<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 29, 1998
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
CMC SECURITIES CORPORATION IV
(Formerly known as Capstead Securities Corporation V)
(Exact name of Registrant as specified in its Charter)
DELAWARE 75-2431915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2711 N. HASKELL AVENUE, SUITE 900
DALLAS, TEXAS 75204
(214) 874-2500
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
------------------
RONN K. LYTLE
2711 N. HASKELL AVENUE, SUITE 900
DALLAS, TEXAS 75204
(214) 874-2500
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
------------------
The Commission is requested to send copies of all communications to:
DAVID BARBOUR ANDREW F. JACOBS
Andrews & Kurth L.L.P. Capstead Mortgage Corporation
1717 Main Street 2711 N. Haskell Avenue
Suite 3700 Suite 900
Dallas, Texas 75201 Dallas, Texas 75204
(214) 659-4400 (214) 874-2500
Approximate date of commencement of proposed sale to the public: FROM
TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT PURSUANT
TO RULE 415.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, other than securities offered only in connection with dividend or
reinvestment plans, please check the following box. / X /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. / /
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
===================================================================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS PROPOSED AGGREGATE AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING OFFERING REGISTRATION
REGISTERED REGISTERED PRICE PER UNIT(1) PRICE(1) FEE(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Collateralized Mortgage Obligations (Issuable in Series). . . $1,000,000 100% $1,000,000 $295
===================================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of computing the registration fee.
(2) Calculated pursuant to Rule 457 based upon an estimate of the maximum
offering price.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
<PAGE> 2
PROSPECTUS
$1,000,000
CMC SECURITIES CORPORATION IV
COLLATERALIZED MORTGAGE OBLIGATIONS (ISSUABLE IN SERIES)
------------------
This Prospectus relates to $1,000,000 aggregate principal amount of
Collateralized Mortgage Obligations (the "Bonds"), which may be sold from time
to time in one or more Series on terms determined at the time of sale and
described in the related Prospectus Supplement or Supplements. 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, (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, 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. "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.
Scheduled distributions on the Certificates pledged as collateral for a
Series of Bonds, together with the reinvestment earnings thereon, if
applicable, 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 CMC
Securities Corporation IV. The Bonds will be nonrecourse obligations of the
Issuer and 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 29, 1998.
<PAGE> 3
PROSPECTUS SUPPLEMENT
The Prospectus Supplement or Supplements 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;
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(xviii) whether an election will be made to treat one or more segregated
pools of assets securing such Series as a REMIC;
(xix) the identity of the Indenture Trustee for such Series; and
(xx) additional information with respect to the plan of distribution of
such Bonds.
AVAILABLE INFORMATION
The Issuer was incorporated in Delaware on May 6, 1992. 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 filed by the
Issuer with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington D.C. 20549; and at the following regional
offices of the Commission: Chicago Regional Office, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and New York Regional Office, 7 World Trade
Center, Suite 1300, 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
Commission maintains a Web site that contains reports, proxy and information
statements and other information about registrants, including the Issuer, that
file electronically with the Commission. The address of such Web site is
http://www.sec.gov.
The Issuer has filed with the Commission a Registration Statement (the
"Registration Statement") under the Securities Act of 1933, as amended, with
respect to the Bonds offered by this Prospectus and the related Prospectus
Supplement. This Prospectus and Prospectus Supplement, which form a part of the
Registration Statement, do not contain all of the information set forth in the
Registration Statement, certain parts having been omitted pursuant to the rules
and regulations of the Commission. The Registration Statement will be available
for inspection and copying as set forth above.
The Issuer does not plan to send any financial reports to holders of
Bonds. The Indenture Trustee, however, will include with each payment on Bonds
of a Series a statement containing certain information concerning the Bonds.
The Issuer's principal executive offices are located at 2711 N. Haskell
Avenue, Suite 900, Dallas, Texas 75204. Its telephone number is (214) 874-
2500.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Issuer with the
Commission are incorporated herein by reference:
1. The Issuer's Annual Report on Form 10-K for the year ended December
31, 1997, as filed with the Commission on March 23, 1998.
2. The Issuer's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, as filed with the Commission on May 13, 1998.
3. The Issuer's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998, as filed with the Commision on August 13, 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.
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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 Andrew F.
Jacobs, Senior Vice President--Control and Treasurer, CMC Securities
Corporation IV, 2711 N. Haskell Avenue, Suite 900, Dallas, Texas 75204
(214/874-2500).
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<PAGE> 6
GLOSSARY OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
Term Page
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<S> <C>
"1986 Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
"Administrator" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Agency Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 9
"Assumed Reinvestment Rate" . . . . . . . . . . . . . . . . . . . . . . . . . i
"Basic Principal Payment" . . . . . . . . . . . . . . . . . . . . . . . . 11, 26
"Beneficial Owners" . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 29
"Bond Value Group" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
"Bond Value" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 26
"Bondholders" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
"Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 9
"Book Entry Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 29
"Certificate Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Claim Ceiling" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
"Clearing Agency Participants" . . . . . . . . . . . . . . . . . . . . . 16, 29
"Clearing Agency" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 29
"Code" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 45
"Collateral" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
"Collection Account" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
"Commission" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Committee Report" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Compound Interest Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Conventional Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
"Due Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11, 26
"ERISA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
"Exchange Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"FDIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
"FHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
"FHLMC Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
"FHLMC Certificate Group" . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"FHLMC Certificate Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"FHLMC Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 9
"FHLMC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Final REMIC Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . 44
"Floating Interest Rate Bonds" . . . . . . . . . . . . . . . . . . . . . . . 25
"FmHA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
"FNMA Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . i, i, 9, 9
"FNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Garn-St Germain Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
"GNMA Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . i, i, 9, 9
"GNMA Servicer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"GNMA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"GPM Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Guaranty Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
"Housing Act" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
"Indenture Trustee" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Indenture" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Interest Accrual Period" . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Inverse Floating Interest Rate Bonds" . . . . . . . . . . . . . . . . . . . 25
"IRS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
"Issuer" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 10
"Maximum Variable Interest Rate" . . . . . . . . . . . . . . . . 14, 14, 25, 25
</TABLE>
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<TABLE>
<S> <C>
"Minimum Variable Interest Rate" . . . . . . . . . . . . . . . . . . . . 25, 25
"Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 51
"NCUA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
"Non-Agency Certificates" . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Non-Priority Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
"Non-REMIC Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
"OID Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"Optional Variable Interest Rate Bond Redemption" . . . . . . . . . . . . 13, 28
"OTS" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
"Owner" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
"Participating Series" . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
"Pass-Through Entity" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
"Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
"Plan" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
"Pooling and Administration Agreement" . . . . . . . . . . . . . . . . . . . 34
"Premium REMIC Regular Bonds" . . . . . . . . . . . . . . . . . . . . . . . . 51
"Prepayment Assumption" . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"Principal Payment Date" . . . . . . . . . . . . . . . . . . . . . . . . . . 11
"Priority Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
"PTCE" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
"PTC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
"Registration Statement" . . . . . . . . . . . . . . . . . . . . . . . . . . 3
"Regular Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16, 44
"Regulations" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
"REIT" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
"REMIC Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i, 44
"REMIC Pool" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
"REMIC Regular Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"REMIC" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Requisite Amount of the Special Hazard and Bankruptcy Account" . . . . . . . 20
"Reserve Funds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
"Residual Bondholders" . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
"Residual Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i
"Retail Class Bond" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
"Scheduled Amortization Amount" . . . . . . . . . . . . . . . . . . . . . . . 12
"Scheduled Amortization Bonds" . . . . . . . . . . . . . . . . . . . . . 12, 24
"Scheduled Principal" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
"Series Supplement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
"Servicers" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"Servicing Agreement" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
"SMMEA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17, 61
"Special Allocation Bonds" . . . . . . . . . . . . . . . . . . . . . . . . . 20
"Special Redemption Date" . . . . . . . . . . . . . . . . . . . . . . . . 13, 27
"Spread" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
"Startup Day" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Tax-Exempt Investor" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
"TIA" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
"Time-Out Period" . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14, 28
"TMP" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
"Underlying Mortgage Loans" . . . . . . . . . . . . . . . . . . . . . . . . . 18
"Underwriters" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
"VA Loans" . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
"Variable Interest Rate Bonds" . . . . . . . . . . . . . . . . . . . . . . . 25
"Variable Interest Rate Payment Date" . . . . . . . . . . . . . . . . . . . . 13
"Variable Interest Rate Period" . . . . . . . . . . . . . . . . . . . . . 14, 25
"Variable Interest Rate" . . . . . . . . . . . . . . . . . . . . . . . . 10, 25
</TABLE>
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUPPLEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . iii
AVAILABLE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . iv
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE . . . . . . . . . . . . . . . iv
GLOSSARY OF PRINCIPAL TERMS . . . . . . . . . . . . . . . . . . . . . . . . . i
SUMMARY OF PROSPECTUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Limited Obligations . . . . . . . . . . . . . . . . . . . . . . . . . 10
Prepayment and Yield Considerations . . . . . . . . . . . . . . . . . 10
Limited Liquidity . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Limited Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Limitations, Reduction and Substitution of Credit Enhancement . . . . 11
The Special Hazard and Bankruptcy Account . . . . . . . . . . . . . . 11
Special Allocation Bonds; Events of Default . . . . . . . . . . . . . 12
Sale of Collateral on Default; Interest Rate Considerations . . . . . 12
Deposits, Substitutions and Withdrawals of Collateral . . . . . . . . 12
Nature of Direct or Indirect Backing for Bonds . . . . . . . . . . . 12
Insurance Considerations for Non-Agency Certificates . . . . . . . . 13
Original Issue Discount; Residual Bonds . . . . . . . . . . . . . . . 13
Funds Available for Redemptions at the Request of Bondholders . . . . 13
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . 14
FNMA Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
FHLMC Guaranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Other Legal Considerations . . . . . . . . . . . . . . . . . . . . . 14
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
DESCRIPTION OF THE BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . 15
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Payments of Interest . . . . . . . . . . . . . . . . . . . . . . . . 17
Payments of Principal . . . . . . . . . . . . . . . . . . . . . . . . 17
Maturity of the Bonds . . . . . . . . . . . . . . . . . . . . . . . . 18
Redemption at the Request of Bondholders . . . . . . . . . . . . . . 19
Special Redemption . . . . . . . . . . . . . . . . . . . . . . . . . 19
Optional Redemption . . . . . . . . . . . . . . . . . . . . . . . . . 19
Optional Variable Interest Rate Bond Redemption . . . . . . . . . . . 20
