting from
foreclosure is greater, and voluntary prepayments may be less likely, in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values.
Approximately 76.3% of the Mortgage Loans (by Scheduled Principal Balance as of
the Cut-off Date) are secured by Mortgaged Properties located in the State of
California. To the extent that the locations of the Mortgaged Properties are
concentrated in a given region, the risk of delinquencies, losses and
involuntary prepayments resulting from adverse economic conditions in such
region or from other factors, such as fires, storms, landslides, mudflows, and
earthquakes, is increased. Certain information regarding the location of the
Mortgaged Properties with respect to the Mortgage Loans is set forth under
"Description of the Mortgage Loans" and "Risk Factors" herein.
Other factors affecting prepayment of mortgage loans include changes
in mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
the Bonds will depend on the rate of payment (including prepayments) of the
principal of the Mortgage Loans, the actual maturity of each Class of Bonds
could occur significantly earlier than its stated maturity.
In addition, the yield to maturity of the Bonds will depend on the
price paid by the holders of such Bonds and the related interest rate. The
extent to which the yield to maturity of a Class of Bonds is sensitive to
prepayments will depend upon the degree to which it is purchased at a discount
or premium. If the Class A Bonds are purchased at a premium, a faster than
anticipated rate of principal prepayments could result in an actual yield to
investors that is lower than the anticipated yield.
Prepayments of principal on the Mortgage Loans generally will be
passed through to the Class A Bondholders in the month following the month of
receipt. Any prepayment of a Mortgage Loan or liquidation of a Mortgage Loan
(by foreclosure proceedings or by virtue of the purchase of a Mortgage Loan in
advance of its stated maturity as required or permitted by the Pooling and
Administration Agreement) will have the effect of passing through to the Class
A Bondholders amounts which would otherwise be passed through in amortized
increments over the remaining term of such Mortgage Loan.
The yield on the Bonds will be sensitive to (i) fluctuations in the
levels of the LIBOR Indices used to determine the interest rates on the LIBOR
Loans (ii) fluctuations in the levels of the CMT Index used to determine the
interest rates on the CMT Loans and (iii) the FNMA Index used to adjust the
interest rates on the 5/25 Mortgage Loans on the related 5/25 Adjustment Dates.
In addition, the Bond Interest Rate on the Class A Bonds as to any Payment
Date, although
S-25
<PAGE> 26
based on LIBOR, is subject to an interest rate ceiling equal to the lesser of
the Net WAC and 8.50% per annum. Based upon the payment performance of the
Mortgage Loans underlying the Certificates, the Net WAC may either increase or
decrease, independently of, and in some cases inversely to, fluctuations in
LIBOR, resulting in Basis Risk Shortfalls with respect to the interest payable
on the Class A Bonds. Although such Basis Risk Shortfalls will be payable on
future Payment Dates from amounts on deposit in the Reserve Fund, there can be
no assurance that amounts on deposit in the Reserve Fund will be sufficient to
cover Basis Risk Shortfalls on any future Payment Dates. On any Payment Date
on which a Basis Risk Shortfall occurs with respect to the Class A Bonds, to
the extent of a Reserve Fund Deficiency, the amount of such Basis Risk
Shortfall will be recovered on subsequent Payment Dates from interest otherwise
payable to the Class AX Bonds. Any such amount of interest foregone by the
Class AX Bonds will only be recovered on future Payment Dates to the extent of
amounts in the Reserve Fund in excess of the Reserve Fund Requirement.
With respect to the 5/25 Mortgage Loans, if the adjusted Mortgage Rate on and
after the related 5/25 Adjustment Date is below the then prevailing mortgage
rates for similar mortgage loans, the related Mortgagors may not be as likely
to refinance such Mortgage Loans, which may result in a decrease in the rate of
prepayment of such Mortgage Loans. Conversely, if the adjusted Mortgage Rate
on and after the related 5/25 Adjustment Date is greater than the then
prevailing mortgage rates for similar mortgage loans, the related Mortgagors
may be more likely to refinance such Mortgage Loans, which may result in an
increase in the rate of prepayment of such Mortgage Loans.
The yield to maturity of the Class A Bonds and the Class AX Bonds will
also be affected by the amounts and timing of Net Interest Shortfalls (as
defined under "Description of the Bonds--Net Interest Shortfalls" herein). The
aggregate of Net Interest Shortfalls will be allocated between the Class A and
Class AX Bonds in proportion to the amount of Accrued Bond Interest that would
have accrued in the absence of such Net Interest Shortfalls.
AS DESCRIBED HEREIN, APPROXIMATELY 1.83% OF THE MORTGAGE LOANS WERE
DELINQUENT BETWEEN 30 AND 59 DAYS; APPROXIMATELY 0.49% OF THE MORTGAGE LOANS
WERE DELINQUENT BETWEEN 60 AND 89 DAYS; APPROXIMATELY 0.57% OF THE MORTGAGE
LOANS WERE DELINQUENT IN EXCESS OF 90 DAYS (IN EACH CASE AS CALCULATED BY
SCHEDULED PRINCIPAL BALANCE) AS OF SEPTEMBER 1, 1998. IN ADDITION,
APPROXIMATELY 3.34 % (BY SCHEDULED PRINCIPAL BALANCE) OF THE MORTGAGE LOANS
WERE IN FORECLOSURE OR CONSTITUTED REAL ESTATE OWNED AS OF SEPTEMBER 1, 1998.
SEE "RISK FACTORS" HEREIN.
The yield on the Book Entry Bonds may be affected by any delays in
receipt of payments thereon as described under "Description of Book Entry
Procedures".
The yield on the Bonds also may be affected by any repurchase of the
Mortgage Loans by the Issuer on or after the earlier of (i) the Payment Date
occurring in March 2001 or (ii) the Payment Date on which the aggregate
outstanding principal amount of the Bonds is less than 25% of the Original
Principal Amount thereof. See "Description of the Bonds--Optional Redemption"
herein.
NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS OR
DEFAULTS ON THE MORTGAGE LOANS OR AS TO THE YIELD TO MATURITY OF THE BONDS. AN
INVESTOR IS URGED TO MAKE AN INVESTMENT DECISION WITH RESPECT TO THE BONDS
BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH BONDS RESULTING FROM THEIR
RESPECTIVE PURCHASE PRICES AND SUCH INVESTOR'S OWN DETERMINATION AS TO
ANTICIPATED PREPAYMENT RATES AND DEFAULTS ON THE MORTGAGE LOANS.
YIELD CONSIDERATIONS RELATING TO ADJUSTABLE RATE MORTGAGE LOANS
The Issuer is not aware of any publicly available statistics that set
forth principal prepayment experience or prepayment forecasts of adjustable
rate mortgage loans over an extended period of time, and its experience with
respect to such loans is insufficient to draw any conclusions with respect to
the expected prepayment rates on the Mortgage Loans. The rate of principal
prepayments with respect to adjustable rate mortgage loans has fluctuated in
recent years.
In addition, the features of adjustable rate mortgage loan programs in
the past have varied significantly in response to market conditions such as
interest rates, consumer demand, regulatory restrictions and other factors.
The lack of uniformity of the terms and provisions of such adjustable rate
mortgage loan programs has made it impracticable to compile meaningful
comparative data on prepayment rates and, accordingly, there can be no
assurance as to the rate of prepayments on the Mortgage Loans in stable or
changing interest rate environments. As is the case with conventional fixed
rate mortgage loans, adjustable rate mortgage loans may be subject to a greater
rate of principal prepayments in a declining interest rate environment. For
example, if prevailing interest rates fall significantly, adjustable rate
mortgage
S-26
<PAGE> 27
loans could be subject to higher prepayment rates than if prevailing interest
rates remain constant because the availability of fixed rate mortgage loans at
competitive interest rates may cause mortgagors to refinance their adjustable
rate mortgage loans in order to obtain lower fixed interest rates.
YIELD CONSIDERATIONS RELATING TO INTEREST RATE CONVERSIONS
The Issuer is not aware of any publicly available statistics that set
forth conversion experience or forecasts of conversion of convertible
adjustable rate mortgage loans over an extended period of time, and its
experience with respect to such loans is insufficient to draw any conclusions
with respect to the expected conversion rates. Because Mortgagors may attempt
to limit the risk of higher rates during periods of rising interest rates by
exercising the option to convert Mortgage Loans and thereby secure a fixed
rate, the yield on the Bonds may be adversely affected by such conversions at
times when prepayments generally would not be expected. Also, Mortgagors may
attempt to secure a fixed rate in a declining interest rate environment and may
elect to do so through the conversion feature.
The rate at which Mortgagors exercise their conversion rights and the
resulting purchase or non-purchase of the related Mortgage Loans by the
respective Servicers of such Mortgage Loans will affect the rate of payment of
principal of, and hence the effective yield on, the Bonds. The effective yield
on the Bonds may also be affected by the failure of the Servicer of a Mortgage
Loan to repurchase such Mortgage Loan as described below.
As described herein, approximately 1.43% of the Mortgage Loans (by
Scheduled Principal Balance as of the Cut-off Date) are LIBOR Loans or CMT
Loans that contain a conversion option, pursuant to which the related Mortgagor
may elect to convert the rate of interest borne by such Mortgage Loan to a
fixed rate of interest. Pursuant to the terms of the related Servicing
Agreement, the related Servicer may be required to repurchase any Mortgage Loan
with respect to which such conversion option is exercised. Any such repurchase
would have the same effect as a prepayment in full of the affected Mortgage
Loan, and would result in a commensurate prepayment of principal on the Bonds.
In the event that a Servicer fails (or is not required) to purchase a LIBOR
Loan or a CMT Loan with respect to which a conversion option has been
exercised, and the LIBOR Index or the CMT Index, as applicable, plus the
related LIBOR Gross Margin or CMT Gross Margin, respectively, for such Mortgage
Loan is higher than the new fixed rate for such Mortgage Loan, the yield on the
Bonds may be less than would have been the case in the absence of such interest
rate conversion.
YIELD CONSIDERATIONS RELATING TO THE LEVEL OF ONE-MONTH LIBOR; THE NET WAC
LIMITATION
The yield to investors on the Class A Bonds will be sensitive to
fluctuations in the level of One-Month LIBOR. Investors in the Class A Bonds
should consider the risk that (i) lower than expected levels of One-Month LIBOR
could result in yields that are lower than the expected yields on the Class A
Bonds and (ii) the Bond Interest Rate on the Class A Bonds cannot exceed the
lesser of (i) 8.50% or (ii) the Net WAC for the related Payment Date. Although
Basis Risk Shortfalls on the Class A Bonds arising from the Net WAC limitation
on the Class A Bond Interest Rate may be recovered on future Payment Dates to
the extent of amounts on deposit in the Reserve Fund, there can be no assurance
that amounts on deposit in the Reserve Fund will be sufficient to cover any
such Basis Risk Shortfalls.
ADDITIONAL YIELD CONSIDERATIONS FOR THE CLASS AX BONDS
The yield to investors in the Class AX Bonds will be highly sensitive
to the rate of principal prepayments of the Mortgage Loans. Investors in the
Class AX Bonds should consider the associated risks, including the risk that
faster than anticipated rates of principal prepayment on Mortgage Loans could
result in actual yields to investors that are significantly lower than
anticipated yields or the failure of such investors to fully recover their
investments.
To illustrate the significance of prepayments on the payments on the
Class AX Bonds, the following table indicates the pre-tax yields to maturity
(on a corporate bond equivalent basis) under the specified assumptions at the
different constant percentages of CPR. The yields were calculated by
determining the applicable monthly discount rate which, when applied to the
related assumed stream of cash flows to be paid on the Class AX Bonds, would
cause the discounted present value of such cash flow to equal the assumed
purchase price percentage for such Bonds stated in such table and converting
the applicable monthly discount rate to a corporate bond equivalent rate.
Implicit in the use of any discounted present value or internal rate of return
calculations such as these is the assumption that intermediate cash flows are
reinvested at the discount rate on internal rate of return. Thus, these
calculations do not take into account the different interest rates at which
investors may be able to reinvest funds received by them as payments on such
Bonds and, consequently, do not reflect the return on any investment when such
reinvestment rates are considered. It is unlikely that the Mortgage Loans will
prepay at any of the constant levels of CPR shown or any other constant rate
until maturity or
S-27
<PAGE> 28
that all of the Mortgage Loans will prepay at the same rate. The timing of
changes in the rate of prepayments may significantly affect the total payments
received, the date of receipt of such payments and the actual yield to maturity
to any investor, even if the average rate of principal prepayments is
consistent with an investor's expectation. In general, the earlier the payment
of principal of the Mortgage Loans, the greater the effect on an investor's
yield to maturity. As a result, the effect of an investor's yield of principal
prepayments occurring at a rate higher (or lower) than the rate anticipated by
the investor during the period immediately following the issuance of the Class
AX Bonds will not be equally offset by a subsequent like reduction (or
increase) in the rate of principal prepayments.
The following table has been prepared based on the Modeling
Assumptions (as defined herein) and the additional assumptions that (i) the
assumed purchase price of the Class AX Bonds is the sum of the percentage of
the Class Notional Balance specified in the heading of such table plus the
accrued interest on the Class AX Bonds and (ii) such purchase price is paid on
September 29, 1998.
PRE-TAX YIELD* TO MATURITY OF THE CLASS AX BOND
(ASSUMED PURCHASE PRICE PERCENTAGE = 2.971595%)
<TABLE>
<CAPTION>
CPR
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
0% 20% 40% 50% 60%
-- --- --- --- ---
80.24% 52.11% 20.00% 1.82% (18.39)%
</TABLE>
- ----------------
*Corporate bond equivalent basis
An investor must make its own decision as to the appropriate
prepayment assumptions to be used in deciding whether or not to purchase a
Class AX Bond.
ADDITIONAL YIELD CONSIDERATIONS FOR THE RESIDUAL BONDS
The after-tax yields on the Class R Bonds may be significantly lower
than would be the case if the Class R Bonds were not taxable as residual
interests in a REMIC. See "Certain Federal Income Tax Consequences--Special
Tax Considerations Applicable to Residual Bonds" in the Prospectus.
DESCRIPTION OF BOOK ENTRY PROCEDURES
The Book Entry Bonds will be represented by one or more bonds
registered in the name of the nominee of The Depository Trust Company (the
"CLEARING AGENCY"). The Clearing Agency will maintain book entry records of
ownership, transfers and pledges of the Book Entry Bonds only in the names of
its participants and indirect 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 Book Entry Termination (as defined below), Beneficial
Owners who are not Clearing Agency Participants may transfer and pledge their
interests in the Book Entry 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. The Clearing
Agency may charge its customary fee to Clearing Agency Participants in
connection with any such transfers and pledges.
Payments of principal and interest on the Book Entry Bonds will be
made on each Payment Date by the Indenture Trustee to the Clearing Agency. The
Clearing Agency will be responsible for crediting the amount of such payments
to the accounts of the applicable Clearing Agency Participants in accordance
with the Clearing Agency's normal procedures. Each Clearing Agency Participant
will be responsible for disbursing such payments to the beneficial owners of
the Book Entry Bonds that it represents and to each financial intermediary for
which it acts as agent. Each such financial intermediary will be responsible
for disbursing funds to the beneficial owners of the Book Entry Bonds that it
represents.
S-28
<PAGE> 29
The Book Entry 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 occurs (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 a clearing corporation with respect to the Book Entry Bonds and the Issuer
and the Indenture Trustee are unable to engage a qualified successor to serve
as the Clearing Agency, (ii) the Clearing Agency Participants, at the direction
of Beneficial Owners representing a majority of the outstanding principal
amount of the Book Entry 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, or (iii) the Issuer, at its option, advises the Indenture
Trustee that it elects to terminate the book entry system. Upon Book Entry
Termination, Beneficial Owners will become registered Bondholders and will deal
directly with the Indenture Trustee with respect to transfers, notices and
payments.
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 Bondholders under the Indenture only at the
direction of one or more Clearing Agency Participants to whom the Book Entry
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 Book-Entry Bonds only at the direction of and on behalf
of Clearing Agency Participants with respect to those principal amounts of such
Book-Entry Bonds.
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, prior to Book Entry Termination, payments on the
Book-Entry Bonds will be made by the Indenture Trustee to the Clearing Agency
and the Clearing Agency will credit such payments to the accounts of 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 payments. See "Risk Factors--Book
Entry Registration" and "Description of the Bonds--Book Entry Registration" in
the Prospectus.
DESCRIPTION OF THE CERTIFICATES
Each Certificate securing the Bonds was issued pursuant to a Pooling
and Administration Agreement (each, a "POOLING AND ADMINISTRATION AGREEMENT").
The 1991-VI Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of November 1, 1991, as supplemented and
amended through and as of the Cut-off Date, among CMC, as sponsor, GE, as
successor administrator, and Chase Bank of Texas, National Association
(formerly Texas Commerce Bank National Association), as certificate trustee (in
such capacity, the "CERTIFICATE TRUSTEE").
The 1991-VII Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of December 1, 1991, as supplemented and
amended through and as of the Cut-off Date, among CMC, as sponsor, GE, as
successor administrator, and the Certificate Trustee.
The 1992-V Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of April 1, 1992, as supplemented and
amended through and as of the Cut-off Date, among CMC, as sponsor, GE, as
successor administrator, and the Certificate Trustee.
The 1992-VI Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of May 1, 1992, as supplemented and amended
through and as of the Cut-off Date, among CMC, as sponsor, GE, as successor
administrator, and the Certificate Trustee.
The 1992-VII Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of May 1, 1992, as supplemented and amended
through and as of the Cut-off Date, among CMC, as sponsor, GE, as successor
administrator, and the Certificate Trustee.
The 1992-VIII Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of June 1, 1992, as supplemented and amended
through and as of the Cut-off Date, among CMC, as sponsor, GE, as successor
administrator, and the Certificate Trustee.
S-29
<PAGE> 30
The 1992-IX Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of June 1, 1992, as supplemented and amended
through and as of the Cut-off Date, among CMC, as sponsor and successor
administrator, and the Certificate Trustee.
The 1992-X Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of June 1, 1992, as supplemented and amended
through and as of the Cut-off Date, among CMC, as sponsor, GE, as successor
administrator, and the Certificate Trustee.
The 1992-XIV Certificates were issued pursuant to a Pooling and
Administration Agreement, dated as of September 1, 1992, as supplemented and
amended through and as of the Cut-off Date, among CMC, as sponsor, GE and FNMC,
as successor administrators, and the Certificate Trustee.
The 1991-B Certificates were issued as a part of the Capstead Capital
Corporation Portfolio Pass-Through Program 1991B pursuant to a Pooling and
Administration Agreement, dated as of January 1, 1991, as supplemented and
amended through and as of the Cut-off Date, among Capstead Capital Corporation
("CCC"), as sponsor, GE, as successor administrator, and the Certificate
Trustee.
The 1991-E Certificates were issued as a part of the Capstead Capital
Corporation Portfolio Pass-Through Program 1991E pursuant to a Pooling and
Administration Agreement, dated as of August 1, 1991, as supplemented and
amended through and as of the Cut-off Date, among CCC, as sponsor, GE, as
successor administrator, and the Certificate Trustee.
The 1992-PA Certificates were issued as a part of the Capstead Capital
Corporation Portfolio Pass-Through Program 1992PA pursuant to a Pooling and
Administration Agreement, dated as of June 1, 1992, as supplemented and amended
through and as of the Cut-off Date among CCC, as sponsor, FNMC, as successor
administrator, and the Certificate Trustee.
The 1992-GA Certificates were issued as a part of the Capstead Capital
Corporation Portfolio Pass-Through Program 1992GA pursuant to an Amended and
Restated Pooling and Administration Agreement, dated as of October 1, 1993, as
supplemented and amended through and as of the Cut-off Date, among CCC, as
sponsor, CMC, as administrator, and the Certificate Trustee.
The 1993-PA Certificates were issued as a part of the Capstead Capital
Corporation Portfolio Pass-Through Program 1993PA pursuant to a Pooling and
Administration Agreement, dated as of March 1, 1993, as supplemented and
amended through and as of the Cut-off Date, among CCC, as sponsor, CMC, as
administrator, and the Certificate Trustee.
The 1994-UA Certificates were issued as a part of the Capstead Capital
Corporation Portfolio Pass-Through Program 1994UA pursuant to a Pooling and
Administration Agreement, dated as of April 1, 1994, as supplemented and
amended through and as of the Cut-off Date, among CCC, as sponsor, CMC, as
administrator, and the Certificate Trustee.
The 1994-GA Certificates were issued as a part of the Capstead Capital
Corporation Portfolio Pass-Through Program 1994GA pursuant to a Pooling and
Administration Agreement, dated as of September 1, 1994, as supplemented and
amended through and as of the Cut-off Date, among CCC, as sponsor, CMC, as
administrator, and the Certificate Trustee.
Effective September 1, 1998, the Issuer succeeded to all of the rights
and obligations as sponsor under each of the Pooling and Administration
Agreements (in such capacity, the "SPONSOR"). The Company is a PMBS Issuer for
the purposes of the Prospectus. See "The Trust Fund -- Private Mortgage-Backed
Securities" in the Prospectus.
Each Certificate evidences the entire interest in a pool of Mortgage
Loans (each, a "MORTGAGE POOL"). The Mortgage Loans constituting each Mortgage
Pool have been assigned to the Certificate Trustee for the benefit of the
holder of the related Certificates. The Certificates will be obtained by the
Issuer and pledged to the Indenture Trustee as collateral for the Bonds.
Thereafter, the Certificates will at all times be registered in the name of the
Indenture Trustee and held as security for the benefit of the holders of Bonds
(the "BONDHOLDERS"). Servicing of the Mortgage Loans will be performed
pursuant to the Servicing Agreements and supervised by the Administrators
pursuant to the Pooling and Administration Agreements. The Servicers and the
Administrators will receive a fee for their respective services. See "Pooling,
Administration and Servicing" herein.
S-30
<PAGE> 31
DESCRIPTION OF THE MORTGAGE LOANS AND THE MORTGAGED PROPERTIES
Certain data with respect to the Mortgage Loans is set forth below.
If the characteristics of the actual mortgage loans constituting the Mortgage
Loans differ in a material respect from the characteristics described below, a
detailed description of such Mortgage Loans will be available to purchasers of
the Bonds at or before, and will be filed by means of a Current Report on Form
8-K with the Commission within fifteen days after, delivery of the Bond.
The Mortgage Loans underlying the Certificates are evidenced by
promissory notes the "MORTGAGE NOTES") secured by first mortgages or first
deeds of trust or other similar security instruments creating a first lien on
single-family (one- to four-family) residential properties (the "MORTGAGED
PROPERTIES").
For a description of certain delinquency and foreclosure statistics
with respect to the Mortgage Loans see "Description of Insurance, Special
Hazard Accounts and Bankruptcy Accounts--The Mortgage Pool Insurance Policies."
The information set forth under "Certain Legal Aspects of Mortgage Loans" in
the accompanying Prospectus is applicable to the Mortgage Loans.
The "SCHEDULED PRINCIPAL BALANCE" (a) of a Mortgage Loan in respect of
which a delinquency, default or foreclosure has occurred (a "DEFAULTED MORTGAGE
LOAN"), or in respect of any Mortgage Loan to which a Deficient Valuation has
been applied, as of any date on or before the Liquidation Date of such Mortgage
Loan, is equal to the amount which would be the unpaid principal balance of
such Mortgage Loan on such date on the assumption that no delinquency or
default in payment has occurred, after giving effect to any partial principal
prepayments, insurance proceeds and liquidation proceeds previously applied to
the principal of the Mortgage Loan and reducing the outstanding principal
balance of the Mortgage Loan by an amount equal to any Deficient Valuation
relative to such Mortgage Loan; (b) with respect to a Mortgage Loan which has
been foreclosed, as of any date after the related Liquidation Date, zero, and
(c) with respect to all other Mortgage Loans, the outstanding principal balance
thereof. The "LIQUIDATION DATE" of a Mortgage Loan is the date, in the
judgment of the applicable Administrator, of final transfer to the Certificate
Account of all payments and recoveries on such Mortgage Loan.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy
court may establish the value of the Mortgaged Property at an amount less than
the then outstanding principal balance of the Mortgage Loan secured by such
Mortgaged Property and could reduce the secured debt to such value. In such
case, the holder of such Mortgage Loan would become an unsecured creditor to
the extent of the difference between the outstanding principal balance of such
Mortgage Loan and such reduced secured debt (such a difference is referred to
herein as a "DEFICIENT VALUATION").
MORTGAGE RATE ADJUSTMENTS WITH RESPECT TO THE LIBOR LOANS
The LIBOR Loans bear interest rates (each, a "LIBOR MORTGAGE RATE")
which adjust every six months at specified margins over the average of
interbank offered rates for six month U.S. dollar deposits in the London market
based on quotations of major banks, in the case of certain of the LIBOR Loans,
as published by The Wall Street Journal (each, a "WSJ LIBOR LOAN"), and in the
case of the remaining LIBOR Loans, as published by FNMA (each, a "FNMA LIBOR
LOAN"). The most recent such applicable published rate available as of the
date 45 days before the related adjustment date (each, a "LIBOR ADJUSTMENT
DATE") on a LIBOR Loan is referred to as the "CURRENT LIBOR INDEX". The LIBOR
Mortgage Rate for each LIBOR Loan will adjust every six months, on each related
LIBOR Adjustment Date, to a rate equal to the sum of (i) the Current LIBOR
Index plus (ii) a margin of 2.625 to 3.00 percentage points, as specified for
such LIBOR Loan in the related Mortgage Note (each, a "LIBOR GROSS MARGIN"),
with such sum being rounded to the nearest one-eighth of one percentage point
(0.125%), except in the case of certain of the FNMA LIBOR Loans which are not
rounded. The LIBOR Gross Margin with respect to each LIBOR Loan is fixed for
the life of such LIBOR Loan. The LIBOR Loans were originated at different
times and, therefore, their LIBOR Adjustment Dates occur in different months.
With respect to certain of the LIBOR Loans, the initial LIBOR Adjustment Date
may have been a date less than six months after the applicable origination
date.
With respect to each LIBOR Loan: (i) on any given LIBOR Adjustment
Date, the LIBOR Mortgage Rate borne by such LIBOR Loan may not be increased or
decreased by more than one percentage point (1.0%)(the "LIBOR MORTGAGE INTEREST
RATE ADJUSTMENT CAP"); (ii) the LIBOR Mortgage Rate cannot exceed a rate which
is six percentage points (6.0%) greater than the initial LIBOR Mortgage Rate
borne by such LIBOR Loan (the "LIBOR LIFETIME MORTGAGE INTEREST RATE CAP"); and
(iii) the LIBOR Mortgage Rate cannot be decreased to a rate less than the
applicable minimum rate specified for such LIBOR Loan in the related Mortgage
Note, which minimum rate is not less than 3.625% (the "LIBOR MINIMUM MORTGAGE
INTEREST RATE").
