<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1999
Registration No. 333-64481
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 1
TO
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
TITLE OF EACH CLASS PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE AMOUNT TO BE MAXIMUM OFFERING AGGREGATE OFFERING REGISTRATION
REGISTERED REGISTERED PRICE PER UNIT(1) PRICE(1) FEE(2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Collateralized Mortgage Obligations (Issuable in Series) $1,000,000 100% $1,000,000 $295 (3)
- -----------------------------------------------------------------------------------------------------------------------------------
</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.
(3) The Registrant has previously paid a registration fee of $295 in connection
with this filing.
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 SUPPLEMENT
(TO PROSPECTUS DATED ________, 1999)
$----------
(APPROXIMATE)
CMC SECURITIES CORPORATION IV
ISSUER
-------------------------
MASTER SERVICER
COLLATERALIZED MORTGAGE OBLIGATIONS, SERIES 1999-_
The Collateralized Mortgage Obligations, Series 1999-_ (collectively,
the "Bonds"), consist of all Classes identified in the chart below (the
"Offered Bonds") as well as certain additional Classes of Other Subordinate
Bonds (as hereinafter defined) which are not being offered for sale hereunder.
The original principal amount of one or more Classes of Bonds may be increased
or decreased by up to 10% prior to their issuance, depending on the Mortgage
Loans actually included in the Mortgage Pool (as defined below), and may be
adjusted as necessary to obtain the required ratings on the Offered Bonds. It
is a condition to their issuance that each Class of Offered Bonds receive from
________________ ("______") and _____________ ("_____") the respective ratings
set forth under "Summary of Terms--Rating". __________________ (cover continued
on next page)
THE BONDS WILL BE NONRECOURSE OBLIGATIONS SOLELY OF THE ISSUER AND DO NOT
REPRESENT AN OBLIGATION OF OR INTEREST IN THE LOAN SELLER, THE MASTER SERVICER,
THE CERTIFICATE TRUSTEE, THE INDENTURE TRUSTEE, THE UNDERWRITER OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE BONDS NOR THE UNDERLYING MORTGAGE LOANS ARE
INSURED OR GUARANTEED BY ANY GOVERNMENTAL ENTITY, THE ISSUER, THE LOAN SELLER,
THE MASTER SERVICER, THE CERTIFICATE TRUSTEE, THE INDENTURE TRUSTEE, THE
UNDERWRITER OR ANY OF THEIR RESPECTIVE AFFILIATES, OR ANY OTHER PERSON.
-----------------------------
THESE BONDS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
----------------
PROSPECTIVE INVESTORS SHOULD CONSIDER, AMONG OTHER THINGS, THE
FACTORS SET FORTH UNDER "RISK FACTORS" COMMENCING AT PAGE S-__ OF THIS
PROSPECTUS SUPPLEMENT AND AT PAGE __ OF THE PROSPECTUS.
<TABLE>
<CAPTION>
APPROX. INITIAL BOND APPROX. INITIAL BOND
PRINCIPAL INTEREST PRINCIPAL INTEREST
BALANCE RATE CLASS BALANCE RATE CLASS
<S> <C> <C> <C> <C> <C>
$ (1) Class P Bonds $ % Class A-19
$ % Class A-1 Bonds $ (9) Class A-20
$ % Class A-2 Bonds $ (10) Class A-21
$ % Class A-3 Bonds $ (11) Class A-22
$ % Class A-4 Bonds $ % Class A-23
(2) % Class A-5 Bonds (12) (12) Class X Bonds
$ (3) (4) Class A-6 Bonds $ % Class B-1
$ (5) Class A-7 Bonds $ % Class B-2
$ % (6) Class A-8 Bonds $ % Class B-3
$ % Class A-9 Bonds $ % Class R-1
(7) % Class A-10 Bonds $ % Class R-2
$ (5) Class A-11 Bonds
$ % (8) Class A-12 Bonds
$ % Class A-13 Bonds
$ % Class A-14 Bonds
$ % Class A-15 Bonds
$ % Class A-16 Bonds
$ % Class A-17 Bonds
$ % Class A-18 Bonds
</TABLE>
(footnotes on next page)
The Offered Bonds will be purchased by _______________ (the
"Underwriter") from the Issuer and will be offered by the Underwriter from time
to time in negotiated transactions at varying prices to be determined at the
time of sale. Proceeds to the Issuer are expected to be approximately ____% of
the aggregate principal balance of the Offered Bonds plus accrued interest
thereon, but before deducting expenses payable by the Issuer in connection with
the Offered Bonds estimated to be $______.
The Offered Bonds are offered by the Underwriter when, as and if
issued, delivered to and accepted by the Underwriter and subject to certain
other conditions. It is expected that delivery of the Class R-1 and Class R-2
Bonds will be made against payment therefor at the offices of ______________,
__________, __________ and that delivery of the other Offered Bonds will be
made in book-entry form only, through the Same Day Funds Settlement System of
The Depository Trust Company, in each case on or about ___________, 1999.
[NAME OF UNDERWRITER]
The date of this Prospectus Supplement is __________, 1999
<PAGE> 3
(cover continued from previous page)
(1) The Class P Bonds are principal only Bonds and will not bear interest. The
Class Current Principal Balance of the Class P Bonds initially will be the
amount shown above and is equal to the PO Percentage (as defined herein)
of each Discount Mortgage Loan.
(2) The Class A-5 Bonds are interest only Bonds. The Class Notional Balance of
the Class A-5 Bonds (the "Class A-5 Notional Balance") on any Payment Date
will be equal to the sum of (i) the product of (A) _______% and (B) the
Class Current Principal Balance of the Class A-1 Bonds, (ii) the product
of (A) _________% and (B) the Class Current Principal Balance of the Class
A-2 Bonds, (iii) the product of (A) _________% and (B) the Class Current
Principal Balance of the Class A-3 Bonds and (iv) the product of (A)
________% and (B) the Class Current Principal Balance of the Class A-4
Bonds. The Class A-5 Notional Balance as of the Cut-off Date will equal
approximately $_________.
(3) The Class Current Principal Balance of the Class A-6 bonds initially will
be the amount shown above and is equal to $___________.
(4) During the initial Interest Accrual Period, interest will accrue on the
Class A-6 Bonds at the rate of _______% per annum. During each Interest
Accrual Period thereafter, interest will accrue on the Class A-6 Bonds at
a per annum rate of LIBOR plus ____%, determined monthly as described
herein, subject to a maximum rate of ____% per annum and a minimum rate of
____% per annum.
(5) During the initial Interest Accrual Period, interest will accrue on the
Class A-7 and Class A-11 Bonds at the rate of ______% per annum. During
each Interest Accrual Period thereafter, interest will accrue on the Class
A-7 and Class A-11 Bonds at a per annum rate equal to ______% - (______ x
LIBOR), determined monthly as described herein, subject to a maximum rate
of _______% per annum and a minimum rate of ____% per annum.
(6) On each Payment Date on or before the Class A-8 Accretion Termination Date
(as defined herein), an amount equal to the Class A-8 Accrual Amount (as
defined herein) will be added to the Class A-8 Principal Balance, and such
amount will be paid as principal to the Class A-6 and Class A-7 Bonds as
described herein and will not be paid as interest to the Class A-8 Bonds.
The Class A-8 Bonds are "Compound Interest Bonds" as described in the
Prospectus.
(7) The Class A-10 Bonds are interest only Bonds. The Class Notional Balance
of the Class A-10 Bonds (the "Class A-10 Notional Balance") on any Payment
Date will be equal to the Class Current Principal Balance of the Class A-9
Bonds on such Payment Date.
(8) On each Payment Date on or before the Class A-12 Accretion Termination
Date (as defined herein), an amount equal to the Class A-12 Accrual Amount
(as defined herein) will be added to the Class A-12 Principal Balance, and
such amount will be paid as principal to the Class A-6 and Class A-11
Bonds as described herein and will not be paid as interest to the Class
A-12 Bonds. The Class A-12 Bonds are "Compound Interest Bonds" as
described in the Prospectus.
(9) During the initial twelve Interest Accrual Periods, interest will accrue
on the Class A-20 Bonds at the rate of ____% per annum. During each
Interest Accrual Period thereafter, interest will accrue on the Class A-20
Bonds at a per annum rate of ____%.
(10) During the initial Interest Accrual Period, interest will accrue on the
Class A-21 Bonds at the rate of _______% per annum. During each Interest
Accrual Period thereafter, interest will accrue on the Class A-21 Bonds at
a per annum rate of LIBOR plus ____%, determined monthly as described
herein, subject to a maximum rate of ____% per annum and a minimum rate of
____% per annum.
S-2
<PAGE> 4
(cover continued from previous page)
(11) During the initial Interest Accrual Period, interest will accrue on the
Class A-22 Bonds at the rate of ________% per annum. During each Interest
Accrual Period thereafter, interest will accrue on the Class A-22 Bonds at
a per annum rate equal to ____% - (3 x LIBOR), determined monthly as
described herein, subject to a maximum rate of ____% per annum and a
minimum rate of ____% per annum.
(12) The Class X Bonds are interest only Bonds. The Class Notional Balance of
the Class X Bonds (the "Class X Notional Balance") on any Payment Date
will be equal to the aggregate Scheduled Principal Balances of the
Non-Discount Mortgage Loans, which will equal approximately $________ as
of the Cut-off Date. The Class X Bonds will bear interest on their Class
Notional Balance at a variable Bond Interest Rate equal to the weighted
average of the excess, if any, of (a) the Net Rates on each Non-Discount
Mortgage Loan over (b) ____% per annum. The Bond Interest Rates for the
Class X Bonds for the initial Interest Accrual Period are expected to be
approximately _____% per annum.