Procedures and Redemption Notices . . . . . . . . . . . . . . . . . . 20
Book Entry Registration . . . . . . . . . . . . . . . . . . . . . . . 20
SECURITY FOR THE BONDS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
GNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
GNMA Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 21
FNMA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FNMA Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . 23
FHLMC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
</TABLE>
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<TABLE>
<S> <C>
FHLMC Certificates . . . . . . . . . . . . . . . . . . . . . . . . . 24
Non-Agency Certificates . . . . . . . . . . . . . . . . . . . . . . . 26
Certificates Collateralizing the Bonds . . . . . . . . . . . . . . . 26
Reserve Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Other Insurance, Guarantees and Similar Instruments or Agreements . . 28
Minimum Principal Payment Agreement . . . . . . . . . . . . . . . . . 28
Collection Account . . . . . . . . . . . . . . . . . . . . . . . . . 28
Deposits, Substitution and Withdrawal of Certificates . . . . . . . . 28
CERTAIN LEGAL ASPECTS OF MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . 28
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Rights of Reinstatement and Redemption . . . . . . . . . . . . . . . 30
Anti-Deficiency Legislation and Other Limitations on Lenders . . . . 30
Enforceability of Certain Provisions . . . . . . . . . . . . . . . . 31
Adjustable Rate Loans . . . . . . . . . . . . . . . . . . . . . . . . 33
Environmental Legislation . . . . . . . . . . . . . . . . . . . . . . 33
Applicability of Usury Laws . . . . . . . . . . . . . . . . . . . . . 34
Soldiers' and Sailors' Civil Relief Act . . . . . . . . . . . . . . . 34
THE ISSUER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
CERTAIN FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . 35
REMIC Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Non-REMIC Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Taxation of Regular Bonds . . . . . . . . . . . . . . . . . . . . . . 37
Back-up Withholding and Information Reporting . . . . . . . . . . . . 44
Special Tax Considerations Applicable to Residual Bonds . . . . . . . 44
Non-Interest Expenses of the REMIC . . . . . . . . . . . . . . . . . 46
Excess Inclusions . . . . . . . . . . . . . . . . . . . . . . . . . . 47
LEGAL INVESTMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
ERISA MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
THE INDENTURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Modification of Indenture . . . . . . . . . . . . . . . . . . . . . . 54
Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Rights Upon Event of Default . . . . . . . . . . . . . . . . . . . . 55
List of Bondholders . . . . . . . . . . . . . . . . . . . . . . . . . 56
Issuer's Annual Compliance Statement . . . . . . . . . . . . . . . . 56
Indenture Trustee's Annual Report . . . . . . . . . . . . . . . . . . 56
Satisfaction and Discharge of Indenture . . . . . . . . . . . . . . . 56
The Indenture Trustee . . . . . . . . . . . . . . . . . . . . . . . . 56
Reports by Indenture Trustee to Bondholders . . . . . . . . . . . . . 57
Limitation on Suits . . . . . . . . . . . . . . . . . . . . . . . . . 57
LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>
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<TABLE>
<S> <C>
PART II - INFORMATION REQUIRED IN THE REGISTRATION STATEMENT . . . . . . . . 1
Item 14. Other Expenses of Issuance and Distribution . . . . . . . . 1
Item 15. Indemnification of Directors and Officers . . . . . . . . . 1
Item 16. Exhibits . . . . . . . . . . . . . . . . . . . . . . . 2
Item 17. Undertakings . . . . . . . . . . . . . . . . . . . . . . . . 2
</TABLE>
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<PAGE> 11
SUMMARY OF PROSPECTUS
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
(defined hereafter) 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
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<PAGE> 12
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
nonrecourse 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 ................... CMC Securities Corporation IV (the "Issuer") is a
limited purpose finance corporation wholly owned by
Capstead Mortgage Corporation, a Maryland
Corporation ("CMC"). The Bonds represent
nonrecourse obligations of the Issuer. Neither CMC
nor any other affiliate of the Issuer will
guarantee, or otherwise be obligated to pay, the
Bonds of any Series. 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 May 6, 1992. The Issuer's principal
executive offices are located at 2711 Haskell
Avenue, Suite 900, 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 Variable 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 ("Variable Interest Rate")
for the initial Interest Accrual Period (as defined
below) on the Variable Interest Rate Bonds;
(b) the formula or index by which the Variable
Interest Rate will be determined for subsequent
Interest Accrual Periods;
(c) the intervals at which the Variable Interest
Rate will be recalculated and the period over which
the newly calculated Variable Interest Rate will be
applicable; and
(d) any minimum or maximum Variable 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. Unless otherwise specified
in the related Prospectus Supplement, upon maturity
or earlier redemption of the Bonds of any Series,
interest will be paid to the date specified in the
related
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<PAGE> 13
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
payments 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 (unless
otherwise specified in the related Prospectus
Supplement) mailed by the Indenture Trustee or
paying agent, if any, appointed by the Issuer for
such purpose, to holders of definitive Bonds at
their respective addresses appearing on the
register on the applicable record date specified in
the Prospectus Supplement. Beneficial owners of
Bonds held in book entry form ("Book Entry Bonds")
will receive interest payments according to
procedures described under "Description of the
Bonds--Book Entry Registration" herein and the
related Prospectus Supplement for any Series of
Bonds having one or more Classes of Book Entry
Bonds.
PRINCIPAL PAYMENTS ....... Unless the Prospectus Supplement relating to a
Series of Bonds provides otherwise, principal
payments on each Series of Bonds will be made on
each Payment Date (each Payment Date on which
principal is payable being a "Principal Payment
Date") in an aggregate amount equal to the sum of
(i) the amount of interest, if any, accrued 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
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<PAGE> 14
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 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 the 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
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<PAGE> 15
mortgage loans, as well as on the prevailing level
of interest rates and other economic factors, and no
assurance can be given as to the actual prepayment
experience of the Certificates. See "Description of
the Bonds--Maturity of the Bonds."
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 the related Prospectus
Supplement and Series Supplement to the Indenture
for a Series of Bonds, redemptions of one or more
Classes of Bonds of such Series may be made pursuant
to the request of Bondholders. See "Description of
the Bonds--Redemption at 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 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 Variable
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 Variable Interest Rate Bonds of
such Series, in whole or in part (an "Optional
Variable Interest Rate Bond Redemption"), on any
Payment Date on such Class of Variable Interest Rate
Bonds (a "Variable 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 Variable Interest Rate at which
interest on such Variable Interest Rate Bonds
accrues during the period specified in the related
Prospectus Supplement preceding such Variable Rate
Interest Payment Date (a "Variable Interest Rate
Period") is equal or, pursuant to the related
Prospectus Supplement, deemed to be equal to the
Maximum Variable Interest Rate at which interest may
accrue on such
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Variable Interest Rate Bonds, as set forth in the
related Prospectus Supplement (the "Maximum Variable
Interest Rate"). If any such Optional Variable
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 Variable Interest Rate Bonds in which any
Optional Variable 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 Variable 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 Variable Interest Rate Bond
Redemption in that Series. See "Description of the
Bonds--Optional Variable Interest Rate Bond
Redemption."
SECURITY FOR THE BONDS ... Except to the extent specified otherwise in the
related Prospectus Supplement, each Series of Bonds
will be separately secured by collateral
("Collateral") consisting of the following:
A. Certificates ........ The Certificates securing a Series of Bonds may
consist of (i) GNMA Certificates, (ii) FNMA
Certificates, (iii) FHLMC Certificates, (iv)
Non-Agency Certificates, or (v) a combination of
such Certificates. Any GNMA Certificates will be
backed by the full faith and credit of the United
States. Any FNMA and FHLMC Certificates will not be
backed, directly or indirectly, by the full faith
and credit of the United States. 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
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deposit cash on the closing date for such Series, to
secure such Series, in lieu of any Certificates
which are not delivered on such closing date. See
"Security for the Bonds--Certificates
Collateralizing the Bonds."
B. Collection Account .. Unless specified otherwise in the Prospectus
Supplement for a Series of Bonds, 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."
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 free from the lien
of the Indenture to the persons, 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
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<PAGE> 18
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 "Risk Factors -- Book Entry
Registration" and "Description of the Bonds--Book
Entry Registration."
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 one or more segregated pools 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
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<PAGE> 19
"prohibited transaction" within the meaning of the
Employee Retirement Income Security Act of 1974, as
amended, and 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 its stockholders. See "Use of
Proceeds."
RATINGS .................. The related Prospectus Supplement for each Series
of Bonds will specify the respective ratings to be
borne by each Class of such Series of Bonds and the
nationally recognized statistical rating agency or
agencies issuing each such rating.
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RISK FACTORS
Investors should consider, among other things, the following risk
factors in connection with the purchase of Bonds.
General. An investment in Bonds evidencing interests in a Mortgage
Pool may be affected, among other things, by a decline in real estate values or
a decline in mortgage interest rates. 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
related Mortgaged Properties, in a particular Mortgage Pool become equal to or
greater than the value of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry. To the extent that such losses
are not covered by applicable insurance policies, if any, or by any credit
enhancement as described herein, Holders of the Bonds of a series evidencing
interests in such Mortgage Pool will bear all risk of loss resulting from
default by mortgagors and will have to look primarily to the value of the
Mortgaged Properties for recovery of the outstanding principal and unpaid
interest of the defaulted Mortgage Loans.
The actual rates of delinquencies, foreclosures and losses on the
Mortgage Loans, particularly those secured by multifamily Mortgaged Properties,
could be affected by adverse changes in general economic conditions and by
local conditions including excessive building resulting in an oversupply of
rental housing stock or a decrease in employment reducing the demand for rental
units in the area, by federal, state or local regulations and controls
affecting rents, prices of goods, fuel and energy consumption and prices, water
and environmental restrictions affecting new construction, by increasing labor
and materials costs, and by the relative attractiveness to tenants of the
multifamily rental projects securing the Mortgage Loans and their
neighborhoods. Repayment of a Mortgage Loan secured by an apartment building
owned by a cooperative will depend primarily on the receipt of payments from
the tenant-stockholders of the cooperative and its ability to refinance the
loan at maturity. To the extent that such losses are not covered by applicable
insurance policies, if any, or by any other credit enhancement, Holders of the
Bonds of a series evidencing interests in the related Mortgage Pool will bear
all risk of loss resulting from default by mortgagors and will have to look
primarily to the value of the multifamily projects for recovery of the
outstanding principal and unpaid interest of the defaulted Mortgage Loans.
Limited Obligations. The Bonds will represent nonrecourse obligations
of the Issuer. The Bonds of each series will not be insured or guaranteed by
any government agency or instrumentality, the Issuer, any Servicer, the
Administrator or, unless otherwise specified in the related Prospectus
Supplement, by any other person.
Prepayment and Yield Considerations. The prepayment experience on the
Mortgage Loans and the mortgage loans underlying the Agency Securities (the
"Underlying Mortgage Loans") will affect the average life of each class of
Bonds secured by such Mortgage Loans or Underlying Mortgage Loans. Prepayments
on the Mortgage Loans and the Underlying Mortgage Loans may be influenced by a
variety of economic, geographic, social and other factors, including the
difference between the interest rates on the Mortgage Loans or the Underlying
Mortgage Loans (giving consideration to the cost of refinancing) and prevailing
mortgage rates. In general, if mortgage interest rates fall below the interest
rates on the Mortgage Loans or the Underlying Mortgage Loans, the rate of
prepayment would be expected to increase and Bondholders of such series may be
unable to reinvest such payments in securities of comparable quality having
interest rates similar to those borne by the Bonds of such series. Conversely,
if mortgage interest rates rise above the interest rates on the Mortgage Loans
or the Underlying Mortgage Loans, the rate of prepayment would be expected to
decrease. Prepayments on Mortgage Loans and Underlying Mortgage Loans secured
by multifamily properties may also be influenced by a variety of economic
factors affecting project sale or refinancing, including, without limitation,
the relative tax benefits of continued ownership of the property as a result of
changes in federal tax law, among other factors. Prepayments may be influenced
by a variety of economic, geographic, social and other factors, including
aging, seasonality and interest rate fluctuations. Other factors affecting
prepayment of mortgage loans include changes in housing needs, job transfers,
unemployment and servicing decisions. See "Certain Investment, Prepayment,
Yield and Weighted Average Life Considerations" in the related Prospectus
Supplement.