S-31
<PAGE> 32
Because of the LIBOR Mortgage Interest Rate Adjustment Cap, the LIBOR
Lifetime Mortgage Interest Rate Cap and the LIBOR Minimum Mortgage Interest
Rate, the LIBOR Mortgage Rate in effect from time to time on any LIBOR Loan may
not be equal to the applicable Current LIBOR Index plus the LIBOR Gross Margin
(subject to rounding).
On each LIBOR Adjustment Date for each LIBOR Loan, the LIBOR Mortgage
Rate will be reset in accordance with the applicable Current LIBOR Index and
the LIBOR Gross Margin (subject to rounding), subject to the LIBOR Lifetime
Mortgage Interest Rate Cap, the LIBOR Mortgage Interest Rate Adjustment Cap,
and the LIBOR Minimum Mortgage Interest Rate. To accommodate changes in the
Current LIBOR Index, the scheduled payment for each Mortgage Loan will be
adjusted on its respective LIBOR Adjustment Date to an amount that would fully
amortize such LIBOR Loan over its remaining term at the LIBOR Mortgage Rate in
effect as of the date of such adjustment.
THE LIBOR INDEX
As described previously, the LIBOR Index is the average of the
interbank offered rates for six month United States dollar deposits in the
London interbank market based on quotations of major banks, as published in The
Wall Street Journal or by FNMA. The table below sets forth historical average
values of the LIBOR Index for the months indicated (as made available from
FNMA), which values may differ from those published in The Wall Street Journal.
The table does not purport to be representative of subsequent levels of the
LIBOR Index as published either by The Wall Street Journal or by FNMA.
<TABLE>
<CAPTION>
Year (1)
----------------------------------------------------
Month 1998 1997 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
January . . . 5.75% 5.71% 5.34% 6.69% 3.39% 3.44% 4.25%
February . . 5.78 5.68 5.29 6.44 4.00 3.33 4.38
March . . . . 5.80 5.96 5.52 6.44 4.25 3.38 4.55
April . . . . 5.87 6.08 5.42 6.31 4.63 3.31 4.27
May . . . . . 5.81 6.01 5.64 6.06 5.00 3.44 4.25
June . . . . 5.87 5.94 5.84 5.88 5.25 3.56 4.13
July . . . . 5.82 5.83 5.92 5.88 5.33 3.56 3.63
August . . . 5.86 5.74 5.94 5.33 3.44 3.63
September . . 5.85 5.75 5.99 5.69 3.38 3.31
October . . . 5.81 5.58 5.95 6.00 3.50 3.64
November . . 6.04 5.55 5.74 6.44 3.52 3.89
December . . 6.01 5.62 5.56 7.00 3.50 3.64
- --------------
</TABLE>
(1) Figures are averages of daily rates and do not necessarily correspond
to the LIBOR Index values determined as provided in any related
Mortgage Note.
MORTGAGE RATE ADJUSTMENTS WITH RESPECT TO THE CMT LOANS
Each CMT Loan bears interest at a rate (each, a "CMT MORTGAGE RATE")
which is adjustable annually at a specified margin over the weekly average
yield on United States Treasury securities adjusted to a constant maturity of
one year, as made available by the Federal Reserve Board (the "CMT INDEX").
The most recent such applicable published rate available as of the date 45 days
before such related adjustment date (each, a "CMT ADJUSTMENT DATE") on a CMT
Loan is referred to as the "CURRENT CMT INDEX". The CMT Mortgage Rate for each
CMT Loan will adjust on each related CMT Adjustment Date to a rate equal to the
sum of (i) the Current CMT Index plus (ii) a margin of 2.75 to 3.00 percentage
points, as specified for such CMT Loan in the related Mortgage Note (each, a
"CMT GROSS MARGIN"), with such sum being rounded to the nearest one-eighth of
one percentage point (0.125%). The CMT Gross Margin with respect to each CMT
Loan is fixed for the life of such CMT Loan. The CMT Loans were originated at
different times and, therefore, their CMT Adjustment Dates will occur in
different months. With respect to certain of the CMT Loans, the initial CMT
Adjustment Date may have been a date more or less than one year after the
applicable origination date.
S-32
<PAGE> 33
With respect to each CMT Loan: (i) on any given CMT Adjustment Date,
the CMT Mortgage Rate borne by such CMT Loan may not be increased or decreased
by more than two percentage points (2.0%) (the "CMT MORTGAGE INTEREST RATE
ADJUSTMENT CAP"); provided, however, that on the first CMT Adjustment Date with
respect to certain of the CMT Loans, the Mortgage Rate borne by such CMT Loan
may increase by up to three percentage points (3.0%) or decrease by up to two
percentage points (2.0%); and (ii) either (a) the CMT Mortgage Rate cannot
exceed a rate which is six percentage points (6.0%) greater than the initial
CMT Mortgage Rate borne by such CMT Loan, or (b) the CMT Mortgage Rate is fixed
for either three or five years after origination, and thereafter cannot exceed
a rate which is five percentage points (5.0%) greater than such initial fixed
rate (the caps referred to under (a) and (b) above, the "CMT LIFETIME MORTGAGE
INTERESTRATE CAPS"). In addition, the CMT Mortgage Rates are subject to
minimum rates (each, a "CMT MINIMUM MORTGAGE INTEREST RATE").
Because of the CMT Mortgage Interest Rate Adjustment Cap, the CMT
Lifetime Mortgage Interest Rate Cap and the CMT Minimum Mortgage Interest Rate,
the CMT Mortgage Rate in effect from time to time on any CMT Loan after the
first anniversary of its origination may not be equal to the applicable Current
CMT Index plus the CMT Gross Margin (subject to rounding).
On each CMT Adjustment Date for each CMT Loan, the CMT Mortgage Rate
will be reset in accordance with the applicable Current CMT Index and the CMT
Gross Margin (subject to rounding), subject to the CMT Lifetime Mortgage
Interest Rate Caps, the CMT Mortgage Interest Rate Adjustment Cap, and the CMT
Minimum Mortgage Interest Rate. To accommodate changes in the Current CMT
Index, the scheduled payment for each CMT Loan will be adjusted on its
respective CMT Adjustment Date to an amount that would fully amortize such
Mortgage Loan over its remaining term at the CMT Mortgage Rate in effect as of
the date of such adjustment.
THE CMT INDEX
The CMT Index will be based on the weekly average yield of United
States Treasury securities adjusted to a constant maturity of one year as
published in Federal Reserve Statistical Release No. H.15 (519). CMT Index
values are also published in The Wall Street Journal.
Yields on United States Treasury securities are estimated from the
United States Treasury's daily yield curve. This curve, which relates the
yield on a security to its time to maturity, is based on the closing market bid
yields on actively-traded United States Treasury securities in the
over-the-counter market. These market yields are calculated from composites of
quotations reported by five leading United States Treasury securities dealers
to the Federal Reserve Bank of New York. The constant yield values are read
from the yield curve at fixed maturities. This method permits, for example,
estimations of the yield for a one-year maturity even if no outstanding
security has exactly one year remaining to maturity.
The index to be used in calculating the interest rates borne by the
CMT Loans is the weekly-average yield on United States Treasury securities
adjusted to a constant maturity of one year and is estimated from the United
States Treasury's
S-33
<PAGE> 34
daily yield curve as described above. The table below sets forth historical
values of the CMT Index for the months indicated. The table does not purport
to be representative of subsequent levels of the CMT Index.
<TABLE>
<CAPTION>
YEAR (1)
----------------------------------------------------------------
MONTH 1998 1997 1996 1995 1994 1993 1992 1991
----- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January . . . . . . . . . . . . . 5.24% 5.61% 5.09% 7.05% 3.54% 3.50% 4.15% 6.64%
February . . . . . . . . . . . . 5.31 5.53 4.94 6.70 3.87 3.39 4.29 6.27
March . . . . . . . . . . . . . . 5.39 5.80 5.34 6.43 4.32 3.33 4.63 6.40
April . . . . . . . . . . . . . . 5.38 5.99 5.54 6.27 4.82 3.24 4.30 6.24
May . . . . . . . . . . . . . . . 5.44 5.87 5.64 6.00 5.31 3.36 4.19 6.13
June . . . . . . . . . . . . . . 5.41 5.69 5.81 5.64 5.27 3.54 4.17 6.36
July . . . . . . . . . . . . . . 5.36 5.54 5.85 5.59 5.48 3.47 3.60 6.31
August . . . . . . . . . . . . . 5.21 5.56 5.67 5.75 5.56 3.44 3.47 5.78
September . . . . . . . . . . . . 5.52 5.83 5.62 5.76 3.36 3.18 5.57
October . . . . . . . . . . . . . 5.46 5.55 5.59 6.11 3.39 3.30 5.33
November . . . . . . . . . . . . 5.46 5.42 5.43 6.54 3.58 3.68 4.89
December . . . . . . . . . . . . 5.53 5.47 5.31 7.14 3.61 3.71 4.38
- ---------------
</TABLE>
(1) Figures are averages of daily rates and do not necessarily correspond
to the CMT Index values determined as provided in any related Mortgage
Note.
MORTGAGE RATE ADJUSTMENTS WITH RESPECT TO THE 5/25 MORTGAGE LOANS
The initial Mortgage Rate on each 5/25 Mortgage Loan has been or will
be adjusted once on the related 5/25 Adjustment Date. The adjusted Mortgage
Rate for each 5/25 Mortgage Loan equals the sum of the FNMA Index (described in
the following paragraph) and a margin of 1.75 to 3.00 percentage points, as
specified in the related Mortgage Note, in each case, rounded to the nearest
0.125%, provided that the adjusted Mortgage Rate on any 5/25 Mortgage Loan may
not increase to more than eight percentage points above the initial interest
rate on such Mortgage Loan. Effective with the first due date following the
5/25 Adjustment Date, the monthly principal and interest payment on a 5/25
Mortgage Loan is reset to an amount that fully amortizes the then outstanding
principal balance of such 5/25 Mortgage Loan by its stated maturity at its
adjusted Mortgage Rate. An increase in the Mortgage Rate on a 5/25 Mortgage
Loan will result in a larger portion of each monthly payment being allocated to
interest and a smaller portion being allocated to principal, and, conversely, a
decrease in the Mortgage Rate on the 5/25 Mortgage Loan will result in a larger
portion of each monthly payment being allocated to principal and a smaller
portion being allocated to interest.
The "FNMA INDEX" utilized in the adjustment of the Mortgage Rate on
the 5/25 Mortgage Loans will be the FNMA posted annual yield (net) for 30-year
standard conventional fixed rate mortgage commitments for delivery within 30
days (priced at par), as published in the Wall Street Journal, most recently
available as of the date 45 days prior to the 5/25 Adjustment Date, or in the
event that such index is no longer available, an index selected by the relevant
Administrator that is based on comparable information.
The initial Mortgage Rate on each 5/25 Mortgage Loan was not set with
reference to the FNMA Index, but rather was set independently based on a number
of factors, including but not limited to prevailing mortgage market interest
rates for non-conforming loans, the current interest rate for collateralized
mortgage obligations, and the perceived risk related to the individual 5/25
Mortgage Loan. The initial Mortgage Rate on each 5/25 Mortgage Loan was lower
than the prevailing 30-year mortgage rate for non-conforming mortgage loans at
the date of origination of such 5/25 Mortgage Loan.
As of the Cut-off Date, approximately 56.93% of the 5/25 Mortgage
Loans (by aggregate Scheduled Principal Balance, as defined herein) had reached
their 5/25 Adjustment Date. The remainder of the 5/25 Mortgage Loans will
reach their 5/25 Adjustment Date by December 1999.
S-34
<PAGE> 35
In the event that the adjusted Mortgage Rate is below the then
prevailing mortgage rates for similar loans, the related Mortgagors of the 5/25
Mortgage Loans may not be as likely to refinance such mortgage loans, which may
result in a decrease in the rate of prepayment of such mortgage loans.
Conversely, in the event that the adjusted Mortgage Rate is greater than the
then prevailing mortgage rates for similar loans, the Mortgagors of such 5/25
Mortgage Loans may be more likely to refinance such Mortgage Loans, which may
result in an increase in the rate of prepayment of such Mortgage Loans. If the
adjusted Mortgage Rate is higher than the initial Mortgage Rate, the repayment
of the 5/25 Mortgage Loans will be dependent on the ability of the related
Mortgagors to make larger monthly payments following the adjustment of the
Mortgage Rate. Therefore, the rate of default on the 5/25 Mortgage Loans may
be greater than that on other Mortgage Loans. To the extent that coverage
under the Credit Enhancement described herein is insufficient to cover any such
defaults, a loss to the Bondholders may result.
THE FNMA INDEX
The "FNMA INDEX" utilized in the adjustment of the Mortgage Rate on
the 5/25 Mortgage Loans will be the FNMA posted annual yield (net) for 30-year
standard conventional fixed rate mortgage commitments for delivery within 30
days (priced at par), as published in the Wall Street Journal, most recently
available as of the date 45 days prior to the 5/25 Adjustment Date, or in the
event that such index is no longer available, an index selected by the relevant
Administrator that is based on comparable information.
The table below sets forth historical values for the FNMA Index as
published by FNMA. The table does not purport to be representative of
subsequent levels of the FNMA Index.
<TABLE>
<CAPTION>
YEAR (1)
----------------------------------------------------------
MONTH 1998 1997 1996 1995 1994 1993 1992
----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January . . . . . . . . . . . . . 6.99% 7.90% 7.16% 8.99% 6.78% 7.59% 8.60%
February . . . . . . . . . . . . 7.12 7.93 7.60 8.57 7.32 7.28 8.51
March . . . . . . . . . . . . . . 7.12 8.24 7.95 8.71 8.21 7.22 8.80
April . . . . . . . . . . . . . . 7.12 8.13 8.19 8.45 8.44 7.21 8.66
May . . . . . . . . . . . . . . . 6.98 7.98 8.29 7.80 8.53 7.26 8.40
June . . . . . . . . . . . . . . 6.99 7.76 8.23 7.80 8.58 6.96 8.19
July . . . . . . . . . . . . . . 6.97 7.38 8.31 7.97 8.46 6.96 7.86
August . . . . . . . . . . . . . 6.77 7.64 8.28 7.87 8.48 6.65 7.70
September . . . . . . . . . . . . 7.44 8.10 7.80 8.82 6.70 7.62
October . . . . . . . . . . . . . 7.30 7.81 7.60 8.98 6.69 8.12
November . . . . . . . . . . . . 7.28 7.57 7.41 9.26 7.03 8.20
December . . . . . . . . . . . . 7.18 7.76 7.15 9.28 7.00 7.97
- ---------------
</TABLE>
(1) Figures are averages of daily rates and do not necessarily correspond
to the FNMA Index values determined as provided in any related
Mortgage Note.
DELINQUENCY AND FORECLOSURE STATISTICS OF CMC'S TOTAL INVESTMENT PORTFOLIO AND
CMC'S ADJUSTABLE RATE MORTGAGE INVESTMENT PORTFOLIO
The following tables set forth certain information concerning CMC's
delinquency and loan loss experience with respect to the first lien,
residential mortgage loans in CMC's total investment portfolio and adjustable
rate mortgage loan investment portfolio (which portfolio includes mortgage
loans owed by the CMC Investment Partnership, of which CMC and a wholly-owned
subsidiary of CMC are the sole general partners, and mortgage loans which back
collateralized mortgage obligations and pass-through certificates issued or
sold by subsidiaries of CMC). CMC's adjustable rate mortgage loan investment
portfolio includes other types of adjustable rate mortgage loans in addition to
adjustable rate mortgage loans such as are included in the Mortgage Loans.
S-35
<PAGE> 36
DELINQUENCY AND FORECLOSURE STATISTICS AS PERCENTAGES
OF CMC'S TOTAL PORTFOLIO
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF DECEMBER 31,
-------------------------------------- -------------------------------------- -
1998 1997
-------------------------------------- -------------------------------------- -
Number of Dollar amount of Number of Dollar amount of
mortgage loans mortgage loans as mortgage loans mortgage loans as
as a percentage a percentage of as a percentage a percentage of
of total portfolio total portfolio of total portfolio total portfolio
----------------- ------------------- ------------------ ------------------- -
Period of Delinquency (% of Portfolio)
<S> <C> <C> <C> <C>
30-59 days delinquent............ 1.68% 1.63% 1.94% 1.88%
60-89 days delinquent............ 0.29% 0.30% 0.32% 0.31%
90 + days delinquent............. 0.28% 0.26% 0.23% 0.23%
Foreclosures pending............. 1.48% 1.57% 1.28% 1.38%
---- ---- ---- ----
Total 3.73% 3.76% 3.77% 3.80%
==== ==== ==== ====
Foreclosed Loans (1)............. 0.39% 0.39% 0.63% 0.63%
Total Loan Portfolio:
By aggregate principal
balance: $4,199,728,517 $5,307,705,174
By number of Mortgage
Loans: 15,835 19,656
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31,
--------------------------------------- --------------------------------------
1996 1995
--------------------------------------- --------------------------------------
Number of Dollar amount of Number of Dollar amount of
mortgage loans as mortgage loans as mortgage loans mortgage loans as
a percentage of a percentage of as a percentage a percentage of
total portfolio total portfolio of total portfolio total portfolio
------------------- ------------------- ------------------ -------------------
Period of Delinquency (% of Portfolio)
<S> <C> <C> <C> <C>
30-59 days delinquent............ 1.90% 1.86% 2.27% 2.22%
60-89 days delinquent............ 0.57% 0.56% 0.49% 0.50%
90 + days delinquent............. 0.58% 0.55% 1.22% 1.29%
Foreclosures pending............. 1.83% 2.02% 2.27% 2.42%
---- ---- ---- ----
Total 4.88% 4.99% 6.25% 6.43%
==== ==== ==== ====
Foreclosed Loans (1)............. 0.76% 0.71% 0.84% 0.84%
Total Loan Portfolio:
By aggregate principal
balance: $6,489,374,792 $7,507,373,000
By number of Mortgage
Loans: 23,370 26,391
</TABLE>
- ----------------
(1) For the purposes of this table, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to which
had been acquired and which had not been liquidated by the end of the period
indicated.
S-36
<PAGE> 37
DELINQUENCY AND FORECLOSURE STATISTICS AS PERCENTAGES
OF CMC'S ADJUSTABLE RATE MORTGAGE LOAN PORTFOLIO
<TABLE>
<CAPTION>
AS OF AUGUST 31, AS OF DECEMBER 31,
-------------------------------------- --------------------------------------
1998 1997
-------------------------------------- --------------------------------------
Number of Dollar amount of Number of Dollar amount of
mortgage loans mortgage loans as mortgage loans mortgage loans as
as a percentage a percentage of as a percentage a percentage of
of total portfolio total portfolio of total portfolio total portfolio
------------------ --------------- ------------------ ---------------
Period of Delinquency (% of Portfolio)
<S> <C> <C> <C> <C>
30-59 days delinquent............ 2.63% 2.43% 2.90% 2.78%
60-89 days delinquent............ 0.61% 0.60% 0.52% 0.45%
90 + days delinquent............. 0.50% 0.46% 0.40% 0.40%
Foreclosures pending............. 1.51% 2.62% 2.21% 2.31%
---- ---- ---- ----
Total 5.25% 6.11% 6.03% 5.94%
==== ==== ==== ====
Foreclosed Loans (1)............. 0.71% 0.67% 1.39% 1.33%
Total Adjustable Rate Portfolio:
By aggregate principal balance: $1,082,757,023 $1,515,489,810
By number of Mortgage Loans: 4,067 5,614
<CAPTION>
AS OF DECEMBER 31, AS OF DECEMBER 31,
--------------------------------------- --------------------------------------
1996 1995
--------------------------------------- --------------------------------------
Number of Dollar amount of Number of Dollar amount of
mortgage loans as mortgage loans as mortgage loans mortgage loans as
a percentage of a percentage of as a percentage a percentage of
total portfolio total portfolio of total portfolio total portfolio
--------------- --------------- ------------------ ---------------
Period of Delinquency (% of Portfolio)
<S> <C> <C> <C> <C>
30-59 days delinquent............ 2.75% 2.79% 3.18% 3.21%
60-89 days delinquent............ 0.89% 0.82% 0.72% 0.75%
90 + days delinquent............. 1.09% 1.06% 2.12% 2.26%
Foreclosures pending............. 2.88% 3.22% 3.87% 4.25%
---- ---- ---- -----
Total 7.61% 7.89% 9.89% 10.47%
==== ==== ==== =====
Foreclosed Loans (1)............. 1.57% 1.51% 1.61% 1.70%
Total Adjustable Rate Portfolio:
By aggregate principal balance: $2,095,396,049 $2,597,213,000
By number of Mortgage Loans: 7,558 9,158
</TABLE>
- ------------------
(1) For the purposes of this table, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to which
had been acquired and which had not been liquidated by the end of the period
indicated.
S-37
<PAGE> 38
No assurance can be given that the values of the Mortgaged Properties
have remained or will remain at their levels on the dates of origination of the
related Mortgage Loans. Adverse economic conditions (which may or may not affect
real property values) may affect the timely payments by Mortgagors of scheduled
payments of principal and interest on the Mortgage Loans and accordingly, the
actual rates of delinquencies, foreclosures and losses with respect to the
Mortgage Loans. If the residential real estate market should experience an
overall decline in property values such that the outstanding balances of the
Mortgage Loans, and any secondary financing on the Mortgaged Properties by a
lender, become equal to or greater than the value of the Mortgaged Properties,
the actual rates of delinquencies, foreclosures and losses could be
significantly higher than the rates indicated in the tables above. To the extent
that such losses occur in connection with the Mortgage Loans and are not
otherwise covered by a primary mortgage insurance policy or a Standard Hazard
Insurance Policy, or a Mortgage Pool Insurance Policy or amounts available in
applicable Special Hazard Account (including proceeds from the applicable
Special Hazard Policy) and the applicable Bankruptcy Account described herein,
they will be borne by the Bondholders.
DESCRIPTION OF MORTGAGE LOANS
The tables set forth below approximate information, as of the Cut-off
Date, with respect to the Mortgage Loans. The characteristics of the Mortgage
Loans on the Closing Date may differ from the descriptions set forth below due
to unscheduled partial or full prepayments or defaults with respect to the
Mortgage Loans occurring after the Cut-off Date. To the extent that the Mortgage
Loans differ from the description contained herein, variances may result.
OUTSTANDING PRINCIPAL BALANCE
The following table sets forth certain information as of the Cut-off
Date with respect to the outstanding principal balances of the Mortgage Loans:
<TABLE>
<CAPTION>
RANGE OF PERCENT OF
OUTSTANDING AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
PRINCIPAL BALANCE NUMBER OF LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
----------------- --------------- ---------------------- -----------------
<S> <C> <C> <C>
$ 0 - 100,000 15 $ 936,884.62 0.27%
100,001 - 200,000 195 34,026,788.87 9.84
200,001 - 300,000 781 187,274,653.65 54.15
300,001 - 400,000 204 69,786,379.75 20.18
400,001 - 500,000 68 29,917,823.51 8.65
500,001 - 600,000 30 16,254,179.78 4.70
600,001 - 700,000 11 6,926,953.70 2.00
700,001 - 800,000 1 708,299.44 0.20
---- ---------------------- ------
Total 1305 $ 345,831,963.32 100.00%
==== ====================== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date, whether or
not such payments are received.
S-38
<PAGE> 39
MORTGAGE RATES
The following table sets forth certain information as of the Cut-off
Date with respect to the Mortgage Rates borne by the Mortgage Loans:
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
MORTGAGE RATE (%) NUMBER OF LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
----------------- --------------- --------------------- -----------------
<S> <C> <C> <C>
5.6251 - 5.7500 1 $ 301,901.31 0.09%
5.7501 - 5.8750 2 476,203.43 0.14
5.8751 - 6.0000 3 718,738.44 0.21
6.0001 - 6.1250 6 1,257,264.93 0.36
6.1251 - 6.2500 7 1,809,566.29 0.52
6.2501 - 6.3750 14 3,826,261.85 1.11
6.3751 - 6.5000 24 6,507,660.96 1.88
6.5001 - 6.6250 23 5,316,026.59 1.54
6.6251 - 6.7500 30 8,329,330.32 2.41
6.7501 - 6.8750 28 7,782,154.40 2.25
6.8751 - 7.0000 20 5,251,157.15 1.52
7.0001 - 7.1250 14 3,846,651.92 1.11
7.1251 - 7.2500 16 4,215,245.91 1.22
7.2501 - 7.3750 6 1,492,677.83 0.43
7.3751 - 7.5000 8 1,949,611.21 0.56
7.5001 - 7.6250 6 1,836,067.44 0.53
7.6251 - 7.7500 4 1,039,154.22 0.30
7.7501 - 7.8750 3 909,807.04 0.26
7.8751 - 8.0000 58 16,561,181.59 4.79
8.0001 - 8.1250 54 13,819,813.79 4.00
8.1251 - 8.2500 52 15,092,483.11 4.36
8.2501 - 8.3750 93 23,811,880.68 6.89
8.3751 - 8.5000 98 25,651,587.39 7.42
8.5001 - 8.6250 71 18,941,533.26 5.48
8.6251 - 8.7500 105 27,399,065.30 7.92
8.7501 - 8.8750 37 8,908,826.58 2.58
8.8751 - 9.0000 33 8,390,167.66 2.43
9.0001 - 9.1250 95 24,567,232.46 7.10
9.1251 - 9.2500 66 17,138,994.99 4.96
9.2501 - 9.3750 81 22,255,342.17 6.44
9.3751 - 9.5000 71 18,904,991.64 5.47
9.5001 - 9.6250 49 13,135,296.03 3.80
9.6251 - 9.7500 29 6,978,082.32 2.02
9.7501 - 9.8750 21 5,742,065.58 1.66
9.8751 - 10.0000 61 17,659,909.11 5.11
10.0001 - 10.1250 8 2,193,153.68 0.63
10.1251 - 10.2500 3 745,206.81 0.22
10.2501 - 10.3750 2 371,033.02 0.11
10.3751 - 10.5000 1 192,985.64 0.06
10.6251 - 10.7500 1 190,062.01 0.05
10.7501 - 10.8750 1 315,587.26 0.09
----- -------------------- ------
Total 1,305 $ 345,831,963.32 100.00%
===== ==================== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date, whether
or not such payments are received.