---------------------------
The Bonds will be collateralized by mortgage pass-through certificates
(the "Certificates") evidencing the beneficial ownership interest in entire
pools (each, a "mortgage pool" and collectively, the "Mortgage Pool") of
certain first lien, fixed rate mortgage loans secured by one- to four-family
residences and individual condominium units and having original terms to stated
maturity ranging from __ to __ years (the "Mortgage Loans") originated or
acquired by ______________ or its affiliates ("________") (the "Loan Seller").
The Mortgage Loans will have an aggregate principal balance as of __________,
1999, (the "Cut-off Date") of $________, subject to adjustment as described
herein. The Mortgage Loans have original terms to maturity of __ to __ years
and having an aggregate principal balance as of the Cut-off Date of
$___________, subject to adjustment as described herein. The characteristics of
the Mortgage Loans are described herein under "Description of the Mortgage
Loans" and in Annex A hereto.
Prior to the date of initial issuance of the Bonds (the "Closing
Date"), _______ will have sold certain of the Mortgage Loans (the "_______
Mortgage Loans") to __________________ ("_____") pursuant to one or more loan
sale agreements (each, a "_____ Loan Sale Agreement"). On the Closing Date,
_____ will sell the Mortgage Loans to Capstead Capital Corporation ("CCC"), a
Delaware corporation that is a wholly-owned limited purpose finance subsidiary
of Capstead Mortgage Corporation ("CMC"), a Maryland corporation, pursuant to
the terms of a purchase agreement between ______ and CCC (the "Purchase
Agreement"). CCC will, in turn, simultaneously sell the Mortgage Loans to CMC
Securities Corporation IV (the "Issuer"), a Delaware corporation that is a
wholly-owned limited purpose finance subsidiary of CMC, pursuant to an
assignment and assumption agreement between CCC and the Issuer (the "CCC
Assignment Agreement"). The Issuer will deposit the Mortgage Loans into a trust
(the "Trust") pursuant to the terms of a pooling and servicing agreement (the
"Pooling and Servicing Agreement") among the Issuer, as depositor,
_________________ ("_____"), as master servicer (the "Master Servicer"), and
_______________, a national bank, as trustee (the "Certificate Trustee"). The
Trust will create a separate series of Certificates for the benefit of the
Issuer in exchange for the Mortgage Loans. The Issuer will pledge the
Certificates to ______________, as indenture trustee (the "Indenture Trustee")
under the terms of an indenture (the "Indenture") between the Issuer and the
Indenture Trustee. The Certificates constitute a series of "Non-Agency
Certificates" as described in the Prospectus. The Pooling and Servicing
Agreement constitutes a "Pooling and Administration Agreement" as described in
the Prospectus.
The Bonds constitute a Series of "Bonds" that are "Special Allocation
Bonds", as such terms are described in the Prospectus, and will be non-recourse
obligations of the Issuer. Proceeds from the Certificates and the other assets
pledged as collateral to secure the Bonds under the lien of the Indenture (the
"Trust Estate") are the sole source of payments on the Bonds. Neither the Bonds
nor the Certificates are insured or guaranteed by any government agency or
instrumentality, CMC, CCC, the Issuer, the Loan Seller, ______, the Master
Servicer, the Certificate Trustee, the Indenture Trustee, the Underwriter or
any other person or entity.
Each Class of Senior Bonds (as defined herein) constitutes a "Senior
Class" of "Senior Bonds" as described in the Prospectus and each Class of
Subordinate Bonds (as defined herein) constitutes a "Junior Class" of "Junior
Bonds" as described in the Prospectus. The primary credit support for the
Senior Bonds is the subordination of the Subordinate Bonds to such Senior
Bonds. In addition, the Senior Bonds, other than the Class A-23 Bonds, will be
allocated all or
S-3
<PAGE> 5
a disproportionately large share of the principal payments and prepayments
received on the Mortgage Loans for a period of time, as described herein. The
primary credit support for each Class of Offered Subordinate Bonds (as defined
herein) is the subordination of the Other Subordinate Bonds (as defined herein)
with higher numerical designations. The rights of Class B-2 to receive payments
of principal and interest will be subordinate to such rights of Class B-1 and
such rights of Class B-3 will be similarly subordinate to such rights of
Classes B-1 and B-2. Except for Excess Special Hazard Losses (as defined
herein), Realized Losses (as defined herein) on the Mortgage Loans will be
allocated first to the Other Subordinate Bonds in reverse numerical order,
second to the Offered Subordinate Bonds in reverse numerical order, and then to
the Senior Bonds, in each case as described herein. Following the reduction of
the aggregate Current Principal Balance of the Other Subordinate Bonds to zero,
the yield to maturity on each Class of Offered Subordinate Bonds, in increasing
order of numerical Class designation, will be extremely sensitive to such
Realized Losses on the related Mortgage Loans because all or a
disproportionately large amount of such losses (rather than a pro rata portion
thereof) will be allocable to the Offered Subordinate Bonds with the highest
numerical designation then outstanding. Similarly, following the reduction of
the aggregate Current Principal Balance of the Offered Subordinate Bonds to
zero, the yield to maturity on the Senior Bonds will be extremely sensitive to
all Realized Losses on the Mortgage Loans . See "Description of the
Bonds--Allocation of Losses; Subordination" herein.
Payments in respect of the Bonds will be made on the 25th day of each
month or, if such day is not a business day, then on the next succeeding
business day, commencing in ________ (each, a "Payment Date"). As more fully
described herein under "Description of the Bonds--Payments on the
Bonds--Interest", interest payments on the Offered Bonds will be based on the
Current Principal Balance thereof (or on the applicable Class Notional Balance,
in the case of the Interest Only Bonds) and the related Bond Interest Rates.
Interest accruing on each Class of Bonds during each Interest Accrual Period
after the first Interest Accrual Period will be calculated on the assumption
that principal payments on, and allocation of Realized Losses to, such Bonds
are made on the last day of the preceding Interest Accrual Period, and not on
the following Payment Date when actually made. Payments in respect of principal
of the Bonds will be allocated among the various Classes of Bonds entitled to
principal as described under "Description of the Bonds--Payments on the
Bonds--Principal" herein.
There is currently no secondary market for the Bonds and there can be
no assurance that one will develop. The Underwriter intends to establish a
market in the Offered Bonds but is not obligated to do so. There is no
assurance that any such market, if established, will continue or will provide
investors with a sufficient level of liquidity.
The Mortgage Loans generally may be prepaid in full or in part at any
time without penalty. Mortgage Loan prepayment rates may fluctuate
significantly. Prospective investors should consider the following:
o The yield to investors in each Class of Bonds, particularly the Class
P Bonds, Class A-5 Bonds, Class A-10 Bonds and Class X Bonds, will be
sensitive to the rate and timing of principal payments on the Mortgage
Loans, or in the case of the Class P Bonds, all of the Discount
Mortgage Loans (as defined herein). In addition, as a result of the
method of calculation of the Bond Interest Rates with respect to the
Class X Bonds, the yield to maturity of such Classes will be adversely
affected by principal prepayments of the Mortgage Loans with
relatively high Net Rates. Investors in the Bonds referred to above
should consider the associated risks, including, in the case of the
Class A-5 and Class A-10 Bonds, the risk that a rapid rate of
principal payments on the Mortgage Loans could result in the failure
of investors in such Classes of Bonds to recover fully their initial
investments; in the case of the Class X Bonds, the risk that a rapid
rate of principal payments on the Non-Discount Mortgage Loans could
result in a failure of investors in such Class of Bonds to fully
recover their investments. The Class A-5, Class A-10 and Class X Bonds
may be subject to significant and rapid fluctuations in value.
o The weighted average lives of all Classes of Bonds (as defined herein)
other than the PAC Bonds will be relatively more sensitive to
fluctuations in rates of principal prepayments on the Mortgage Loans
than the weighted average lives of such PAC Bonds.
o Low levels of LIBOR will significantly reduce the yield of the Class
A-6 and Class A-21 Bonds, which will bear interest at a rate that
varies directly with LIBOR.
S-4
<PAGE> 6
o High levels of LIBOR will significantly reduce the yield of the Class
A-7, Class A-11 and Class A-22 Bonds, which will bear interest at a
rate that varies at a multiple of and inversely with LIBOR.
o The yield to maturity of a Class of Offered Bonds purchased at a
discount or premium will be more sensitive to the rate and timing of
payments thereon. Holders of the Offered Bonds should consider, in the
case of any such Bonds purchased at a discount, the risk that a slower
than anticipated rate of principal payments could result in an actual
yield that is lower than the anticipated yield and, in the case of any
Offered Bonds purchased at a premium the risk that a faster than
anticipated rate of principal payments could result in an actual yield
that is lower than the anticipated yield.
o Because the payments on the Class P Bonds are derived from principal
payments on the Discount Mortgage Loans , the yield to maturity of the
Class P Bonds will be adversely affected if the Discount Mortgage
Loans or prepay more slowly than anticipated.
o The yield to investors on the Bonds, and particularly the Class B-1,
Class B-2 and Class B-3 Bonds, will be adversely affected by Realized
Losses and Net Interest Shortfalls (each, as defined herein) with
respect to the Mortgage Loans.
o No representation is made as to the anticipated rate of principal
payments on the Mortgage Loans, the amount and timing of Realized
Losses or Net Interest Shortfalls, or as to the resulting yield to
maturity of any Class of Bonds.
o The Offered Bonds may not be suitable investments for all investors
due to their complex nature. No investor should purchase any Offered
Bonds unless such investor understands and is able to bear the
prepayment, yield, liquidity and other risks associated with an
investment in such Offered Bonds.
See "Summary of Terms--Yield and Prepayment Considerations" and "Yield and
Prepayment Considerations" herein.