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
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<PAGE> 21
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 Bonds represent nonrecourse obligations of the
Issuer. 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, except as otherwise specified in the related
Prospectus Supplement, 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 or
to the Residual Bond, in the case of a REMIC, 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, no 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.
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 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. To the extent described in
the related Prospectus Supplement, a Series of Bonds may have the benefits of
the Issuer's 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
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<PAGE> 22
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 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
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<PAGE> 23
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. At certain fast Mortgage Loan or Underlying Mortgage
Loan prepayment rates, original issue discount may accrue on certain classes of
Bonds, including certain Variable Rate Regular Bonds, that may never be
received as cash, resulting in a subsequent loss on such Bonds. See "Certain
Federal Income Tax Consequences--Taxation of Regular Bonds--Original Issue
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 return that is significantly lower than
would be anticipated based upon the stated interest rate of their Residual
Bonds. See "Certain Federal Income Tax Considerations--Special Tax
Considerations Applicable to Residual Bonds."
Funds Available for Redemptions at the Request of Bondholders. With
respect to any Series of Bonds for which the related Prospectus Supplement
provides for redemptions at the request of Bondholders there can be no
assurance that amounts available for such redemption, if any, for such Series
of Bonds will be sufficient to permit Bonds to be redeemed within a reasonable
time after redemption is requested, for reasons including the following:
1. Scheduled principal payments on the Mortgage Loans underlying
each Certificate pledged with respect to each Series of Bonds will be
minimal in the early years and will increase in the later years of such
Mortgage Loans. As a result, the scheduled principal payments on the
Certificates and the amount thus available to be applied to payments of
principal on the Bonds of such Series, including redemptions at the
request of Bondholders, will be limited in the early years and will
increase during the later years of each such Series. Accordingly, the
availability of funds for redemption of Bonds of any Series at the
request of Bondholders will depend largely upon the rates of prepayment
of the Certificates securing 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.
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<PAGE> 24
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.
FNMA Guaranty. Full and timely payment of interest and principal on
any FNMA Certificates relating to a series will be guaranteed by FNMA. This
guarantee will be backed by the credit of FNMA, a federally chartered,
privately owned corporation. The full faith and credit of the United States
will not, however, guarantee any payments on any such FNMA Certificates.
Neither the United States nor any agency thereof will be obligated to finance
FNMA's operations or to assist FNMA in any other manner.
FHLMC Guaranty. Payment of principal and interest on any FHLMC
Certificates relating to a series will be guaranteed by FHLMC as specified
herein. This guarantee will be backed by the credit of FHLMC, a federally
chartered corporation. The full faith and credit of the United States will not,
however, guarantee any payments on any such FHLMC Certificates. Neither the
United States nor any agency thereof is obligated to finance FHLMC's operations
or to assist FHLMC in any other manner.
Other Legal Considerations. Applicable state laws generally regulate
interest rates and other charges, require certain disclosures, and require
licensing of the originators of the Mortgage Loans. In addition, other state
laws, public policy and general principles of equity relating to the protection
of consumers, unfair and deceptive practices and debt recollection practices
may apply to the origination, servicing and collection of the Mortgage Loans.
Depending on the provisions of the applicable law and the specified facts and
circumstances involved, violations of these laws, policies and principles may
limit the ability of the Indenture Trustee to collect all or part of the
principal of or interest on the related Mortgage Loans, and may entitle the
borrower to a refund of amounts previously paid. See "Certain Legal Aspects of
the Mortgage Loans."
The Mortgage Loans are also subject to federal laws, including:
(i) the Federal Truth in Lending Act and Regulation Z promulgated
thereunder, which require certain disclosures to the borrowers regarding
the terms thereof;
(ii) the Equal Credit Opportunity Act and Regulation B
promulgated thereunder, which prohibit discrimination on the basis of
age, race, color, sex, religion, marital status, national origin,
receipt of public assistance or the exercise of any right under the
Consumer Credit Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the borrower's credit experience.
Violations of certain provisions of these federal laws may limit the ability of
the Servicer or the Administrator to collect all or part of the principal of or
interest on the Mortgage Loans and in addition could subject the Servicer or
the Administrator to damages and administrative enforcement. Unless otherwise
specified in the related Prospectus Supplement, the related Seller or the
Issuer will be required to repurchase any Mortgage Loan which, at the time of
origination, did not comply with such federal laws or regulations.
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USE OF PROCEEDS
Unless otherwise specified in an applicable Prospectus Supplement,
substantially all of the net proceeds to be received from the sale of each
series of Bonds will be applied to the simultaneous purchase of the Mortgage
Loans to be pledged to secure such series or to reimburse the amounts
previously used to effect such a purchase, the costs of carrying such Mortgage
Loans until sale of the Bonds and other expenses connected with pooling the
Mortgage Loans to be pledged to secure the Bonds and issuing the Bonds.
Subsequently, the Issuer may distribute to its stockholders all or a portion of
any remaining net proceeds.
PLAN OF DISTRIBUTION
The Issuer may sell the Bonds offered hereby through 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 any Underwriters will be subject to certain
conditions precedent, and such Underwriters will be obligated to purchase all
of the Series of Bonds described in the Prospectus Supplement with respect to
such Series if any such Bonds are purchased. The Bonds may be acquired by the
Underwriters for their own account and may be resold from time to time in one
or more transactions, including negotiated transactions, at a fixed public
offering price or at varying prices determined at the time of sale. If the
Bonds of a Series are offered other than through underwriters, the related
Prospectus Supplement will contain information regarding the nature of such
offering and any agreements to be entered into between the Issuer and the
purchasers of the Bonds of such Series.
The place and time of delivery for the Series of Bonds in respect of
which this Prospectus is delivered will be set forth in the related Prospectus
Supplement.
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.
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A Series of Bonds may include one or more Classes of "Scheduled
Amortization Bonds" and "Companion Bonds." Scheduled Amortization Bonds are
Bonds with respect to which payments of principal are to be made in specified
amounts on specified Payment Dates, to the extent of funds available on such
Payment Date. Companion Bonds are Bonds which receive payments of all or a
portion of any funds available on a given Payment Date which are in excess of
amounts required to be applied to payments on Scheduled Amortization Bonds on
such Payment Date. Because of the manner of application of payments of
principal to Companion Bonds, the weighted average lives of Companion Bonds of
a Series may be expected to be more sensitive to the actual rate of prepayments
on the Mortgage Loans underlying the Certificates securing such Series of Bonds
than will the Scheduled Amortization Bonds of such Series.
The Bonds of each Series will be issued as provided in the related
Prospectus Supplement either in definitive, fully-registered form or in book
entry form, in either case only in the minimum denominations and authorized
denominations in excess of such amount specified in the related Prospectus
Supplement. The Bonds may be transferred or exchanged without the payment of
any service charge other than any tax or 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 2.7 and 2.8)
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 (i) 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, or (ii) upon written request made at least five
business days prior to the applicable Record Date (as set forth in the related
Prospectus Supplement) by any Bondholder of a Bond or Bonds of a Class having
an initial outstanding principal balance that is in excess of the lesser of (x)
$5,000,000 and (y) two-thirds of the initial outstanding principal balance of
all Bonds of such Class, by wire to a US depository institution satisfactory to
the Indenture Trustee, or by such other means of payment as such Bondholder and
the Indenture Trustee may agree, 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 2.9 and 3.2) 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, the remaining
actual unpaid principal amount of such Bond and, in the case of a Bond that is
a Senior Bond or a Junior Bond (in each case as set forth in the related
Prospectus Supplement), the Imputed Principal Balance (as set forth in the
related Prospectus Supplement) of such Bond. Payments on Bonds which include
only interest will be accompanied by a statement showing the aggregate actual
unpaid principal amount (if any) of the Bonds of each Class of the same Series
and, if such Series includes Classes of Senior Bonds and Junior Bonds, the
aggregate Imputed Principal Balance (if any) of the Bonds of each Class of such
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
8.7)
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
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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, if any, on their unpaid
principal balances from the date and at the rate per annum (which may be zero)
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.
One or more Classes of Bonds of a Series may bear interest at a variable
rate ("Variable Interest Rate Bonds"). The interest rate of a Class of Variable
Interest Rate Bonds is a variable rate which may have an interest rate maximum
(the "Maximum Variable Interest Rate") or an interest rate minimum (the
"Minimum Variable Interest Rate") or both, subject to general market
conditions. Certain Variable Interest Rate Bonds may accrue interest at a rate
that varies directly with a variable rate based on an objective index
("Floating Interest Rate Bonds"). Other Variable Interest Rate Bonds may accrue
interest at a rate that varies inversely with a variable rate based on an
objective index ("Inverse Floating Interest Rate Bonds"). For each Class of
Variable Interest Rate Bonds, the related Prospectus Supplement will set forth
the interest rate ("Variable Interest Rate") for the initial Interest Accrual
Period on the Variable Interest Rate Bonds, the intervals at which the Variable
Interest Rate will be recalculated, and the periods (each such period, a
"Variable Interest Rate Period") over which the initial Variable Interest Rate
and each successively calculated Variable Interest Rate shall apply and the
formula or index by which the Variable Interest Rate for each succeeding
Variable Interest Rate Period will be determined. The interest payment dates on
Variable 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. Except as otherwise provided in the related Prospectus Supplement,
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");
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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 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.
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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) all such scheduled payments are reinvested on receipt
at the Assumed Reinvestment Rate for such Series and (iii) no portion of the
Spread is applied to the payment of principal on the Bonds, unless the related
Prospectus Supplement provides otherwise, in which event such Stated Maturities
will be based on the assumptions specified in such Prospectus Supplement.
The Prospectus Supplement for each Series of Bonds may contain a table
setting forth the projected weighted average life of each Class of Bonds of
such Series offered in such Prospectus Supplement, other than those Class or
Classes of Bonds of such Series (if any) on which no principal is payable, and
the percentage of the original principal amount of each Class of such 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 or if the Bonds of such Series are not subject to
special redemption. 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 for such Series, that the future debt service on any portion of the
Bonds cannot be met. 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 or the
related Prospectus Supplement states that the Bonds offered thereby are not
subject to special redemption, 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 10.2) 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 10.1 and 10.2)
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
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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 10.1 and 10.2)
OPTIONAL VARIABLE 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 Variable Interest Rate Bonds, in whole or in part (an "Optional
Variable Interest Rate Bond Redemption"), on any Variable 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 Variable Interest Rate at which interest on such Class of Variable
Interest Rate Bonds accrues during the Variable Interest Rate Period applicable
to such Variable Interest Rate Payment Date is equal or, pursuant to the
related Prospectus Supplement, deemed to be equal to the Maximum Variable
Interest Rate set forth in the related Prospectus Supplement. If any such
Optional Variable 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 Variable Interest Rate Bonds in which any
Optional Variable 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 Variable 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 Variable 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
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representing their ownership interest in the Bonds except under the limited
circumstances, if any, described in the related Prospectus Supplement. See
"Risk Factors -- Book Entry Registration."