S-39
<PAGE> 40
NET MORTGAGE RATES
The following table sets forth certain information as of the Cut-off Date
with respect to the Net Mortgage Rates borne by the Mortgage Loans:
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF
NUMBER OUTSTANDING AGGREGATE OUTSTANDING
MORTGAGE RATE (%) OF LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
----------------- -------- -------------------- -----------------
<S> <C> <C> <C>
5.0001 - 5.1250 1 $ 301,901.31 0.09%
5.1251 - 5.2500 3 723,617.25 0.21
5.2501 - 5.3750 2 471,324.62 0.14
5.3751 - 5.5000 7 1,524,009.29 0.44
5.5001 - 5.6250 9 2,207,311.48 0.64
5.6251 - 5.7500 14 4,041,582.42 1.17
5.7501 - 5.8750 24 6,413,779.09 1.85
5.8751 - 6.0000 27 6,334,269.51 1.83
6.0001 - 6.1250 33 9,132,495.50 2.64
6.1251 - 6.2500 23 6,340,040.07 1.83
6.2501 - 6.3750 20 5,674,125.90 1.64
6.3751 - 6.5000 13 3,226,973.12 0.93
6.5001 - 6.6250 14 3,737,427.75 1.08
6.6251 - 6.7500 8 1,968,895.73 0.57
6.7501 - 6.8750 10 2,573,675.06 0.74
6.8751 - 7.0000 4 1,127,751.79 0.33
7.0001 - 7.1250 19 5,421,441.16 1.57
7.1251 - 7.2500 62 17,288,599.08 5.00
7.2501 - 7.3750 63 16,618,110.16 4.81
7.3751 - 7.5000 47 12,114,225.25 3.50
7.5001 - 7.6250 80 21,597,001.97 6.24
7.6251 - 7.7500 98 26,450,836.05 7.65
7.7501 - 7.8750 55 14,433,058.07 4.17
7.8751 - 8.0000 24 6,286,500.62 1.82
8.0001 - 8.1250 78 20,350,664.63 5.88
8.1251 - 8.2500 16 3,729,548.95 1.08
8.2501 - 8.3750 54 14,162,833.86 4.10
8.3751 - 8.5000 71 18,075,103.07 5.23
8.5001 - 8.6250 40 9,997,661.28 2.89
8.6251 - 8.7500 68 17,589,739.36 5.09
8.7501 - 8.8750 73 20,420,352.73 5.90
8.8751 - 9.0000 75 19,340,985.07 5.59
9.0001 - 9.1250 49 13,283,763.16 3.84
9.1251 - 9.2500 32 8,059,402.60 2.33
9.2501 - 9.3750 25 6,994,302.56 2.02
9.3751 - 9.5000 52 15,008,955.36 4.34
9.5001 - 9.6250 7 1,849,968.55 0.53
9.6251 - 9.7500 1 205,649.22 0.06
9.7501 - 9.8750 1 201,283.56 0.06
9.8751 - 10.000 2 362,735.10 0.10
10.2501 - 10.3750 1 190,062.01 0.05
Total 1305 $ 345,831,963.32 100.00%
==== ================= ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date, whether or
not such payments are received.
The weighted average Net Mortgage Rate at the Cut-off Date of the
Mortgage Loans is approximately 7.900%.
S-40
<PAGE> 41
GROSS MARGIN
The following table sets forth certain information, as of the Cut-off
Date, with respect to the Gross Margins used in calculating the mortgage coupon
rates to be borne by the Mortgage Loans as of each Adjustment Date:
<TABLE>
<CAPTION>
AGGREGATE PERCENT OF
NUMBER OUTSTANDING AGGREGATE OUTSTANDING
GROSS MARGIN (%) OF LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
- ---------------- -------- -------------------- -----------------
<S> <C> <C> <C>
0.0000 681 $ 180,127,238.17 52.09%
1.7500 182 47,910,001.06 13.85
2.2500 2 452,364.45 0.13
2.5000 1 140,621.95 0.04
2.7500 279 77,534,865.25 22.42
2.8000 17 4,179,230.10 1.21
2.8500 2 401,573.40 0.12
2.8700 1 260,587.96 0.08
2.8750 84 20,684,244.46 5.98
2.9000 2 1,222,206.75 0.35
2.9250 2 454,263.91 0.13
3.0000 41 10,226,247.33 2.96
3.0500 1 198,427.47 0.06
3.1250 10 2,040,091.06 0.59
----- -------------------- ------
Total 1305 $ 345,831,963.32 100.00%
===== ==================== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date, whether
or not such payments are received.
S-41
<PAGE> 42
NEXT ADJUSTMENT DATES
The following table sets forth certain information as of the Cut-off
Date with respect to the next dates on which the interest rates of the Mortgage
Loans may be adjusted:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
NEXT ADJUSTMENT DATE OF LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
-------------------- -------- ---------------------- -----------------
<S> <C> <C> <C>
N/A 681 $ 180,127,238.17 52.09%
10/1/98 52 13,600,672.27 3.93
11/1/98 50 13,678,537.56 3.96
12/1/98 117 30,924,192.44 8.94
1/1/99 72 18,480,715.80 5.34
2/1/99 66 18,340,217.39 5.30
3/1/99 34 10,092,181.93 2.92
4/1/99 65 17,823,065.04 5.15
5/1/99 28 7,764,086.14 2.25
6/1/99 81 20,019,488.42 5.79
7/1/99 19 4,895,681.22 1.42
8/1/99 15 4,175,138.10 1.21
9/1/99 19 4,796,236.36 1.39
10/1/99 2 491,256.61 0.14
11/1/99 1 96,563.49 0.03
12/1/99 2 381,046.77 0.11
1/1/05 1 145,645.61 0.04
---- ------------------ ------
Total 1305 $ 345,831,963.32 100.00%
==== ================== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date, whether or
not such payments are received.
S-42
<PAGE> 43
ORIGINAL LOAN-TO-VALUE RATIO
The following table sets forth certain information as of the Cut-off
Date with respect to the original Loan-to-Value Ratios of the Mortgage Loans:
<TABLE>
<CAPTION>
ORIGINAL PERCENT OF
LOAN-TO-VALUE NUMBER AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
RATIO(%) OF LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
-------- -------- ---------------------- -----------------
<S> <C> <C> <C>
25.01 - 30.00 5 $ 1,739,309.02 0.50%
30.01 - 35.00 3 882,825.73 0.26
35.01 - 40.00 4 1,055,442.82 0.31
40.01 - 45.00 12 3,154,733.15 0.91
45.01 - 50.00 15 3,697,477.35 1.07
50.01 - 55.00 25 6,814,149.81 1.97
55.01 - 60.00 33 9,205,586.88 2.66
60.01 - 65.00 53 15,475,307.95 4.47
65.01 - 70.00 144 43,256,770.64 12.51
70.01 - 75.00 214 62,007,584.97 17.93
75.01 - 80.00 511 130,720,635.44 37.80
80.01 - 85.00 23 6,151,527.36 1.78
85.01 - 90.00 237 56,886,507.79 16.45
90.01 - 95.00 26 4,784,104.41 1.38
---- ------------------ ------
Total 1305 $ 345,831,963.32 100.00%
==== ================== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date,
whether or not such payments are received.
For purposes of the foregoing table, the "Original Loan-to-Value Ratio"
of each Mortgage Loan was calculated based upon the appraised value of the
related Mortgaged Property at the time of origination and the initial principal
balance of such Mortgage Loan. As used herein, the "appraised value" of a
Mortgaged Property is equal to the lesser of the sales price of such Mortgaged
Property (unless the proceeds of the Mortgage Loan was used to refinance an
existing mortgage loan) to the related Mortgagor or the value reflected in the
appraisal of the Mortgaged Property made at the time of origination of the
related Mortgage Loan. The weighted average original Loan-to-Value Ratio of the
Mortgage Loans is approximately 76%. Because of the amount of time elapsed since
origination of the Mortgage Loans, the Loan-to-Value Ratio of a Mortgage Loan
based upon the appraised value of the related Mortgaged Property and outstanding
principal balance of the Mortgage Loan, each as of the Cut-off Date, may be
substantially more or less than the Loan-to-Value Ratio used to determine the
foregoing table.
S-43
<PAGE> 44
PROPERTY TYPE
The following table sets forth certain information, as of the Cut-off
Date, with respect to the Mortgaged Properties which secure the Mortgage Loans:
<TABLE>
<CAPTION>
PERCENT OF
MORTGAGED NUMBER AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
PROPERTY TYPE OF LOANS PRINCIPAL BALANCE(1) PRINCIPAL BALANCE
------------- -------- -------------------- -----------------
<S> <C> <C> <C>
Single Family Detached 1208 $ 322,364,754.92 93.21%
Planned Unit Development 19 5,224,415.42 1.51
Condominium 54 12,794,963.43 3.70
Highrise Condominium 5 933,831.49 0.27
Duplex 3 913,537.67 0.26
FourPlex 1 173,152.54 0.05
TownHouse 15 3,427,307.85 0.99
---- ------------------ ------
Total 1305 $ 345,831,963.32 100.00%
==== ================== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date,
whether or not such payments are received.
S-44
<PAGE> 45
GEOGRAPHIC DISTRIBUTION
The following table sets forth certain information as of the Cut-off
Date with respect to the geographic distribution of the Mortgaged Properties
securing the Mortgage Loans:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
STATE OF LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
----- -------- ---------------------- -----------------
<S> <C> <C> <C>
Alabama 2 $ 247,977.84 0.07%
Arizona 2 475,053.68 0.14
California 996 263,886,889.79 76.30
Colorado 2 459,307.34 0.13
Connecticut 2 589,560.04 0.17
District of
Columbia 8 1,928,832.65 0.56
Delaware 2 839,631.87 0.24
Florida 29 7,866,129.31 2.27
Georgia 29 7,172,246.30 2.07
Hawaii 4 1,022,750.57 0.30
Illinois 7 1,863,736.53 0.54
Indiana 1 145,645.61 0.04
Louisiana 4 1,034,238.44 0.30
Massachusetts 4 1,007,075.58 0.29
Maryland 34 9,822,769.79 2.84
Michigan 5 1,621,206.21 0.47
Montana 2 365,334.83 0.11
New
Hampshire 1 209,045.30 0.06
New Jersey 34 9,185,608.01 2.66
New Mexico 10 2,513,372.32 0.73
Nevada 3 611,133.46 0.18
New York 15 3,839,879.30 1.11
Ohio 1 361,334.27 0.10
Oklahoma 6 1,560,358.97 0.45
Pennsylvania 10 3,136,013.69 0.91
Tennessee 2 339,012.37 0.10
Texas 39 9,749,831.19 2.82
Virginia 41 11,488,405.66 3.32
Washington 10 2,489,582.40 0.72
---- -------------------- ------
Total 1305 $ 345,831,963.32 100.00%
==== ==================== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date, whether
or not such payments are received.
S-45
<PAGE> 46
INDEX TYPE
The following table sets forth certain information, as of the Cut-off
Date, with respect to the indices (if applicable) used to calculate the Mortgage
Rates of the Mortgage Loans:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
INDEX TYPE OF LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
---------- -------- ---------------------- -----------------
<S> <C> <C> <C>
1 Year CMT 240 $ 64,820,429.50 39.12%
6 Month FNMA LIBOR 4 923,121.31 0.56
6 Month WSJ LIBOR 195 51,350,667.64 30.99
6 Month CMT 1 291,107.61 0.18
FNMA Index (2) 184 48,319,399.09 29.16
--- ------------------ ------
Total 624 $ 165,704,725.15 100.00%
=== ================== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date,
whether or not such payments are received.
MONTHS SINCE FIRST DUE DATE
The following table sets forth certain information, as of the Cut-off
Date, with respect to number of months since the first due date of the Mortgage
Loans:
<TABLE>
<CAPTION>
PERCENT OF
MONTHS SINCE NUMBER AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
FIRST DUE DATE OF LOANS PRINCIPAL BALANCE (1) PRINCIPAL BALANCE
-------------- -------- ---------------------- -----------------
<S> <C> <C> <C>
37 - 48 29 $ 6,486,900.25 1.88%
49 - 60 266 69,383,804.80 20.06
61 - 72 270 73,051,300.54 21.12
73 - 84 733 194,952,042.98 56.37
85 - 96 5 1,505,550.30 0.44
109 - 120 1 291,107.61 0.08
121 - 132 1 161,256.84 0.05
---- --------------- ------
Total 1305 $345,831,963.32 100.00%
==== =============== ======
</TABLE>
(1) After application of payments due on or before the Cut-off Date,
whether or not such payments are received.
In addition, the Mortgage Loans are expected to have the following
characteristics, unless specified otherwise, as of the Cut-off Date (percentages
are by aggregate Scheduled Principal Balance of the Mortgage Loans as of the
Cut-off Date):
The weighted average number of months to the next LIBOR Adjustment Date
for the LIBOR Loans is approximately 3.48 months. The weighted average number of
months to the next CMT Adjustment Date for the CMT Loans is approximately 6.85
months. The weighted average number of months to the 5/25 Adjustment Date for
5/25 Mortgage Loans in respect of which the applicable 5/25 Adjustment has not
been reached is approximately 5.72 months.
The weighted average remaining stated term to maturity of the Mortgage
Loans is approximately 277 months.
With respect to approximately 99.69% of the Mortgaged Properties
securing the Mortgage Loans, the related Mortgagor represented at the
origination of the related mortgage loan that the dwelling will be an
owner-occupied primary residence.
The average outstanding principal balance of the Mortgage Loans is
approximately $265,005.
S-46
<PAGE> 47
The latest scheduled maturity date of any Mortgage Loan is expected to
be January 1, 2025.
No more than 28.32% of the Mortgage Loans were originated according to
CMC's reduced documentation program, pursuant to which in certain circumstances
mortgage loans may be originated without the verification of the mortgagor's
employment and income.
Approximately 32.89% of the Mortgage Loans will have been the subject
of "cash-out" refinancings pursuant to which the outstanding principal balance
of each such Mortgage Loan has been increased over the principal amount
outstanding prior to such refinancing.
The majority of the Mortgage Loans are not expected to contain
due-on-sale clauses or similar provisions, and may be assumed by subsequent
borrowers if such subsequent borrowers have qualifications generally meeting the
underwriting criteria described in the Prospectus. See "Certain Legal Aspects of
Mortgage Loans--Enforceability of Certain Provisions" in the Prospectus.
Approximately 1.43% of the Mortgage Loans contain a conversion option
whereby the related Mortgagor, upon the satisfaction of certain conditions, may
elect to convert such Mortgage Loan to a Mortgage Loan having a fixed rate of
interest.
CMC will act as Administrator with respect to approximately 43% of the
Mortgage Loans; GE will act as Administrator with respect to approximately 44%
of the Mortgage Loans; and FNMC will act as Administrator with respect to
approximately 13% of the Mortgage Loans.
POOLING, ADMINISTRATION AND SERVICING
GENERAL
The following discussion applies to the Pooling and Administration
Agreements and each related Servicing Agreement. The summaries do not purport to
be complete and are subject to, and qualified in their entirety by reference to,
the provisions of the Pooling and Administration Agreements and the Servicing
Agreements. Where particular provisions or terms used in the Pooling and
Administration Agreements or the Servicing Agreements are referred to, such
provisions or terms are as specified in the applicable agreement.
REPRESENTATIONS AND WARRANTIES
The Mortgage Loans were acquired by CMC or an affiliate of CMC from
certain entities (the "SELLERS") and were subsequently sold to the original
sponsors in order to form the Certificates. In connection with the CMC's or its
affiliate's acquisition of the Mortgage Loans, the related Sellers made certain
representations and warranties to CMC or such affiliate. Such representations
and warranties generally included, among other things: (i) that no default
existed under the Mortgage Loan; (ii) that title insurance and any required
hazard and primary mortgage insurance were effective; (iii) that the prior owner
had good title to each such Mortgage Loan, and such Mortgage Loan was subject to
no offsets, defenses, counterclaims or rights of rescission; (iv) that each
Mortgage constituted a valid first lien on the Mortgaged Property (subject only
to certain permissible exceptions), and that the Mortgaged Property was free
from damage and was in good repair; and (v) that no Mortgage Loan is subject to
potential losses because the circumstances of its origination involved
fraudulent or negligent conduct by either the Mortgagor, the originator or the
Servicer ("FRAUDULENT MORTGAGE LOANS"). Remedies in respect of breaches of any
such representations and warranties are available to the Certificate Trustee as
described below.
In addition to the Seller's representations and warranties, the
Mortgage Loans are the subject of certain other representations and warranties
made by the Servicers. Such representations and warranties will generally have
included, among other things: (i) that there is no default under the terms and
covenants of the Mortgage Loan as of the date such Mortgage Loan is first
serviced by such Servicer; (ii) that there are no delinquent tax or delinquent
assessment liens against the Mortgaged Property; (iii) that the Servicer has not
done any act or omitted to do any act which would create an offset, defense or a
counterclaim to the Mortgage Loan; and (iv) that the Servicer has complied with
various laws which impose requirements, restrictions or conditions on the
servicer in connection with the servicing of Mortgage Loans under the related
Servicing Agreement. The applicable sponsor represented and warranted in the
related Pooling and Administration Agreement that, as of the applicable cut-off
dates relating to the formation of the Certificates representing
S-47
<PAGE> 48
a 100% beneficial ownership interest in the applicable Mortgage Loans, the
representations and warranties of the Sellers and Servicers with respect to such
Mortgage Loans were true and correct. The remedies in respect of breaches of
such representations and warranties are available to the Certificate Trustee as
described below.
Upon the discovery by the Certificate Trustee or the Administrator of a
material breach of any representation or warranty made in respect of a Mortgage
Loan as described above or of a material defect in the mortgage documents
relating to such Mortgage Loan, the related party will be obligated to cure such
breach or repurchase such Mortgage Loan at a price equal to 100% of the then
outstanding principal amount thereof plus accrued interest thereon to the end of
the month in which the date of purchase occurs. In addition, the Sellers and the
Servicers have agreed to indemnify against any loss or liability incurred by the
Certificate Trustee on account of any material breach of any representation or
warranty made pursuant to the applicable loan sale agreements and the Servicing
Agreements, respectively. The repurchase obligations of the Issuer, the Sellers,
and the Servicers constitute the sole remedy available to the Bondholders or the
Indenture Trustee for a material breach of their respective representations and
warranties or for a material defect in the mortgage loan documents.
SERVICING AGREEMENTS
All of the Mortgage Loans will be serviced by servicers (each, a
"SERVICER") pursuant to servicing agreements (each, a "SERVICING AGREEMENT")
between the Servicer and the original owner of the related Certificates. The
following chart gives certain information regarding the Mortgage Loans serviced
by each Servicer which services more than 10% of the Mortgage Loans, by
aggregate principal balance.
<TABLE>
<CAPTION>
PERCENT OF
AGGREGATE OUTSTANDING AGGREGATE OUTSTANDING
CUT-OFF DATE CUT-OFF DATE NUMBER OF
SERVICER PRINCIPAL BALANCE PRINCIPAL BALANCE LOANS
-------- ----------------- ----------------- -----
<S> <C> <C> <C>
Capstead Inc. $ 99,167,477.01 28.68% 384
First Nationwide Mortgage 37,237,400.87 10.77
Corporation 135
GE Capital Mortgage Services, Inc. 188,068,850.89 54.38% 704
----------------- ----- -----
Total $ 324,473,728.70 93.83% 1,223
================= ===== =====
</TABLE>
All of the applicable loan sellers' right, title and interest in the Servicing
Agreements with respect to the Mortgage Loans were assigned to the applicable
original sponsor, which in turn assigned them to the Certificate Trustee
pursuant to the applicable Pooling and Administration Agreement.
Each Servicer must be a FNMA- or FHLMC-approved servicer of
conventional mortgage loans. In addition CMC requires adequate servicing
experience, where appropriate, and financial stability, including net worth of
at least $1,000,000, as well as satisfaction of certain other criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers under
the Mortgage Loans (the "MORTGAGORS") and remittance of such collections to the
Certificate Trustee, maintenance of standard hazard insurance and primary
mortgage insurance, maintenance of escrow or impoundment accounts of Mortgagors
for payment of taxes, insurance, and other items required to be paid by the
Mortgagor pursuant to the Mortgage Loan, attempting to cure delinquencies,
supervising foreclosures, management of Mortgaged Properties under certain
circumstances, and maintaining accounting records relating to the Mortgage
Loans. Each Servicer will also be obligated to make advances in respect of
delinquent installments of principal and interest on Mortgage Loans, as
described more fully under "--Advances", and in respect of certain taxes and
insurance premiums not paid on a timely basis by Mortgagors.
Generally, the Servicers will be entitled to a monthly servicing fee of
at least 0.25% for fixed rate Mortgage Loans and 0.375% for adjustable rate
Mortgage Loans, in each case per annum of the outstanding principal balance of
each Mortgage Loan serviced by it. The Servicers are also generally entitled to
collect and retain, as part of their servicing compensation, late payment
charges and assumption underwriting fees. The Servicers of the Mortgage Loans
will be reimbursed from proceeds of one or more of the insurance policies
described herein ("INSURANCE PROCEEDS") or from proceeds received in connection
with the liquidation of defaulted Mortgage Loans ("LIQUIDATION PROCEEDS") for
certain expenditures generally to the same extent the related Administrator
would be reimbursed for similar expenditures pursuant to the related Pooling
and Administration Agreement. See "--Advances" and "--Servicing Compensation
and Payment of Expenses" herein.
S-48
<PAGE> 49
Each Servicer will be required to service each Mortgage Loan pursuant
to the terms of its Servicing Agreement for the entire term of such Mortgage
Loan, unless such Servicing Agreement is earlier terminated by the Certificate
Trustee. Upon termination of a Servicing Agreement, the related Administrator
will act as Servicer of the related Mortgage Loans pursuant to a Servicing
Agreement on the same terms and conditions applicable to any other Servicer.
Pursuant to the Servicing Agreements, on the eighteenth day of each
month, or if such day is not a business day, the preceding business day (the
"REMITTANCE DATE"), the Servicers will remit to the Certificate Trustee payments
(including prepayments) of principal, together with interest at a rate (the
"REMITTANCE RATE") equal to the Mortgage Rate borne by the Mortgage Loan less
the related Servicer's servicing fee. The Servicers are not required to advance
any monthly installment of principal and interest deemed to be a Nonrecoverable
Advance (as defined herein). All remittances from a Servicer will be deposited
to a trust account (each, a "CERTIFICATE ACCOUNT") established by and maintained
with the Certificate Trustee. Funds in each Certificate Account will be invested
from time to time in permitted instruments pursuant to the terms of the
applicable Pooling and Administration Agreement ("Permitted Instruments"), and
maturing on or before the next Certificate Distribution Date. The only funds
available to make distributions on a Certificate and to pay related expenses
will be payments (including Principal Prepayments and Monthly Advances) on the
related Mortgage Loans. As described herein, a Principal Prepayment includes
certain payments by the Mortgagor, insurance proceeds and liquidation proceeds.
Funds or Permitted Instruments in a Certificate Account will be applied on the
Certificate Distribution Date to distribute principal and interest on the
Mortgage Loans to the Certificate Trustee, the applicable Administrator, the
applicable Pool Insurer and the applicable insurer under the applicable Special
Hazard Insurance Policy.
Each Administrator's obligations with respect to the Mortgage Loans
will consist of (i) the obligation to notify the Sponsor and the related
Servicer if the documentation for any Mortgage Loan is found to be defective,
(ii) its monitoring and supervisory obligations under the applicable Pooling and
Administration Agreement (including its obligations to enforce certain
repurchase and other obligations of the Servicers) and (iii) its obligation to
make certain cash advances in the event of delinquencies in payments on or with
respect to the related Mortgage Loans if the applicable Servicer has not made
such advance. The obligations of the Servicers with respect to the Mortgage
Loans will be limited to their servicing duties and their obligation to make
advances pursuant to the Servicing Agreements.
PAYMENTS ON MORTGAGE LOANS
Each Servicer is required to establish and maintain a separate account
(each, a "CUSTODIAL ACCOUNT"). Subject to the following paragraph, each
Custodial Account must be an account the deposits in which are fully insured by
either the Federal Deposit Insurance Company or the National Credit Union
Administration or are, to the extent such deposits are in excess of the coverage
provided by such insurance, continuously secured by certain obligations issued
or guaranteed by the United States of America. If at any time the amount on
deposit in such Custodial Account shall exceed the amount so insured or secured,
the applicable Servicer must remit to the related Certificate Trustee the amount
on deposit in such Custodial Account which exceeds the amount so insured or
secured, less any amount such Servicer may retain for its own account pursuant
to its Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described above,
and such Servicer will not be required to remit amounts on deposit therein in
excess of the amount so insured or secured, so long as such Servicer meets
certain requirements established by the rating agencies requested to rate the
Certificates.
ADVANCES
With respect to a defaulted Mortgage Loan, the related Servicer will be
obligated to advance its own funds or funds from its Custodial Account equal to
the payment of principal and interest (adjusted to the applicable Remittance
Rate) which was due on the Mortgage Due Date and which was delinquent as of the
close of business on the business day preceding the Remittance Date ("MONTHLY
ADVANCE"). Such advances are required to be made by the related Servicer unless
the Servicer, with concurrence of the related Administrator, determines that
such advances ultimately would not be reimbursable under any applicable
insurance policy, from the proceeds of liquidation of the related Mortgaged
Properties, or from any other source (any amount not so reimbursable being
referred to herein as a "NONRECOVERABLE ADVANCE"). Such advance obligation will
continue through the month following the month of final
S-49
<PAGE> 50
liquidation of such Mortgage Loan. If a Servicer is obligated so to advance, it
will include with the next succeeding remittance an amount equal to the
principal payment and interest payment (adjusted to the applicable Remittance
Rate) due on the Mortgage Due Date and delinquent as of the close of business on
the business day preceding the related Remittance Date. Any Servicer funds thus
advanced are reimbursable to such Servicer out of recoveries on the Mortgage
Loans respecting which such amounts were advanced. The Servicers will also be
obligated to make advances in respect of certain taxes and insurance premiums
not paid by Mortgagors on a timely basis. Funds so advanced are reimbursable to
the Servicers out of recoveries on the related Mortgage Loans. Each Servicer's
right of reimbursement for any advance will be prior to the rights of the
Indenture Trustee as Certificateholder to receive any related Insurance Proceeds
or Liquidation Proceeds.
Each Administrator is obligated pursuant to the related Pooling and
Administration Agreement to advance on or before the Certificate Distribution
Date an amount equal to any Monthly Advance which a Servicer fails to remit, but
is not obligated to make such advance if such Administrator determines it to be
a Nonrecoverable Advance. Failure by a Servicer to make a Monthly Advance is
grounds for termination under the related Servicing Agreement.
The Certificate Trustee will be obligated pursuant to the related
Pooling and Administration Agreement, and to the extent not prohibited by law,
to advance on or before any relevant Certificate Distribution Date an amount
equal to any Monthly Advance which a Servicer and the related Administrator fail
to remit on or before the related Remittance Date or such Certificate
Distribution Date, but will not be obligated to make such advance if the
Certificate Trustee determines it to be a Nonrecoverable Advance.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans pursuant to written
guidelines promulgated by CMC. The Administrators will exercise their best
reasonable efforts to insure that the Servicers service the Mortgage Loans in
compliance with such guidelines and in a manner consistent with industry
standards.