As described herein, multiple real estate mortgage investment conduit
("REMIC" ) elections will be made in connection with the Bonds for federal
income tax purposes. As described more fully herein and in the Prospectus, all
of the Bonds other than the Class R-1 and Class R-2 Bonds will be designated as
"regular interests" in a REMIC and the Class R-1 and Class R-2 Bonds will each
represent a "residual interest" in a REMIC. See "Special Tax Considerations"
herein and "Certain Federal Income Tax Consequences" in the Prospectus. The
Class R-1 and Class R-2 Bonds will be subject to certain restrictions on
transfer and may have tax liabilities during the early years of the REMICs that
substantially exceed the principal and interest paid thereon during such
period. See "Restrictions on Purchase and Transfer of the Residual Bonds"
herein.
The Class B-2 and Class B-3 Bonds will not constitute
"mortgage-related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA"), because those Classes are not rated in one
of the two highest rating categories by a nationally-recognized rating agency.
The Residual Bonds may not be purchased by Plans (as defined herein),
persons acting on behalf of Plans, or persons using assets of Plans (each of
the foregoing, a "Plan Investor") and the Interest Only Bonds and the Class B-3
Bonds may not be transferred to a Plan Investor, except as described herein.
Each purchaser of an Interest Only Bond or of a Class B-3 Bond will be deemed
to represent, by virtue of its acquisition thereof, that it is not a Plan
Investor, unless such purchaser provides a Benefit Plan Opinion or, in the case
of an insurance company, a representation letter as described herein.
The information set forth herein under "The Master Servicer and the
Sub-Servicer" is based on information that has been provided by the Master
Servicer and each Sub-Servicer, as applicable. No representation is made by the
Issuer, ______, the Underwriter, the Certificate Trustee, the Indenture Trustee
or any of their respective affiliates as to the accuracy or completeness of the
information provided by the Master Servicer or any Sub-Servicer.
---------------
S-5
<PAGE> 7
No person is authorized in connection with this offering to give any
information or to make any representation about the Issuer, the Loan Seller,
______, the Master Servicer, the Certificate Trustee, the Indenture Trustee,
the Offered Bonds, or any other matter referred to herein, other than those
contained in this Prospectus Supplement or the Prospectus. If any other
information or representation is given or made, such information or
representation may not be relied upon as having been authorized by the Issuer,
the Loan Seller, ______, the Master Servicer, the Certificate Trustee or the
Indenture Trustee. This Prospectus Supplement and the Prospectus do not
constitute an offer to sell or a solicitation of an offer to buy securities
other than the Offered Bonds, or an offer to sell or a solicitation of an offer
to buy securities in any jurisdiction or to any person to whom it is unlawful
to make such offer in such jurisdiction. Neither the delivery of this
Prospectus Supplement or the Prospectus nor any sale hereunder or thereunder
shall, under any circumstances, create any implication that the information
contained herein or therein is correct as of any time subsequent to their
respective dates.
---------------
To the extent statements contained herein do not relate to historic or
current information, this Prospectus Supplement may be deemed to contain
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. Actual results could differ materially from those contained
in such statements as a result of the matters set forth herein under "Summary
of Terms--Yield and Prepayment Considerations" and "Yield and Prepayment
Considerations" and elsewhere in this Prospectus Supplement.
The Offered Bonds will be part of a separate series of Bonds being
offered by the Issuer pursuant to its Prospectus dated __________, 1999, of
which this Prospectus Supplement is a part and which accompanies this
Prospectus Supplement. The Prospectus contains important information regarding
this offering that is not contained herein, and prospective investors are urged
to read the Prospectus and this Prospectus Supplement in full.
---------------
REPORTS TO BONDHOLDERS
With respect to the Offered Bonds (other than the Residual Bonds),
unless and until definitive bonds are issued, monthly reports containing
information concerning the Trust Estate will be sent to Cede & Co. ("Cede"), as
nominee of The Depository Trust Company ("DTC") and registered holder of such
Bonds, pursuant to the Indenture. Such reports may be available to beneficial
owners of Offered Bonds (other than the Residual Bonds) in accordance with the
regulations and procedures of DTC. See "Indenture--Reports to Bondholders"
herein.
---------------
The Issuer will file with the Securities and Exchange Commission (the
"Commission") certain materials relating to the Mortgage Pool and the Offered
Bonds on Form 8-K. Such materials were prepared by the Underwriter for certain
prospective investors, and, unless otherwise specified in such Form 8-K, the
information included in such materials is subject to and is superseded by the
information set forth in this Prospectus Supplement.
S-6
<PAGE> 8
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
REPORTS TO BONDHOLDERS..................................................S-6
SUMMARY OF TERMS....................................................... S-9
RISK FACTORS...........................................................S-27
Limited Obligations...........................................S-27
Yield and Prepayment Considerations...........................S-27
Residual Bonds................................................S-27
Subordination.................................................S-27
Geographic Concentration of the Mortgaged Properties..........S-27
DESCRIPTION OF THE CERTIFICATES........................................S-28
DESCRIPTION OF THE MORTGAGE LOANS......................................S-29
THE MASTER SERVICER AND THE SUB-SERVICER...............................S-29
General .....................................................S-29
[Master Servicer].............................................S-30
[Loan Seller].................................................S-30
[Loan Seller] Underwriting Standards..........................S-31
DESCRIPTION OF THE BONDS...............................................S-31
General .....................................................S-31
Book-Entry Registration.......................................S-32
Available Funds...............................................S-34
Principal Payments on Retail Bonds............................S-34
Payments on the Bonds.........................................S-37
Allocation of Losses; Subordination...........................S-49
Subordination.................................................S-51
YIELD AND PREPAYMENT CONSIDERATIONS....................................S-52
General .....................................................S-52
Stated Maturity...............................................S-52
Weighted Average Lives........................................S-52
Interest Only Bonds...........................................S-53
Class A-8 Bonds...............................................S-53
Class A-23 Bonds..............................................S-53
Class P Bonds.................................................S-53
Prepayment Model..............................................S-53
Pricing Assumptions...........................................S-54
Decrement Tables..............................................S-54
Yield on the Class P Bonds....................................S-74
Yield on the Interest Only Bonds..............................S-74
Yield on the Class A-7, Class A-11 and Class A-22 Bonds.......S-75
Yield on the PAC Bonds........................................S-76
Yield on the TAC Bonds........................................S-77
INDENTURE..............................................................S-77
General .....................................................S-77
Indenture Event of Default....................................S-78
Reports to Bondholders........................................S-78
POOLING AND SERVICING AGREEMENT........................................S-78
General .....................................................S-78
Servicing.....................................................S-78
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Assignment of Mortgage Loans.............................................................S-78
Substitution of Mortgage Loans...........................................................S-80
Representations and Warranties...........................................................S-80
Collection and Other Servicing Procedures................................................S-81
Hazard Insurance.........................................................................S-82
Realization upon Defaulted Mortgage Loans; Purchases of Defaulted Mortgage Loans ........S-84
Servicing Compensation, Compensating Interest and Payment of Expenses....................S-84
Protected Accounts.......................................................................S-85
Certificate Account......................................................................S-86
Certain Matters Regarding the Master Servicer............................................S-88
Events of Default........................................................................S-89
Monthly Advances.........................................................................S-90
Termination..............................................................................S-90
SPECIAL TAX CONSIDERATIONS........................................................................S-91
Residual Bondholders.....................................................................S-91
Regular Bondholders......................................................................S-92
Non-U.S. Holders.........................................................................S-93
RESTRICTIONS ON PURCHASE AND TRANSFER OF THE RESIDUAL BONDS.......................................S-93
ERISA CONSIDERATIONS..............................................................................S-94
Prohibited Transactions..................................................................S-94
LEGAL INVESTMENT..................................................................................S-95
UNDERWRITING......................................................................................S-96
USE OF PROCEEDS...................................................................................S-96
LEGAL MATTERS.....................................................................................S-97
RATING .........................................................................................S-97
PRINCIPAL DEFINITIONS.............................................................................S-99
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SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used but not defined in this
summary shall have the meaning assigned elsewhere in the Prospectus Supplement.
See "Principal Definitions" herein.
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Title of Bonds.............................. Collateralized Mortgage Obligations, Series 1999-_ (the "Bonds").
Issuer ................................... CMC Securities Corporation IV (the "Issuer"). See "The Issuer" in
the Prospectus.
Offered Bonds............................... The Classes of Bonds in the approximate principal or notional
amounts set forth, and bearing interest, if applicable, at the rates set
forth or calculated as described, on the cover page of this Prospectus
Supplement.
Other Subordinate Bonds..................... In addition to the Offered Bonds, the Issuer will issue the following
Classes of "Other Subordinate Bonds", in the indicated approximate
original principal amounts, which will provide credit support to the
Offered Bonds, but which are not offered hereby:
Bond Approximate Initial
Class Interest Rate Principal Balance
B-4 ____% $_______
B-5 ____% $_______
B-6 ____% $_______
Any information contained herein with respect to the Other
Subordinate Bonds is provided only to permit a better
understanding of the Offered Bonds. Designations
Bonds ................................. Offered Bonds and Other Subordinate Bonds.
Offered Bonds ......................... The Class P, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7, Class A-8, Class A-9, Class A-10, Class A-11,
Class A-12, Class A-13, Class A-14, Class A-15, Class A-16, Class
A-17, Class A-18, Class A-19, Class A-20, Class A-21, Class A-22,
Class A-23, Class X, Class B-1, Class B-2, Class B-3, Class R-1 and
Class R-2 Bonds.
Senior Bonds .......................... The Class P, Class A-1, Class A-2, Class A-3, Class A-4, Class A-5,
Class A-6, Class A-7, Class A-8, Class A-9, Class A-10, Class A-11,
Class A-12, Class A-13, Class A-14, Class A-15, Class A-16, Class
A-17, Class A-18, Class A-19, Class A-20, Class A-21, Class A-22,
Class A-23, Class X, Class R-1 and Class R-2 Bonds.