If Bonds of a Series are issued as Book Entry Bonds, the Clearing Agency
will be required to make book entry transfers among Clearing Agency
Participants, to receive and transmit payments of principal and interest with
respect to the Bonds of such Series, and to receive and transmit requests for
redemption with respect to such Bonds. Clearing Agency Participants with whom
Beneficial Owners have accounts with respect to such Book Entry Bonds will be
similarly required to make book entry transfers and receive and transmit
payments and redemption requests on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not be registered holders
of Bonds and will not possess physical certificates, a method will be provided
whereby Beneficial Owners may receive payments, transfer their interests, and
submit redemption requests.
SECURITY FOR THE BONDS
GENERAL
Each Series of Bonds will be secured by assignments to the Indenture
Trustee of Collateral 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 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
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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 Guaranty 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.
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
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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.
FNMA CERTIFICATES
FNMA Certificates are Guaranteed Mortgage Pass-Through Certificates
representing fractional undivided interests in a pool of mortgage loans formed
by FNMA. Each mortgage loan must meet the applicable standards of the FNMA
purchase program. Mortgage loans comprising a pool are either provided by FNMA
from its own portfolio or purchased pursuant to the criteria of the FNMA
purchase program.
Mortgage loans underlying FNMA Certificates relating to a series will
consist of conventional mortgage loans, FHA Loans or VA Loans. Original
maturities of substantially all of the conventional, level payment mortgage
loans underlying a FNMA Certificate are expected to be between either 8 to 15
years or 20 to 30 years. The original maturities of substantially all of the
fixed rate level payment FHA Loans or VA Loans are expected to be 30 years.
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 generally be between 50 basis points and 250 points greater than the
annual FNMA Certificate pass-through rate. If specified in the Prospectus
Supplement, FNMA Certificates may be backed by adjustable rate mortgages.
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.
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FNMA guarantees to each registered holder of a FNMA Certificate that it
will distribute amounts representing such holder's proportionate share of
scheduled principal and interest payments at the applicable pass-through rate
provided for by such FNMA Certificate on the underlying mortgage loans, whether
or not received, and such holder's proportionate share of the full principal
amount of any foreclosed or other finally liquidated mortgage loan, whether or
not such principal amount is actually recovered. The obligations of FNMA under
its guarantees are obligations solely of FNMA and are not backed by, nor
entitled to, the full faith and credit of the United States. 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. If FNMA were unable to satisfy its
obligations, distributions to holders of FNMA Certificates would consist solely
of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FNMA Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
FHLMC
FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended,
(the "FHLMC Act"). The common stock of FHLMC is owned 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 seeks
to provide an enhanced degree of liquidity for residential mortgage investments
primarily by assisting in the development of secondary markets for conventional
mortgages. The principal activity of FHLMC currently consists of the purchase
of first lien conventional mortgage loans or participation interests in such
mortgage loans and the sale of the mortgage loans or participations so
purchased in the form of mortgage securities, primarily FHLMC Certificates.
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 a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans (a "FHLMC Certificate Pool"). FHLMC Certificates are sold under the
terms of a mortgage participation certificate agreement. A FHLMC Certificate
may be issued under either FHLMC's Cash Program or Guarantor Program.
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans (a "FHLMC Certificate Group"). FHLMC Certificates are sold under the
terms of a Mortgage Participation Certificate Agreement. A FHLMC Certificate
may be issued under either FHLMC's Cash Program or Guarantor Program.
Unless otherwise described in the related Prospectus Supplement,
mortgage loans underlying the FHLMC Certificates relating to a series will
consist of mortgage loans with original terms to maturity of between 10 and 30
years. Each such mortgage loan must meet the applicable standards set forth in
FHLMC Act. A FHLMC Certificate group may include whole loans, participation
interest in whole loans and undivided interests in whole loans and/or
participations comprising another FHLMC Certificate group. Under the Guarantor
Program any such FHLMC Certificate group may include only whole loans or
participation interest in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest at the applicable certificate rate on the registered
holder's pro rata share of the unpaid principal balance outstanding on the
mortgage loans in the related FHLMC Certificate Pool, whether or not received.
FHLMC also guarantees to each registered holder of a FHLMC Certificate 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.
Under FHLMC's Gold PC Program, FHLMC guarantees the timely payment of principal
based on the difference between the pool factor published in the month
preceding the month of distribution and the pool factor published in such month
of distribution. Pursuant to its guarantees, FHLMC indemnifies holders 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 collection of principal at any time after
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default on an underlying mortgage loan, but not later than (i) 30 days
following foreclosure sale, (ii) 30 days following payment of the claim by any
mortgage insurer, or (iii) 30 days following 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. 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 reserves the right to exercise its
judgment with respect to the mortgage loans in the same manner as for mortgage
loans which it has purchased but not sold. The length of time necessary for
FHLMC to determine that a mortgage loan should be accelerated varies with the
particular circumstances of each mortgagor, and FHLMC has not adopted standards
which require that the demand be made within any specified period.
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.
FHLMC Certificates are not guaranteed by the United States or by any
Federal Home Loan Bank and do not constitute debts or obligations of the United
States or any Federal Home Loan Bank. The obligations of FHLMC under its
guarantee 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 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
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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.
If specified in a Prospectus Supplement, FHLMC Certificates may be
backed by multifamily mortgage loans having the characteristics specified in
such Prospectus Supplement.
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 (five or more units)
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 (the "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.
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
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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 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 free
from the lien of the Indenture to the persons, 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
or other persons 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.
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OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement, the assets securing the Bonds
may also include insurance, guarantees, surety bonds, letters of credit,
guaranteed investment contracts, swap agreements, option agreements or similar
arrangements for the purpose of (i) maintaining timely payments or providing
additional protection against losses on the assets securing the Bonds, (ii)
paying administrative expenses, (iii) establishing a minimum reinvestment rate
on the payments made in respect of such assets or principal payment rate on
such assets, (iv) guaranteeing timely payment of principal and interest under
the Bonds, or (v) for such other purpose as is specified in such Prospectus
Supplement. Such arrangements may include agreements under which Bondholders
are entitled to receive amounts deposited in various accounts held by the
Indenture Trustee upon the terms specified in the Prospectus 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 8.2) 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 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
GENERAL
The following discussion contains summaries of certain legal aspects of
Mortgage Loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of
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all states in which the real property securing the Mortgage Loans is situated.
The summaries are qualified in their entirety by reference to the applicable
federal laws governing the 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 if
permitted under local law, 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. Consequently, delays in completion of
the foreclosure may occasionally result from difficulties in locating parties
necessary to the proceeding. Judicial foreclosure proceedings may be contested
by any of the parties defendant, and substantial delays in the foreclosure
proceedings may result from any contest. At the completion of a judicial
foreclosure action, the court issues a judgment of foreclosure and generally
appoints a sheriff or other court officer to conduct the sale of the property
to obtain proceeds with which to pay the holders of liens on the property.
In the case of foreclosure under either a mortgage or a deed of trust,
the sale by the sheriff 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, among other reasons, the property usually is not purchased by a
third party at the foreclosure sale. Rather, the lender usually purchases the
property from the trustee or sheriff. 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, which includes the unpaid
principal balance of the mortgage loan, accrued and unpaid interest and the
expenses incurred in connection with the foreclosure and subsequent ownership
of the property. Any loss may be reduced by the receipt of any mortgage
insurance proceeds.
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RIGHTS OF REINSTATEMENT AND REDEMPTION
In some states, the borrower, or any other person having a junior lien
on the real property, may, during a reinstatement or redemption period, cure
the default by paying the entire amount in arrears plus certain of the costs
and expenses incurred in enforcing the obligation. Certain state laws control
the amount of foreclosure expenses and costs, including attorneys' fees, which
may be recovered by a lender. In some states, the borrower has the right to
reinstate the loan at any time following default until shortly before the
foreclosure sale.
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 mortgaged property from the foreclosure sale.
Depending upon state law, the right of redemption may apply to sale following
judicial foreclosure or to sale pursuant to a non-judicial power of 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 at a foreclosure sale, or 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 expired.
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 mortgagee under 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 foreclosure sale of the
real property and the amount due to the lender under the deed of trust
mortgage. Statutory provisions in some states may limit any deficiency
judgment against the former borrower following a foreclosure 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 foreclosure sale.
Some state statutes 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. In other states, the lender has the option of bringing a personal
action against the borrower on the debt without first exhausting such security;
however, in some of these states, the lender, following judgment on such
personal action, may be deemed to have elected a remedy and may be precluded
from exercising remedies with respect to the security. Consequently, the
practical effect of the election requirement, when applicable, is that lenders
will usually proceed first against the security rather than bringing a personal
action against the borrower. In some states, exceptions to the anti-deficiency
statutes are provided for in certain instances where the value of the lender's
security has been impaired by acts or omissions of the borrower, for example,
in the event of waste.
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, the filing of a petition acts as a stay against the enforcement of
remedies for the collection of a debt. 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.
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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 comply with the provisions
of the law. In some cases, this liability may affect assignees of the mortgage
loans. Under the laws of many states and under federal statutes and
regulations, an assignee of contracts arising out of consumer transactions
takes such liens subject to claims or defense which would be available to the
consumer in any proceeding between the consumer and contractor or broker who
originated the contract.
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. Certain of these instances include
intra-family transfers, certain transfers by operation of law, leases of fewer
than three years and the creation of a junior encumbrance. Regulations
promulgated under the Garn-St Germain Act by the Federal Home Loan Bank Board
also prohibit the imposition of a prepayment penalty upon the acceleration of a
loan pursuant to a due-on-sale clause. 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, the extent of
which cannot be predicted.
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The standard form of note, mortgage and deed of trust used by lenders
may contain provisions obligating the borrower to pay a late charge if payments
are not timely made and in some circumstances may provide for prepayment fees
or penalties if the obligation is paid prior to maturity. In certain states,
there are or may be specific limitations upon late charges which a lender may
collect from a borrower for delinquent payments. Certain states also limit the
amounts that a lender may collect from a borrower as an additional charge if
the loan is prepaid. The enforceability, under the laws of a number of states
of provisions provided for prepayment fees or penalties upon an involuntary
prepayment is unclear, and no assurance can be given that, at the time a
prepayment fee or penalty is required to be made on a Mortgage Loan in
connection with an involuntary prepayment, the obligation to make such payment
will be enforceable under applicable state law. The absence of a restraint on
prepayment, particularly with respect to Mortgage Loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
the Mortgage Loans. Unless otherwise provided in the related Prospectus
Supplement, late charges and prepayment fees (to the extent permitted by law
and not waived by the Servicers) will be retained by the Servicers as
additional servicing compensation.
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 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.
The Mortgage Loans may include a debt-acceleration clause, which permits
the lender to accelerate the debt upon a monetary default of the borrower,
after the applicable cure period. The courts of all states will enforce
clauses providing for acceleration in the event of a material payment default.
However, courts of any state, exercising equity jurisdiction, may refuse to
allow a lender to foreclose a mortgage or deed of trust when an acceleration of
the indebtedness would be inequitable or unjust and the circumstances would
render the acceleration unconscionable.