In any case in which property subject to a Mortgage is being conveyed
by the Mortgagor, each Servicer will in general be obligated, to the extent it
has knowledge of such conveyance, to exercise its rights to accelerate the
maturity of such Mortgage Loan under any due-on-sale clause applicable thereto
but only if the exercise of such rights is permitted by law and will not impair
or threaten to impair any recovery under any related Primary Mortgage Insurance
Policy. The Servicing Agreements provide that if the Servicer is prevented from
enforcing such due-on-sale clause under applicable law, or if the applicable
Mortgage Loan does not contain a due-on-sale clause, the Servicer will enter
into an assumption and modification agreement with the person to whom such
property has been or is about to be conveyed, pursuant to which such person will
become liable under the Mortgage Note, provided however that the Servicer may
not enter into an assumption and modification agreement with such person unless
such person satisfies the criteria necessary to maintain coverage provided by
all applicable insurance policies or unless such assumption and modification
agreement is otherwise required by law. Notwithstanding the foregoing, if the
Servicer enters into such an assumption and modification agreement with respect
to a Mortgage Loan containing a due-on-sale clause, the Mortgagor will remain
liable under the Mortgage Note to the extent permitted by applicable law. See
"Certain Legal Aspects of Mortgage Loans--Enforceability of Certain Provisions"
in the Prospectus. In connection with any such assumption, the Mortgage Rate
borne by the related Mortgage Note may not be decreased.
MAINTENANCE OF INSURANCE POLICIES; CLAIMS THEREUNDER AND OTHER REALIZATION UPON
DEFAULTED MORTGAGE LOANS
The Certificate Trustee is required to pay the premiums for the
Mortgage Pool Insurance Policies from amounts available in the related
Certificate Account. The Certificate Trustee will pay premiums for the Special
Hazard Insurance Policies from amounts available in the related Certificate
Account unless coverage under the policy has been exhausted through payment of
claims or alternative coverage for special hazards has been provided. IN THE
EVENT, HOWEVER, THAT DEFAULTED MORTGAGE LOANS ARE NOT COVERED BY THE RELATED
MORTGAGE POOL INSURANCE POLICY, ANY PRIMARY MORTGAGE INSURANCE POLICIES, ANY
SPECIAL HAZARD INSURANCE POLICY OR AMOUNTS AVAILABLE IN THE SPECIAL HAZARD
ACCOUNT (INCLUDING PROCEEDS UNDER THE SPECIAL HAZARD INSURANCE POLICY), OR ANY
BANKRUPTCY ACCOUNT, OR CLAIMS ARE EITHER NOT MADE OR PAID UNDER SUCH POLICIES,
OR IF COVERAGE THEREUNDER HAS CEASED, A LOSS WILL OCCUR TO THE EXTENT THAT THE
PROCEEDS FROM THE LIQUIDATION OF A DEFAULTED MORTGAGE LOAN, AFTER REIMBURSEMENT
OF THE APPLICABLE SERVICER'S EXPENSES (INCLUDING REIMBURSEMENT OF ADVANCES), ARE
LESS THAN THE PRINCIPAL BALANCE OF SUCH DEFAULTED MORTGAGE LOAN.
Each Servicer will maintain a primary mortgage insurance policy (each,
a "PRIMARY MORTGAGE INSURANCE POLICY") with respect to each Mortgage Loan
serviced by it for which such coverage is required. Further, each Servicing
S-50
<PAGE> 51
Agreement requires the related Servicer to cause to be maintained for each
Mortgage Loan serviced by it a standard hazard insurance policy (each, a
"STANDARD HAZARD INSURANCE POLICY") providing fire and extended coverage. Each
Servicing Agreement also requires that a title insurance policy (each, a "TITLE
INSURANCE POLICY") be in effect on each of the Mortgaged Properties with respect
to the Mortgage Loans subject to such Servicing Agreement.
The related Administrator will prepare and file claims with the
respective issuers of the Mortgage Pool Insurance Policies and the Special
Hazard Insurance Policies. Each Servicer, with respect to each Mortgage Loan
serviced by it, will present claims to any primary insurer under any related
Primary Mortgage Insurance Policy and to the hazard insurer under any related
Standard Hazard Insurance Policy. All collections under the Mortgage Pool
Insurance Policies, any related Primary Mortgage Insurance Policy and any
related Standard Hazard Insurance Policy (less any proceeds to be applied to the
restoration or repair of the related Mortgaged Property) will be deposited with
the Certificate Trustee.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Mortgage Loan, the related Administrator will
receive compensation with respect to each interest payment on such Mortgage
Loan. This compensation and the fees payable to the Certificate Trustee and the
Indenture Trustee in respect of such interest payments will be in an amount
equal to 0.0135% per annum. In addition, the related Administrator will be
entitled to receive, as a fee on each Certificate Distribution Date, an amount
equal to the reinvestment income earned on collections on the Mortgage Loans
paid into the related Certificate Account in the month preceding such
Certificate Distribution Date. As compensation for its servicing duties, each
Servicer will be entitled to a monthly servicing fee on each Mortgage Loan
serviced by it in the amount by which the Mortgage Rate exceeds the Remittance
Rate. In addition to the primary compensation, each Servicer will retain all
assumption underwriting fees and late payment charges, to the extent collected
from Mortgagors.
As set forth above, each Administrator and each Servicer will be
entitled to reimbursement for certain expenses incurred by it in connection with
the liquidation of defaulted Mortgage Loans. No loss will be suffered on the
Certificates by reason of such expenses to the extent claims for such expenses
are paid directly under a Primary Mortgage Insurance Policy. In the event,
however, that the defaulted Mortgage Loans are not covered by the Primary
Mortgage Insurance Policies or claims are either not made or paid under such
policies, or if coverage thereunder has ceased, such a loss will occur to the
extent that the proceeds from the liquidation of a defaulted Mortgage Loan,
after reimbursement of the Servicer's expenses, are less than the principal
balance of such defaulted Mortgage Loan.
CERTAIN MATTERS REGARDING THE ADMINISTRATORS
The Administrators will have general responsibility for monitoring the
servicing of the Mortgage Loans for which they act as Administrator, and will
furnish a monthly report to the Certificate Trustee evaluating the performance
of each Servicer. The Administrators shall recommend actions to be taken with
respect to termination with cause of Servicers' rights pursuant to the Servicing
Agreements.
The Administrator may not resign from its obligations and duties under
the related Pooling and Administration Agreement, or from its duties as a
Servicer, unless and until a successor administrator acceptable to each rating
agency rating the Bonds has assumed the Administrator's obligations and duties
under the related Pooling and Administration Agreement.
EVENTS OF DEFAULT
Events of Default under each Pooling and Administration Agreement will
consist of (i) any failure by the related Administrator duly to observe or
perform in any material respect any of its covenants or agreements in the
Pooling and Administration Agreement which continues unremedied for 60 days
after the giving of written notice of such failure or breach as the case may be,
to such Administrator by the Certificate Trustee or to such Administrator and
the Certificate Trustee by the Indenture Trustee as Certificateholder; and (ii)
certain events of insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceedings regarding an Administrator and certain
actions by such Administrator indicating its insolvency or inability to pay its
obligations.
S-51
<PAGE> 52
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied, the Certificate
Trustee or the Indenture Trustee as Certificateholder may terminate all of the
rights and obligations of an Administrator under a Pooling and Administration
Agreement, whereupon the Sponsor shall appoint a housing and home finance
institution having a net worth of at least $10,000,000 as the successor to such
Administrator. Pending appointment of a successor to such Administrator, the
Certificate Trustee is obligated to succeed to the extent permitted by law, to
all the responsibilities, duties and liabilities of such Administrator under the
related Pooling and Administration Agreement and will be entitled to similar
compensation arrangements. In the event that no such successor shall have been
appointed within 30 days or the Certificate Trustee would be obligated to
succeed the Administrator but is unable so to act, the Sponsor or the
Certificate Trustee may petition a court of competent jurisdiction for the
appointment of a housing and home finance institution with a net worth of at
least $10,000,000 to act as successor to such Administrator under the related
Pooling and Administration Agreement. The Certificate Trustee and the Sponsor
may agree upon the servicing compensation to be paid such successor, which in no
event may be greater than the compensation to the terminated Administrator under
the related Pooling and Administration Agreement.
AMENDMENT
The Pooling and Administration Agreements may be amended by the related
Administrator, the Sponsor, the Certificate Trustee and , where applicable, FSA,
without the consent of the Indenture Trustee as Certificateholder, (i) to cure
any ambiguity, (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein or (iii) to make any other
provisions with respect to matters or questions arising under such Pooling and
Administration Agreement which are not inconsistent with the provisions thereof,
provided that in each case, subject as stated in the next sentence, such action
will not adversely affect in any material respect the interests of the Indenture
Trustee as Certificateholder. An amendment described above will not be deemed to
adversely affect in any material respect the interests of the Indenture Trustee
as Certificateholder if either (a) an opinion of counsel satisfactory to the
Certificate Trustee is obtained to such effect or (b) the person requesting the
amendment obtains a letter from each rating agency requested by the Issuer to
rate the Bonds that the amendment would not result in a downgrading or
withdrawal of the rating then assigned by it to the Bonds. The Pooling and
Administration Agreements may also be amended by the related Administrator, the
Sponsor and the Certificate Trustee with the consent of the Indenture Trustee as
Certificateholder for the purpose of adding provisions to or changing in any
manner or eliminating any of the provisions of such Pooling and Administration
Agreement or of modifying in any manner the rights of the Indenture Trustee as
Certificateholder; provided, however, that no such amendment may be made which
reduces in any manner the amount of, or delays the timing of, payments which are
required to be distributed on any Certificate or adversely affects the tax
consequences to the Indenture Trustee as Certificateholder, as evidenced by an
opinion of counsel. Notwithstanding the foregoing, the Sponsor, the related
Administrator and the Certificate Trustee may amend a Pooling and Administration
Agreement without the consent of the Indenture Trustee as Certificateholder in
order to modify, eliminate or add to any of its provisions to such extent as may
be appropriate or necessary to maintain REMIC status of all or any portion of
the Trust Estate or to avoid or minimize the risk of the imposition of any tax
on the Trust Estate that would be a claim against the Indenture Trustee or
Certificate Trustee at any time prior to final payment on the Bonds, provided
that the Certificate Trustee has obtained the opinion of counsel to the effect
that such action is necessary or appropriate to maintain REMIC status or to
avoid or minimize the risk of the imposition of such a tax.
DESCRIPTION OF INSURANCE, SPECIAL
HAZARD ACCOUNTS AND BANKRUPTCY ACCOUNTS
GENERAL
All of the Mortgage Loans are the subject of insurance coverage
provided by (i) one of the Mortgage Pool Insurance Policies and, (ii) either a
Special Hazard Insurance Policy or assets in a Special Hazard Account (including
proceeds under a Special Hazard Insurance Policy. In addition, substantially all
of the Mortgage Loans in which the Loan-to-Value Ratio exceeds 80% are the
subject of insurance provided by Primary Mortgage Insurance Policies in order to
reduce the credit risk to 75%. Rights to assets in a Bankruptcy Account are
available to the related Certificate Trustee for losses due to Mortgagor
bankruptcies as more fully described below.
S-52
<PAGE> 53
THE MORTGAGE POOL INSURANCE POLICIES
GENERAL. Each Mortgage Loan will be the subject of limited insurance
coverage provided by a Mortgage Pool Insurance Policy. However, if coverage
under a Mortgage Pool Insurance Policy is exhausted, losses sustained with
respect to Mortgage Loans that otherwise would have been covered by such policy
will not be covered by the other Mortgage Pool Insurance Policies and may result
in losses to the Bondholders.
GEMICO POOL POLICIES. The Mortgage Loans underlying the Series 1991-VI,
1991-VII, 1992-V, 1992-VI, 1992- VII, 1992-VIII, 1992-IX, 1992-X, 1992-XIV,
1991-B, 1991-E, 1992-GA and 1994-GA Certificates (collectively, the
"GEMICO CERTIFICATES") will have the limited benefit of a Mortgage Pool
Insurance Policy (each, a "GEMICO POOL POLICY") issued by GEMICO. The GEMICO
Pool Policies will cover certain losses by reason of default on the Mortgage
Loans underlying the GEMICO Certificates (the "GEMICO MORTGAGE LOANS") and, in
the case of the Series 1991-B, 1991-E, 1992-GA and 1994-GA Certificates, certain
other residential mortgage loans not evidenced by the GEMICO Certificates
("OTHER GEMICO MORTGAGE LOANS" and, together with the GEMICO Mortgage Loans, the
"GEMICO INSURED LOANS"). Claims paid under a GEMICO Pool Policy in respect of
the Other GEMICO Mortgage Loans will reduce the amount of corresponding coverage
available with respect to the GEMICO Mortgage Loans underlying the related
GEMICO Certificate, notwithstanding that such GEMICO Mortgage Loans may not have
suffered any losses at such time. If the rate of losses respecting the Other
GEMICO Mortgage Loans is disproportionately greater than the rate of losses
respecting the GEMICO Mortgage Loans with respect to any GEMICO Pool Policy,
coverage available under such GEMICO Pool Policy in respect of the related
GEMICO Mortgage Loans will be reduced below that which would otherwise have been
provided if such GEMICO Pool Policy provided coverage exclusively for the
related GEMICO Mortgage Loans. No assurance can be given that disproportionately
high claims in respect of Other GEMICO Mortgage Loans will not adversely affect
the amount of coverage available for the GEMICO Mortgage Loans under a specified
GEMICO Pool Policy.
The GEMICO Pool Policies are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted GEMICO
Insured Loans only upon satisfaction of certain conditions precedent set forth
in the related GEMICO Pool Policy, a copy of which will be made available to
Bondholders upon request to the Indenture Trustee, at the cost of the requesting
Bondholder. Except with respect to certain GEMICO Insured Loans covered by an
endorsement to a GEMICO Pool Policy waiving settlement with the applicable
primary insurer under certain limited circumstances and except with respect to
limited coverage in respect of certain losses attributable to fraud in the
origination of the GEMICO Insured Loans, the GEMICO Pool Policies will not cover
losses in connection with a GEMICO Insured Loan arising out of a failure to pay
or denial of a claim under a Primary Mortgage Insurance Policy, regardless of
the reason therefor.
S-53
<PAGE> 54
The following table sets forth certain information as of August 31,
1998 regarding each GEMICO Pool Policy and the related GEMICO Mortgage Loans and
Other GEMICO Mortgage Loans underlying the related GEMICO Certificate.
<TABLE>
<CAPTION>
AGGREGATE OUTSTANDING PRINCIPAL APPROXIMATE POOL
SERIES OF BALANCE OF GEMICO MORTGAGE LOSS COVERAGE
CERTIFICATES LOANS AND OTHER MORTGAGE LOANS AVAILABLE CLAIMS PAID
------------ ------------------------------ --------- -----------
<S> <C> <C> <C>
1991-VI $ 16,242,000 $ 15,506,000 $ 6,062,000
1991-VII 26,073,000 24,330,000 11,841,000
1992-V 25,604,000 23,229,000 4,472,000
1992-VI 13,203,000 13,126,000 1,025,000
1992-VII 19,678,000 15,532,000 2,654,000
1992-VIII 15,223,000 12,208,000 11,913,000
1992-IX 33,581,000 19,534,000 6,098,000
1992-X 19,372,000 14,847,000 2,721,000
1992-XIV 17,458,000(2) 8,402,000 3,385,000
1991-B 4,483,000 11,605,000(1) 12,145,000
1991-E 105,007,000 66,301,000(1) 40,789,000
1992-GA 171,945,000 86,325,000(1) 10,404,000
1994-GA 61,976,000 29,481,000(1) 757,000
</TABLE>
(1) Includes coverage available to Other GEMICO Mortgage Loans related to such
GEMICO Pool Policy.
(2) Only certain of the Mortgage Loans underlying the 1992-XIV Certificate are
GEMICO Mortgage Loans.
S-54
<PAGE> 55
CERTAIN DELINQUENCY INFORMATION WITH RESPECT TO THE GEMICO INSURED
LOANS.
The following table sets forth certain information, by percentage of
aggregate principal balance, concerning delinquency experience with respect to
the GEMICO Insured Loans (by GEMICO Certificate) for the GEMICO Pool Policies
that do not cover any Other GEMICO Mortgage Loans:
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1998
----------------------------------------------------------------------------------------------
1991-B 1991-VI 1991-VII 1992-V 1992-VI 1992-VII 1992-VIII 1992-IX 1992-X 1992-XIV
------ ------- -------- ------ ------- -------- --------- ------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days delinquent..... 0.00% 1.79% 2.60% 1.72% 0.00% 0.00% 1.62% 0.57% 1.23% 0.00%
60-89 days delinquent..... 0.00% 0.00% 0.00% 0.00% 0.00% 1.280% 0.00% 0.71% 1.23% 0.00%
90+ days delinquent....... 0.00% 1.95% 1.10% 1.11% 1.10% 2.56% 1.53% 0.79% 0.00% 1.58%
Foreclosures pending...... 7.09% 1.14% 1.54% 2.34% 0.00% 3.85% 0.00% 5.40% 0.00% 2.11%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total................ 7.09% 4.88% 5.24% 5.17% 1.10% 7.69% 3.15% 7.47% 2.46% 3.69%
Foreclosed Loans(1)....... 9.48% 1.16% 0.00% 0.00% 0.00% 0.00% 0.00% 2.66% 1.23% 0.00%
</TABLE>
- -----------------
(1) For purposes of this table, foreclosed loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to
which had been acquired and which had not been liquidated by the end of
the period indicated.
The following table sets forth certain information, by percentage of
aggregate principal balance, concerning delinquency experience with respect to
the GEMICO Insured Loans (by GEMICO Certificate) for the GEMICO Pool Policies
that cover Other GEMICO Mortgage Loans:
<TABLE>
<CAPTION>
AS OF AUGUST 30, 1998
-----------------------------------------------------------------------------------------------------
1991-E 1992-GA 1994-GA
------ ------- -------
GEMICO Mortgage GEMICO Mortgage GEMICO Mortgage
Loans and Other Loans and Other Loans and Other
GEMICO GEMICO GEMICO GEMICO GEMICO GEMICO
Mortgage Loans Mortgage Loans Mortgage Loans Mortgage Loans Mortgage LoansL Mortgage Loans
-------------- -------------- -------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
30-59 days delinquent... 0.00% 1.980% 4.18% 3.39% 4.60% 5.61%
60-89 days delinquent... 0.00% 1.180% 0.63% 0.61% 3.03% 1.77%
90+ days delinquent..... 0.00% 1.800% 0.22% 1.28% 0.00% 1.04%
Foreclosures pending.... 0.00% 2.54% 1.16% 1.62% 0.00% 2.49%
---- ----- ---- ---- ---- -----
Total.............. 0.00% 7.5% 6.19% 6.9% 7.63% 10.91%
Foreclosed Loans(1)..... 0.00% 0.42% 0.00% 0.71% 0.00% 1.610%
</TABLE>
- -----------
(1) For purposes of this table, foreclosed loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to
which had been acquired and which had not been liquidated by the end of
the period indicated.
S-55
<PAGE> 56
PMI POOL POLICIES. Each of the Series 1992-XIV, 1992-PA and 1993-PA
Certificates (collectively, the "PMI CERTIFICATES") will have the limited
benefit of a Mortgage Pool Insurance Policy (each, a "PMI POOL POLICY") issued
by PMI. The PMI Pool Policies will cover certain losses by reason of default on
the Mortgage Loans underlying the PMI Certificates (the "PMI MORTGAGE LOANS")
and certain other residential mortgage loans not evidenced by the PMI
Certificates ("OTHER PMI MORTGAGE LOANS" and, together with the PMI Mortgage
Loans, the "PMI INSURED LOANS"). Claims paid under a PMI Pool Policy in respect
of the Other PMI Mortgage Loans will reduce the amount of corresponding coverage
available with respect to the PMI Mortgage Loans underlying the related PMI
Certificate, notwithstanding that such PMI Mortgage Loans may not have suffered
any losses at such time. If the rate of losses respecting the Other PMI Mortgage
Loans is disproportionately greater than the rate of losses respecting the PMI
Mortgage Loans with respect to any PMI Pool Policy, coverage available under
such PMI Pool Policy in respect of the related PMI Mortgage Loans will be
reduced below that which would otherwise have been provided if such PMI Pool
Policy provided coverage exclusively for the related PMI Mortgage Loans. No
assurance can be given that disproportionately high claims in respect of Other
PMI Mortgage Loans will not adversely affect the amount of coverage available
for the PMI Mortgage Loans under a specified PMI Pool Policy.
The PMI Pool Policies are not blanket policies against loss, since
claims thereunder may only be made respecting particular defaulted PMI Insured
Loans only upon satisfaction of certain conditions precedent set forth in the
related PMI Pool Policy, a copy of which will be made available to Bondholders
upon request to the Indenture Trustee, at the cost of the requesting Bondholder.
Except with respect to certain PMI Insured Loans covered by an endorsement to a
PMI Pool Policy waiving settlement with the applicable primary insurer under
certain limited circumstances and except with respect to limited coverage in
respect of certain losses attributable to fraud in the origination of the PMI
Insured Loans, the PMI Pool Policies will not cover losses in connection with a
PMI Insured Loan arising out of a failure to pay or denial of a claim under a
Primary Mortgage Insurance Policy, regardless of the reason therefor.
The following table sets forth certain information, as of August 31,
1998, regarding each PMI Pool Policy and the related PMI Mortgage Loans and
Other PMI Mortgage Loans underlying the related PMI Certificate.
<TABLE>
<CAPTION>
AGGREGATE OUTSTANDING
PRINCIPAL BALANCE OF
PMI MORTGAGE LOANS APPROXIMATE POOL CLAIMS PAID
SERIES OF AND OTHER LOSS COVERAGE AS OF
CERTIFICATES PMI MORTGAGE LOANS(1) AVAILABLE CUT-OFF DATE
- ------------ --------------------- --------- ------------
<S> <C> <C> <C>
1992 XIV $ 18,785,000(2) $ 9,108,000(3) $ 4,911,000
1992-PA 56,935,000 24,455,000(1) 12,853,000
1993-PA 164,254,000 68,655,000(1) 15,998,000
</TABLE>
- -----------
(1) Includes coverage available to Other PMI Mortgage Loans
related to such PMI Pool Policy.
(2) Only certain of the Mortgage Loans underlying the Series
1992-XIV Certificate are PMI Mortgage Loans.
(3) The Mortgage Loans underlying the Series 1992-XIV Certificates
have the benefit of a PMI Pool Policy with coverage of
$2,098,000 and a GEMICO Pool Policy with coverage of
$7,0l0,000.
S-56
<PAGE> 57
CERTAIN DELINQUENCY INFORMATION WITH RESPECT TO THE PMI INSURED LOANS.
The following table sets forth certain information, by percentage of
aggregate principal balance, concerning delinquency experience with respect to
the PMI Loans and Other PMI Mortgage Loans (where applicable) for each of the
PMI Pool Policies:
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1998
-----------------------------------------------------------------------------------------------------
1992-PA 1993-PA 1992-XIV
PMI Mortgage Loans PMI Mortgage Loans
PMI and Other PMI PMI and Other PMI(2)
Mortgage Loans Mortgage Loans Mortgage Loans PMI Mortgage Loans Mortgage Loans
-------------- -------------- -------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
30-59 days delinquent... 1.02% 4.22% 4.12% 4.04% 2.46%
60-89 days delinquent... 0.81% 0.79% 0.63% 0.30% 2.88%
90+ days delinquent..... 1.68% 4.71% 1.25% 0.84% 0.00%
Foreclosures pending.... 0.78% 0.81% 2.54% 2.78% 5.49%
---- ----- ---- ---- -----
Total.............. 4.29% 10.53% 8.54% 7.96% 10.83%
Foreclosed Loans(1)..... 2.43% 1.57% 1.10% 0.99% 3.80%
</TABLE>
(1) For purposes of this table, foreclosed loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to
which had been acquired and which had not been liquidated by the end of
the period indicated.
(2) There are no Other PMI Mortgage Loans underlying the 1992-XIV
Certificate.
The PMI Certificates will have the limited benefit of the Financial
Guaranty Insurance Policy. The following summary of the provisions of the
Financial Guaranty Insurance Policy does not purport to be complete and is
qualified in its entirety by reference to the Financial Guaranty Insurance
Policy, a copy of which may be obtained from the applicable Certificate Trustee.
Simultaneously with the issuance of the PMI Pool Policy, FSA delivered
a Financial Guaranty Insurance Policy to the Certificate Trustee for the benefit
of the holders of the PMI Certificates, which evidence interests in certain, but
not all, of the PMI Insured Loans. All the PMI Certificates are the subject of
coverage provided by the Financial Guaranty Insurance Policy. THE FINANCIAL
GUARANTY INSURANCE POLICY PROVIDES CERTAIN INSURANCE COVERAGE WITH RESPECT TO
THE PMI CERTIFICATES AS SPECIFIED HEREAFTER; HOWEVER, THE FINANCIAL GUARANTY
INSURANCE POLICY DOES NOT DIRECTLY INSURE THE PMI CERTIFICATES. Pursuant to the
terms of the Financial Guaranty Insurance Policy, FSA has irrevocably guaranteed
to the Certificate Trustee for the benefit of the holders of the PMI
Certificates, Guaranteed Distributions (as defined below) relating to the PMI
Certificates. The maximum amount of Guaranteed Distributions payable under the
Financial Guaranty Insurance Policy will not exceed the maximum aggregate amount
set forth therein, which amount is equal to approximately 7.2% of the aggregate
principal balance of the PMI Insured Loans which are subject to coverage under
the Financial Guaranty Insurance Policy as of the date such mortgage loans
became subject to the coverage provided by such policy.
"Guaranteed Distributions" means, (a) with respect to each distribution
date for the PMI Certificates, the aggregate amount of principal and interest
due and payable to the holder of the PMI Certificates on such distribution date
and (b) certain expenses payable pursuant to the related Pooling and
Administration Agreement, in each case to the extent that the amount required to
pay such distributions and expenses equals moneys which PMI is obligated to pay
pursuant to one of more appropriately completed valid claims made under the PMI
Pool Policy but which claims have not been paid by PMI in accordance with the
terms of the PMI Pool Policy. FSA will be obligated to pay a claim made under
the Financial Guaranty Insurance Policy only if certain conditions are
satisfied, including: (i) PMI has defaulted in its obligation to pay a valid
claim rightfully and appropriately made under the PMI Pool Policy (including any
claim rightfully and appropriately made under the applicable fraud waiver
letter) and (ii) the sum of (A) all claims made under the Financial Guaranty
Insurance Policy previously paid by FSA and (B) all appropriately made claims
then due and payable under the Financial Guaranty Policy in accordance with its
terms do not equal or exceed the maximum aggregate amount of claims payable
under the Financial Guaranty Insurance Policy.