Interest Only Bonds.................... The Class A-5, Class A-10 and Class X Bonds.
Principal Only Bonds................... The Class P Bonds.
Accrual Bonds.......................... The Class A-8 and Class A-12 Bonds.
Subordinate Bonds ..................... The Class B-1, Class B-2, Class B-3, Class B-4, Class B-5 and Class
B-6 Bonds.
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Offered Subordinate Bonds ............. The Class B-1, Class B-2 and Class B-3 Bonds.
Other Subordinate Bonds ............... The Class B-4, Class B-5 and Class B-6 Bonds. The Other
Subordinate Bonds are not offered hereby.
PAC Bonds.............................. The Class A-1, Class A-2, Class A-3, Class A-4 and Class A-9
Bonds.
TAC Bonds.............................. Class A-6 and Class A-11 Bonds.
Companion Bonds........................ Class A-6, Class A-7, Class A-8 and Class A-12 Bonds.
LIBOR Bonds............................ The Class A-6, Class A-7, Class A-11, Class A-21 and Class A-22
Bonds.
Senior P&I Bonds ...................... All Senior Bonds other than the Class P, Class A-5, Class A-10 and
Class X Bonds.
Regular Bonds ......................... All Classes of Bonds other than the Residual Bonds.
Residual Bonds ........................ The Class R-1 and Class R-2 Bonds.
Retail Bonds .......................... The Class A-14, Class A-15, Class A-16, Class A-17, Class A-18,
Class A-19 and Class A-20 Bonds.
Physical Bonds ........................ The Residual Bonds and the Other Subordinate Bonds.
Book-Entry Bonds ...................... All Offered Bonds other than the Physical Bonds.
Denominations .............................. Each Class of Book-Entry Bonds will be registered as a single Bond
held by a nominee of DTC, and beneficial interests will be held by
investors through the book-entry facilities of DTC, as described
herein, in minimum denominations of (i) in the case of the Senior
Bonds (other than the Retail Bonds and the Residual Bonds), $____
and increments of $___ in excess thereof, (ii) in the case of the Retail
Bonds, $_____ and increments of $_____ in excess thereof and (iii)
in the case of the Offered Subordinate Bonds, $_____ and increments
of $_____ in excess thereof. One Bond of each Class of Book-Entry
Bonds may be issued in a different principal or notional amount to
accommodate the remainder of the initial principal or notional
amount of the Bonds of such Class.
The Class R-1 and Class R-2 Bonds will each be issued in
certificated fully-registered form in a single bond of $___
and $____, respectively.
Master Servicer ............................ ______________________, as Master Servicer under the Pooling
and Servicing Agreement. ________ will also act as custodian with
respect to the Mortgage Files. As compensation for its services, the
Master Servicer will be entitled to receive investment income earned
on funds deposited in certain accounts and certain additional
servicing compensation as described herein. The Master Servicer is
the "Administrator" as such term is used in the Prospectus. See
"Pooling and Servicing Agreement--Certain Matters Regarding the
Master Servicer" herein.
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The Master Servicer will not ultimately be responsible for
the performance of the servicing activities of the
Sub-Servicer except as described under "The Pooling and
Servicing Agreement--Servicing Compensation, Compensating and
Payment of Expenses" and "--Monthly Advances." See "The
Master Servicer and the Sub- Servicer" herein.
Sub-Servicer................................ _________ will service the _____ Mortgage Loans (in such
capacities, is referred to as a "Sub-Servicer").
Certificate Trustee......................... ________________, a ________, as Certificate Trustee under
the Pooling and Servicing Agreement. See "Pooling and
Servicing Agreement--The Certificate Trustee" herein.
Indenture Trustee........................... _____________, a _______ bank, as Indenture Trustee under the
Indenture. See "Indenture" herein.
Loan Seller................................. _________________.
Cut-off Date ............................... ___________, 1999.
Closing Date ............................... On or about ____________.
The Mortgage Pool .......................... The Mortgage Loans in the aggregate (the "Mortgage Pool") consist
primarily of first lien, fixed rate fully amortizing mortgage loans
secured by one- to four-family residences and individual
condominium units and having original terms to stated maturity
ranging from __ to __ years.
All of the Mortgage Loans are conventional mortgage loans.
All but one of the Mortgage Loans with Loan-to-Value Ratios
(as defined herein) in excess of __% have primary mortgage
insurance.
The Mortgage Loans consist of the ____ Mortgage Loans having
original terms to stated maturity ranging from __ to __
years. See "--Description of the Mortgage Loans" herein.
Approximately ____% Mortgage Loans, by their Scheduled
Principal Balances as of the Cut-off Date are Jumbo Loans.
"Jumbo Loans" are mortgage loans that have principal balances
at origination that exceed the then applicable limitations
for purchase by the Federal National Mortgage Association
("Fannie Mae") and Freddie Mac (formerly the Federal Home
Loan Mortgage Corporation) ("Freddie Mac").
Set forth below is certain information regarding the Mortgage
Loans and the related Mortgaged Properties as of the Cut-off
Date. All such information is provided on an approximate
basis. All weighted average information provided below
reflects weighting of the Mortgage Loans by their respective
Scheduled Principal Balances as of the Cut-off Date. In each
case, such Scheduled Principal Balance has been calculated on
the assumption that the principal portion of all scheduled
payments (as defined herein) due in respect of each Mortgage
Loan on or before the Cut-off Date has been received.
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Mortgage Loans
Number of Mortgage Loans................. ____
Aggregate Scheduled Principal
Balance.............................. $_______
Minimum Scheduled Principal Balance...... $_______
Maximum Scheduled Principal Balance...... $_______
Average Scheduled Principal Balance...... $_______
Minimum Mortgage Rate.................... ____% per annum
Maximum Mortgage Rate.................... ____% per annum
Weighted Average Mortgage Rate........... ____% per annum
Weighted Average Net Rate................ ____% per annum
Minimum Remaining Term
to Stated Maturity................... ___ months
Maximum Remaining Term
to Stated Maturity................... ___ months
Weighted Average Remaining
Term to Stated Maturity.............. ___ months
Weighted Average Original
Loan-to-Value Ratio.................. ____%
Location of Mortgaged Property
California.......................... ____%
New Jersey.......................... ____%
New York............................ ____%
Massachusetts....................... ____%
Florida............................. ____%
Other............................... _____%
Net Rate.................................... The "Net Rate" for each Mortgage Loan is the rate of interest borne
by such Mortgage Loan (the "Mortgage Rate") less the applicable
Sub-Servicing Fee attributable thereto (in each case expressed as a
per annum rate) (the "Aggregate Expense Rate"). It is expected that
with respect to each Payment Date, the Sub-Servicing Fee for each
Mortgage Loan sub-serviced by ______ will generally be ____% per
annum of the Outstanding Principal Balance of such Mortgage Loan
and the Sub-Servicing Fee for each Mortgage Loan sub-serviced by
_____ and ___ will be ____% per annum of the Outstanding
Principal Balance of such Mortgage Loan. Any _____ Sub-Servicing
Fee in excess of ____% per annum will be set aside to pay for lender
funded mortgage insurance and will not be treated as servicing
compensation to ______ and will not be available to make
Compensating Interest Payments. For any Payment Date, the "Due
Date" for each Mortgage Loan will be the first day of the month in
which the Payment Date occurs.
Scheduled Principal Balance................. The "Scheduled Principal Balance" of a Mortgage Loan with respect
to a Payment Date is (i) the unpaid principal balance of such
Mortgage Loan as of the close of business on the related Due Date
(i.e., taking account of the principal payment to be made on such Due
Date and irrespective of any delinquency in its payment), as specified
in the amortization schedule at the time relating thereto (before any
adjustment to such amortization schedule by reason of any
bankruptcy or similar proceeding occurring after the Cut-off Date
(other than a Deficient Valuation, as defined under "Description of
the Bonds--Allocation of Losses; Subordination" herein) or any
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moratorium or similar waiver or grace period) less (ii) any
principal prepayments and the principal portion of any Net
Liquidation Proceeds (as defined herein) received during or
prior to the immediately preceding Prepayment Period (as
defined herein); provided that the Scheduled Principal
Balance of any Liquidated Mortgage Loan (as defined herein)
is zero.
Payment Dates............................... The 25th day of each month, or if such day is not a business day, then
the next succeeding business day, beginning in ______ 1999 (each,
a "Payment Date").
Record Date................................. The "Record Date" for each Payment Date will be the close of
business on the last business day of the month preceding the month
in which the related Payment Date occurs.
Due Period.................................. With respect to each Payment Date, the period commencing on the
second day of the month preceding the month in which the Payment
Date occurs and ending at the close of business on the first day of the
month in which the Payment Date occurs (each, a "Due Period").
Prepayment Period........................... With respect to each Payment Date and the Mortgage Loans, the
period from the first day through the last day of the month preceding
the month in which the Payment Date occurs (a "Prepayment
Period").
Payments on the Bonds....................... Interest Payments. With respect to each Payment Date, interest will
accrue during the related Interest Accrual Period for each Class of
Bonds (other than the Principal Only Bonds) at the rate for such Class
set forth or determined as provided on the cover page hereof (each,
a "Bond Interest Rate") on the Class Current Principal Balance (or in
the case of the Interest Only Bonds, the Class Notional Balance) of
such Class immediately preceding such Payment Date. With respect
to each Payment Date, the "Interest Accrual Period" for each interest-
bearing Class of Bonds other than the LIBOR Bonds will be the
calendar month preceding the month in which the Payment Date
occurs, and in the case of each Class of LIBOR Bonds will be the
period beginning on the 25th day of the month preceding the month
in which the Payment Date occurs and ending on the 24th day of the
month in which the Payment Date occurs, in each case commencing
in ________, 1999. Interest will be calculated on the basis of a 360-
day year comprised of twelve 30-day months.