Certain of the Mortgage Loans may not restrict secondary financing,
thereby permitting the borrower to use the property securing such Mortgage
Loans as security for one or more additional loans. Certain of the Mortgage
Loans may preclude secondary financing (by permitting the first lender to
accelerate the maturity of its loan if the borrower further encumbers the
property or in some other fashion) or may require the consent of the senior
lender to any junior or substitute financing; however, such provisions may be
unenforceable in certain jurisdictions under certain circumstances.
Where the borrower encumbers the Mortgage Premises with one or more
junior liens, the senior lender is subjected to additional risk. For example,
the borrower may have difficulty servicing and repaying multiple loans or acts
of the senior lender which prejudice the junior lender or impair the junior
lender's security may create a superior equity in favor of the junior lender.
For example, if the borrower and the senior lender agree to an increase in the
principal amount of or the interest rate payable on the senior loan, the senior
lender may lose its priority to the extent any existing junior lender is harmed
or the borrower is additionally burdened. In addition, if the borrower
defaults on the senior loan and/or any junior loan or loans, the existence of
junior loans and actions taken by junior lenders can impair the security
available to the senior and can interfere with, delay and in certain
circumstances even prevent the taking of action by the senior lender. In
addition, the bankruptcy of a junior lender may operate to stay foreclosure or
similar proceedings by the senior lender.
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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
The federal Comprehensive Environmental Response Compensation and
Liability Act, as amended, ("CERCLA") imposes strict liability on present and
past "owners" and "operator" of a contaminated mortgaged property if agents or
employees of the lender have become sufficiently involved in the management of
such mortgaged property or the operations of the borrower. Such liability may
exist event if the lender did not cause or contribute to the contamination and
regardless of whether the lender has actually taken possession of a mortgaged
property through foreclosure, deed in lieu of foreclosure or otherwise. The
magnitude of the CERCLA liability at any given contaminated site is a function
of the actions required to address adequately the risks to human health and the
environment posed by the particular conditions at the site. As a result, such
liability is not constrained by the value of the property or the amount of the
original or unamortized principal balance of any loans secured by the property.
Moreover, under certain circumstances, liability under CERCLA may be joint and
several -- i.e.,any liable party may be obligated to pay the entire cleanup
costs regardless of its relative contribution to the contamination. If a
lender is found to be liable, it is entitled to bring an action for
contribution against other liable parties, such as the present or past owners
and operators of the property. The lender nonetheless may have to bear a
disproportionate share of the liability if such other parties are defunct or
without substantial assets.
Until recent legislation was adopted, it was uncertain what actions
could be taken by a secured lender in the event of a loan default without
incurring exposure under CERCLA in the event the property was environmentally
contaminated. The Asset Conservation, Lender Liability and Deposit Insurance
Act of 1996 (the "1996 Lender Liability Act") provides for a safe harbor for
secured lenders from CERCLA liability even though the lender forecloses and
sells the real estate securing the loan, provided the secured lender sells "at
the earliest practicable, commercially reasonable time, at commercially
reasonable terms, taking into account market conditions and legal and
regulatory requirements." Although the 1996 Lender Liability Act provides
significant protection to secured lenders, it has not been construed by the
courts, and there are circumstances in which actions taken could expose a
secured lender to CERCLA liability. The transferee from the secured lender is
not entitled to the protections enjoyed by a secured lender. Thus,
contamination may decrease the amount that prospective buyers are willing to
pay for a Property and thus, decrease the likelihood that the Certificate
Trustee will recover fully on the Mortgage Loan through foreclosure.
Many states have environmental clean-up statutes similar to CERCLA, and
not all of those statutes provide for a secured creditor exemption. In
addition, underground storage tanks are commonly found on a wide variety of
commercial and industrial properties. Federal and state laws impose liability
on the owners and operators of underground storage tanks for any cleanup that
may be required as a result of releases from such tanks. These laws also
impose certain compliance obligations on the tank owners and operators, such as
regular monitoring for leaks and upgrading of older tanks. A lender may become
a tank owner or operator, and subject to compliance obligations and potential
cleanup liabilities, either as a result of becoming involved in the management
of a site at which a tank is located or, more commonly, by taking title to such
a property. Federal and state laws also obligate property owners and
operators to maintain and, under some circumstances, remove asbestos-containing
building materials and lead based paint. As a result, the presence of these
materials can increase the cost of operating a property and thus diminish its
value. In a few states, transfers of some types of properties are conditioned
upon cleanup of contamination prior to transfer. In these cases, a lender that
becomes the owner of a property through foreclosure, deed in lieu of
foreclosure or otherwise may be required to clean up the contamination before
selling or otherwise transferring the property.
Beyond statute-based environmental liability, there exist common law
causes of action (for example, actions based on nuisance or on toxic tort
resulting in death, personal injury or damage to property) related to hazardous
environmental conditions on a property. While it may be more difficult to hold
a lender liable in such cases, unanticipated or uninsured liabilities of the
borrower may jeopardize the borrower's ability to meet its loan obligations.
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Under the laws of many states, contamination of a property may give rise
to a lien on the property for clean-up costs. In several states, such a lien
has priority over all existing liens, including those of existing security
instruments. In these states, the lien of a security instrument may lose its
priority to such a "superlien."
In the event that title to a mortgaged property securing a Mortgage Loan
in a Certificate were 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. The Issuer, CMC, 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 Office of Thrift Supervision 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.
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. Further, such borrowers may have the maturity of their
Mortgage Loans extended, the payments lowered and the payment schedule
readjusted after the completion of military service. Unless otherwise provided
in the Prospectus Supplement for a Series of Bonds, no person will be required
to purchase any Mortgage Loan on which the mortgage coupon rate is reduced by
the Relief Act or similar state legislation. 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.
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THE ISSUER
GENERAL
The Issuer was incorporated in the State of Delaware on May 6, 1992. The
Issuer is a limited purpose finance subsidiary of CMC. The Issuer's and CMC's
principal executive offices are located at 2711 N. Haskell Avenue, Suite 900,
Dallas, Texas 75204. The Issuer's telephone number is (214) 874-2500.
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 foregoing. 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 certificate of incorporation containing provisions
substantially identical to the provisions of Articles III and VIII of the
Issuer's Certificate of Incorporation.
The Issuer has no intent to file, and CMC 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.
CMC 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.
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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 new
originated debt instruments issued by the REMIC on the day of their creation
and not as ownership interests in the REMIC or the REMIC's assets. Residual
Bonds are not treated as debt instruments for federal income tax purposes. See
"Special Tax Considerations Applicable to Residual Bonds" below. The Prospectus
Supplement for each such Series of Bonds will indicate whether the Issuer
intends to make a REMIC election for that Series.
In general (i) REMIC Bonds held by a thrift institution taxed as a
"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)(5)(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)(5)(A), in each case, in the same
proportion that the assets of the REMIC Pool would be so treated. However, if
at all times 95% or more of the assets held by the REMIC Pool are assets
qualifying under any of the foregoing Code sections, the REMIC Bonds will be
treated entirely as qualifying assets (and the income will be treated entirely
as qualifying income). The Agency Certificates will be considered qualifying
assets under the foregoing Code sections. The Final REMIC Regulations provide
that, for purposes of Code Sections 593(d)(1) and 856(c)(5)(A), payments of
principal and interest on the 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)(5)(A), and (ii) REMIC Bonds held by a
regulated investment company will not constitute "Government securities" within
the meaning of Code Section 851(b)(4)(A)(i). However, REMIC Bonds acquired by
another REMIC on its Startup Day (as defined below) in exchange for regular or
residual interests in the REMIC will constitute "qualified mortgages" within
the meaning of Code Section 860G(a)(3). Notwithstanding the foregoing, however,
REMIC income received by a REIT owning a 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
on 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
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Regulations provide a "safe harbor" pursuant to which the de minimis
requirement will be met if at all times the aggregate adjusted basis of any
nonqualified assets (i.e., assets other than qualified mortgages and permitted
investments) is less than 1% of the aggregate adjusted basis of all the REMIC
Pool's assets.
If a REMIC Pool fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, the REMIC
Pool will not be treated as a REMIC for such year and thereafter. In this
event, the classification of the REMIC Pool for federal income tax purposes is
uncertain. The REMIC Regular Bonds may continue to be treated as debt
instruments for federal income tax purposes, but the REMIC Pool could be
treated as a taxable mortgage pool (a "TMP"). If the REMIC Pool is treated as a
TMP, any residual income of the REMIC Pool (i.e., income from the mortgage
loans less interest and original issue discount expense allocable to the REMIC
Regular Bonds and any administrative expenses of the REMIC Pool) would be
subject to corporate income tax at the REMIC Pool level. On the other hand, the
arrangement may be treated as a separate association taxable as a corporation
under Treasury regulations and the REMIC Regular Bonds may be treated as stock
interests therein, rather than debt instruments. The Code, however, authorizes
the Treasury Department to issue regulations that address situations where
failure to meet one or more of the requirements for REMIC status occurs
inadvertently and in good faith, and disqualification of the REMIC would occur
absent regulatory relief. However, the 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)(5)(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)(4)(A)(i).
TAXATION OF REGULAR BONDS
General
The discussion under this caption, "Taxation of Regular Bonds," applies
only to Regular Bonds and not to Residual Bonds. In general, interest paid or
accrued, original issue discount, and market discount on a Bond will be treated
as ordinary income to the Bondholder, and principal payments on a Bond will be
treated as a return of capital to the extent of the Bondholder's basis in the
Bond allocable thereto. A Bondholder must use the accrual method of accounting
with regard to REMIC Bonds, regardless of the method of accounting otherwise
used by such Bondholder.
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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 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
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stated redemption price at maturity is treated as equal to the issue price plus
the greater of the amount of foregone interest or the excess, if any, of the
Bond's stated principal amount over its issue price. The OID Regulations
indicate that all interest on a long first period Bond that is issued with non-
de minimis original issue discount will be included in the Bond's stated
redemption price at maturity. Bondholders should consult their own tax advisors
to determine the issue price and the stated redemption price at maturity of a
Bond.
Under a "de minimis" rule, original issue discount will be considered to
be zero, however, if it equals less than 0.25% of the stated redemption price
at maturity of the Bond multiplied by its weighted average maturity, computed,
for this purpose, as the sum of the amounts determined by multiplying (i) the
number of full years (rounding down for partial years) from the issue date
until each payment (included in the stated redemption price at maturity) is
scheduled to be made by (ii) a fraction, the numerator of which is the amount
of each payment included in the stated redemption price at maturity of the Bond
and the denominator of which is the Bond's stated redemption price at maturity.
Although presently unclear, it appears that the schedule of such payments
should be determined in accordance with the Prepayment Assumption. In addition,
if the original issue discount is de minimis all stated interest (including
stated interest that would otherwise be treated as original issue discount) is
treated as qualified stated interest. Unless the holder of a Bond elects to
accrue all discount under a constant yield to maturity method, as described
below, the holder 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.
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
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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 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, that the expected yield without the cap or floor, or (iii)
the governor
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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.
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
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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 effect the timing of income accruals on
such Bonds.
It is not clear how income should be accrued with respect to Regular
Bonds issued at a significant premium and 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.
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.
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
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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 new contingent payment
rules issued on January 19, 1993 as described above under "Original Issue
Discount," any gain on the sale or exchange of such Bond is treated as interest
income.