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<PAGE> 58
Pursuant to the Financial Guaranty Insurance Policy, FSA will be
subrogated to the rights of each holder of PMI Certificates (as insured under
the PMI Pool Policy) to receive distributions with respect to each PMI
Certificate held by such holder to the extent of any payments made by FSA under
the Financial Guaranty Insurance Policy with respect to the PMI Certificates.
FSA's obligations under the Financial Guaranty Insurance Policy in
respect of the related Guaranteed Distributions shall be discharged to the
extent funds are transferred to the Certificate Trustee as provided in the
Financial Guaranty Insurance Policy, whether or not such funds are properly
applied by the Certificate Trustee.
Claims under the Financial Guaranty Insurance Policy will rank equally
with other unsecured and unsubordinated obligations of FSA ranking not less than
pari passu with other unsecured and unsubordinated indebtedness of FSA for
borrowed money. Claims against FSA under the Financial Guaranty Insurance Policy
and claims against FSA under each other financial guaranty insurance policy
issued by FSA constitute pari passu claims against the general assets of FSA.
The terms of the Financial Guaranty Insurance Policy cannot be modified or
altered by any other agreement or instrument. The Financial Guaranty Insurance
Policy may not be canceled or revoked prior to the expiration of its term, which
term will expire at the earlier of (i) payment in full of the related PMI
Certificates, (ii) the date on which claims have been paid under the Financial
Guaranty Insurance Policy in an amount equal to the maximum aggregate amount of
claims payable thereunder, (iii) the date on which coverage under the PMI Pool
Policy has been reduced to zero, and (iv) the date on which the PMI Pool Policy
is terminated in accordance with its terms.
The Financial Guaranty Insurance Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law. The Financial Guaranty Insurance Policy is governed by the
laws of the State of New York. Publicly available information regarding FSA is
contained in the most recent Forms 10-K and 10-Q filed with the Securities and
Exchange Commission by FSA's parent company, Financial Security Assurance
Holdings Limited.
UGIC POOL POLICY. The 1994-UA Certificate (the "UGIC CERTIFICATE") will
have the limited benefit of a Mortgage Pool Insurance Policy (the "UGIC POOL
POLICY") issued by UGIC. The UGIC Pool Policy will cover certain losses by
reason of default on the Mortgage Loans underlying the UGIC Certificate (the
"UGIC MORTGAGE LOANS") and certain other residential mortgage loans not
evidenced by the UGIC Certificates ("OTHER UGIC MORTGAGE LOANS" and, together
with the UGIC Mortgage Loans, the "UGIC INSURED LOANS"). Claims paid under the
UGIC Pool Policy in respect of the Other UGIC Mortgage Loans will reduce the
amount of corresponding coverage available with respect to the UGIC Mortgage
Loans underlying the UGIC Certificate, notwithstanding that such UGIC Mortgage
Loans may not have suffered any losses at such time. If the rate of losses
respecting the Other UGIC Mortgage Loans is disproportionately greater than the
rate of losses respecting the UGIC Mortgage Loans with respect to the UGIC Pool
Policy, coverage available under the UGIC Pool Policy in respect of the UGIC
Mortgage Loans will be reduced below that which would otherwise have been
provided if the UGIC Pool Policy provided coverage exclusively for the UGIC
Mortgage Loans. No assurance can be given that disproportionately high claims in
respect of Other UGIC Mortgage Loans will not adversely affect the amount of
coverage available for the UGIC Mortgage Loans under the UGIC Pool Policy.
The UGIC Pool Policy is not a blanket policy against loss, since claims
thereunder may only be made respecting particular defaulted UGIC Insured Loans
only upon satisfaction of certain conditions precedent set forth in the UGIC
Pool Policy, a copy of which will be made available to Bondholders upon request
to the Indenture Trustee, at the cost of the requesting Bondholder. Except with
respect to certain UGIC Insured Loans covered by an endorsement to the UGIC Pool
Policy waiving settlement with the applicable primary insurer under certain
limited circumstances and except with respect to limited coverage in respect of
certain losses attributable to fraud in the origination of the UGIC Insured
Loans, the UGIC Pool Policy will not cover losses in connection with a UGIC
Insured Loan arising out of a failure to pay or denial of a claim under a
Primary Mortgage Insurance Policy, regardless of the reason therefor.
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<PAGE> 59
The following table sets forth certain information as at August 31,
1998 regarding the UGIC Pool Policy and the UGIC Mortgage Loans and Other UGIC
Mortgage Loans underlying the UGIC Certificate.
<TABLE>
<CAPTION>
AGGREGATE OUTSTANDING
PRINCIPAL BALANCE OF UGIC APPROXIMATE POOL CLAIMS PAID
SERIES OF MORTGAGE LOANS AND OTHER LOSS COVERAGE AS OF
CERTIFICATES UGIC MORTGAGE LOANS AVAILABLE CUT-OFF DATE
------------ ------------------- --------- ------------
<S> <C> <C> <C>
1994-UA $56,028,000 $26,099,000(1) $2,064,000
</TABLE>
- ------------
(1) Includes coverage available to the Other UGIC Mortgage Loans.
CERTAIN DELINQUENCY INFORMATION WITH RESPECT TO THE UGIC INSURED LOANS.
The following table sets forth certain information as at August 31,
1998 concerning delinquency experience with respect to the UGIC Insured Loans
for the UGIC Pool Policy:
<TABLE>
<CAPTION>
1994-UA
-------
UGIC Mortgage
Loans and Other
UGIC UGIC
Mortgage Loans Mortgage Loans
-------------- --------------
<S> <C> <C>
30-59 days delinquent............... 2.83% 5.50%
60-89 days delinquent............... 0.00% 0.40%
90+ days delinquent................. 0.00% 1.74%
Foreclosures pending................ 6.24% 5.04%
Total.......................... 9.07% 12.68%
Foreclosed Loans (1)................ 0.00% 0.89%
</TABLE>
- ----------
(1) For purposes of this table, foreclosed loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to
which had been acquired and which had not been liquidated by the end of
the period indicated.
OTHER CREDIT ENHANCEMENTS
Notwithstanding the foregoing, with respect to any loss that is not
covered by a Mortgage Pool Insurance Policy, a Primary Mortgage Insurance
Policy, or amounts available in a Special Hazard Account (including proceeds
from the related Special Hazard Insurance Policy) or the related Bankruptcy
Account (each, a "NON-COVERED LOSS"), each of the Sponsors, CMC, as an
Administrator, and the Indenture Trustee have agreed that the CMC will
subordinate its fees under the related Pooling and Administration Agreements
with respect to which it is the Administrator to the extent necessary to make up
a shortfall in the aggregate amount payable to each Bondholder on each Payment
Date to the extent that such shortfall results from a Non-Covered Loss. In the
event that CMC's fee is insufficient to make such Non-Covered Loss whole on a
Payment Date, CMC's future fees under the related Pooling and Administration
Agreements with respect to which it is the Administrator will be subordinate to
payments on the Bonds until such Non-Covered Loss is made whole. Notwithstanding
the foregoing, the aggregate amount required to be applied to Non-Covered Losses
from the subordination of the CMC's fee as an Administrator shall be limited to
an amount that is equal to $834,547, less an amount equal to the amount of any
Non-Covered Losses which have been made whole from (i) assets on deposit in any
bankruptcy account with respect to a series of CCC's or the Issuer's portfolio
pass-through certificates or (ii) the subordination of CMC's fee as
Administrator with respect to any series of CCC's or the Issuer's portfolio
pass-through certificates, including Series 1992-GA, Series 1993-PA, Series
1994-UA and Series 1994-GA.
In addition, in the event that funds on deposit in the Bankruptcy
Account are depleted as a result of the coverage of Non-Covered Losses as
described above, CMC will provide coverage for any further Bankruptcy Losses by
subordinating its right to receive its fee, but only up to an amount equal to
the Bankruptcy Account Requisite Amount
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<PAGE> 60
as of September 1, 1994, less an amount equal to all withdrawals from the
Bankruptcy Account in respect of bankruptcy-related losses from September 1,
1994 to the date of determination.
PRIMARY MORTGAGE INSURANCE POLICIES
Substantially all of the Mortgage having a Loan-to Value Ratio greater than
80% will be covered by a Primary Mortgage Insurance Policy.
Servicing Agreements require each Servicer to cause a Primary Mortgage
Insurance Policy to be maintained in full force and effect with respect to each
Mortgage Loan serviced by it which is currently covered by a Primary Mortgage
Insurance Policy until the Loan-to-Value Ratio of such Mortgage Loan declines to
80%.
Subject to their provisions and certain conditions and exclusions described
below, the Primary Mortgage Insurance Policies will insure each covered Mortgage
Loan against default as to the principal amount thereof exceeding 75% of the
appraised value of the Mortgaged Property at the time of the origination of such
Mortgage Loan. The Primary Mortgage Insurance Policies will not insure against
certain losses which may be sustained in the event of a personal bankruptcy of
the mortgagor under a Mortgage Loan.
The Primary Mortgage Insurance Policies generally provide that no claim may
be validly presented thereunder unless (i) certain cash advances have been made
and (ii) where there has been physical loss or damage to the Mortgaged Property,
it has been restored to its condition as of the date it was insured, reasonable
wear and tear excepted. Assuming the satisfaction of these conditions, the
issuer of a Primary Mortgage Insurance Policy will be required, within the
applicable policy limits, to pay either (i) an amount equal to the principal
balance of the defaulted Mortgage Loan covered thereby, plus accrued and unpaid
interest thereon to the date of claim, property preservation expenses, certain
other costs and other advances made by the insured, against receipt of good and
marketable title to the Mortgaged Property or (ii) the product of the amount
described in clause (i), subject to certain exceptions, multiplied by the
applicable percentage of insurance coverage. Under the Primary Mortgage
Insurance Policies the insurer may have the option to purchase a defaulted
Mortgage Loan before foreclosure of the related Mortgaged Property.
Claim payments, if any, under each Primary Mortgage Insurance Policy will
be required to be remitted by the Servicers to the Certificate Trustee and will
be treated in the same manner as a prepayment of a Mortgage Loan.
STANDARD HAZARD INSURANCE POLICIES
The Servicing Agreements require each Servicer to cause to be maintained
for each Mortgage Loan serviced by it a Standard Hazard Insurance Policy
providing for not less than the coverage of the standard form of fire insurance
policy with extended coverage customary in the state in which the Mortgaged
Property is located. Such coverage will be in an amount equal to the principal
balance owing on such Mortgage Loan or, if less, the maximum insurable value of
the Mortgaged Property securing such Mortgage Loan. In all events, such coverage
shall be in an amount sufficient to ensure avoidance of the applicability of the
co-insurance provisions under the terms and conditions of the applicable policy.
The ability of each Servicer to assure that hazard insurance proceeds are
appropriately applied may be dependent on its being named as an additional
insured under any Standard Hazard Insurance Policy and under any flood insurance
policy referred to below, or upon the extent to which information in this regard
is furnished to such Servicer by Mortgagors. All amounts collected by each
Servicer under any Standard Hazard Insurance Policy will be deposited in its
Custodial Account. Each Servicing Agreement provides that the related Servicer
may satisfy its obligation to cause hazard insurance policies to be maintained
by maintaining a blanket policy insuring against hazard losses on the Mortgage
Loans.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the Mortgaged Properties by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects, domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive.
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<PAGE> 61
Since the amount of hazard insurance to be maintained on the Mortgaged
Properties may decline as the principal balances owing thereon decrease, and
since residential properties have generally appreciated in value over time, in
the event of partial loss, hazard insurance proceeds may be insufficient to
restore fully the damaged property.
SPECIAL HAZARD INSURANCE
Each of the Mortgage Loans underlying the Series 1991-VI, 1991-VII, 1992-V,
1992-VI, 1992-VII, 1992-VIII, 1992-IX, 1992-X and 1992-XIV Certificates will
have an undivided interest in a special hazard insurance policy (each, a
"SPECIAL HAZARD INSURANCE POLICY"). Each of the Mortgage Loans underlying the
Series 1991-B, 1991-E, 1992-PA, 1992-GA, 1993-PA, 1994-UA and 1994-GA
Certificates, together with certain Other Mortgage Loans will have an undivided
interest in a reserve account providing coverage with respect to a defined level
of special hazard-related losses (each, a "SPECIAL HAZARD ACCOUNT"). Each of the
Special Hazard Accounts is funded by Permitted Instruments and a Special Hazard
Insurance Policy.
Each Special Hazard Insurance Policy will insure the Mortgage Loans covered
by such policy against (i) physical loss or damage to properties subject to
defaulted Mortgage Loans caused by certain hazards (including earthquakes,
mudflows and, to a limited extent, floods) not insured against under customary
standard forms of fire and hazard insurance policies with extended coverage (or
a flood insurance policy if the reason of the application of the co-insurance if
the Mortgaged Property is in a federally designated flood area) and (ii) loss on
the Mortgage Loans caused by reason of the application of the co-insurance
clause typically contained in customary standard hazard insurance policies. The
Special Hazard Insurance Policies will not cover losses occasioned by normal
wear and tear, gradual deterioration, inherent vice, inadequate maintenance of
part or all of any property, errors in design, faulty workmanship or materials,
war, nuclear reaction, nuclear or chemical contamination, civil insurrection or
certain governmental actions, flood loss which could have been covered under the
National Flood Insurance Program (if the Mortgaged Property is located in a
federally designated flood area), any dishonest act on the part of any insured
party or its agent and certain other risks described in the policy. A copy of
the each Special Hazard Insurance Policy will be made available to the
Bondholders upon request to the Indenture Trustee, at the cost of the requesting
Bondholder.
Each Special Hazard Account was established by the Certificate Trustee and
is funded by Permitted Instruments and a Special Hazard Insurance Policy. The
amount of assets or special hazard insurance coverage required to be available
in each Special Hazard Account (the "SPECIAL HAZARD ACCOUNT REQUISITE AMOUNT")
may be increased or reduced from time to time as described in the related
Pooling and Administration Agreement. Claims paid out of a Special Hazard
Account (including claims paid under the related Special Hazard Insurance
Policy) in respect of any Other Mortgage Loans will reduce the amount of
corresponding coverage available with respect to the Mortgage Loans covered by
such Special Hazard Account, notwithstanding that the Mortgage Loans may not
have suffered any losses at such time. If the rate of losses respecting Other
Mortgage Loans is disproportionately greater than the rate of losses respecting
Mortgage Loans covered by a specified Special Hazard Account, coverage available
from such Special Hazard Account in respect of the Mortgage Loans will be
reduced below that which would otherwise have been provided if the Special
Hazard Account provided coverage exclusively for the Mortgage Loans. No
assurance can be given that disproportionately high claims in respect of Other
Mortgage Loans will not adversely affect the amount of coverage available to
Mortgage Loans from any Special Hazard Account.
The Special Hazard Insurance Policies included in the Special Hazard
Accounts will cover certain special hazard- related losses in excess of a
specified reserved amount (the "RESERVED AMOUNT") that is generally equal to 20%
of the related Special Hazard Account Requisite Amount prior to deduction of
special hazard losses (but not less than $1,000,000), reduced by all claims paid
in respect of special hazard losses following the date such Special Hazard
Insurance Policy was obtained, until the Reserved Amount is reduced to zero.
Cash has been deposited in each Special Hazard Account equal to the applicable
Reserved Amount as of the last date any mortgage loans were made subject to
coverage thereunder.
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<PAGE> 62
The following tables sets forth certain information with respect to the
Special Hazard Insurance Policies and the Special Hazard Accounts by series of
Certificates:
<TABLE>
<CAPTION>
LIMITATION ON CLAIMS
SERIES OF UNDER SPECIAL HAZARD CLAIMS PAID AS OF
CERTIFICATES INSURER INSURANCE POLICY AUGUST 31, 1998
------------ ------- ---------------- ---------------
<S> <C> <C> <C>
1991-VI C&I(1) $2,933,000 $50,000
1991-VII C&I(1) 3,419,000 110,000
1992-V C&I(1) 6,069,000 71,000
1992-VI C&I(1) 3,569,000 0
1992-VII Aetna(2) 1,161,000 (4)
1992-VIII C&I(1) 2,840,000 141,000
1992-IX C&I(1) 3,055,000 30,000
1992-X C&I(1) 2,917,000 74,000
1992-XIV C&I(1) 3,424,000 117,000
1991-B Aetna(2) 1,262,000(3) 21,000
1991-E Aetna(2) 1,262,000(3) 536,000
1992-PA Aetna(2) 709,000(3) 214,000
1992-GA Aetna(2) 1,834,000 192,000
1993-PA Aetna(2) 1,616,000 557,000
1994-UA Aetna(2) 1,372,000 0
1994-GA Aetna(2) 1,899,000 0
- ---------------
</TABLE>
(1) Commerce and Industry Insurance Company, a property and casualty
insurance company organized under the laws of the State of New York.
(2) Aetna Casualty and Surety Company, a property and casualty insurance
company organized under the laws of the State of Connecticut.
(3) The Series 1991-B, 1991-E and 1992-PA Certificates have a combined
Special Hazard Account with an aggregate limit on claims in respect of
such Certificates of $1,262,000. There is an aggregate limit of
$709,000 in respect of claims in respect of the Series 1992-PA
Certificate.
(4) Not reported by Aetna.
Neither the funds on deposit in any Special Hazard Account nor the coverage
under any Special Hazard Insurance Policy will be available to cover any losses
or shortfalls other than special hazard-related losses in respect of the
mortgage loans specifically covered by such Special Hazard Account or Special
Hazard Insurance Policy.
BANKRUPTCY ACCOUNTS
Each Mortgage Loan together with certain Other Mortgage Loans will have the
benefit of a bankruptcy account (each, a "BANKRUPTCY ACCOUNT").
Each Bankruptcy Account is a reserve account providing coverage with
respect to a defined level of bankruptcy- related losses resulting from
Mortgagor bankruptcies with respect to the Mortgage Loans underlying the
applicable Certificate. Each Bankruptcy Account was established by the
Certificate Trustee and is funded by Permitted Instruments. The amount of assets
required to be available each Bankruptcy Account (the "BANKRUPTCY ACCOUNT
REQUISITE AMOUNT") may be increased or reduced from time to time as described in
the related Pooling and Administration Agreement. Claims paid out of a
Bankruptcy Account in respect of any Other Mortgage Loan will reduce the amount
of corresponding coverage available with respect to the Mortgage Loans covered
by such Bankruptcy Account, notwithstanding that the Mortgage Loans may not have
suffered any losses at such time. If the rate of losses respecting Other
Mortgage Loans is disproportionately greater than the rate of losses respecting
Mortgage Loans covered by a specified Bankruptcy Account, coverage available
from such Bankruptcy Account in respect of the Mortgage Loans will be reduced
below that which would otherwise have been provided if the Bankruptcy Account
provided coverage exclusively for the Mortgage Loans. No assurance can be given
that disproportionately high claims in respect of Other
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<PAGE> 63
Mortgage Loans will not adversely affect the amount of coverage available to
Mortgage Loans from any Bankruptcy Account.
The Mortgage Loans underlying the Series 1992-GA, 1993-PA, 1994-UA and
1994-GA Certificates will each have the benefit of a Bankruptcy Account with a
maximum coverage (per Series) of $100,000.
The Mortgage Loans underlying the Series 1991-B, 1991-E and 1992-PA
Certificates have the benefit of a combined Bankruptcy Account with a maximum
aggregate coverage for all such Certificates of $100,000.
The Mortgage Loans underlying the Series 1991-VI, 1991-VII, 1992-V,
1992-VI, 1992-VIII, 1992-IX, 1992-X and 1992-XIV Certificates will have the
benefit of a Bankruptcy Account maintained in respect of the 1992-VII
Certificate with a maximum aggregate coverage for all such Certificates of
$117,000.
As of September 28, 1998, no claims had been paid from any Bankruptcy
Account.
The coverage under each Bankruptcy Account may be canceled or reduced,
to the extent permitted by the rating agencies rating the Bonds, so long as such
cancellation or reduction does not adversely affect the ratings described under
"Bond Ratings" herein.
In the event that aggregate Mortgagor bankruptcy losses experienced
with respect to the Mortgage Loans covered by a specified or Bankruptcy Account
exceed the coverage under such Bankruptcy Account, as applicable, any further
Mortgagor bankruptcy losses on such Mortgage Loans may result in losses to
Bondholders. See "Description of the Bonds--Priority of Payments" herein and
"The Indenture--Rights Upon Event of Default" in the Prospectus.
Neither the funds on deposit in any Bankruptcy Account will be available to
cover any losses or shortfalls other than bankruptcy related losses in respect
of the mortgage loans specifically covered by such Bankruptcy Account.
FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, a REMIC election will be made with respect
to a portion of the Trust Estate (the "SERIES 1998-3 REMIC"). The Class A Bonds
and the Class AX Bonds will be considered to represent beneficial interests in
the "regular interests" (designated as the "REGULAR INTERESTS") in the Series
1998-3 REMIC.
The Class A Bonds except to the extent of any Basis Risk Shortfall and any
amounts of interest received in excess of the Net WAC (such amounts being
referred to herein as the "ADDITIONAL INTEREST DISTRIBUTION AMOUNTS"), will be
treated as regular interests in a REMIC under section 860G of the Code.
Accordingly, the Class AX Bonds and the portion of the Class A Bonds
representing a Regular Interest will be treated as (i) assets described in
section 7701(a)(19)(C) of the Code, and (ii) "real estate assets" within the
meaning of section 856(c)(5) of the Code, in each case to the extent described
in the Prospectus. Interest on such portion of the Class A Bonds and Class AX
Bonds will be treated as interest on obligations secured by mortgages on real
property within the meaning of section 856(c)(3)(B) of the Code to the same
extent that such portion of the Class A Bonds and the Class AX Bonds are treated
as real estate assets. See "Certain Federal Income Tax Consequences" in the
Prospectus.
Each Holder of a Class A Bond is deemed to own an undivided beneficial
ownership in two assets: (i) the Regular Interests and (ii) an interest rate cap
contract (a "CAP AGREEMENT"). The Cap Agreement with respect to the Class A
Bonds is not included in the Series 1998-3 REMIC. The treatment of amounts
received by a Class A Bondholder under such Bondholder's right to receive
Additional Interest Distribution Amounts will depend on the portion of such
Bondholder's purchase price allocable thereto. Under the REMIC regulations, each
Class A Bondholder must allocate its purchase price for the Class A Bonds
between its undivided interest in the Regular Interests and its undivided
interest in the Cap Agreement in accordance with the relative fair market values
of each property right. Payments made to the Class A Bonds under the Cap
Agreement will be included in income based on the regulations relating to
notional principal contracts (the "NOTIONAL PRINCIPAL CONTRACT REGULATIONS").
The OID Regulations (as defined in the Prospectus) (which technically do not
apply to REMIC regular interests) provide that the issuer's allocations of the
issue price are binding on all holders unless the holder explicitly discloses on
its tax return that its allocation is different from the issuer's allocation.
Holders of the Class A Bonds may obtain information as to the value assigned to
the Cap Agreement from the Indenture Trustee. Under the REMIC regulations, the
Indenture Trustee is required to account for the Regular Interest and the Cap
Agreement as discrete property rights. Ownership of the Cap Agreement will
entitle
S-63
<PAGE> 64
the owner to amortize the separate price paid for the related Cap Agreement
under the Notional Principal Contract Regulations. The Internal Revenue Service
issued regulations applicable to debt instruments acquired after August 13, 1996
that provide for the integration of a qualifying debt instrument with a hedge if
the combined cash flows of the components are substantially equivalent to the
cash flows on a variable rate debt instrument. These regulations expressly
exclude REMIC regular instruments from their application. Each Holder of a Class
AX Bond will be required to report as income pursuant to the Notional Principal
Contract Regulations the portion of the purchase price for the Class A Bonds
allocable to the Cap Agreement and will be entitled to deduct payments made
under the Cap Agreement pursuant to such regulations. Amounts deposited in the
Reserve Fund, and earnings thereon, will be taxable to the Class AX Bondholders
as deposited, and earned, and will not be treated as paid under the Cap
Agreement to the Class A Bondholders until actually paid to them.
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement plans
and arrangements that are subject to ERISA or corresponding provisions of the
Code, including individual retirement accounts and annuities, Keogh plans and
collective investment funds in which such plans, accounts, annuities or
arrangements are invested (any of the foregoing a "PLAN"), persons acting on
behalf of a Plan, or persons using the assets of a Plan ("PLAN INVESTORS"),
should review carefully with their legal advisors whether the purchase or
holding of the Bonds could either give rise to a transaction that is prohibited
under ERISA or the Code or cause the collateral securing the Bonds to be treated
as plan assets for purposes of regulations of the Department of Labor set forth
in 29 C.F.R. 2510.3-101 (the "PLAN ASSET REGULATIONS").
PROHIBITED TRANSACTIONS
GENERAL. Section 406 of ERISA prohibits parties in interest or disqualified
persons ("PARTIES IN INTEREST") with respect to a Plan from engaging in certain
transactions (including loans) involving a Plan and its assets unless a
statutory or administrative exemption applies to the transaction. Section 4975
of the Code imposes certain excise taxes (or, in some cases, a civil penalty may
be assessed pursuant to section 502(i) of ERISA) on Parties in Interest which
engage in non-exempt prohibited transactions.
PLAN ASSET REGULATION AND THE BONDS. The United States Department of Labor
(the "DOL") has issued the Plan Asset Regulations concerning the definition of
what constitutes the assets of a Plan for purposes of ERISA and the prohibited
transaction provisions of the Code. The Plan Asset Regulations describe the
circumstances under which the assets of an entity in which a Plan invests will
be considered to be "plan assets" such that any person who exercises control
over such assets would be subject to ERISA's fiduciary standards. Under the Plan
Asset Regulations, generally when a Plan invests in another entity, the Plan's
assets do not include, solely by reason of such investment, any of the
underlying assets of the entity. However, the Plan Asset Regulations provide
that, if a Plan acquires an "equity interest" in an entity, the assets of the
entity will be treated as assets of the Plan investor unless certain exceptions
not applicable here apply.
Under the Plan Asset Regulations, the term "equity interest" is defined as
any interest in an entity other than an instrument that is treated as
indebtedness under "applicable local law" and which has no "substantial equity
features". If the Bonds are not treated as equity interests in the Issuer for
purposes of the Plan Asset Regulation, a Plan's investment in the Bonds would
not cause the assets of the Issuer to be deemed Plan assets. However, the
Issuer, an Administrator, the Certificate Trustee, the Indenture Trustee and the
Underwriter may be the sponsor of or investment advisor with respect to one or
more Plans. Because such parties may receive certain benefits in connection with
the sale of Bonds, the purchase of Bonds using Plan assets over which any such
parties have investment authority might be deemed to be a violation of the
prohibited transaction rules of ERISA and the Code for which no exemption may be
available.