The Class P Bonds are principal only Bonds and will not bear
interest.
On each Payment Date, as described herein, interest will be
payable on each interest-bearing Class of Bonds, other than
the Accrual Bonds, in an aggregate amount equal to the
Accrued Bond Interest for such Class on such Payment Date,
plus any Accrued Bond Interest thereon remaining unpaid from
previous Payment Dates. Accrued interest on the Accrual Bonds
will be paid as described under "Description of the
Bonds--Payments on the Bonds--Senior Bonds" herein. Net
Interest Shortfalls on the Mortgage Loans will be allocated
to the Classes of Bonds as described herein. See
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"Description of the Bonds--Payments on the Bonds--Interest"
herein.
LIBOR. The Bond Interest Rates for the LIBOR Bonds will be
determined by the Master Servicer based on the arithmetic
mean of quotations of the London Interbank Offered Rate for
one-month U.S. dollar deposits ("LIBOR") as provided by the
Reference Banks (as defined herein), as further described
herein. See "Description of the Bonds--Payments on the
Bonds--Calculation of LIBOR" herein.
Principal Payments. On each Payment Date, amounts in respect
of principal will be paid to the holders of the Bonds (other
than the Interest Only Bonds) as provided herein under
"Description of the Bonds--Payments on the Bonds--Principal".
Credit Enhancement--
General.................................. Credit enhancement for the Senior Bonds generally will be provided
by the Subordinate Bonds. Credit enhancement for each Class of
Subordinate Bonds will be provided by the Class or Classes of
Subordinate Bonds with higher numerical Class designations.
Credit Enhancement --
Subordination............................ The rights of the holders of each Class of the Subordinate Bonds to
receive payments with respect to the Mortgage Loans, will be
subordinated to such rights of the holders of the Senior Bonds, and
to each Class of Subordinate Bonds having a lower numerical
designation than such Class. The subordination of the Subordinate
Bonds to the Senior Bonds, and the further subordination among the
Subordinate Bonds, are each intended to increase the likelihood of
timely receipt by the holders of the Bonds with higher relative
payment priority of the maximum amount to which they are entitled
on any Payment Date and to provide such holders protection against
losses resulting from defaults on Mortgage Loans, to the extent
described herein. The Subordinate Bonds also provide protection
against Special Hazard Losses (as defined herein) to the extent
described herein. However, in certain circumstances, the amount of
available subordination (including the limited subordination provided
for certain types of losses) may be exhausted and shortfalls in
payments on the Offered Bonds could result. Holders of Senior
Bonds will bear their pro rata share of (i) any Realized Losses with
respect to Mortgage Loans in excess of the available total
subordination amount provided by the related Subordinate Bonds and
(ii) any Excess Special Hazard Losses with respect to Mortgage
Loans. See "Description of the Bonds--Payments on the Bonds",
"Description of the Bonds--Allocation of Losses; Subordination"
and "Description of the Bonds--Subordination" herein.
As of the Closing Date the aggregate Current Principal
Balances of the Subordinate Bonds and of the Other
Subordinate Bonds which are part of the Subordinate Bonds
will equal approximately ____% and ____%, respectively, of
the aggregate Current Principal Balances of all of the
Classes of Bonds.
In addition, to extend the period during which the
Subordinate Bonds remain available as credit enhancement to
the Senior Bonds, the
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entire amount of any prepayments and certain other
unscheduled recoveries of principal with respect to the
Mortgage Loans will be allocated to the Senior Bonds (other
than Class A-23 Bonds) to the extent described herein during
the first five years after the Cut-off Date (with such
allocation being subject to reduction over an additional
four-year period thereafter as described herein). This
allocation has the effect of accelerating the amortization of
the Senior Bonds as a whole while, in the absence of losses
in respect of the Mortgage Loans, increasing the percentage
interest in the principal balance of the Mortgage Loans
evidenced by the related Subordinate Bonds. See "Description
of the Bonds--Payments on the Bonds" and "--Subordination"
herein.
Monthly Advances............................ The Sub-Servicer will be obligated to make all required advances.
The Master Servicer will be obligated to advance delinquent
scheduled payments of principal and interest on Mortgage Loans
under certain circumstances to the extent the related Sub-Servicer
fails to make such advances, subject to the Master Servicer's
determination of recoverability (each such advance by a Sub-Servicer
or the Master Servicer, a "Monthly Advance"). See "Pooling and
Servicing Agreement--Monthly Advances" herein.
Allocation of Losses........................ Subject to the limitations set forth below, Realized Losses (other than
those relating to Excess Special Hazard Losses (as defined herein))
on the Mortgage Loans will be allocated as follows: (i) the
applicable Non-PO Percentage of the principal portion of such
Realized Losses will be allocated to the Bonds (other than the Class
P Bonds ), first, to the Subordinate Bonds in the inverse order of their
numerical Class designations and then pro rata to the Senior Bonds
(other than the Class P Bonds ) until, in each case, the Class Current
Principal Balance of each such Class of Bonds is reduced to zero; and
(ii) the applicable PO Percentage of any such Realized Losses will be
allocated, to the extent described herein, among the Subordinate
Bonds in the inverse order of their numerical Class designations,
through the operation of the applicable PO Deferred Payment
Writedown Amount for the Class P Bonds . Notwithstanding the
foregoing, the aggregate amount of Realized Losses which may be
allocated by means of subordination to cover Special Hazard Losses
is initially limited to $________ for the Bonds. See "Description of
the Bonds--Allocation of Losses; Subordination" herein.
Any Special Hazard Losses in excess of the amounts of
coverage therefor (an "Excess Special Hazard Loss") on
Non-Discount Mortgage Loans will be allocated on a pro rata
basis among the Senior Bonds (other than the Class P Bonds)
and the Subordinate Bonds . The principal portion of such
Excess Special Hazard Losses on Discount Mortgage Loans will
be allocated to the Class P Bonds, in an amount equal to the
related PO Percentage thereof, and the remainder of such
Excess Special Hazard Losses on such Discount Mortgage Loans
will be allocated among the Senior Bonds (other than the
Class P Bonds ) and the Subordinate Bonds on a pro rata basis
as described above. After the applicable Cross-Over Date, the
Non-PO Realized Losses (as defined herein) including, without
limitation, the Non-PO Percentage of all Special Hazard
Losses, on the Mortgage Loans will be allocated among the
Senior Bonds
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(excluding the Class P Bonds) on a pro rata basis. The amount
of any Realized Loss (other than an Excess Special Hazard
Loss) allocated to the Class P Bonds on or prior to the
Cross-Over Date will be treated as a PO Deferred Amount. See
"Description of the Bonds--Allocation of Losses;
Subordination" herein.
Neither the Offered Bonds nor the Mortgage Loans are insured
or guaranteed by any government agency or instrumentality,
CMC, CCC, the Issuer, the Loan Seller, ______, the Master
Servicer, the Certificate Trustee, the Indenture Trustee, the
Underwriter or any affiliates thereof or any other person or
entity.
Yield and Prepayment
Considerations........................... General Considerations. The yield to maturity of each Class of
Bonds will be affected by the amount and timing of principal
payments on the Mortgage Loans, the allocation of Available Funds
to such Class of Bonds, the applicable Bond Interest Rate (if any) for
such Class of Bonds and the purchase price paid for such Bonds. In
addition, the yields to investors in the Bonds will be adversely
affected by Realized Losses and Net Interest Shortfalls. The
interaction of the foregoing factors may have different effects on the
various Classes of Bonds and the effects on any Class may vary at
different times during the life of such Class. No representation is
made as to the anticipated rate of prepayments on the Mortgage
Loans, the amount and timing of Realized Losses or Net Interest
Shortfalls or as to the anticipated yield to maturity of any Bonds.
Prospective investors are urged to consider their own estimates as to
the anticipated rate of future prepayments on the Mortgage Loans and
the suitability of the Bonds to their investment objectives. In
addition to the discussion below, prospective investors should review
the discussion under "Yield and Prepayment Considerations" herein.
Mortgage Loan Payments. If prevailing mortgage rates fall
significantly below the Mortgage Rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher
prepayment rates than if prevailing rates remain at or above
the Mortgage Rates on the Mortgage Loans. Other factors
affecting prepayments of Mortgage Loans include changes in
Mortgagors' housing needs, job transfers, unemployment, net
equity in the Mortgaged Properties and servicing decisions.
Amounts received by virtue of liquidations of the related
Mortgage Loans, repurchases of the related Mortgage Loans
upon breach of representations or warranties and optional
redemption of the Bonds, also affect the timing of receipt of
principal on the Bonds. In general, the Mortgage Loans may be
prepaid at any time without penalty.
Timing and Amount of Payments. Unlike certain corporate
bonds, the timing and amount of principal payments on the
Bonds are not fixed because they are generally determined by
the timing and amount of distributions on the underlying
Certificates, distributions of which are generally determined
by the timing and amount of principal payments on the
applicable Mortgage Loans. The timing of payments on the
Mortgage Loans may significantly affect an investor's yield.
In general, the earlier a prepayment of principal on
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the Mortgage Loans, the greater will be the effect on an
investor's yield to maturity. As a result, the effect on an
investor's yield of principal prepayments occurring at a rate
higher (or lower) than the rate anticipated by the investor
during the period immediately following the issuance of the
Bonds will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. Furthermore,
the effective yield to Bondholders with respect to Bonds
other than the LIBOR Bonds will be slightly lower than the
yield otherwise produced by the applicable Bond Interest Rate
and purchase price because, while interest generally will
accrue on each such Bond from the first day of the month, the
payment of such interest will not be made earlier than the
25th day of the month following the month of accrual.
Moreover, to the extent any Net Interest Shortfall or the
interest portion of any Realized Loss is allocated to a Class
of Bonds the yield to investors in such Class will be
reduced.