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
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market discount rules have not yet been issued; therefore, investors should
consult their own tax advisors regarding the application of these rules, as
well as the advisability of making any of the elections discussed above.
Taxation of Certain Foreign Investors
Generally, payments of interest (including any payment with respect to
accrued original issue discount) on the Bonds to a Bondholder who is a
nonresident alien individual, foreign corporation or other non-United States
person ("foreign person") not engaged in a trade or business within the United
States, will not be subject to federal income or withholding tax if (i) such
Bondholder does not actually or constructively own 10 percent or more of the
combined voting power of all classes of equity in the Issuer (which may include
the beneficial owners of the Issuer), (ii) such Bondholder is not a controlled
foreign corporation (within the meaning of Code Section 957) related to the
Issuer, and (iii) such Bondholder complies with applicable identification and
certification requirements. If such identification and certification
requirements are not satisfied and the interest on the Bonds is not effectively
connected with the conduct of a trade or business within the United States by
such foreign person, a 30 percent withholding tax will apply, unless reduced or
eliminated pursuant to an applicable tax treaty. Payments on REMIC Regular
Bonds may subject a foreign person to U.S. federal income and withholding tax
where such foreign person also owns, actually or constructively, Residual Bonds
which are residual interests in the same REMIC, notwithstanding compliance with
the certification requirements discussed above.
If a tax is withheld by the withholding agent, the Bondholder would be
entitled to a refund of such tax if such Bondholder can prove it is a foreign
person and it is not a 10 percent shareholder of the Issuer or a controlled
foreign corporation related to the Issuer. A Bondholder may be required to file
a U.S. federal income tax return to obtain a refund. Foreign investors should
consult their tax advisors regarding the potential imposition of the 30 percent
withholding tax.
BACK-UP WITHHOLDING AND INFORMATION REPORTING
Payments of interest, original issue discount, or other reportable
payments (including, under certain circumstances, principal payments) made on
the Bonds, and proceeds from the sale, including redemption, of the Bonds to or
through certain brokers, including the Indenture Trustee, may be subject to a
"back-up" withholding tax of 31% of reportable payments unless a Bondholder
complies with certain reporting and/or certification procedures. Any amount so
withheld from payments on the Bonds would be refunded or allowed as a credit
against a Bondholder's federal income tax.
To the extent required by law, reports of accrued interest, in the case
of each Series of Bonds for which a REMIC election is made, and interest paid
for each other Series of Bonds and original issue discount will be made
annually to the Internal Revenue Service and to individuals, estates, non-
exempt and non-charitable trusts, and partnerships who are either holders of
record of Bonds or beneficial owners who own Bonds through a broker or
middleman as nominee. All brokers, nominees and all other non-exempt holders of
record of Bonds (including corporations, non-calendar year taxpayers,
securities or commodities dealers, real estate investment trusts, investment
companies, common trust funds, thrift institutions and charitable trusts) may
request such information for any calendar quarter by telephone or in writing by
contacting the person designated in Internal Revenue Service Publication 938
with respect to a particular Series of Bonds. Holders through nominees must
request such information from the nominee. Treasury regulations provide that
information necessary to compute the accrual of any market discount on the
Bonds must 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
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the taxable year on which such Residual Bondholder owns any Residual Bonds. The
REMIC's taxable income for each day will be determined by allocating the
REMIC's taxable income for each calendar quarter ratably to each day in the
quarter. Such a Residual Bondholder's share of the REMIC's taxable income for
each day will be based on the portion of the outstanding Residual Bonds that
such Residual Bondholder owns on that day. The REMIC's taxable income will be
determined under an accrual method and will be taxable to the Residual
Bondholders without regard to the timing or amounts of cash distributions by
the REMIC. As residual interests, the Residual Bonds will be subject to tax
rules, described below, that differ from those that would apply if the Residual
Bonds were treated for federal income tax purposes as direct ownership
interests in the Certificates, or as debt instruments issued by the REMIC.
Under certain REMIC structures, a Residual Bondholder may be required to
include taxable income from the Residual Bond in excess of the cash distributed
with respect to one or more taxable years. For 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. 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
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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.
Non-Interest Expenses of the REMIC
All or a portion of the REMIC's servicing, administrative and other non-
interest expenses will be allocated as a separate item to Residual Bondholders
that are "pass-through interest holders". Such a holder would be required to
add its allocable share, if any, of such expenses to its gross income and to
treat the same amount as an item of investment expense. An individual, a trust
or an estate would generally be allowed a deduction for such an expense item
only as a miscellaneous itemized deduction subject to the limitations under
Code section 67. That section allows such deductions only to the extent that in
the aggregate all such expenses exceed two percent of an individual's adjusted
gross income. In addition, in the case of Residual Bondholders who are
individuals, certain otherwise allowable itemized deductions will be reduced,
but not by more than 80%, by an amount equal to 3% of the Residual Bondholder's
adjusted gross income in excess of a statutorily defined threshold. The REMIC
is required to report to each pass-through interest holder and to the IRS such
holder's allocable share, if any, of the REMIC's non-interest expenses. The
term "pass-through interest holder" generally refers to individuals, entities
taxed as individuals and certain pass-through entities, but does not include
real estate investment trusts. Residual Bondholders that are "pass-through
interest holders" should consult
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their own tax advisors about the impact of these rules on an investment in the
Residual Bonds. Finally, non-interest expenses of a REMIC are not deductible by
noncorporate taxpayers for alternative minimum tax purposes.
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.
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
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defined below). Such tax is generally imposed on the transferor of the residual
interest, except that where such transfer is through an agent for a
Disqualified Organization, the tax is instead imposed on such agent. However, a
transferor of a residual interest is in no event liable for such tax with
respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization, and as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Furthermore, the Treasury Department may waive the tax on
transfers if the Disqualified Organization promptly disposes of the residual
interest and the transferor (or agent) pays the tax on the excess inclusion
income for the period during which the Disqualified Organization held the
residual interest. A Disqualified Organization means (i) the United States, any
State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, (ii) any organization (other than a farmer's cooperative described
in Section 521 of the Code) that is exempt from the tax imposed by Chapter 1 of
the Code and not subject to the tax imposed by Section 511 of the Code; (iii)
any rural electric or telephone cooperative described in Section 1381(a)(2)(C)
of the Code; or (iv) any other person whose holding of the residual interests
of the REMIC may cause the REMIC to incur a liability for any tax imposed under
the Code that would not otherwise be imposed but for the purchase or transfer
of the residual interests to such person. For purposes of clause (i) of the
previous sentence, a corporation shall not be treated as an instrumentality of
the United States or of any State or political subdivision thereof, if (i) all
of the activities of such corporation are subject to the tax imposed by Chapter
1 of the Code, and (ii) a majority of the board of directors of such
corporation is not selected by the United States or any State or political
subdivision thereof (except that this clause (ii) shall not apply to the
Federal Home Loan Mortgage Corporation).
In addition to the tax on transfers, a partnership, trust, estate,
regulated investment company, real estate investment trust, common trust fund,
or cooperative (a "Pass-Through Entity") that holds a residual interest is
subject to tax at the highest corporate rate on the allocable portion of excess
inclusion income of a Disqualified Organization that owns an equity interest in
such an entity. The Pass-Through Entity would not be liable for such tax if it
has received an affidavit from such record holder that (i) states under penalty
of perjury that it is not a Disqualified Organization or (ii) furnishes a
social security number and states under penalties of perjury that the social
security number is that of the transferee, provided that during the period such
person is the record holder of the Residual Bond, the Pass-Through Entity does
not have actual knowledge that such affidavit is false. The Indenture and/or
the agreements governing the Trusts with respect to a Series will provide for
reasonable arrangements designed to ensure that Residual Bonds are not held by
Disqualified Organizations and for the furnishing of information to residual
holders to compute the foregoing taxes.
Mark to Market Rules
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 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.
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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 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.
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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 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
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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 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.
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Tax-Exempt Investors
A qualified pension fund or other entity that is exempt from federal
income taxation (a "Tax-Exempt Investor") under Code Section 501 nonetheless
will be subject to tax on its income that is "unrelated business taxable
income" ("UBTI") within the meaning of Code Section 512. Net income
attributable to a Residual Bond beneficially owned by a Tax-Exempt Investor
will be considered UBTI and thus will be subject to federal income tax, to the
extent that any such income is considered an excess inclusion. See "Excess
Inclusions" above.
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement, the
Bonds constitute "mortgage related securities" for purposes of the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are rated in
one of the two highest rating categories by at least one nationally recognized
statistical rating organization. As "mortgage related securities," such Bonds
will constitute legal investments for persons, trusts, corporations,
partnerships, associations, business trusts and business entities (including
but not limited to state-chartered savings banks, commercial banks, savings and
loan associations and insurance companies, as well as trustees and state
government employee retirement systems) created pursuant to or existing under
the laws of the United States or any State (including the District of Columbia
and Puerto Rico) whose authorized investments are subject to State regulation
to the same extent that, under applicable law, obligations issued by or
guaranteed as to principal and interest by the United States or any agency or
instrumentality thereof constitute legal investments for such entities.
Pursuant to SMMEA, Alaska, Arkansas, Colorado, Connecticut, Delaware, Florida,
Georgia, Illinois, Kansas, Louisiana, Maryland, Michigan, Missouri, Nebraska,
New Hampshire, New York, North Carolina, Ohio, South Dakota, Utah, Virginia and
West Virginia each enacted legislation prior to the October 4, 1991 deadline
for such enactment, limiting to varying extent the ability of certain entities
(in particular, insurance companies) to invest in "mortgage related
securities," in most cases by requiring the affected investors to rely upon
existing state law, and not SMMEA. Accordingly, the investors affected by such
legislation will be authorized to invest in the Bonds only to the extent
provided in such legislation.
Institutions whose investment activities are subject to legal investment
laws or regulations or review by certain regulatory authorities may be subject
to restrictions on investment in certain Classes of the Bonds. Any financial
institution which is subject to the jurisdiction of the Comptroller of the
Currency, the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation ("FDIC"), the Office of Thrift Supervision
("OTS"), the National Credit Union Administration ("NCUA") or other federal or
state agencies with similar authority should review any applicable rules,
guidelines and regulations prior to purchasing the Bonds. The Federal Financial
Institutions Examination Council, for example, has issued a Supervisory Policy
Statement on Securities Activities effective February 10, 1992 (the "Policy
Statement"). The Policy Statement has been adopted by the Comptroller of the
Currency, the Federal Reserve Board, the FDIC, the OTS and the NCUA (with
certain modifications), with respect to the depository institutions that they
regulate. The Policy Statement prohibits depository institutions from investing
in certain "high-risk mortgage securities" (including securities such as
certain Classes of Bonds), except under limited circumstances, and sets forth
certain investment practices deemed to be unsuitable for regulated
institutions. The NCUA issued final regulations effective December 2, 1991 that
restrict and in some instances prohibit the investment by federal credit unions
in certain types of mortgage related securities.
Notwithstanding SMMEA, there may be other restrictions on the ability of
certain investors, including depository institutions, either to purchase Bonds
or to purchase Bonds representing more than a specified percentage of the
investors' assets.