The Bonds may not be purchased with the assets of a Plan if the Issuer, an
Investor, the Certificate Trustee, the Indenture Trustee, the Underwriter or any
of their respective affiliates (i) has investment or administrative discretion
with respect to such Plan assets; (ii) has authority or responsibility to give,
or regularly gives, investment advice with respect to such Plan assets, for a
fee and pursuant to an agreement or understanding that such advice (a) will
serve as a primary basis for investment decisions with respect to such Plan
assets and (b) will be based on the particular investment needs for such Plan;
or (iii) is an employer maintaining or contributing to such Plan.
S-64
<PAGE> 65
If the Bonds are deemed to be equity interests in the Issuer, the Issuer
could be considered to hold Plan assets by reason of a Plan's investment in the
Bonds. In such an event, the Administrators and other persons exercising
management or discretionary control over the assets of the Issuer may be deemed
to be fiduciaries with respect to investing Plans and thus subject to the
fiduciary responsibility provisions of Title I of ERISA, including the
prohibited transaction provisions of Section 406 of ERISA, and Section 4975 of
the Code with respect to transactions involving the Issuer's assets. There can
be no assurance that any statutory or administrative exemption will apply to all
prohibited transactions that might arise in connection with the purchase or
holding of an equity interest in the Issuer by a Plan.
The Residual Bonds are expected to have "substantial equity
characteristics." Accordingly, no Residual Bond may be acquired by a Plan or
Plan Investor. Although the matter is not entirely clear, the Class AX Bonds may
have "substantial equity characteristics." Consequently, no transfer of the
Class AX Bonds will be permitted to be made to any person unless the proposed
transferee delivers to the Indenture Trustee either (i) a certificate from such
transferee to the effect that such transferee is not a Plan Investor or, in the
case of an insurance company, is either not a Plan Investor or is eligible for
an exemption from the applicable prohibited transaction provisions of ERISA and
the Code, or (ii) an opinion of counsel satisfactory to the Indenture Trustee
and the Issuer to the effect that the purchase and holding of such Bonds will
not constitute or result in a prohibited transaction under ERISA or the Code and
will not subject the Administrators, the Certificate Trustee, the Indenture
Trustee, the Issuer or their respective affiliates to any obligation or
liability (including obligations or liabilities under ERISA or Section 4975 of
the Code) in addition to those undertaken in the Indenture (a "BENEFIT PLAN
OPINION").
In addition, without regard to whether the Bonds are considered to be
equity interests in the Issuer, certain affiliates of the Issuer or the
Administrators might be considered or might become Parties in Interest with
respect to a Plan. In either case, the acquisition or holding of Bonds by or on
behalf of such a Plan could be considered to give rise to an indirect prohibited
transaction within the meaning of ERISA and the Code, unless it is subject to
one or more exemptions such as Prohibited Transaction Class Exemption ("PTCE")
84-14, which exempts certain transactions effected on behalf of a Plan by a
"qualified professional asset manager", PTCE 90-1, which exempts certain
transactions involving insurance company pooled separate accounts, PTCE-91-38,
which exempts certain transactions involving bank collective investment funds,
PTCE 95-60, which exempts certain transactions involving insurance company
general accounts, or PTCE 96-23, which exempts certain transactions effected on
behalf of a Plan by certain "in-house asset managers". Each purchaser or
transferee of a Class A Bond that is a Plan Investor shall be deemed to have
represented that the relevant conditions for exemptive relief under at least one
of the foregoing exemptions or another exemption have been satisfied.
The sale of Bonds to a Plan is in no respect a representation by the Issuer
or the Underwriter that this investment meets all relevant legal requirements
with respect to investments by Plans generally or any particular Plan, or that
this investment is appropriate for Plans generally or any particular Plan.
ANY PLAN INVESTOR PROPOSING TO INVEST IN THE BONDS SHOULD CONSULT WITH ITS
COUNSEL TO CONFIRM THAT SUCH INVESTMENT WILL NOT RESULT IN A PROHIBITED
TRANSACTION THAT IS NOT SUBJECT TO AN EXEMPTION AND WILL SATISFY THE OTHER
REQUIREMENTS OF ERISA AND THE CODE APPLICABLE TO PLANS.
S-65
<PAGE> 66
THE ISSUER
The Issuer has issued the following collateralized mortgage obligations,
each separately secured by conventional mortgage pass-through certificates
evidencing interests in pools of loans on single-family residential properties
and having the following characteristics:
<TABLE>
<CAPTION>
APPROXIMATE CERTIFICATE PASS-THROUGH RATE
AGGREGATE -----------------------------
ORIGINAL BOND MORTGAGE LOAN
SERIES DATE OF ISSUANCE PRINCIPAL AMOUNT PRINCIPAL AMOUNT MINIMUM MAXIMUM
------ ---------------- ---------------- ---------------- ------- --------
<S> <C> <C> <C> <C> <C>
1991-VII December 24, 1991 $350,000,000 $352,884,063 7.968% 11.468%
1991-VIII December 23, 1991 125,000,000 125,285,552 8.0405 10.0405
1992-I January 28, 1992 350,000,000 354,001,696 7.8229 9.9529
1992-II February 28, 1992 350,000,000 353,452,616 7.4755 12.4155
1992-III March 30, 1992 125,000,000 125,986,205 7.4233 9.9233
1992-IV March 30, 1992 350,000,000 352,475,163 7.7306 10.6056
1992-V April 30, 1992 275,000,000 277,014,666 7.5906 9.7156
1992-VI May 29, 1992 200,000,000 202,157,049 7.1377 11.1377
1992-VII May 29, 1992 200,000,000 202,066,510 7.6896 10.5946
1992-VIII June 30, 1992 200,000,000 201,006,064 7.2664 10.1414
1992-IX June 29, 1992 200,000,000 201,038,619 4.9438 6.4438
1992-X June 30, 1992 200,781,630 200,781,630 7.2476(1) 10.2776(1)
1992-XI July 30, 1992 350,755,266 350,755,266 8.0233(2) 9.3983(2)
1992-XII August 28, 1992 200,174,762 200,459,562 7.2306 10.1056
1992-XIII August 28, 1992 200,000,000 200,447,240 7.4192 10.4492
1992-XIV September 30, 1992 200,000,000 200,099,994 3.8950 5.8950
1992-XV September 30, 1992 150,000,000 151,067,670 6.5571 9.2121
1993-I January 29, 1993 200,000,000 199,941,150 8.0000 8.0000
</TABLE>
(1) Net Certificate Pass-Through Rate, which is the Certificate Pass-
Through Rate less 0.04% for administration expenses.
(2) Net Certificate Pass-Through Rate, which is the Certificate Pass-
Through Rate less 0.03% for administration expenses.
The Issuer has not engaged in any other business to date. For the purpose
of calculating the rates of earnings to fixed charges set forth below, earnings
consist of income before fixed charges and income taxes, and fixed charges
consist of interest, amortization of bond discounts and amortization of bond
issuance costs.
The Issuer's ratio of earnings to fixed charges for the twelve months ended
December 31, 1997 was 1:1.
LITIGATION
Between July 23, 1998 and September 22, 1998, CMC, the parent of the
Issuer, and certain of the senior officers of CMC were sued in twenty-three
different lawsuits, each of which alleges violations of the federal securities
laws. Twenty of the lawsuits were filed in the United States District Court for
the Northern District of Texas. The other lawsuit was filed in the United States
District Court for the Eastern District of New York, but has been transferred to
the Northern District of Texas. In all but one of the lawsuits, the individual
defendants were Ronn K. Lytle, Christopher T. Gilson, Julie A. Moore, Andrew F.
Jacobs and William H. Rudluff. In the other, the individual defendants included
only Messrs. Lytle and Jacobs and Ms. Moore. Each of the actions is filed as a
purported class action but the persons on behalf of whom the lawsuits are
allegedly filed and the alleged class period vary somewhat among the various
actions.
S-66
<PAGE> 67
The earliest starting date for the alleged class period is January 28, 1997, the
date on which CMC issued a press release announcing is operating results for
fiscal year 1996, and the latest concluding date for the alleged class period is
July 24, 1998, the date on which CMC announced its operating results for the
second quarter of fiscal 1998 and also announced that it was eliminating for a
period of time the common stock dividend.
In substance, each of the lawsuits alleges that CMC caused the market price
for is securities to be artificially inflated during the alleged class periods
as a result of CMC having issued false and misleading statements concerning
CMC's business, operations, and financial condition and omitting to discuss
material adverse information regarding the same matters. Each of the complaints
seeks monetary damages in unspecified amounts. CMC intends to defend vigorously
the claims asserted against it. However, no prediction can be made at this stage
of the possible outcome of such lawsuits or of the ultimate effect on the
financial condition of CMC, and thus on CMC's ability to perform its obligations
as Administrator, if one or more of such lawsuits resulted in judgment against
CMC or the other defendants.
UNDERWRITING
Greenwich Capital Markets, Inc. (the "UNDERWRITER") has agreed, subject to
the terms and conditions of the Underwriting Agreement to purchase from the
Issuer the entire principal amount of the Class A Bonds.
The Issuer has been advised by the Underwriter that it proposes to offer
the Class A Bonds from time to time for sale in one or more negotiated
transactions or otherwise, at prices to be determined at the time of sale. The
Underwriter may effect such transactions by selling the Bonds to or through
certain dealers and such dealers may receive compensation in the form of
underwriting discounts, concessions or commissions from the Underwriter and any
purchasers of such Bonds for whom they may act as agent. The Underwriter and any
dealers that participate with the Underwriter in the distribution of the Bonds
may be deemed to be underwriters, and any amounts or commissions received by
them and any profit on the resale of such Bonds positioned by them may be deemed
to be underwriting discounts or commissions, under the Securities Act of 1933,
as amended (the "ACT").
The CMC and the Issuer, jointly, and severally, will indemnify the
Underwriter against certain liabilities, including liabilities under the Act,
and may also contribute to payments the Underwriter may be required to make in
respect thereof.
LEGAL MATTERS
Certain legal matters in respect of the Offered Bonds will be passed upon
for the Issuer by Andrews & Kurth L.L.P., Dallas, Texas and for the Underwriter
by Brown & Wood LLP, Washington, D.C.
BOND RATINGS
It is a condition to the issuance of the Class A Bonds, the Class AX Bonds
and the Class R Bonds that they be rated "AAAr" by S&P and "AAA" by DCR.
The ratings assigned by S&P and DCR to collateralized mortgage obligations
address the likelihood of the receipt by Bondholders of all payments to which
such Bondholders are entitled. Such ratings address the structural and legal
aspects associated with the Bonds, including the nature of the underlying
mortgage loans. Such ratings of collateralized mortgage obligations do not
represent any assessment of the likelihood or rate of principal prepayments. The
ratings do not address the possibility that Bondholders might suffer a lower
than anticipated yield or that the holders of the Bonds may not fully recoup
their initial investment. The ratings of the Bonds should be evaluated
independently from similar ratings on other types of securities.
In the case of ratings by S&P, the letter "r" is attached to highlight
derivative, hybrid and certain other obligations that S&P believes may
experience high volatility or high variability in expected returns due to
non-credit risks. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
S-67
<PAGE> 68
The Ratings assigned by S&P and DCR to the Class AX Bonds do not
address whether investors will recoup their initial investment. Further, the
ratings on the Class R Bonds only address the return of the class principal
balance and interest thereon at the stated rate.
The Issuer has not requested a rating on the Bonds by any rating agency
other than S&P and DCR. 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 and DCR. 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
or by DCR.
S-68
<PAGE> 69
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
Page
<S> <C>
"Accrued Bond Interest"..................................................S-16
"Act" .......................................................S-60
"Additional Interest Distribution Amounts"...............................S-56
"Bankruptcy Account".....................................................S-54
"Bankruptcy Account Requisite Amount"....................................S-55
"Basis Risk Shortfall"...................................................S-16
"Beneficial Owners".......................................................S-6
"Benefit Plan Opinion"...................................................S-57
"Bond Interest Payment Amount"............................................S-7
"Bond Interest Rate".....................................................S-16
"Bondholders" .......................................................S-27
"Bonds" ...................................................S-1, S-6
"Book Entry Bonds"...................................................S-1, S-6
"Book Entry Termination"............................................S-6, S-25
"Cap Agreement" .......................................................S-56
"CCC" .......................................................S-27
"Certificate Account"....................................................S-28
"Certificate Trustee"....................................................S-26
"Certificates" ........................................................S-2
"Class A Bond Interest Rate".............................................S-16
"Class AX Bond Interest Rate"............................................S-16
"Class R Bond Interest Rate".............................................S-16
"Class Notional Balance".................................................S-20
"Clearing Agency" ..................................................S-6, S-25
"Clearing Agency Participants"...........................................S-25
"Certificate Distribution"................................................S-8
"Class Current Principal Balance"........................................S-20
"Closing Date" ........................................................S-7
"CMC" ........................................................S-7
"CMT Adjustment Date"....................................................S-30
"CMT Gross Margin".......................................................S-30
"CMT Index" ..................................................S-2, S-30
"CMT Loans" ........................................................S-2
"CMT Lifetime Mortgage Interest Rate Cap"................................S-31
"CMT Minimum Mortgage Interest Rate".....................................S-31
"CMT Mortgage Interest Rate Adjustment Cap"..............................S-31
"CMT Mortgage Rate"......................................................S-30
"Code" .......................................................S-11
"Commission" ........................................................S-4
"Compensating Interest"..................................................S-17
"CPR" .......................................................S-20
"Current CMT Index"......................................................S-30
"Current LIBOR Index"....................................................S-29
"Current Principal Balance"..............................................S-20
"Custodial Account"......................................................S-42
"Cut-off Date" ........................................................S-7
"DCR" ..................................................S-1, S-12
"Deficient Valuation.......................................................31
"Definitive Bonds"........................................................S-6
"DOL" .......................................................S-57
"DTC" ........................................................S-1
"Due Period" ........................................................S-7
"Financial Guaranty Insurance Policy".....................................S-2
"FNMA LIBOR Loan" .......................................................S-29
</TABLE>
S-69
<PAGE> 70
<TABLE>
<S> <C>
"FNMC" ........................................................S-7
"Fraudulent Mortgage Loans"..............................................S-41
"FSA" ........................................................S-2
"GE" ........................................................S-7
"GEMICO" ........................................................S-2
"GEMICO Certificates"....................................................S-46
"GEMICO Insured Loans"...................................................S-46
"GEMICO Mortgage Loans"..................................................S-46
"GEMICO Pool Policy".....................................................S-46
"Gross WAC" .......................................................S-18
"Indenture" ........................................................S-7
"Indenture Trustee".......................................................S-7
"Initial Call Date"......................................................S-11
"Insurance Proceeds".....................................................S-42
"Interest Accrual Period"...........................................S-7, S-16
"Interest Shortfall".....................................................S-16
"Issuer" ........................................................S-6
"LIBOR Adjustment Date"..................................................S-29
"LIBOR Determination Date"...............................................S-17
"LIBOR Gross Margin".....................................................S-29
"LIBOR Index" ........................................................S-2
"LIBOR Lifetime Mortgage Interest Rate Cap"..............................S-29
"LIBOR Loans" ........................................................S-2
"LIBOR Minimum Mortgage Interest Rate"...................................S-29
"LIBOR Mortgage Interest Rate Adjustment Cap"............................S-29
"LIBOR Mortgage Rate"....................................................S-29
"Liquidation Date".........................................................31
"Liquidation Proceeds"...................................................S-42
"Margin" .......................................................S-16
"Modeling Assumptions"...................................................S-20
"Monthly Advance" .......................................................S-42
"Mortgage Loan" ........................................................S-8
"Mortgage Loans" ........................................................S-2
"Mortgage Notes" .......................................................S-29
"Mortgage Pool" ..................................................S-2, S-27
"Mortgage Pool Insurance Policy"..........................................S-2
"Mortgage Rate" .......................................................S-16
"Mortgaged Properties".............................................S-14, S-29
"Mortgagors" .......................................................S-42
"Net Interest Shortfall".................................................S-18
"Net Mortgage Rate"......................................................S-16
"Net WAC" .......................................................S-16
"Nonrecoverable Advance"...........................................S-29, S-43
"Non-Covered Loss".......................................................S-51
"Notional Principal Contract Regulations"................................S-56
"One-Month LIBOR" .......................................................S-17
"Optional Redemption Date"...............................................S-11
"Original Principal Amounts"..............................................S-6
"Other GEMICO Mortgage Loans"............................................S-46
"Other Mortgage Loans"....................................................S-2
"Other PMI Mortgage Loans"...............................................S-49
"Other UGIC Mortgage Loans"..............................................S-50
"Parties in Interest"....................................................S-56
"Payment Date" ...................................................S-2, S-7
"Plan" .......................................................S-56
"Plan Asset Regulations".................................................S-56
"Plan Investor" ........................................................S-3
"Plan Investors" .......................................................S-56
</TABLE>
S-70
<PAGE> 71
<TABLE>
<S> <C>
"PMI" ........................................................S-2
"PMI Certificates".......................................................S-49
"PMI Insured Loans"......................................................S-49
"PMI Mortgage Loans".....................................................S-49
"PMI Pool Policy" .......................................................S-49
"Pool Insured Loans"......................................................S-2
"Pool Insurers" ........................................................S-2
"Pooling and Administration Agreement"...................................S-26
"Pooling and Administration Agreements"...................................S-2
"Primary Mortgage Insurance Policy"......................................S-44
"Principal Distribution Amount"..........................................S-18
"Principal Prepayment"...................................................S-17
"PTCE" .......................................................S-57
"Rating Agencies" ..................................................S-1, S-12
"Redemption Price".......................................................S-11
"Reference Banks" .......................................................S-17
"Registration Statement"..................................................S-4
"Regular Interests"...........................................S-3, S-11, S-56
"REITs" .......................................................S-12
"Relief Act Shortfall"...................................................S-17
"REMIC" ..................................................S-3, S-11
"Remittance Date" .......................................................S-28
"Remittance Rate" .......................................................S-28
"Reserve Fund" .................................................S-18, S-19
"Reserve Fund Requirement"...............................................S-21
"Reserve Interest Rate"..................................................S-18
"Reserved Amount" .......................................................S-53
"S&P" ..................................................S-1, S-12
"Scheduled Principal Balance...............................................31
"Sellers" .......................................................S-41
"Series 1998-3 REMIC"....................................................S-56
"Servicer" .......................................................S-28
"Servicing Agreement"....................................................S-28
"Special Hazard Account".................................................S-53
"Special Hazard Account Requisite Amount"................................S-53
"Special Hazard Insurance Policy"........................................S-53
"Sponsor" .......................................................S-27
"Standard Hazard Insurance Policy".......................................S-44
"Title Insurance Policy".................................................S-44
"Trust Estate" ........................................................S-2
"Trustee's Fee Rate".....................................................S-18
"UGIC" ........................................................S-2
"UGIC Certificate".......................................................S-50
"UGIC Insured Loans".....................................................S-50
"UGIC Mortgage Loans"....................................................S-50
"UGIC Pool Policy".......................................................S-50
"Underwriter" ..................................................S-1, S-60
"Unrecovered Interest Shortfall".........................................S-17
"WSJ LIBOR Loan" .......................................................S-29
"5/25 Adjustment Date"....................................................S-2
"5/25" Mortgage Loans"....................................................S-2
</TABLE>
S-71
<PAGE> 72
PROSPECTUS
$773,288,342
(LOGO)
CAPSTEAD SECURITIES CORPORATION IV
COLLATERALIZED MORTGAGE OBLIGATIONS (ISSUABLE IN SERIES)
---------------------
This Prospectus relates to $773,288,342 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. 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 Agency Certificates or
Non-Agency Certificates, or a combination of such Certificates. "Agency
Certificates" are either (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"), or (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"). "Non-Agency Certificates" are private
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 Agency Certificates or pools of whole mortgage
loans secured by single family or multi-family residences. 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. The 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. Each
Series of Bonds may be redeemable only under the limited circumstances described
herein and in the related Prospectus Supplement.
The Issuer with respect to a Series of Bonds (the "Issuer") will be
Capstead Securities Corporation IV. The Issuer will have no significant assets
other than those pledged as collateral to secure separately each Series of the
Issuer's Bonds. Unless otherwise specified in the Prospectus Supplement, the
Bonds are not guaranteed or insured by GNMA, FNMA, FHLMC, or any other
governmental organization or any other person or entity.
The Issuer may elect to treat one or more segregated pools of assets
securing any Series of Bonds as a "real estate mortgage investment conduit"
("REMIC"). See "Certain Federal Income Tax Consequences" herein. 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.
---------------------
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 28, 1998.
<PAGE> 73
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to a Series of Bonds to be offered
hereunder will, among other things, set forth with respect to such Series of
Bonds: (i) information regarding the issuance 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, the amount of the 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 is participating in the Issuer's Special Hazard
and Bankruptcy Account and, if so, the Claim Ceiling for such Series (as defined
herein); (xii) if applicable, the Issuer's ratio of earnings to fixed charges;
(xiii) whether such Series constitutes a Series of Special Allocation Bonds;
(xiv) if all or part of the collateral for the Bonds of such Series consists of
Non-Agency Certificates, information concerning the Agency Certificates or
mortgages evidenced by such Certificates and related servicing and, if
applicable, insurance or guaranty arrangements; (xv) 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; (xvi)
the investment rating agencies and ratings required with respect to such Series;
(xvii) the extent, if any, to which deposits, withdrawals or substitutions of
Certificates securing the Bonds may be permitted; (xviii) whether the Issuer
intends to elect to treat the segregated pool of assets securing such series as
a REMIC; and (xix) additional information with respect to the plan of
distribution of such Bonds.
---------------------
AVAILABLE INFORMATION
The Issuer was incorporated in Delaware on August 16, 1991. The Issuer is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith is required
to file reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information 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 Commission's regional offices at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7
World Trade Center, 13th Floor, New York, New York 10048. Copies of such
material can also be obtained from the Commission at prescribed rates through
its Public Reference Section at 450 Fifth Street, N.W., Washington, D.C. 20549.
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 information concerning the Bonds.
The Issuer's principal executive offices are located at 2711 N. Haskell
Avenue Suite 1000, Dallas, Texas 75204. Its telephone number is (214) 874-2500.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Issuer with the Commission
under the Exchange Act are incorporated by reference in this Prospectus: (1) the
Issuer's Annual Report on Form 10-K for its fiscal year ended December 31, 1997;
and (2) the Issuer's Quarterly Reports on Form 10-Q for its fiscal quarters
ended March 31, 1998 and June 30, 1998.
All documents filed by the Issuer pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Bonds shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
The Issuer will provide without charge to each person to whom a copy of
this Prospectus has been delivered, upon the request of such person, a copy of
any of or all the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
any such document). Requests for such copies should be directed to Attn:
Investor Relations, Capstead Securities Corporation IV, 2711 N. Haskell Avenue,
Suite 1000, Dallas, Texas 75204 (214/874-2323).
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<PAGE> 75
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 Agency
Certificates or pools of mortgage loans secured
by single family (one- to four-units) or
multi-family 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 an Indenture (an "Indenture") between
the Issuer (as defined below) and the trustee for
such Series (the "Indenture Trustee"), as
supplemented by one or more supplemental
indentures between the Issuer and the Indenture
Trustee authorizing such Series (each a "Series
Supplement"). 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 may be insured
or 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 Bonds will represent obligations
solely of the Issuer and will not be insured or
guaranteed by any affiliate of the Issuer or by
any other person or entity.
Issuer..................... Capstead Securities Corporation IV (the "Issuer") is
a limited purpose finance corporation wholly
owned by Capstead Mortgage Corporation. Neither
Capstead Mortgage Corporation nor any other
affiliate of the Issuer will guarantee, or
otherwise be obli-
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<PAGE> 76
gated to pay, the Bonds of any Series. Although
the Bonds are recourse obligations of the Issuer
(except as otherwise specified in the related
Prospectus Supplement with respect to Bonds for
which a REMIC election is made), its assets,
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 be used only to
collateralize the Bonds of such Series. The
Issuer was incorporated in the State of Delaware
on August 16, 1991. The Issuer's principal
executive offices are located at 2711 N. Haskell
Avenue, Dallas, Texas 75204; telephone number
(214) 874-2500. 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 for such Class as specified in the related
Prospectus Supplement (each such period an
"Interest Accrual Period" and each such date a
"Payment Date"). Unless otherwise 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. 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
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<PAGE> 77
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 but
not then payable on any Compound Interest Bonds
of such Series in the prior Interest Accrual
Period; (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. See "Description of the
Bonds -- Payments of Principal."
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.
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 all amounts available on such Payment Date
from certain items of collateral, as described in
the following sentence, over the sum of all
amounts due on such Payment Date for payments of
principal and interest on such Bonds. Amounts
available on any Payment Date from certain items
of collateral may include, to the extent
described in the related Prospectus Supplement,
(i) all distributions received on the
Certificates securing such Series of Bonds in the
Due Period prior to such Payment Date for such
Series of Bonds, (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 in the
Due Period prior to such Payment Date and
reinvestment income thereon. Amounts due for
payment on such Series of Bonds on any Payment
Date may include, to the extent described in the
related Prospectus Supplement, (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 but not then payable on
any Compound Interest Bonds of such
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<PAGE> 78
Series in the prior Interest Accrual Period, (iv)
the amounts, if any, paid with respect to special
redemption on 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
Payment Date. Any Spread distributed to the
Issuer will not be available for payment of
principal and interest on the Bonds, and such
distributions will no longer be subject to the
lien of Indenture.
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 requested to rate 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
mortgages 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."
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 Series Supplement 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 Request of Bondholders."
B. Special Redemption.... The Bonds of each 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
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<PAGE> 79
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 substantial principal payments on
the underlying mortgages and/or low reinvestment
yields, 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
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
under the circumstances provided in the related
Prospectus Supplement at the redemption price set
forth in such Prospectus Supplement. See
"Description of the Bonds -- Optional
Redemption."
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 Rate Interest 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 Classes with
later Stated Maturities will not be affected
thereby, unless otherwise provided in the related
Prospectus Supplement. If so provided in a
Prospectus Supplement, after a redemption in full
of a Class of Floating Interest Rate Bonds in
which any Optional Floating Interest Rate Bond
Redemption has occurred, there may be a period of
time, such period to include one or more
Principal 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 Principal 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."