Discounts and Premiums. In the case of any Bonds purchased at
a discount (including the Class P Bonds), a slower than
anticipated rate of principal payments could result in an
actual yield that is lower than the anticipated yield. In the
case of any Bonds purchased at a premium (including each
Class of Interest Only Bonds), a faster than anticipated rate
of principal payments could result in an actual yield that is
lower than the anticipated yield. A discount or premium would
be determined in relation to the price at which a Bond will
yield its Bond Interest Rate, after giving effect to any
payment delay.
Reinvestment Risk. Because the Mortgage Loans may be prepaid
at any time, it is not possible to predict the rate at which
payments on the Bonds will be received. Since prevailing
interest rates are subject to fluctuation, there can be no
assurance that investors in the Bonds will be able to
reinvest the payments thereon at yields equaling or exceeding
the yields on the Bonds. Yields on any such reinvestments may
be lower, and may even be significantly lower, than yields on
the Bonds. Generally, when prevailing interest rates
increase, prepayment rates on mortgage loans tend to
decrease, resulting in a reduced rate of return of principal
to investors at a time when reinvestment at such higher
prevailing rates would be desirable. Conversely, when
prevailing interest rates decline, prepayment rates on
mortgage loans tend to increase, resulting in a greater rate
of return of principal to investors at a time when
reinvestment at comparable yields may not be possible.
Prospective investors in the Bonds should consider carefully
the related reinvestment risks in light of other investments
that may be available to such investors.
Weighted Average Interest Rates. Because the Bond Interest
Rate applicable to the Class X Bonds will equal or be based
upon the weighted average of the excess, if any, of the Net
Rates of the Non- Discount Mortgage Loans over a specified
percentage, disproportionate prepayments of Non-Discount
Mortgage Loans with higher Net Rates will adversely affect
the yield on such Class. Because Mortgage Loans with higher
Net Rates will have higher Mortgage Rates as well, and such
Mortgage Loans are likely to prepay at rates that are faster
than those applicable to Mortgage
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Loans with lower Mortgage Rates, the yields on the Bonds will
be adversely affected.
Subordination of Certain Classes of Bonds. The rights of the
Bondholders of the Subordinate Bonds to receive payments with
respect to the Mortgage Loans will be subordinated to such
rights of the holders of the Senior Bonds and to each Class
of Subordinate Bonds having a lower numerical designation
than such Class. The level of subordination available as
support to the Senior Bonds will be directly affected by the
rate and timing of prepayments and the occurrence of Realized
Losses.
Prepayments. The applicable Non-PO Percentage (as defined
herein) of principal prepayments on the Mortgage Loans will
be allocated solely to the Senior P&I Bonds during the first
five years after the Closing Date and then such allocation
will decrease subject to meeting certain loss and delinquency
tests during the next four years until the Senior P&I Bonds
and the related Subordinate Bonds share pro rata in such
allocations. Consequently, during not less than the first
nine years after the Closing Date, any prepayments will have
the effect of accelerating the amortization of one or more
Classes of the Senior P&I Bonds, while increasing the
percentage interest evidenced by the Subordinate Bonds. The
entire amount of the applicable PO Percentage of any
prepayment on a Discount Mortgage Loan will be allocated
solely to the Class P Bonds, as long as the Class Current
Principal Balance of such Class of Bonds has not been reduced
to zero. In addition, in order to maintain the relative
subordination among the Subordinate Bonds , the applicable
Non-PO Percentage of prepayments and certain other
unscheduled recoveries of principal in respect of the
Mortgage Loans will not be payable to the holders of a Class
of Subordinate Bonds on any Payment Date if the Class
Prepayment Payment Trigger (as defined herein) for such Class
is not satisfied, except as otherwise described herein. If
the Class Prepayment Payment Trigger is not satisfied with
respect to any Class of Subordinate Bonds, the amortization
of those Classes of Subordinate Bonds with a lower numerical
class designation may occur more rapidly than would otherwise
have been the case and, in the absence of losses in respect
of the Mortgage Loans, the percentage interest in the
principal balance of the Mortgage Loans evidenced by such
Class of Subordinate Bonds may increase.
Sequential Pay Senior P&I Bonds. The Classes of Senior P&I
Bonds are subject to various priorities for payment of
principal as described herein. Payments on Classes currently
entitled to receive principal payments will be immediately
affected by the prepayment rate of the Mortgage Loans at such
time. Payments on Classes with a later priority of payment
will not be directly affected by the prepayment rate until
such time as principal is payable on such Classes. However,
the timing of commencement of principal payments and the
weighted average lives of such Classes may be affected by the
prepayment rate experienced both before and after the
commencement of principal payments on such Classes. In
addition, because principal payments are paid to certain
Classes of Senior P&I Bonds before other Classes of Senior
P&I Bonds , holders of Senior P&I Bonds that receive
principal later bear a greater risk of being
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allocated Realized Losses on the Mortgage Loans than holders
of such Classes that receive principal earlier.
PAC Bonds. The Senior Bonds have been structured to provide
for relatively stable payments of principal to the PAC Bonds.
Using the modeling assumptions described in "Yield and
Prepayment Considerations--Yield on the PAC Bonds" herein,
the outstanding principal balance of each of the Classes of
the PAC Bonds will be reduced to its Planned Balance (as
defined herein) for each Payment Date if prepayments on the
Mortgage Loans occur at a constant rate within the range of
approximately ___% to approximately ___% SPA (as defined
herein) with respect to the PAC Bonds. To the extent that
prepayments on the Mortgage Loans occur at a constant rate
below approximately ___% SPA with respect to the PAC Bonds,
the Available Funds allocable as payments of principal on
each Payment Date may be insufficient to make payments of
principal on the PAC Bonds, respectively, in amounts
sufficient to reduce their Class Current Principal Balances
in accordance with their respective Planned Balances for such
Payment Date, and, as a result, the weighted average lives of
such Bonds may be extended. To the extent that prepayments
occur at a constant rate higher than approximately ___% SPA
with respect to the PAC Bonds, the weighted average lives of
such Bonds may be shortened.
TAC Bonds. The Senior Bonds have been structured to provide
for relatively stable payments of principal to the TAC Bonds.
Using the modeling assumptions described in "Yield and
Prepayment Considerations--Yield on the TAC Bonds" herein,
the outstanding principal balance of each Class of the TAC
Bonds will be reduced to its respective Targeted Balance (as
defined herein) for each Payment Date if prepayments on the
Mortgage Loans occur at a constant rate of ___% SPA. To the
extent that prepayments on the Mortgage Loans occur at a
constant rate below ___% SPA, the Available Funds allocable
as payments of principal on each Payment Date may be
insufficient to make payments of principal on the TAC Bonds
in amounts sufficient to reduce their Class Current Principal
Balance in accordance with their respective Targeted Balances
for such Payment Date, and, as a result, the weighted average
lives of such Class of Bonds may be extended. To the extent
that prepayments occur at a constant rate higher than ___%
SPA, the weighted average lives of such Class of Bonds may be
shortened.
In addition, principal prepayments and other unscheduled
payments of principal on the Mortgage Loans may result in
principal available for payment to the PAC Bonds on a Payment
Date in an amount greater than the amount necessary to reduce
the applicable Class Current Principal Balances to their
respective Planned Balances for such Payment Date. Such
excess will first be paid to the Companion Bonds until their
respective Class Current Principal Balances have been reduced
to zero and then to the TAC Bonds. In addition, if the rate
of principal prepayments and other unscheduled payments of
principal on the Mortgage Loans causes the principal
available for payment on the Bonds on any Payment Date to be
less than the amounts necessary to reduce the Class Current
Principal Balances of the PAC Bonds then entitled to receive
principal to their respective
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Planned Balances, the TAC Bonds will not receive any payment
of principal. Accordingly, the rate of payments on the
Mortgage Loans is expected to have a greater effect on the
weighted average lives of the TAC Bonds than on the weighted
average lives of the PAC Bonds.
Companion Bonds. Principal prepayments and other unscheduled
payments of principal on the Mortgage Loans may result in
principal available for payment to the PAC Bonds and the TAC
Bonds on a Payment Date in an amount greater than the amount
necessary to reduce the applicable Class Current Principal
Balances to their respective Planned Balances or Targeted
Balances for such Payment Date. Such excess will be paid
first to the Companion Bonds until their respective Class
Current Principal Balances have been reduced to zero. In
addition, if the rate of principal prepayments and other
unscheduled payments of principal on the Mortgage Loans
causes the principal available for payment on the Bonds on
any Payment Date to be less than the amounts necessary to
reduce the Class Current Principal Balances of the PAC Bonds
and the TAC Bonds then entitled to receive principal to their
respective Planned Balances or Targeted Balances, the
Companion Bonds will not receive any payment of principal.
Accordingly, the rate of payments on the Mortgage Loans is
expected to have a greater effect on the weighted average
lives of the Companion Bonds than on the weighted average
lives of the PAC Bonds and the TAC Bonds.
Interest Only Bonds. Because the Class Notional Balances of
the Class X Bonds will be based upon the Scheduled Principal
Balances of the Non-Discount Mortgage Loans, the yield on the
Class X Bonds will be sensitive to the rate and timing of
principal payments of the Non-Discount Mortgage Loans. The
yield on the Class A-5 and Class A-10 Bonds also will be
sensitive to the rate and timing of principal payments of the
Mortgage Loans, because the Class A-5 Notional Balance is
based on the Class Current Principal Balances of the Class
A-1 through Class A-4 Bonds and the Class A-10 Notional
Balance is based on the Class Current Principal Balance of
the Class A-9 Bonds. A rapid rate of principal payments on
the Mortgage Loans will have a materially negative effect on
the yield to investors in the Class A-5 and Class A-10 Bonds,
a rapid rate of principal payments on the Non-Discount
Mortgage Loans will have a materially negative effect on the
yield to investors in the Class X Bonds. Investors should
fully consider the associated risks, including the risk that
a rapid rate of principal payments could result in the
failure of investors in each such Class of Bonds to recover
fully their initial investments. See "Yield and Prepayment
Considerations--Yield on the Interest Only Bonds" herein.