The foregoing does not take into consideration the applicability of
statutes, rules, regulations, orders, guidelines or agreements generally
governing investments made by a particular investor, including, but not limited
to "prudent investor" provisions, percentage-of-assets limits and provisions
which may restrict or prohibit investment in securities which are not "interest
bearing" or "income paying" or in securities that are issued in book entry
form.
If specified in the related Prospectus Supplement, other Classes of
Bonds offered pursuant to this Prospectus will not constitute "mortgage related
securities" under SMMEA. The appropriate characterization of those Bonds under
various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase the Bonds,
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may be subject to significant interpretive uncertainties. No representation is
made as to the proper characterization of Bonds not qualifying as "mortgage
related securities" for legal investment or financial institution regulatory
purposes, or as to the ability of particular investors to purchase such Bonds
under applicable legal investment restrictions. The uncertainties described
above (and any unfavorable future determination concerning legal investment or
financial institution regulatory characteristics of such Bonds) may adversely
affect the liquidity of such Bonds.
Investors should consult their own legal advisors in determining whether
and to what extent the Bonds constitute legal investments for such investors.
ERISA MATTERS
Title I of ERISA and section 4975 of the Code impose certain
restrictions on employee benefit plans and other retirement plans or
arrangements subject thereto ("Plans") and on persons who are parties in
interest or disqualified persons ("Parties in Interest") with respect to such
Plans. Certain employee benefit plans, such as governmental plans and church
plans (if no election has been made under section 410(d) of the Code) are not
subject to the restrictions of ERISA, and assets of such plans may be invested
in the Bonds without regard to the ERISA considerations described below,
subject to other applicable Federal and state law. However, any such
governmental or church plan which is qualified under section 401(a) of the Code
and exempt from taxation under section 501(a) of the Code is subject to the
prohibited transaction rules set forth in section 503 of the Code. Any Plan
fiduciary which proposes to cause a Plan to acquire any of the Bonds should
consult with its counsel with respect to the potential consequences under ERISA
and the Code of the Plan's acquisition and ownership of the Bonds. Investments
by Plans are also subject to ERISA's general fiduciary requirements, including
the requirement of investment prudence and diversification and the requirement
that a Plan's investments be made in accordance with the documents governing
the Plan.
Section 406 of ERISA prohibits 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.
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",
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".
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.
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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. The description set forth
below is subject to modification in the Prospectus Supplement for a Series of
Bonds to describe the terms and provisions of the particular Indenture relating
to such Series of Bonds.
MODIFICATION OF INDENTURE
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. In the case of a Series comprising Classes of Senior
Bonds and Junior Bonds, as long as the Imputed Principal Balance (as defined
below) of any Class of Senior Bonds is greater than zero, no amendment,
variation or modification may be made to Article V of the Indenture, concerning
defaults and remedies, without consent of the holders of 100% in the principal
amount of the outstanding Senior Bonds.
Without the consent of the holder of each outstanding Bond of such
Series affected thereby, however, no supplemental indenture shall (a) change
the Stated Maturity of the principal of, or any installment of interest on, any
Bond of such Series or reduce the principal amount thereof, the interest rate
specified thereon (except as provided in the related Series Supplement with
respect to any Class of Variable 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 9.2)
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
9.1)
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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; or (c) certain events of bankruptcy,
insolvency, receivership or reorganization of the Issuer. (Indenture, Section
5.1)
RIGHTS UPON EVENT OF DEFAULT
Unless specified otherwise in the related Prospectus Supplement and
Series Supplement, in case an Event of Default should occur and be continuing
with respect to a Series of Bonds, the holders of 100% (or such other
percentage specified in the related Prospectus Supplement) in principal amount
of the outstanding Bonds (or such Classes of Bonds as are specified in the
related Prospectus Supplement) of such Series or in certain cases, the holders
of the Junior Class of such Series having the highest priority of payment (the
"Highest Priority Junior Class") representing not less than 66 2/3% (or such
other percentage specified in the related Prospectus Supplement) in principal
amount of such Class 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 (or, in the case of a Series comprising Classes of Senior
Bonds and Junior Bonds, the holders of 100% in principal amount of the
outstanding Senior Bonds of such Series or if the principal amount (less
certain losses of the Trust Estate allocated thereto (as so reduced, the
"Imputed Principal Balance")) of the Senior Bonds has been reduced to zero, by
the holders of the Highest Priority Junior Class of such Series representing
not less than 66 2/3% of the principal amount of such Class). (Indenture,
Section 5.2)
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.
Unless specified otherwise in the related Series Supplement, if,
following an Event of Default, 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 as collections are received on the Collateral,
notwithstanding the acceleration of the maturity of such Bonds. In addition, if
a Series of Bonds has been declared due and payable upon an Event of Default,
the Indenture Trustee may in its discretion under certain conditions, or will,
if directed by the holders of the Bonds, sell the Collateral for such Series.
Following an acceleration of the Bonds after an Event of Default all Bonds of
such Series then outstanding will be payable pro rata (in accordance with
Imputed Principal Balances in the case of Special Allocation Bonds and 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. (Indenture, Section 5.8)
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 6.1) Following an acceleration of the Bonds
after 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
6.7) Subject to such provisions for indemnification and certain limitations
contained in the Indenture, the holders of a majority in principal amount of
the outstanding Bonds of a Series (or, in the case of a Series comprising
Classes of Senior Bonds and Junior Bonds, the holders of a majority in
principal amount of the outstanding Senior Bonds of such Series or in certain
cases, the majority in principal amount of the holders of the Highest Priority
Junior Class) 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 (or, in the case of a Series
comprising Classes of Senior Bonds and Junior Bonds, 100% of the outstanding
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Senior Bonds of such Series or, if the Imputed Principal Balance of the Senior
Bonds has been reduced to zero, the holders of the Highest Priority Junior
Class of such Series representing not less than 66 2/3% of the principal amount
of such Class) 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). In the case of a Series of Bonds
comprising Classes of Senior Bonds and Junior Bonds, the holders of Junior
Bonds of such Series shall not be entitled to exercise any of the rights
referred to in the preceding sentence until the Senior Bonds of such Series
have been paid in full or the Imputed Principal Balance of each Class of the
Senior Bonds of a Series has been reduced to zero.
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 3.9)
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 7.3)
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 4.1)
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 or if any
Event of Default occurs with respect to a Series of Bonds that comprises
Classes of Senior Bonds and Classes of Junior Bonds. In such event, the Trustee
may be required to resign its trusteeship with respect to one or more Classes
of such Special Allocation Bonds, Senior Bonds or Junior Bonds and a successor
Trustee would be appointed for such Classes.
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<PAGE> 67
REPORTS BY INDENTURE TRUSTEE TO BONDHOLDERS
On each Principal Payment Date or Special Redemption Date in respect of
a Series, the Indenture Trustee for such Series will send a report to each
Bondholder setting forth the respective amounts of such payment representing
interest and principal and the remaining actual outstanding principal amount of
an Individual Bond of each Class, the Imputed Principal Balance (as defined in
the related Indenture) of any Individual Bond that is a Senior Bond or Junior
Bond, and the aggregate principal amount of the Bonds of each relevant 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 8.7)
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 for such Series of a continuing
Event of Default with respect to such Series; (2) the holders of at least 25%
in principal amount of the Bonds of such Series then outstanding (or in the
case of a Series comprising Classes of Senior Bonds and Junior Bonds (a) all of
the holders of the Classes of Senior Bonds of such Series having Imputed
Principal Balances greater than zero or (b) in the event that no Class of
Senior Bonds of such Series has an Imputed Principal Balance greater than zero,
the holders of the Highest Priority Junior Class of such Series representing
not less than 66 2/3% of the principal amount of such Class) shall 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
(or in the case of a Series comprising Classes of Senior Bonds and Junior Bonds
(a) any holder of a Class of Senior Bonds of such Series having Imputed
Principal Balances greater than zero or (b) in the event that no Class of
Senior Bonds of such Series has an Imputed Principal Balance greater than zero,
any holder of the Highest Priority Junior Class of such Series representing not
less than 66 2/3% of the principal amount of such Class). (Indenture, Section
5.9)
Notwithstanding any other provision of the Indenture, the Indenture
incorporates Section 316(b) of the TIA which provides that the right of any
holder of a Bond to receive payment of the principal of and interest on such
Bond, on or after the respective due dates expressed in such Bond, or to
institute suit for the enforcement of any such payment on or after such
respective dates, shall not be impaired or affected without the consent of such
holder, except as to a postponement of an interest payment consented to as
provided in Section 316(a)(2) of the TIA, and except that such indenture may
contain provisions limiting or denying the right of any such holder to
institute any such suit, if and to the extent that the institution or
prosecution thereof or the entry or judgment therein would, under applicable
law, result in the surrender, impairment, waiver, or loss of the lien of such
indenture upon any property subject to such lien. (Indenture, Section 5.20)
LEGAL MATTERS
The legality of the Bonds will be passed upon for the Issuer by Andrews
& Kurth L.L.P., Dallas, Texas. Andrews and 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 balance sheet of CMC Securities Corporation IV (formerly known as
Capstead Securities Corporation V), appearing in CMC Securities Corporation
IV's Annual Report on Form 10-K for the year ended December 31, 1997 has been
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon included therein and
-57-
<PAGE> 68
incorporated herein by reference. Such balance sheet is incorporated herein by
reference in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
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.
-58-
<PAGE> 69
PART II
INFORMATION REQUIRED IN THE REGISTRATION STATEMENT
ITEM 14. Other Expenses of Issuance and Distribution
Set forth below is an estimate of the amount of fees and expenses to be
incurred in connection with the issuance and distribution of the securities
offered hereby, other than underwriting discounts and commissions.
<TABLE>
<S> <C>
SEC Registration Fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 295.00
Printing and Engraving Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Accounting Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Legal Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Trustee Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Blue Sky Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Rating Agency Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ *
=============
</TABLE>
* To be calculated at a later date.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law, as amended,
provides that a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at its request in such capacity in another
corporation or business association, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
As permitted by Section 102(b)(7) of the Delaware General Corporation
Law, as amended, the Registrant's Certificate of Incorporation provides that a
director of the Registrant shall not be personally liable to the Registrant or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or ( iv)
for any transaction from which the director derived an improper personal
benefit.
The Registrant's Certificate of Incorporation and Bylaws provide that
the Registrant will indemnify each person who is or was a director or officer
of the Registrant to the maximum extent permitted from time to time by law.
Capstead Mortgage Corporation provides insurance from commercial
carriers against certain liabilities incurred by its officers and directors and
by the officers and directors of certain of its subsidiaries and other
affiliated corporations.
See Item 17(c) below.
II-1
<PAGE> 70
ITEM 16. EXHIBITS.
EXHIBIT NO.