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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. Unless
otherwise stated in the Prospectus Supplement,
Non-Agency Certificates will not be backed,
directly or indirectly, by any agency or
instrumentality of the United States. However,
Non-Agency Certificates pledged to secure any
Series of Bonds or the Agency Certificates or
mortgage loans underlying any Non-Agency
Certificate (the "Mortgage Loans") may, be
insured, guaranteed or otherwise backed in the
manner described in the related Prospectus
Supplement. 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 (one- to
four-units) or multi-family residences. 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 will be held by the Indenture Trustee as
Collateral only for the specified Series of
Bonds. If so provided in the Prospectus
Supplement or Series 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. 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
directly to a collection account (the "Collection
Account") to be 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 upon satisfaction of certain
conditions contained in the Indenture and will be
free from the lien of the Indenture. See
"Security for the Bonds -- Collection Account."
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C. Reserve Funds......... Cash, a letter 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 specified
in the Prospectus Supplement by the nationally
recognized statistical rating agency or agencies
requested by the Issuer to rate such Series of
Bonds, or if the Issuer determines to so 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 (a "Clearing Agency")
registered with the Securities and Exchange
Commission, 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 and other
organizations eligible to maintain accounts with
the Clearing Agency ("Clearing Agency
Participants") or their nominees. Transfers and
pledges by purchasers and 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, if applicable, 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."
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Federal Income Tax
Considerations........... 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".
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 an individual retirement
account proposing to invest in the Bonds should
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 or the underlying
Mortgage Loans, as applicable, which are pledged
as collateral for such Series of Bonds and,
subsequently, may distribute all or a portion of
any remaining net proceeds to Capstead Mortgage
Corporation. See "Use of Proceeds."
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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 otherwise specified 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 and bonds similar to the 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 Funds, for
the payment of principal of, and interest on, that Series of Bonds. In addition,
immediately after each required payment of principal of, and interest on, a
Series of Bonds has been paid in full, any balance remaining in the related
Collection Account, if not required to be deposited in a related Reserve Fund,
will be promptly remitted to the Issuer and will no longer be subject to the
lien of the Indenture. In addition, certain amounts remaining in related Reserve
Funds may likewise be remitted to the Issuer following a Payment Date. 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 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 of any such Series
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 otherwise provided in the Prospectus Supplement,
but is accrued and added to the principal of such Compound Interest Bonds. 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. Neither Capstead Mortgage Corporation nor any affiliate of Capstead
Mortgage Corporation other than the Issuer is obligated with respect to the
Bonds.
LIMITATIONS, REDUCTION AND SUBSTITUTION OF CREDIT ENHANCEMENT. With respect
to each Series of Bonds secured by Non-Agency Certificates, credit enhancement
will be provided, to the extent required by the rating agencies requested to
rate such Series of Bonds, to cover certain types of losses on the Mortgage
Loans pooled to form such Non-Agency Certificates. Credit enhancement will be
provided in one or more of the forms described in the related Prospectus
Supplement, including, but not limited to, overcollateralization, prioritization
as to payments of one or more Classes of such Series, a letter of credit, a
mortgage pool insurance policy, a special hazard insurance policy, a bankruptcy
bond, a Reserve Fund, the participation of such Series in the Issuer's Special
Hazard and Bankruptcy Account, or any combination thereof. Regardless of the
form of credit enhancement provided, the amount of coverage will be limited in
amount and in most cases will be subject to periodic reduction in accordance
with a schedule or formula. Furthermore, such credit enhancements
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may provide only very limited coverage as to certain types of losses, and may
provide no coverage as to certain other types of losses. The Indenture Trustee
will generally be permitted to reduce, terminate or substitute all or a portion
of the credit enhancement for any Series of Bonds, if the applicable rating
agencies indicate that the then-current rating thereof will not be adversely
affected.
THE SPECIAL HAZARD AND BANKRUPTCY ACCOUNT. The Special Hazard and
Bankruptcy Account is a joint trust account available to the holders of each
Series of the Issuer's Bonds participating in such Account (each, a
"Participating Series"). The Special Hazard and Bankruptcy Account will not be
pledged, as a whole, to secure any Participating Series, but, rather, will be
pledged to the Indenture Trustee for the benefit of holders of all Participating
Series. The amount of cash or other assets on deposit in the Special Hazard and
Bankruptcy Account will be determined in accordance with the requirements of the
rating agencies requested to rate the Participating Series (the "Requisite
Amount of the Special Hazard and Bankruptcy Account"). Each Participating Series
will have a limit on the aggregate claims which can be made against the assets
in the Special Hazard and Bankruptcy Account (each, a "Claim Ceiling"). The
Trustee will make draws from the Special Hazard and Bankruptcy Account to pay
special hazard and bankruptcy-related claims with respect to each Participating
Series, in the order in which such claims are received by the Trustee from the
Administrator. Should the aggregate draws made by the Trustee against the
Special Hazard and Bankruptcy Account for the benefit of any Participating
Series reach the then applicable Claim Ceiling for such Series, the holders of
such Participating Series may have to bear future bankruptcy and special
hazard-related losses, even though funds remain in the Special Hazard and
Bankruptcy Account for the benefit of holders of other Participating Series.
Conversely, there may be no funds available in the Special Hazard and Bankruptcy
Account even though the Claim Ceiling has not been reached for any Participating
Series, due to payments up to or approaching the respective Claim Ceilings of
other Participating Series. This is due to the fact that the Requisite Amount of
the Special Hazard and Bankruptcy Account is expected to be less than the sum of
the respective Claim Ceilings for all Participating Series.
Any funds in excess of the Requisite Amount of the Bankruptcy and Special
Hazard Account, including reinvestment income, shall be remitted to the Issuer
on a monthly basis, free from the lien of the Indenture. The Requisite Amount of
the Bankruptcy and Special Hazard Account may be reduced, from time to time, to
the extent permitted by the rating agencies requested to rate the Participating
Series, as described in the Prospectus Supplement for each Participating Series.
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 by the Bondholders that the
Bonds are due and payable, 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 the Collateral securing such Series of Bonds 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
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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 alter the characteristics of the Mortgage
Loans underlying the Certificates, 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 -- 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
Bonds, such Certificates, and/or the Mortgage Loans underlying such Certificates
are insured, guaranteed or otherwise backed. 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 or comparable instrument provided for such
Mortgage Loan underlying a Non-Agency Certificate, 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 or Collection Account, also will result in a loss to
Bondholders.
ORIGINAL ISSUE DISCOUNT; RESIDUAL BONDS. All of the Compound Interest Bonds
will be, and certain of the other Bonds may be, issued with original issue
discount for federal income tax purposes. A holder of a 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 -- Taxation of Regular Bonds -- Original Issue Discount" and
"Market Discount."
An election may be made to treat one or more segregated pools 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
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return that is significantly lower than would be anticipated based upon the
stated interest rate of their Residual Bonds. See "Certain Federal Income Tax
Consequences -- 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 such Series. See
"Security for the Bonds."
2. Prepayments of principal on Certificates are least likely to occur
during periods of higher interest rates when it is expected the 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.
USE OF PROCEEDS
All or a portion of the Certificates pledged to secure each Series of Bonds
offered hereby and by the related Series Supplement may be contributed to the
Issuer by Capstead Mortgage Corporation. At the time the Certificates are so
contributed, the Issuer may assume the liability of Capstead Mortgage
Corporation to pay certain commercial paper or other indebtedness issued by
Capstead Mortgage Corporation to acquire the Certificates or Mortgage Loans
underlying the Certificates. In this case, substantially all of the net proceeds
from the issuance of such Series of Bonds will be used to pay the holder or
holders of such commercial paper or other indebtedness. Alternatively, the
Certificates may
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be subject to a lien for the benefit of certain banks which have loaned funds to
Capstead Mortgage Corporation, which funds have been used by Capstead Mortgage
Corporation to acquire the Certificates or Mortgage Loans underlying the
Certificates. In the latter case, the Issuer will take the Certificates to be
pledged as collateral for a Series of Bonds subject to the lien of the banks and
will use substantially all of the net proceeds from the issuance of such Series
of Bonds to pay the banks the amounts secured by such Certificates. The
Certificates will be released from any such banks' lien simultaneously with the
issuance of such Series of Bonds, and pledged to the Trustee, free and clear of
any lien or encumbrance as collateral for such Series of Bonds. In certain
cases, Capstead Mortgage Corporation may enter into repurchase transactions with
one or more investment banking entities (which may include Underwriters of the
Bonds or their affiliates) in respect of the Certificates or Mortgage Loans
underlying the Certificates. In connection therewith, all or a portion of the
net proceeds from the sale of the Bonds may be applied to acquire the
Certificates or Mortgage Loans subject to such repurchase transactions.
Subsequently, the Issuer may distribute to Capstead Mortgage Corporation, as the
sole holder of its Common Stock, all or a portion of any remaining net proceeds.
Alternatively, the Issuer may use substantially all of the net proceeds
from the sale of a Series of Bonds to purchase the related Certificates securing
the Bonds. All or a portion of such Certificates may be acquired by the Issuer
from Capstead Mortgage Corporation. Subsequently, the Issuer may distribute to
Capstead Mortgage Corporation, as the sole holder of its Common Stock, all or a
portion of any remaining net proceeds.
DESCRIPTION OF THE BONDS
GENERAL
The Bonds of each Series will be issued pursuant to the Indenture and the
Series Supplement for such Series 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 Indenture does not limit the amount of Bonds
that can be issued thereunder and provides that Bonds of any Series may be
issued thereunder up to the aggregate principal amount that may be authorized
from time to time by the Issuer.
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 and the Series
Supplement relating to each Series of Bonds. When 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.
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. A Series of Bonds may constitute a Series of Special Allocation 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.
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 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.
(Indenture, Sections 2.07 and 2.08)
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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 New York office of the Paying
Agent for such Series of Bonds. (Indenture, Sections 2.09 and 3.02) 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. (Indenture, 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 their date of issuance, 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 Collateral, if any, a cash flow
sufficient to amortize each Class of Bonds of the Series through redemption and
payment at their respective Stated Maturities and to timely make the interest
payments required to be made on the Bonds of the Series while they are
outstanding. See "Security for the Bonds."
One or more Series of Bonds may constitute 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 or described 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 Payment Date. Such Class of Compound Interest
Bonds will thereafter accrue interest on the outstanding principal amount
thereof as so adjusted.
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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 date or frequency as the Payment Dates for
the other Bonds of such Series. 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 its 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 but not then payable on any Compound Interest Bonds of such
Series in the prior Interest Accrual Period; (ii) an amount determined on the
basis of the Bond Values (as defined below) of the Certificates securing such
Series in a specified period (a "Due Period") corresponding to such Principal
Payment Date (the "Basic Principal Payment"); 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 consisting of Certificates 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
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result in the lowest Bond Value being assigned to the Certificates included in
such Bond Value Group. 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) the 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 but not then payable on any Compound Interest Bonds of such Series
in the prior Interest Accrual Period, (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 guaranteed by the Farmers Home Administration
("FmHA Loans") or partially insured or 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 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 receipts 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) 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.
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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.
REDEMPTION AT THE REQUEST OF BONDHOLDERS
To the extent permitted by the Prospectus Supplement and Series Supplement
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 day
of any 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 on any portion of the
Bonds cannot be met. (Indenture, 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 made 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. (Indenture, Section 10.02) 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. (Indenture, Sections 10.01 and 10.02)
OPTIONAL REDEMPTION
The Issuer may, at its option, 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 the Indenture Trustee
prior to the redemption date. The redemption price, including accrued interest,
for any Bond so redeemed will be specified in the related Prospectus Supplement.
(Indenture, Sections 10.01 and 10.02)
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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 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 interest
and unpaid thereon to the date specified in the related 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. 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. If so provided
in the related Prospectus Supplement, after a redemption in full of a Class of
Floating Interest Rate Bonds in which any Optional Floating Interest Rate Bond
Redemption has occurred, there may be a period of time, such period to include
one or more Principal 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 Principal 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 issued in book entry form ("Book Entry Bonds") and held in
the form of a single certificate issued in the name of a Clearing Agency
("Clearing Agency") registered with the Securities and Exchange Commission 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 and other organizations eligible to maintain accounts with the Clearing
Agency ("Clearing Agency Participants") or their nominees. Clearing Agency
Participants may also be Beneficial Owners (as defined below) of Book Entry
Bonds.
Purchasers and other beneficial owners of Book Entry Bonds ("Beneficial
Owners") may not hold Book Entry Bonds directly, but may hold, transfer or
pledge their ownership interest in the Bonds only through Clearing Agency
Participants. Additionally, Beneficial Owners 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."
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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 consisting of (i) Certificates, (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
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, GNMA Certificates which are based on and
backed by a pool of mortgage loans (i) insured by the FHA under the Housing Act,
(ii) guaranteed by the FmHA under Title V of the Housing Act of 1949, or (iii)
partially insured or guaranteed by the VA under the Servicemen's Readjustment
Act of 1944, as amended, or Chapter 37 of Title 38, United States Code and other
mortgage loans eligible for inclusion in mortgage pools underlying GNMA
Certificates.
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 Certificate 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
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GNMA or approved by FNMA as a seller-servicer of FHA Loans and/or VA Loans. Each
GNMA Certificate will represent a fractional undivided interest in a pool of
mortgage loans which may include 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 registered holder's proportionate interest in the aggregate amount
of the scheduled monthly principal and interest payments on each such mortgage
loan, less amounts to cover servicing and guarantee fees aggregating the excess
of the interest on the mortgage loans over the GNMA Certificate's pass-through
rate. In addition, each payment to a GNMA certificate holder will include
proportionate pass-through payments of any unscheduled recoveries of principal
of the mortgage loans underlying the GNMA Certificate including any prepayments
of principal and proceeds in the event of a foreclosure or other disposition of
any such mortgage 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.
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 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 approve the issuance of each GNMA Certificate in accordance with
a guaranty agreement (the "Guaranty Agreement") between GNMA and the GNMA
Servicer of such GNMA Certificate. Pursuant to the Guarantee Agreement, the GNMA
Servicer will service the underlying mortgage loans and be 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 mortgage
loans underlying the GNMA Certificate are less than the amounts due on such GNMA
Certificate.
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If a GNMA Servicer is unable to make payments on a GNMA Certificate as such
payments become due, it is required promptly to notify GNMA and request GNMA to
make such payments. 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 will have
recourse only against GNMA to obtain such payment. In the case of GNMA
Certificates issued in definitive form, the Indenture Trustee, as registered
holder of the GNMA Certificates pledged to secure a Series of Bonds, will have
the right to proceed directly against GNMA under the terms of the Guaranty
Agreements relating to such GNMA Certificates for any amounts that are not paid
when due. In the case of GNMA Certificates issued in book-entry form, The
Participants Trust Corporation ("PTC"), or its nominee, will have the right to
proceed against GNMA in such event.
If specified in the related Prospectus Supplement, GNMA Certificates
securing a Series of Bonds may be held on deposit at 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. 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 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 FNMA up to $2.25 billion outstanding at any
time, 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 will represent a fractional undivided interest in a
pool of mortgage loans which may consist of either FHA Loans, VA Loans or
conventional loans or participations therein. Such mortgage loans may be secured
by first mortgages or deeds of trust on either one- to four-family or
multi-family residential properties. Mortgage loans underlying a FNMA
Certificate may have annual interest rates that vary by as much as two
percentage points from each other. The original maturities of substantially all
of the conventional loans are expected to be between either 8 to 15 years or 20
to 30 years, and the FHA Loans and VA Loans are expected to be 30 years. Each
FNMA Certificate will be issued pursuant to a trust indenture.
FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such registered 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 and such registered 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.
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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.
Mortgage loans underlying a FNMA Certificate may have annual interest rates
that vary by as much as two percentage points from each other. The rate of
interest payable on a FNMA Certificate is equal to the lowest interest rate of
any mortgage loan in the related pool, less a specified minimum annual
percentage representing servicing compensation and FNMA's guaranty fee. Thus,
the annual interest rates on the mortgage loans underlying a FNMA Certificate
will be between one-half percentage point and two and one-half percentage points
greater than the annual interest rate for a FNMA Certificate.
Regular monthly installment payments on each FNMA Certificate will be
comprised of interest due as specified by such FNMA Certificate plus the
scheduled principal payments on the mortgage loans underlying such FNMA
Certificate due during the period beginning on the second day of the month prior
to the month in which the scheduled monthly installment on such FNMA Certificate
is due and ending on the first day of such month in which the scheduled monthly
installment on such FNMA Certificate is due. Such regular monthly installments
on each such FNMA Certificate will be distributed to the holder of record on the
25th day of each month. Any principal prepayments on the mortgage loans
underlying any FNMA Certificate securing a Series of Bonds or any other early
recovery of principal on such mortgage loans will be passed through to the
holder of record of such FNMA Certificate on the 25th day of the month next
following such prepayment or recovery and, in turn, a portion of such amounts
will be paid to holders of Bonds, secured thereby, as additional principal
payments.
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") and is controlled by the Federal Home Loan Banks. 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 represents an undivided interest in specified first
lien, residential mortgage loans, or participations therein, secured by one- to
four-family dwellings ("single-family properties") or by properties containing
five or more units and designed primarily for residential use ("multi-family
properties") which mortgage loans have been purchased by FHLMC and placed in a
discrete pool ("FHLMC Certificate Pool"). Each FHLMC Certificate Pool is
comprised entirely of conventional loans or of FHA Loans and/or VA Loans. All
mortgage loans secured by multifamily properties are conventional loans. All
mortgage loans placed in a FHLMC Certificate Pool must have original terms to
maturity not exceeding 180 or 360 months, as applicable.
FHLMC guarantees to each registered holder of FHLMC Certificates the timely
payment of interest at the applicable certificate rate on the registered
holder's pro rata share of the unpaid
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principal balance outstanding on the mortgage loans underlying such FHLMC
Certificate Pool. FHLMC also guarantees to each registered holder of FHLMC
Certificates ultimate collection by such holder of all principal on the
underlying mortgage loans, without any offset or deduction, to the extent of
such holder's pro rata share thereof, but does not guarantee the timely payment
of scheduled principal, except under certain programs. Pursuant to its
guarantee, FHLMC indemnifies each holder of FHLMC Certificates against any
diminution in principal by reason of charges for property repairs, maintenance
and foreclosure. FHLMC may remit the amount due on account of its guarantee of
ultimate collection of principal at any time after default on an underlying
mortgage loan, but not later than thirty days following (i) foreclosure sale,
(ii) payment of the claim by any mortgage insurer or the FHA, or payment of the
guaranty by the VA, or (iii) the expiration of any right of redemption,
whichever occurs later, but in any event no later than the earlier of one year
after demand has been made upon the mortgagor for accelerated payment of
principal or for payment of the principal due on the maturity on a mortgage
loan. In taking actions regarding the collection of principal after default on
the mortgage loans underlying FHLMC Certificates, including the timing of demand
for acceleration, FHLMC requires servicers to service the mortgage loans in
substantially the same manner as for mortgages of the same type 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, nor 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.
Requests for registration of ownership of FHLMC Certificates made on or
before the last business day of a month are made effective as of the first day
of that month. With respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, a Federal Reserve Bank which maintains book-entry accounts with
respect thereto will make payments of interest and principal each month to
holders in accordance with the holders' instructions. The first payment to a
holder of a FHLMC Certificate will normally be received by the 15th day of the
second month following the month in which the purchaser became recognized as the
holder of such FHLMC Certificate. Thereafter, payments will normally be received
by the 15th day of each month.
A FHLMC Certificate may be issued under programs created by FHLMC,
including its Cash Program or Guarantor Program. Under FHLMC's Cash Program, the
pooled mortgage loans underlying a FHLMC Certificate are purchased for cash from
a number of sellers. With respect to FHLMC Certificate Pools formed prior to
June 1, 1987, under the Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a FHLMC Certificate may
exceed the interest rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which, when
applied to the interest rate of the mortgage loans purchased, results in the
yield (expressed as a percentage) required by FHLMC. The required yield, which
includes a
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minimum servicing fee retained by the servicer, is calculated using the
outstanding principal balance of the mortgage loans, an assumed term and a
prepayment period as determined by FHLMC. No mortgage loan is purchased by FHLMC
at greater than 100% of its outstanding principal balance. Thus, the range of
interest rates on the mortgage loans in a FHLMC Certificate Pool formed prior to
June 1987 under the Cash Program will vary since mortgage loans are purchased
and identified to a FHLMC Certificate Pool based upon their yield to FHLMC
rather than on the interest rates on the mortgage loans. With respect to FHLMC
Certificate Pools formed on or after June 1, 1987, the range of interest rates
on the mortgage loans and participations in a FHLMC Certificate Pool which is
comprised of 15-or 30-year fixed-rate single family mortgage loans bought by
FHLMC under the Cash Program will be restricted to one percentage point. In
addition, the minimum interest rate on any mortgage loan in a FHLMC Certificate
Pool will be greater than or equal to the annual pass-through rate on the
related FHLMC Certificate, and the maximum interest rate will not be more than
two percentage points above such pass-through rate.
Under FHLMC's Guarantor Program, the mortgage loans underlying a FHLMC
Certificate are purchased from a single seller in exchange for such FHLMC
Certificate. The interest rate on a FHLMC Certificate under such program is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC. Under the Guarantor
Program, the range between the lowest and highest annual interest rates on the
mortgage loans in a FHLMC Certificate Pool may not exceed two percentage points.
For some FHLMC Certificates issued pursuant to purchase contracts under the
Guarantor Program on or after September 1, 1987, the range of the interest rates
on the mortgage loans in a FHLMC Certificate Pool will not exceed one percentage
point.
NON-AGENCY CERTIFICATES
Each Non-Agency Certificate will evidence an undivided interest in Agency
Certificates or a pool of Mortgage Loans secured by first liens on single-family
(one- to four-unit) or multi-family residential properties. Unless otherwise
specified in the Prospectus Supplement, the Non-Agency Certificates will have
the characteristics described herein. Non-Agency Certificates will be issued
pursuant to a Pooling and Administration Agreement among the entity delivering
the Mortgage Loans to form such Non-Agency Certificates (the "Owner"), an
administrator which will perform the functions of a master servicer (the
"Administrator") and a trustee acting under such Pooling and Administration
Agreement for the benefit of the holder or holders of the Non-Agency
Certificates (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 Owner will be required to instruct the
Servicers of the Mortgage Loans covered thereby 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.
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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 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 Loans secured by single-family (one- to four-unit) or
multi-family residential properties. 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, and in accordance
with the terms of the related Series Supplement, 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 term of such loans, of decreasing amounts
of interest and increasing amounts of principal), except for (i) the Mortgage
Loans backing any GPM Certificates, (ii) the "buydown" Mortgage Loans 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, or (iii) adjustable rate Mortgage
Loans backing any Certificates. 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 may 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 and FHLMC, (ii) the approximate aggregate principal amount of the Agency
Certificates or of the Mortgage Loans, as the case may be, by type of loan, of
the Mortgage Loans evidenced by any Non-Agency Certificates securing such
Series, and (iii) the approximate weighted average remaining term to maturity of
such Certificates.
RESERVE FUNDS
Cash, a letter 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, 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 requested to rate
the Bonds, or for any
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other purpose described in the related Prospectus Supplement. 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
requested to rate 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 financial institution acceptable to the
rating agency or agencies requested to rate 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 Series Supplement.
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.
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 business day
immediately preceding the next Payment Date for the related Series of Bonds.
(Indenture, Section 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 upon satisfaction of certain conditions contained in the Indenture 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. The
funds so paid to the Issuer of such Series may be used to pay such Issuer's
general operating expenses and to make distributions to the beneficial owners of
such Issuer and will not be an asset available to holders of the Bonds in the
event of a default on the Bonds.
DEPOSITS, SUBSTITUTION AND WITHDRAWAL OF CERTIFICATES
Subject to the limitations set forth in the Indenture and to the extent
permitted under the related Series Supplement 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
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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.
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS
The discussion under this heading applies only to Mortgage Loans underlying
Non-Agency Certificates. The Mortgages will be either deeds of trust or
mortgages, depending upon the prevailing practice in the state in which the
property subject to a Mortgage Loan is located. A mortgage creates a lien upon
the real property encumbered by the mortgage. It is not prior to the lien for
real estate taxes and assessments. Priority between mortgages depends on their
terms and generally on the order of filing with a state or county office. There
are two parties to a mortgage, the mortgagor, who is the borrower and homeowner,
and the mortgagee, who is the lender. Under the mortgage instrument, the
mortgagor delivers to the mortgagee a note or bond and the mortgage. Although a
deed of trust is similar to a mortgage, a deed of trust formally has three
parties, the borrower-homeowner called the trustor (similar to a mortgagor), a
lender (similar to a mortgagee) called the beneficiary, and a third-party
grantee called the trustee. Under a deed of trust, the borrower grants the
property, irrevocably until the debt is paid, in trust, generally with a power
of sale, to the trustee to secure payment of the obligation. The trustee's
authority under a deed of trust and the mortgagee's authority under a mortgage
are governed by law, the express provisions of the deed of trust or mortgage,
and, in some cases, the directions of the beneficiary.
FORECLOSURE
Foreclosure of a deed of trust is generally accomplished by a non-judicial
trustee's sale under a specific provision in the deed of trust which authorizes
the trustee to sell the property to a third party upon any default by the
borrower under the terms of the note or deed of trust. In some states, the
trustee must record a notice of default and send a copy to the borrower-trustor
and to any person who has recorded a request for a copy of a notice of default
and notice of sale. In addition, the trustee must provide notice in some states
to any other individual having an interest in the real property, including any
junior lienholders. In some states, the borrower, or any other person having a
junior encumbrance on the real estate, may, during a reinstatement period, cure
the default by paying the entire amount in arrears plus the costs and expenses
incurred in enforcing the obligation. Generally, state laws require that a copy
of the notice of sale be posted at designated locations and sent to certain
parties having an interest in the real property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having an
interest in the real property. Delays in completion of the foreclosure may
occasionally result from difficulties in locating necessary parties defendant.
In the case of foreclosure under either a mortgage or a deed of trust, the
sale by the referee or other designated officer or by the trustee is a public
sale. However, because of the difficulty a potential buyer at the sale would
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee or
referee. Thereafter, the lender will assume the burdens of ownership, including
obtaining casualty insurance and making such repairs at its own expense as are
necessary to render the property suitable for sale. The lender will commonly
obtain the services of a real estate broker and pay the broker's commission in
connection with the subsequent resale of the property. The lender may also have
to make improvements to the property. Depending upon market conditions, the
ultimate proceeds of the property may not equal the lender's investment in the
property. Any loss may be reduced by the receipt of any mortgage insurance
proceeds.