Class A-8 Bonds. Because of the payment priorities of the
Senior Bonds, the weighted average life of the Class A-8
Bonds will be extremely sensitive to the rate of prepayments
on the Mortgage Loans.
Class A-23 Bonds. As described herein, during certain periods, no
principal payments or a disproportionately small or large portion of
principal payments will be paid to the Class A-23 Bonds. Unless the
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Class Current Principal Balances of all other Senior P&I
Bonds have been reduced to zero, the Class A-23 Bonds will
not be entitled to receive any payments of principal prior to
the Payment Date occurring in _______.
Class P Bonds. The amounts payable with respect to the Class
P Bonds derive from principal payments on the Discount
Mortgage Loans . As a result, the yield on the Class P Bonds
will be adversely affected by slower than expected payments
of principal (including prepayments, defaults and
liquidations) on the Discount Mortgage Loans. Because
Discount Mortgage Loans have lower Net Rates than the
Non-Discount Mortgage Loans, and because the Mortgage Loans
with lower Net Rates are likely to have lower Mortgage Rates,
the Discount Mortgage Loans are generally likely to prepay at
a slower rate than the Non-Discount Mortgage Loans. See
"Yield and Prepayment Considerations--Yield on the Class P
Bonds" herein.
Residual Bonds. Holders of the Residual Bonds are entitled to
receive payments of principal and interest as described
herein. However, holders of such Bonds may have tax
liabilities with respect to their Bonds during the early
years of the related REMIC that substantially exceed the
principal and interest payable thereon during such periods.
Liquidity................................... There is currently no secondary market for the Bonds, and there can
be no assurance that one will develop. The Underwriter intends to
establish a market in the Offered Bonds, but it is not obligated to do
so. There is no assurance that any such market, if established, will
continue or will provide investors with a sufficient level of liquidity.
Each Bondholder will receive monthly reports pertaining to the
Bonds as described under "Indenture--Reports by Indenture Trustee
to Bondholders" in the Prospectus. There are a limited number of
sources which provide certain information about collateralized
mortgage obligations in the secondary market, and there can be no
assurance that any of these sources will provide information about
the Bonds. Investors should consider the effect of limited
information on the liquidity of the Bonds.
Optional Redemption ........................ At its option, ______ or its designee may, upon giving written notice
to the Issuer, the Master Servicer, the Certificate Trustee and the
Indenture Trustee, repurchase from the related Trust all of the
remaining Mortgage Loans, and thereby effect an early termination
of the related Certificates and redemption of the Bonds, on any
Payment Date when the aggregate outstanding principal balance of
such Mortgage Loans is equal to or less than _% of the aggregate
outstanding principal balance of the Mortgage Loans as of the Cut-
off Date. If on any Payment Date ______ or its designee has not
exercised such option and the aggregate outstanding principal
balance of the Mortgage Loans is equal to or less than __% of the
aggregate outstanding principal balance of the Mortgage Loans as of
the Cut-off Date, the Master Servicer shall also have such option.
Any Payment Date on which ______ or the Master Servicer exercises
its option to purchase the Mortgage Loans is referred to herein as an
"Optional Redemption Date". Any such repurchase shall be at a
price (the "Redemption Price") equal to the aggregate Class Current
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Principal Balances of the then outstanding Bonds , plus
accrued and unpaid interest thereon through the end of the
month preceding the month in which the Optional Redemption
Date occurs, plus an amount equal to all outstanding and
unreimbursed advances (including Monthly Advances) made by
the Master Servicer or any Sub-Servicer and any other amounts
owed to the Master Servicer under the Pooling and Servicing
Agreement or to a Sub-Servicer under the applicable
Sub-Servicing Agreement. Upon any such optional repurchase
after which no Bonds are outstanding, the Trust Estate will
terminate and any remaining assets in the Trust Estate shall
be released to the repurchasing party. See "Pooling and
Servicing Agreement--Termination" herein.
Certain Federal Income Tax
Consequences............................. For federal income tax purposes, elections will be made to treat the
assets of the Trust Estate as two separate real estate mortgage
investment conduits (each a "REMIC," and respectively, "REMIC 1"
and "REMIC 2"). Upon the issuance of the Offered Bonds, Andrews
& Kurth L.L.P., counsel to the Issuer, will deliver its opinion
generally to the effect that, assuming compliance with all provisions
of the Indenture and the Pooling and Servicing Agreement, for
federal income tax purposes, both of REMIC 1 and REMIC 2 will
qualify as a REMIC within the meaning of Sections 860A through
860G of the Internal Revenue Code of 1986 (the "Code"). For
federal income tax purposes, the Senior Bonds thereof (other than the
Residual Bonds) and the Subordinate Bonds will be designated as the
"regular interests" in REMIC 2, and the Class R-1 and Class R-2
Bonds will be designated as the "residual interests" in REMIC 1 and
REMIC 2, respectively.
Because the Senior Bonds thereof (other than the Residual
Bonds) and the Subordinate Bonds will be considered REMIC
regular interests, they will be taxable debt obligations
under the Code, and interest paid or accrued on such Bonds,
including any original issue discount, will be taxable to the
holders of such Bonds in accordance with the accrual method
of accounting, regardless of such Bondholder's usual method
of accounting. It is expected that the Class P, Class A-5,
Class A-8, Class A-10, Class A-12 and Class X Bonds will be,
and the other Classes of Bonds may be, treated as having been
issued with original issue discount for federal income tax
purposes. The Code and applicable regulations do not
adequately address certain issues relevant to the application
of the original issue discount rules to the Class A-7, Class
A-11 and Class A-22 Bonds; however, the Trustee intends to
treat all interest on such Classes of Bonds as original issue
discount. See "Certain Federal Income Tax Consequences--REMIC
Bonds--Taxation of Regular Bonds--Original Issue Discount" in
the Prospectus. The prepayment assumption that should be used
in determining the rate of accrual of original issue
discount, if any, with respect to the Offered Bonds is ___%
of SPA (as defined herein), with respect to the Loans.
However, no representation is made herein as to the rate at
which prepayments actually will occur. See "Yield and
Prepayment Considerations" herein.
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For federal income tax purposes, the Offered Bonds generally
will be treated as "regular or residual interests in a REMIC"
for domestic building and loan associations and as "real
estate assets" for real estate investment trusts ("REITs"),
subject to the limitations described in "Certain Federal
Income Tax Consequences" in the Prospectus. Similarly,
interest on the Offered Bonds will be considered "interest on
obligations secured by mortgages on real property" for REITs,
subject to the limitations described in "Certain Federal
Income Tax Consequences" in the Prospectus.
For further information regarding the federal income tax
consequences of investing in the Offered Bonds see "Certain
Federal Income Tax Consequences" in the Prospectus.
Federal Income Tax Aspects
of Residual Bonds........................ The Residual Bonds generally will be treated in the same
manner as the other Offered Bonds for the various
qualification purposes referred to above, but generally will
not be treated as evidences of indebtedness for federal
income tax purposes. Instead, the Class R-1 and Class R-2
Bonds will be considered as representing the right to the net
income or loss of REMIC 1 and REMIC 2, respectively. Holders
of the Residual Bonds ("Residual Bondholders") will be
required to report, and will be taxed on, their pro rata
shares of such income or loss, and such requirements will
continue until there are no Bonds of any Class outstanding,
even though such Bondholders previously may have received
full payment of their stated interest and principal.
Furthermore, the taxable income of Residual Bondholders
attributable to the Residual Bonds may exceed the principal
and interest payments received by such Bondholders with
respect to such Bonds during the corresponding period, which
could result in a highly negative after-tax return for such
Bondholders. See "Special Tax Considerations" herein.
The REMICs may generate income, a portion of which will be
treated as "excess inclusion" income. Such excess inclusion
income (a) is taxable to a tax-exempt Residual Bondholder as
unrelated business taxable income ("UBTI"), (b) in the case
of foreign holders, is subject to withholding tax at a rate
of 30% (regardless of any statutory or treaty exemptions or
rate reduction that otherwise would apply), and (c) generally
cannot be offset by any net operating losses or current
deductions of Residual Bondholders. Consequently, Residual
Bondholders may experience an after-tax return that is highly
negative. Residual Bondholders who are individuals, estates
or trusts may be subject to limitations on the deductibility
of administrative expenses of the applicable REMICs for
purposes of determining their taxable income and alternative
minimum taxable income.
Furthermore, the Treasury regulations relating to REMICs (the
"REMIC Regulations") provide that certain transfers of
noneconomic residual interests ("NERDs") and residual
interests that have tax avoidance potential ("TAPRIs") will
be disregarded for federal income tax purposes. It is
expected that the Class R-2 Bonds will constitute NERDs and
TAPRIs for purposes of the REMIC Regulations on the Closing
Date. A transferor of a Residual Bond should consult with its
tax advisor to determine whether the Residual
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Bonds would be considered a NERD or a TAPRI at the time of
the transfer thereof for purposes of the REMIC Regulations.
See "Special Tax Considerations" herein.