1.1 Form of Underwriting Agreement (1)
3.1 Certificate of Incorporation (1)
3.2 Amendment to Certificate of Incorporation (2)
3.3 Bylaws (1)
4.1 Form of Indenture between Registrant and Texas Commerce Bank,
National Association (1)
5.1 Opinion of Andrews & Kurth L.L.P. regarding legality (3)
8.1 Opinion of Andrews & Kurth L.L.P., regarding certain tax matters
(3)
10.1 Form of Pooling and Administration Agreement (2)
10.2 Form of Servicing Agreement (1)
10.3 Form of Loan Sale Agreement (1)
10.4 Management Agreement between Registrant and Capstead Advisers,
Inc. (1)
23.1 Consents of Andrews & Kurth L.L.P. (contained in their opinions
filed as Exhibits 5.1 and 8.1 to this Registration Statement)(3)
23.2 Consent of Independent Auditors (3)
24.1 Powers of Attorney (included on Page II-4)
25.1 Statement of Eligibility and Qualification of Trustee (bound
separately from other exhibits) (1)
99.1 Form of Prospectus Supplement (1)
- --------------
(1) Previously filed with the Commission as exhibits to the Registrant's
Form S-3 Registration Statement (File No. 33-47912) on May 14, 1992, and
incorporated by reference herein.
(2) Previously filed with the Commission as exhibits to the Registrant's
Post-Effective Amendment No. 1 to Form S-3 Registration Statement (File
No. 33-47912) on August 17, 1994, and incorporated by reference herein.
(3) Filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in this Registration
Statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities would not exceed
that which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
charges in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not
apply if this Registration Statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-2
<PAGE> 71
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes
of determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act that is incorporated by reference in this Registration Statement
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(d) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the 1933 Act shall be deemed to be part of this Registration Statement as
of the time it was declared effective.
(e) For the purpose of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 (notwithstanding the fact that a
security rating pursuant to Transaction Requirement B.5 has not yet been
obtained, which security rating requirement, in the reasonable belief of the
Registrant, will be met by the time of sale) and has duly caused this
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Dallas, State of Texas, on the 28th day of
September, 1998.
CMC SECURITIES CORPORATION IV
By: /s/ RONN K. LYTLE
------------------------------------------
Ronn K. Lytle
Chairman and Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below (together or by counterparts)
does hereby make, constitute and appoint Ronn K. Lytle and Andrews F. Jacobs
and each of them his true and lawful attorney with full power of substitution
to execute, deliver and file with the Securities and Exchange Commission, for
and on his behalf, and in his capacity or capacities as stated below, any
amendment (including post-effective amendments) to the Registration Statement
with all exhibits thereto, making such changes in the Registration Statement as
the Registrant deems appropriate.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ RONN K. LYTLE Director, Chairman, September 28, 1998
- ----------------------------------- Chief Executive Officer
(Ronn K. Lytle) and President (Principal
Executive Officer)
/s/ MAURICE E. MCGRATH Director September 28, 1998
- -----------------------------------
(Maurice E. McGrath)
/s/ ANDREW F. JACOBS Principal Financial September 28, 1998
- ----------------------------------- and Accounting Officer
(Andrew F. Jacobs)
</TABLE>
II-4
<PAGE> 73
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
1.1 Form of Underwriting Agreement (1)
3.1 Certificate of Incorporation (1)
3.2 Amendment to Certificate of Incorporation (2)
3.3 Bylaws (1)
4.1 Form of Indenture between Registrant and Texas Commerce Bank,
National Association (1)
5.1 Opinion of Andrews & Kurth L.L.P. regarding legality (3)
8.1 Opinion of Andrews & Kurth L.L.P., regarding certain tax matters (3)
10.1 Form of Pooling and Administration Agreement (2)
10.2 Form of Servicing Agreement (1)
10.3 Form of Loan Sale Agreement (1)
10.4 Management Agreement between Registrant and Capstead Advisers,
Inc. (1)
23.1 Consents of Andrews & Kurth L.L.P. (contained in their opinions
filed as Exhibit 5.1 and 8.1 to this Registration Statement) (3)
23.2 Consent of Independent Auditors (3)
24.1 Powers of Attorney (included on Page II-4)
25.1 Statement of Eligibility and Qualification of Trustee (bound
separately from other exhibits) (1)
99.1 Form of Prospectus Supplement (1)
</TABLE>
- ---------------
(1) Previously filed with the Commission as exhibits to the Registrant's
Form S-3 Registration Statement (File No. 33-47912) on May 14, 1992, and
incorporated by reference herein.
(2) Previously filed with the Commission as exhibits to the Registrant's
Post-Effective Amendment No. 1 to Form S-3 Registration Statement (File
No. 33-47912) on August 17, 1994, and incorporated by reference herein.
(3) Filed herewith.
<PAGE> 1
EXHIBIT 5.1
[ANDREWS & KURTH LETTERHEAD]
September 28, 1998
CMC Securities Corporation IV
2711 N. Haskell, Suite 900
Dallas, Texas 75204
Re: CMC Securities Corporation IV
Registration Statement on Form S-3
to Register Collateralized Mortgage Obligations
Gentlemen:
We have acted as counsel for CMC Securities Corporation IV (formerly
Capstead Securities Corporation V), a corporation organized under the laws of
the State of Delaware (the "Issuer"), in connection with the proposed issuance
by the Issuer of its collateralized mortgage obligations (the "Bonds"). The
Bonds of each series are to be issued pursuant to an indenture as supplemented
by one or more supplemental indentures between the Issuer and the trustee (the
"Trustee") authorizing each such series (each a "Series Supplement"). (The
indenture, in the form filed as an exhibit to the Issuer's Registration
Statement referred to below, and each Series Supplement are herein referred to
collectively as the "Indenture"). This opinion is to be filed as an exhibit to
the captioned registration statement relating to the Bonds on Form S-3 (the
"Registration Statement") filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "1933 Act").
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of the Issuer's organizational documents, the Indenture
and the form of Bonds included therein and such other documents, records,
certificates of the Issuer and public officials and other instruments as we
have deemed necessary for the purposes of rendering this opinion. In addition,
we have assumed that the Indenture will be duly executed and delivered; that
the Bonds will be duly executed and delivered substantially in the forms
contemplated by the Indenture; and that the Bonds will be sold as described in
the Registration Statement.
<PAGE> 2
[ANDREWS & KURTH LETTERHEAD]
CMC Securities Corporation IV
September 28, 1998
Page 2
Based upon the foregoing, we are of the opinion that the Bonds are in
due and proper form, and assuming the due authorization, execution and delivery
of the Indenture by the Issuer and the Trustee and the due authorization of the
Bonds by all necessary action on the part of the Issuer, when validly executed,
authenticated and issued in accordance with the Indenture and delivered against
payment therefor, the Bonds will constitute valid and binding obligations of
the Issuer, enforceable against the Issuer in accordance with their terms,
except that the enforceability thereof may be subject to (a) bankruptcy,
insolvency, reorganization, arrangement, moratorium, fraudulent, or
preferential conveyance or other similar laws now or hereinafter in effect
relating to creditors' rights generally, and (b) general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law).
The opinion expressed above is subject to the qualification that we do
not purport to be experts as to the laws of any jurisdiction other than the
United States, the States of Texas and New York and the General Corporation Law
of the State of Delaware, and we express no opinion herein as to the effect
that the laws and decisions of courts of any such other jurisdiction may have
upon such opinions.
We consent to the use and filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and Prospectus contained therein.
In giving such consent we do not imply or admit that we are within the category
of persons whose consent is required under Section 7 of the 1933 Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
ANDREWS & KURTH L.L.P.
By: /s/ DAVID BARBOUR
-------------------------
David Barbour, Partner
/ctk
<PAGE> 1
EXHIBIT 8.1
[ANDREWS & KURTH LETTERHEAD]
September 28, 1998
CMC Securities Corporation IV
2711 N. Haskell, Suite 900
Dallas, Texas 75204
Re: CMC Securities Corporation IV
Registration Statement on Form S-3
Gentlemen:
We have acted as counsel for CMC Securities Corporation IV (formerly
Capstead Securities Corporation V), a corporation organized under the laws of
the State of Delaware (the "Issuer"), in connection with the proposed issuance
by the Issuer of its Collateralized Mortgaged Obligations, issuable in Series
(the "Bonds") under the captioned registration statement, as amended (the
"Registration Statement") filed under the Securities Act of 1933, as amended
(the "1933 Act"). The Bonds of each Series are to be issued pursuant to an
indenture (the "Indenture"), as supplemented by one or more supplemental
indentures authorizing such Series (each a "Series Supplement"). The Indenture
will be substantially in the form filed with the Securities and Exchange
Commission (the "Commission") as an exhibit to the Registration Statement.
This opinion is to be filed as an exhibit to the Registration Statement.
We have examined originals or copies, certified or otherwise identified
to our satisfaction, of (a) the Issuer's Certificate of Incorporation, (b) the
Issuer's Bylaws, (c) minutes of meetings or unanimous consents in lieu of
meetings of the Issuer's board of directors or shareholders, (d) the Indenture
including the form of Bonds and description of requirements for each Series
Supplement contained therein, (e) the prospectus contained in the Registration
Statement, as filed with the Commission herewith (the "Prospectus"), and (f)
such other documents, records, certificates of Issuer and public officials and
other instruments as we have deemed necessary for the purposes of rendering
this opinion. In addition, we have assumed that the Indenture and each Series
Supplement will be duly executed and delivered; that the Bonds will be duly
executed and delivered substantially in the forms contemplated by the
Indenture; and that the Bonds will be sold as described in the Registration
Statement.
<PAGE> 2
CMC Securities Corporation IV
September 28, 1998
Page 2
On the basis of the foregoing, we are of the opinion that the
description of federal income tax consequences appearing under the heading
"Certain Federal Income Tax Consequences" in the Prospectus accurately
describes the material federal income tax consequences to holders of Bonds
under existing law and subject to the qualifications and assumptions stated
therein.
The opinions herein are based upon our interpretations of current law,
including court authority and existing Final and Temporary Regulations, which
are subject to change both prospectively and retroactively, and upon the facts
and assumptions discussed herein. This opinion letter is limited to the
matters set forth herein, and no opinions are intended to be implied or may be
inferred beyond those expressly stated herein. Our opinion is rendered as of
the date hereof and we assume no obligation to update or supplement this
opinion or any matter related to this opinion to reflect any change of fact,
circumstances, or law after the date hereof. In addition, our opinion is based
on the assumption that the matter will be properly presented to the applicable
court. Furthermore, our opinion is not binding on the Internal Revenue Service
or a court. In addition, we must note that our opinion represents merely our
best legal judgment on the matters presented and that others may disagree with
our conclusion. There can be no assurance that the Internal Revenue Service
will not take a contrary position or that a court would agree with our opinion
if litigated. In the event any one of the statements, representations or
assumptions we have relied upon to issue this opinion is incorrect, our opinion
might be adversely affected and may not be relied upon.
We consent to the use and filing of this opinion as Exhibit 8.1 to the
Registration Statement and to the reference to our firm under the caption
"Legal Matters" in the Prospectus Supplement and Prospectus contained therein.
In giving such consent we do not imply or admit that we are within the category
of persons whose consent is required under Section 7 of the 1933 Act or the
rules and regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ ANDREWS & KURTH L.L.P.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement to be filed on or about September 28, 1998 and related
Prospectus of CMC Securities Corporation IV for the registration of $1,000,000
in securities and to the incorporation by reference therein of our report
dated January 21, 1998, with respect to the financial statements of CMC
Securities Corporation IV incorporated by reference in its Annual Report (Form
10-K) for the year ended December 31, 1997, filed with the Securities and
Exchange Commission.
Ernst & Young LLP
Dallas, Texas
September 25, 1998