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RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon a payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of redemption
would defeat the title of any purchaser from the lender subsequent to
foreclosure or sale under a deed of trust. Consequently, the practical effect of
the redemption right is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgage. In some states, statutes
limit or prohibit the right of the beneficiary or mortgagee to obtain a
deficiency judgment against the borrower following foreclosure or sale under a
deed of trust. A deficiency judgment would be a personal judgment against the
former borrower equal in most cases to the difference between the net amount
realized upon the public sale of the real property and the amount due to the
lender under the deed of trust mortgage. Other statutes in some states require
the beneficiary or mortgagee to exhaust the security afforded under a deed of
trust or mortgage by foreclosure in an attempt to satisfy the full debt before
bringing a personal action against the borrower. Finally, other statutory
provisions in some states limit any deficiency judgment against the former
borrower following a judicial sale to the excess of the outstanding debt over
the fair market value of the property at the time of the public sale. The
purpose of these statutes is generally to prevent a beneficiary or a mortgagee
from obtaining a large deficiency judgment against the former borrower as a
result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state laws
affording relief to debtors, may interfere with or affect the ability of the
secured mortgage lender to realize upon collateral and/or enforce a deficiency
judgment. For example, with respect to federal bankruptcy law, a court with
federal bankruptcy jurisdiction may permit a debtor through his or her Chapter
11 or Chapter 13 rehabilitative plan to cure a monetary default in respect of a
mortgage loan on a debtor's residence by paying arrearages within a reasonable
time period and reinstating the original mortgage loan payment schedule even
though the lender accelerated the mortgage loan and final judgment of
foreclosure had been entered in state court (provided no sale of the residence
had yet occurred) prior to the filing of a debtor's petition. Some courts with
federal bankruptcy jurisdiction have approved plans, based on the particular
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such modification may include reducing the
amount of each monthly payment, changing the rate of interest, altering the
repayment schedule, and reducing the lender's security interest to the value of
the residence, thus leaving the lender a general unsecured creditor for the
difference between the value of the residence and the outstanding balance of the
loan.
Federal tax law provides priority to certain tax liens over the lien of the
mortgage. In addition, substantive requirements are imposed upon mortgage
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. These laws include
the federal Truth-in-Lending Act, Real Estate Settlement Procedures Act, Equal
Credit Opportunity Act, Fair Credit Billing Act, Fair Credit Reporting Act, and
related statutes. These federal laws impose specific statutory liabilities upon
lenders who originate mortgage loans and who fail to
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comply with the provisions of the law. In some cases, this liability may affect
assignees of the mortgage loans.
ENFORCEABILITY OF CERTAIN PROVISIONS
Certain of the Mortgage Loans contain due-on-sale clauses. These clauses
permit the lender to accelerate the maturity of the loan if the borrower sells,
transfers, or conveys the property. The enforceability of these clauses has been
the subject of legislation and litigation in many states, and in some cases the
clauses have been upheld, while in other cases their enforceability has been
limited or denied. The ability of mortgage lenders and their assignees and
transferees to enforce due-on-sale clauses was addressed by the Garn-St Germain
Depository Institutions Act of 1982 (the "Garn-St Germain Act") which was
enacted on October 15, 1982. The legislation, subject to certain exceptions,
preempts state constitutional, statutory and case law that prohibits the
enforcement of due-on-sale clauses. Exempted from its preemption are mortgage
loans (originated other than by federal savings and loan associations and
federal savings banks) that were originated or assumed during the period
beginning on the date a state, by statute or final appellate court decision
having statewide effect, prohibited the exercise of due-on-sale clauses and
ending on October 15, 1982 ("Window Period Loans"). Due-on-sale clauses
contained in Mortgage Loans originated by federal savings and loan associations
or federal savings banks are fully enforceable pursuant to regulations of the
Federal Home Loan Bank Board which preempt state law restrictions on the
enforcement of due-on-sale clauses. Mortgage loans originated by such
institutions are therefore not deemed to be Window Period Loans. Under the
Garn-St Germain Act, the exemption for Window Period Loans ended on October 15,
1985, although the Comptroller of the Currency, the National Credit Union
Administration and state legislatures were given the authority to regulate
enforcement of due-on-sale clauses in Window Period Loans originated by national
banks, federal credit unions and all other types of lenders, respectively.
With the expiration of the exemption for Window Period Loans, on October
15, 1985, due-on-sale clauses have become generally enforceable except in those
states whose legislatures exercised their authority to regulate the
enforceability of such clauses with respect to mortgage loans that were (i)
originated or assumed during the "Window Period", which ended in all cases not
later than October 15, 1982, and (ii) originated by lenders other than national
banks, federal savings institutions and federal credit unions. FHLMC has taken
the position in its published mortgage servicing standard that, out of a total
of eleven "window period states", five states (Arizona, Michigan, Minnesota, New
Mexico and Utah) have enacted statutes extending, on various terms and for
varying periods, the prohibition on enforcement of due-on-sale clauses with
respect to certain categories of Window Period Loans. The Garn-St Germain Act
also sets forth nine specific instances in which no mortgage lender covered by
the Act (including federal savings and loan associations and federal savings
banks) may exercise a due-on-sale clause, notwithstanding the fact that a
transfer of the property may have occurred. The inability to enforce a
due-on-sale clause may result in a mortgage loan bearing an interest rate below
the current market rate being assumed by a new home buyer rather than being paid
off, which may have an impact upon the average life of the Mortgage Loans and
the number of Mortgage Loans which may be outstanding until their maturity.
Upon foreclosure, some courts have imposed general equitable principles.
These equitable principles are generally designed to relieve the borrower from
the legal effect of his defaults under the loan documents. Examples of judicial
remedies that have been fashioned include judicial requirements that the lender
undertake affirmative and expensive actions to determine the causes for the
borrower's default and the likelihood that the borrower will be able to
reinstate the loan. In some cases, courts have substituted their judgment for
the lender's judgment and have required that lenders reinstate loans or recast
payment schedules in order to accommodate borrowers who are suffering from
temporary financial disability. In other cases, courts have limited the right of
the lender to foreclose if the default under the mortgage instrument is not
monetary, such as the borrower failing to adequately maintain the property or
the borrower executing a second mortgage or deed of trust affecting the
property. Finally, some courts have been faced with the issue of whether or not
federal or state
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constitutional provisions reflecting due process concerns for adequate notice
require that borrowers under deeds of trust or mortgages receive notices in
addition to the statutorily-prescribed minimum. For the most part, these cases
have upheld the notice provision as being reasonable or have found that the sale
by a trustee under a deed of trust, or under a mortgage having a power of sale,
does not involve sufficient state action to afford constitutional protections to
the borrowers.
ADJUSTABLE RATE LOANS
The laws of certain states may provide that mortgage notes relating to
adjustable rate Mortgage Loans are not negotiable instruments under the Uniform
Commercial Code. In such event, the Certificate Trustee will not be deemed to be
a "holder in due course" within the meaning of the Uniform Commercial Code and
may take such a Mortgage Note subject to certain restrictions on its ability to
foreclose and to certain contractual defenses available to a mortgagor.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property
that is the subject of a cleanup action by the state on account of hazardous
wastes or hazardous substances released or disposed of, or contained in, on the
property. Such a lien will generally have priority over all subsequent liens on
the property and, in certain of these states, will have priority over prior
recorded liens including the lien of a mortgage. In addition, under federal
environmental legislation and under state law in a number of states, a secured
party which takes a deed in lieu of foreclosure or acquires a mortgaged property
at a foreclosure sale or assumes active control over the operation or management
of a property so as to be deemed an "owner" or "operator" of the property may be
liable for the costs of cleaning up a contaminated site. Although such costs
could be substantial, it is unclear whether they would be imposed on a secured
lender to homeowners. In the event that title to a mortgaged property securing a
Mortgage Loan in a Certificate was acquired by the Certificate Trustee and
cleanup costs were incurred in respect of the Mortgaged Property, the holders of
the related Series of Bonds might realize a loss if such costs were required to
be paid by the Certificate Trustee on behalf of the Indenture Trustee as holder
of the Certificates securing such Bonds. In addition, the presence of certain
environmental contamination, including, but not limited to, lead-based paint,
asbestos and leaking underground storage tanks could result in the holders of
the related Series of Bonds realizing a loss if associated costs were required
to be paid by the Certificate Trustee on behalf of the Indenture Trustee as
holder of the Certificates securing such Bonds. The Issuer, Capstead Mortgage
Corporation, the Underwriters, the Servicers, and any of their respective
affiliates (i) have not caused any environmental site assessments or evaluations
to be conducted with respect to any mortgaged properties securing the Mortgage
Loans, (ii) are not required to make any such assessments or evaluations and
(iii) make no representations or warranties and assume no liability with respect
to the absence or effect of hazardous wastes or hazardous substances on any
mortgaged property or any casualty resulting from the presence or effect of
hazardous wastes or hazardous substances.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control
Act of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. A similar federal statute
was in effect with respect to mortgage loans made during the first three months
of 1980. The Federal Home Loan Bank Board is authorized to issue rules and
regulations and to publish interpretations governing implementation of Title V.
The statute authorizes any state to reimpose interest rate limits by adopting a
law or constitutional provision which expressly rejects application of the
federal law. In addition, even where Title V is not so rejected, any state is
authorized by the law to adopt a provision limiting discount points or other
charges on mortgage loans covered by Title V. As of the date hereof, certain
states have taken action to reimpose interest rate limits and/or to limit
discount points or other charges.
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In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges has been adopted, no
Mortgage Loan originated after the effective date of such state action will be
eligible for inclusion in a mortgage pool underlying a Non-Agency Certificate if
such Mortgage Loan will bear interest or provide for discount points or charges
in excess of permitted levels.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Relief Act, a borrower who enters active
military service after the origination of such borrower's Mortgage Loan
(including a borrower who is a member of the National Guard or is in reserve
status at the time of the origination of the Mortgage Loan and is later called
to active duty) may not be charged interest above an annual rate of 6% during
the period of such borrower's active duty status, unless a court orders
otherwise upon application of the lender. It is possible that such interest rate
limitation or similar limitations under state statutes could have an effect, for
an indeterminate period of time, on the ability of the Administrator or other
Servicers to collect full amounts of interest on certain of the Mortgage Loans.
Unless otherwise provided in the Prospectus Supplement for a Series of Bonds,
pursuant to the terms of the Pooling and Administration Agreement governing the
Non-Agency Certificates pledged to secure such Series, Capstead Mortgage
Corporation will be required to purchase any Mortgage Loan on which the mortgage
coupon rate is reduced by the Relief Act or similar state legislation. However,
in the event that Capstead Mortgage Corporation is unable to purchase any such
Mortgage Loan, any shortfall in interest collections resulting from the
application of the Relief Act or similar state legislation could result in
losses to the holders of the Bonds. In addition, the Relief Act imposes
limitations which would impair the ability of the Administrator or other
Servicers to enforce the lien with respect to an affected Mortgage Loan during
the borrower's period of active duty status. Thus, in the event that such a
Mortgage Loan goes into default, there may be delays and losses occasioned by
the inability to enforce the lien with respect to the Mortgaged Property in a
timely fashion.
THE ISSUER
GENERAL
The Issuer was incorporated in the State of Delaware on August 16, 1991,
and is a limited purpose finance subsidiary of Capstead Mortgage Corporation.
The Issuer is a qualified real estate investment trust subsidiary of Capstead
Mortgage Corporation under the Internal Revenue Code of 1986. Capstead Mortgage
Corporation is a publicly owned real estate investment trust which invests
primarily in fixed-rate, long-term mortgage loans secured by single-family
residential properties. The Issuer's and Capstead Mortgage Corporation's
principal executive offices are located at 2001 Bryan Tower, Dallas, Texas
75201. The Issuer's telephone number is (214) 746-8000.
The Issuer has not and will not engage in any business or investment
activities other than (i) issuing and selling Bonds under the Indenture and
purchasing, receiving, owning, holding and pledging as collateral therefor the
related Certificates, Mortgage Loans or other mortgage-related securities, (ii)
issuing and selling bonds under any other indenture, and receiving, owning,
holding and pledging as collateral therefor any of the mortgage-related assets
specified in its Certificate of Incorporation, (iii) investing cash balances on
an interim basis in high quality short-term securities and (iv) engaging in
other activities which are necessary or convenient to accomplish the foregoing
and are incidental thereto. Article III of the Issuer's Certificate of
Incorporation limits the Issuer's purposes to the above and provides that any
Bonds issued must be rated in the highest rating category established by one or
more nationally recognized statistical rating agencies. Article VIII of the
Issuer's Certificate of Incorporation prohibits the Issuer, 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 corporation other than a corporation that
has a
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certificate of incorporation containing provisions identical to the provisions
of Articles III and VIII of the Issuer's Certificate of Incorporation.
The Issuer has no intent to file, and Capstead Mortgage Corporation has no
intent to cause the filing of, a voluntary application under insolvency laws
with respect to the Issuer so long as the Issuer is solvent and does not foresee
becoming insolvent.
Capstead Mortgage Corporation may contribute or sell to the Issuer all or a
portion of the Certificates used to secure any Series of Bonds offered hereby
and by the related Prospectus Supplement and may contribute or sell to the
Issuer additional certificates evidencing Mortgage Loans and other
mortgage-related collateral which will be used to secure other Series of Bonds
which may be issued by the Issuer.
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 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"), the Technical and Miscellaneous Revenue Act of 1988
("TAMRA"), and the Small Business Job Protection Act of 1996 ("SBJPA") and the
Revenue Reconciliation Act of 1993, as well as final Treasury regulations
concerning REMICs ("Final REMIC Regulations") promulgated by the U.S. Department
of the Treasury on December 23, 1992. The discussion below 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. 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
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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
"domestic building and loan association" will be treated as assets described in
Code Section 7701(a)(19)(C); (ii) REMIC Bonds held by a real estate investment
trust will be treated as "real estate assets" within the meaning of Code Section
856(c)(4)(A) and (iii) 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)(4)(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 Section 856(c)(4)(A), payments of principal and interest on the Mortgage
Loans 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)(4)(A), and (ii) REMIC Bonds held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(3)(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 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 "loans . . . secured by
an interest in real property" for purposes of Code Section 7701(a)(19)(C)(v) 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
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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
Conference Committee Report to the 1986 Act (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 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); (ii) 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); (iii) 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)(4)(A); and (iv) Non-REMIC
Bonds held by a regulated investment company will not constitute "Government
securities" within the meaning of Code Section 851(b)(3)(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 on January 27, 1994, as amended on June 14, 1996, 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. 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 that the amount and rate of
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accrual of original issue discount be calculated based on a reasonable assumed
prepayment rate for the mortgages backing the Certificates securing the Bonds in
a manner prescribed by regulations not yet issued ("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. 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.
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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 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
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.
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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 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 can not 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
noncontingent principal payments by more than the lesser of (i) 1.5% of the
product of the noncontingent principal payments and the weight 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
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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 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, than 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. 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 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. Regulations dealing with contingent payment debt obligations were
issued on June 11, 1996 (the "Contingent Debt Regulations"), and are generally
effective as of 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.
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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 Regular Bond 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
Regular Bond 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 Bonds, including 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
Certificates as having qualified stated interest if the underlying mortgage
loans underlying the Certificates (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 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 REMIC Regular
Bonds issued at a significant premium and with respect 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 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.
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Premium
A Bond purchased at a cost greater than its remaining stated redemption
price at maturity is generally 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 irrevocable except with the approval of
the IRS. 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. The Treasury Department has issued final regulations concerning the
amortization of premium but by their terms the regulations do not apply to REMIC
Regular Bonds and bonds like the Regular Bonds.
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, under "Original Issue Discount" above
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 noncorporate 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
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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 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.
Final regulations dealing with withholding tax on income paid to foreign
persons and related matters (the "New Withholding Regulations") were issued by
the Treasury Department on October 6, 1997. The New Withholding Regulations will
generally be effective for payments made after December 31, 1999, subject to
certain transition rules. Prospective Bondholders who are foreign persons are
strongly urged to consult their own tax advisors with respect to the New
Withholding Regulations.
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 also
be furnished.
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
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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
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 have 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.
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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 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.
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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 will be subject to
federal income tax in all events. Thus, for example, an excess inclusion (i)
cannot 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. 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. The SBJPA has eliminated the
special rule permitting Section 593 institutions ("thrift institutions") to use
net operating losses and other allowable deductions to offset their excess
inclusion income from Residual Bonds that have significant value within the
meaning of the Final REMIC Regulations effective for taxable years beginning
after December 31, 1995, except with respect to Residual Bonds continuously held
by thrift institutions since November 1, 1995.
In addition, the SBJPA provides three rules for determining the effect of
excess inclusions on the alternative minimum taxable income of a Residual
Bondholder. First, alternative minimum taxable income for a Residual Bondholder
is determined without regard to the special rule, discussed above, that taxable
income cannot be less than excess inclusions. Second, a Residual Bondholder's
alternative minimum taxable income for a taxable year cannot be less than the
excess inclusions for the year. Third, the amount of any alternative minimum tax
net operating loss deduction must be computed without regard to any excess
inclusions. These rules are effective for taxable years beginning after December
31, 1986, unless a Residual Bondholder elects to have such rules apply only to
taxable years beginning after August 20, 1996.
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.
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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.
The Taxpayer Relief Act of 1997 provides, for taxable years beginning after
December 31, 1997, that if an "electing large partnership" holds a Residual
Bond, all interests in the electing large partnership are treated as held by
disqualified organizations for purposes of the tax imposed upon a pass-through
entity by Section 860(E)(e) of the Code. An exception to this tax, otherwise
available to a pass-through entity that is furnished certain affidavits by
record holders of interests in the entity that does not know such affidavits are
false, is not available to an electing large partnership. An "electing large
partnership" is a partnership that had 100 or more partners during the preceding
taxable year and that has filed an election with the IRS to be so treated.
Mark to Market Rules
A REMIC residual interest acquired after January 3, 1995 cannot be
marked-to-market.
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
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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 Certificates
will not be treated as a modification of the Certificates, provided that the
trust including the 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
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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
made (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 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
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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 Interest 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 Regulations 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 on the
residual interest at least equals the
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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 a 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 the
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.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Bonds. In the case of a "single class REMIC,"
however, the expenses will be allocated, under Treasury regulations, among the
holders of the REMIC Regular Bonds and the holders of the Residual Bonds on a
daily basis in proportion to the relative amounts of income accruing to each
holder of a Residual Bond or REMIC Regular Bond on that day. In the case of a
holder of a REMIC Regular Bond who is an individual or a "pass-through interest
holder" (including certain pass-through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder of a
REMIC Regular Bond, exceed 2% of such holder's adjusted gross income. In
addition, for taxable years beginning after
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December 31, 1990, the amount of itemized deductions otherwise allowable for the
taxable year for an individual whose adjusted gross income exceeds the
applicable amount (which amount will be adjusted for inflation for taxable years
beginning after 1990) will be reduced by the lesser of (i) 3% of the excess of
adjusted gross income over the applicable amount, or (ii) 80% of the amount of
itemized deductions otherwise allowable for such taxable year. The reduction or
disallowance of this deduction may have a significant impact on the yield of the
REMIC Regular Bond to such a holder. In general terms, a single class REMIC is
one that either (i) would qualify, under existing Treasury regulations, as a
grantor trust if it were not a REMIC (treating all interests as ownership
interests, even if they would be classified as debt for federal income tax
purposes) or (ii) is similar to such a trust and which is structured with the
principal purpose of avoiding the single class REMIC rules. Unless otherwise
specified in the related Prospectus Supplement, the expenses of the REMIC will
be allocated to holders of the related Residual Bonds.
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 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
constitute legal investments for such entities. Under SMMEA, in all States which
enacted legislation prior to October 4, 1991 specifically limiting the legal
investment authority of any of such entities with respect to "mortgage related
securities," the Bonds will constitute legal investments for entities subject to
such legislation only to the extent provided in such legislation. SMMEA
provides, however, that in no event will the enactment of any such legislation
affect the validity of any contractual commitment to purchase, hold or invest in
any securities or require the sale or other disposition of any securities, so
long as such contractual commitment was made or such securities were acquired
prior to the enactment of such legislation. 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
overriding the exemption afforded by SMMEA prior to the October 4, 1991
deadline.
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 and the OTS 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.
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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."
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.
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
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.
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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 outstanding Bonds of each Series issued under an Indenture
to be affected, 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 the Bonds of such
Series.
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 Series Supplement 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 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 calculation
of the debt service requirement for any Bond or 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. (Indenture,
Section 9.02)
The Issuer and the 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. (Indenture, 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 five 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
thirty 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,
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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.
(Indenture, 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 or holders of at least 25% in principal
amount of the Bonds of such Series then outstanding may 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. (Indenture, 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 the
holders of the Bonds of such Series have not directed the Indenture 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 the 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. (Indenture, Section 5.05) In addition, if a Series has been
declared due and payable upon an Event of Default, the Indenture Trustee may, in
its discretion, sell the Collateral for such Series in which event all Bonds of
such Series then outstanding will be payable pro rata (except to the extent
provided otherwise in the related Series Supplement), without regard to their
respective 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 fixed interest rate borne by any Bond of such Series.
(Indenture, Section 5.08)
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. (Indenture, Section 6.01) Following an Event of Default, the Trustee
shall be entitled to payment of its fees prior to payment of principal and
interest on the Bonds. (Indenture, Section 6.07) 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. (Indenture, Sections 5.13 and 5.14)
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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.
ISSUER'S ANNUAL COMPLIANCE STATEMENT
The Issuer will be required to file annually with the Indenture Trustee a
brief certificate as to its compliance with all conditions and covenants under
the Indenture. (Indenture, Section 3.09)
INDENTURE TRUSTEE'S ANNUAL REPORT
Except to the extent provided otherwise in the related Series Supplement,
the Indenture Trustee will be required to mail, in each year when required by
the Trust Indenture Act of 1939, as amended ("TIA"), 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 commercial capacity, the
property and funds physically held by the Indenture Trustee as such, any release
or substitution of property subject to the lien of the Indenture which has not
been previously reported, any additional Series of Bonds not previously reported
and any action taken by the Indenture Trustee which materially affects the Bonds
and which has not been previously reported. (Indenture, 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. (Indenture, Section 4.01)
THE INDENTURE TRUSTEE
The Indenture Trustee for each Series of Bonds will be specified in the
respective Prospectus Supplement. Pursuant to the TIA, the Trustee may 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 respective
amounts of such payment representing interest and principal and the remaining
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 or in the case of a Class of
Bonds on which principal payments are applied by lot rather than pro rata) after
giving effect to the payments made on such Principal Payment Date or Special
Redemption Date. (Indenture, 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
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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.
(Indenture, Section 5.09)
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby through any one or more
underwriters or groups of underwriters (the "Underwriters"). 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 if applicable, 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 the 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.
LEGAL MATTERS
The legality of 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.
EXPERTS
The financial statements of Capstead Securities Corporation IV, for the
period ended December 31, 1991, appearing in Capstead Securities Corporation
IV's Annual Report on Form 10-K have been audited by Ernst & Young, independent
auditors, as set forth in their report thereon included therein and incorporated
herein by reference. Such financial statements are incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
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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 (202-752-7585). The
Issuer did not participate in the preparation of FNMA's Prospectus or any such
report, financial statement or other financial information.
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INDEX OF SIGNIFICANT DEFINITIONS
<TABLE>
<CAPTION>
TERM PAGE
<S> <C>
Agency Certificates......................................... 4
Assumed Reinvestment Rate................................... 7
Basic Principal Payment..................................... 6
Beneficial Owners........................................... 10
Bond Value.................................................. 6
Bond Value Group............................................ 18
Bonds....................................................... 4
Book Entry Bonds............................................ 6
Certificates................................................ 4
Claim Ceiling............................................... 13
Clearing Agency............................................. 10
Clearing Agency Participants................................ 10
Code........................................................ 11
Collateral.................................................. 9
Collection Account.......................................... 9
Compound Interest Bonds..................................... 4
Due Period.................................................. 6
Eligible Investments........................................ 29
Event of Default............................................ 56
FHLMC Certificates.......................................... 4
Floating Interest Rate...................................... 5
Floating Interest Rate Bonds................................ 18
FNMA Certificates........................................... 4
GNMA Certificates........................................... 4
Indenture................................................... 4
Indenture Trustee........................................... 4
Interest Accrual Period..................................... 5
Issuer...................................................... 4
Mortgage Loans.............................................. 9
Non-Agency Certificates..................................... 4
Non-Priority Bonds.......................................... 13
Optional Floating Interest Rate Bond Redemption............. 8
Payment Date................................................ 5
Principal Payment Date...................................... 6
Priority Bonds.............................................. 13
REMIC....................................................... 1
Requisite Amount of the Special Hazard and Bankruptcy
Account................................................... 13
Reserve Funds............................................... 10
Scheduled Amortization Bonds................................ 6
SMMEA....................................................... 11
Special Allocation Bonds.................................... 17
Special Hazard and Bankruptcy Account....................... 13
Special Redemption Date..................................... 8
Servicers................................................... 27
Spread...................................................... 6
Stated Maturity............................................. 19
TIA......................................................... 58
Time-Out Period............................................. 8
</TABLE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE ISSUER, CAPSTEAD MORTGAGE CORPORATION OR BY THE UNDERWRITER. NEITHER THIS
PROSPECTUS SUPPLEMENT NOR THE ACCOMPANYING PROSPECTUS CONSTITUTES AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE
ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS
OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE ISSUER OR CAPSTEAD MORTGAGE CORPORATION SINCE SUCH DATE.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information........................ S-4
Incorporation of Certain Documents by
Reference.................................. S-4
Forward-Looking Statements................... S-5
Reports to Bondholders....................... S-5
Summary of Terms............................. S-6
Risk Factors................................. S-15
Description of the Bonds..................... S-17
Certain Prepayment and Yield
Considerations............................. S-25
Description of Book Entry Procedures......... S-28
Description of the Certificates.............. S-29
Description of the Mortgage Loans and the
Mortgaged Properties....................... S-31
Pooling, Administration and Servicing........ S-47
Description of Insurance, Special Hazard
Accounts and Bankruptcy Accounts........... S-52
Federal Income Tax Consequences.............. S-63
ERISA Considerations......................... S-64
The Issuer................................... S-66
Underwriting................................. S-67
Legal Matters................................ S-67
Bond Ratings................................. S-67
Index of Defined Terms....................... S-69
PROSPECTUS
Prospectus Supplement........................ 2
Available Information........................ 2
Incorporation of Certain Documents by
Reference.................................. 3
Summary of Terms............................. 4
Special Considerations....................... 12
Use of Proceeds.............................. 15
Description of the Bonds..................... 16
Security for the Bonds....................... 22
Certain Legal Aspects of Mortgage Loans...... 30
The Issuer................................... 34
Certain Federal Income Tax Consequences...... 35
Legal Investment............................. 54
ERISA Matters................................ 55
The Indenture................................ 55
Plan of Distribution......................... 59
Legal Matters................................ 59
Experts...................................... 59
Additional Information....................... 60
Index of Significant Definitions............. 61
</TABLE>
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CAPSTEAD SECURITIES
CORPORATION IV
$345,831,963
(APPROXIMATE)
COLLATERALIZED MORTGAGE OBLIGATIONS
SERIES 1998-3
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PROSPECTUS SUPPLEMENT
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GREENWICH CAPITAL LOGO
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