The Class R-1 and Class R-2 Bonds represent the residual
interest in REMIC 1 and REMIC 2, respectively, and may
experience a highly negative after-tax return. Accordingly,
prospective investors are urged to consult their own tax
advisors and consider the after-tax effect of ownership of a
Residual Bond and the suitability of the Residual Bonds to
their investment objectives. Restrictions on Purchase and
Transfer of Residual Bonds............... The Residual Bonds
are not offered for sale to tax-exempt organizations that are
"disqualified organizations" as defined in "Certain Federal
Income Tax Consequences--Special Tax Considerations
Applicable to Residual Bonds--Restrictions on Transfer of a
Residual Bond" in the Prospectus. In addition, there are
prohibitions on transfers of Residual Bonds to a Plan or Plan
Investor (each as defined herein). Finally, none of the
Residual Bonds or any beneficial interest therein may be sold
or otherwise transferred except upon delivery to the
Indenture Trustee of the certificates, affidavits and other
agreements described herein. See "Certain Federal Income Tax
Consequences--REMIC Bonds" and "--Special Tax Considerations
Applicable to Residual Bonds--Restrictions on Transfer of a
Residual Bond" in the Prospectus and "Restrictions on
Purchase and Transfer of the Residual Bonds" herein.
ERISA Considerations........................ Fiduciaries of employee benefit plans and certain other retirement
plans and arrangements, including individual retirement accounts and
annuities, Keogh plans, and collective investment funds in which
such plans, accounts, annuities or arrangements are invested, that are
subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), or corresponding provisions of the Code (each
of the foregoing, a "Plan") should review carefully with their legal
advisors whether the purchase or holding of the Offered Bonds will
result in unfavorable consequences for the Plan or its fiduciaries
under the Regulations (as defined in the Prospectus) or the prohibited
transaction provisions of ERISA or the Code (the "Prohibited
Transaction Provisions"). Such consequences could result unless one
of the exceptions in, or exemptions from, the Plan Asset Regulations
and Prohibited Transaction Provisions is applicable. See "ERISA
Considerations" herein and "ERISA Matters" in the Prospectus.
Subject to the considerations set forth herein in "ERISA
Considerations", the Class B-1 and Class B-2 Bonds and the
Senior Bonds, other than the Residual Bonds and the Interest
Only Bonds, may be transferred to a Plan, a person acting on
behalf of a Plan, or any person using the assets of a Plan
(each, a "Plan Investor"). The purchase or holding of any of
the Interest Only Bonds, the Residual Bonds, or the Class B-3
Bonds by a Plan Investor may constitute a non-exempt
prohibited transaction or result in the imposition of excise
taxes or penalties. Accordingly, the Residual Bonds may not
be transferred to a Plan Investor, and the Interest Only
Bonds and the Class B-3 Bonds may not be transferred to a
Plan Investor unless the Plan Investor provides the Master
Servicer and the Indenture Trustee with a Benefit Plan
Opinion (as defined herein). Each purchaser of
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an Interest Only Bond or a Class B-3 Bond, by virtue of such
purchaser's receipt of such Bond, unless such purchaser
provides a Benefit Plan Opinion, will be deemed to have
represented that it is not a Plan Investor, and will be
deemed to have agreed to indemnify and hold the Issuer, the
Master Servicer, each Sub-Servicer, the Certificate Trustee,
the Indenture Trustee and the Underwriter harmless against
any losses, liabilities or expenses or resulting from the
breach of such representation. See "ERISA Considerations"
herein and "ERISA Matters" in the Prospectus. See also
"Restrictions on Purchase and Transfer of the Residual Bonds"
herein.
Stated Maturity of the Bonds................ The "Stated Maturity" of each Class of Bonds will be: with respect
to each Class of Bond, the Payment Date in __________. The Stated
Maturity has been determined by adding one month to the maturity
date of the Mortgage Loan with the latest stated maturity date.
Because the rate of payments on the Bonds will depend on the rate
of payment of principal (including prepayments) on the Mortgage
Loans , the actual final payment on any Class of Offered Bonds could
occur significantly earlier than its Stated Maturity. The rate of
payments on the Mortgage Loans will depend on their particular
characteristics, as well as on the interest rates prevailing from time to
time and other economic factors, and no assurance can be given as to
the actual payment experience of the Mortgage Loans.
Rating...................................... It is a condition to their issuance that each Class of Offered Bonds
receives the ratings set forth below from ______________
("_______") and ____________ ("_____"). ______ and ______ are
referred to herein as the "Rating Agencies".
Rating
Class ______ ____
Class P Bonds
Class A-1 Bonds
Class A-2 Bonds
Class A-3 Bonds
Class A-4 Bonds
Class A-5 Bonds
Class A-6 Bonds
Class A-7 Bonds
Class A-8 Bonds
Class A-9 Bonds
Class A-10 Bonds
Class A-11 Bonds
Class A-12 Bonds
Class A-13 Bonds
Class A-14 Bonds
Class A-15 Bonds
Class A-16 Bonds
Class A-17 Bonds
Class A-18 Bonds
Class A-19 Bonds
Class A-20 Bonds
Class A-21 Bonds
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Class A-22 Bonds
Class A-23 Bonds
Class X Bonds
Class B-1 Bonds
Class B-2 Bonds
Class B-3 Bonds
Class R-1 Bonds
Class R-2 Bonds
The ratings of the Offered Bonds of any Class should be
evaluated independently from similar ratings on other types
of securities. A rating is not a recommendation to buy, sell
or hold securities and may be subject to revision or
withdrawal at any time by the Rating Agencies. See "Rating"
herein.
The Issuer has not requested a rating of the Offered Bonds by
any rating agency other than the Rating Agencies. However,
there can be no assurance as to whether any other rating
agency will rate the Offered Bonds or, if it does, what
rating would be assigned by such other rating agency. The
rating assigned by such other rating agency to the Offered
Bonds could be lower than the respective ratings assigned by
the Rating Agencies.
Legal Investment............................ The Senior Bonds and the Class B-1 Bonds will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market
Enhancement Act of 1984 ("SMMEA") so long as they are rated in
one of the two highest rating categories and, as such, will be legal
investments for certain entities to the extent provided in SMMEA,
subject to state laws overriding SMMEA. Certain states have enacted
legislation overriding the legal investment provisions of SMMEA.
The remaining Classes of Bonds will not constitute "mortgage related
securities" under SMMEA (the "Non-SMMEA Bonds"). The
appropriate characterization of the Non-SMMEA Bonds under
various legal investment restrictions, and thus the ability of investors
subject to these restrictions to purchase Non-SMMEA Bonds, may be
subject to significant interpretive uncertainties.
All investors whose investment activities are subject to
legal investment laws and regulations or to review by certain
regulatory authorities may be subject to restrictions on
investment in the Bonds. Any such institution should consult
its own legal advisors in determining whether and to what
extent there may be restrictions on its ability to invest in
the Bonds. See "Legal Investment" herein and in the
Prospectus.
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RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors (as well as the factors set forth under "Risk Factors" in
the Prospectus) before deciding to invest in the Offered Bonds.
LIMITED OBLIGATIONS
The Offered Bonds will be nonrecourse obligations solely of the Issuer
and will not represent an obligation of or interest in CMC, CCC, ______, the
Loan Seller, the Master Servicer, the Certificate Trustee, the Indenture
Trustee or any of their respective affiliates. None of the Offered Bonds, the
Certificates, or the Mortgage Loans are or will be guaranteed or insured by any
governmental agency or instrumentality or by CMC, CCC, ______, the Loan Seller,
the Master Servicer, the Certificate Trustee, the Indenture Trustee or any of
their respective affiliates. The assets included in the Trust Estate will be
the sole source of payments on the Offered Bonds, and there will be no recourse
to the Issuer, CMC, CCC, ______, the Loan Seller, the Master Servicer, the
Certificate Trustee, the Indenture Trustee or any of their respective
affiliates, or any other entity, in the event that such assets are insufficient
or otherwise unavailable to make all payments provided for under the Offered
Bonds.
YIELD AND PREPAYMENT CONSIDERATIONS
The yield to maturity of each Class of Bonds will be affected by the
amount and timing of principal payments on the Mortgage Loans , the allocation
of the Available Funds to such Class of Bonds, the applicable Bond Interest
Rate for such Class of Bonds and the purchase price paid for such Bonds.
Prospective investors are urged to consider their own estimates as to the
anticipated rate of future prepayments on the Mortgage Loans and the
suitability of the Bonds to their investment objectives. Prospective investors
should review the discussion under "Yield and Prepayment Considerations"
herein.
RESIDUAL BONDS
The Class R-1 and Class R-2 Bonds, which represent the residual
interest in REMIC 1 and REMIC 2, respectively, may experience a highly negative
after tax return. See "Special Tax Considerations" herein.
SUBORDINATION
The rights of the Subordinate Bonds to receive payments in respect of
the Mortgage Loans will be subordinated to such rights of the holders of the
Senior Bonds and the Subordinate Bonds senior thereto, all to the extent
described herein under "Description of the Bonds". Except for Excess Special
Hazard Losses, Realized Losses on Mortgage Loans will be allocated first to the
Other Subordinate Bonds in reverse numerical order, second to the Offered
Subordinate Bonds in reverse numerical order, and then to the Senior Bonds, in
each case as described herein. See "Description of the Bonds--Allocation of
Losses; Subordination" herein.
GEOGRAPHIC CONCENTRATION OF THE MORTGAGED PROPERTIES
Approximately ____% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) are expected to be secured by Mortgaged
Properties located in the State of ______. Consequently, losses and prepayments
on the Mortgage Loans and resultant payments on the Offered Bonds may be
affected significantly by changes in the housing markets and regional economies
of, and the occurrence of natural disasters (such as ___________) in, the State
of ________. In the Purchase Agreement, ______ will represent that, as of the
Closing Date, each Mortgaged Property is free of material damage or any such
damage is adequately covered by an insurance policy. Any repurchase of a
Mortgage Loan due to a breach of this representation will be treated as a
principal prepayment.
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DESCRIPTION OF THE CERTIFICATES
Each Certificate securing the Bonds will be issued pursuant to the
Pooling and Servicing Agreement. On or prior to the Closing Date, ______ will
have acquired the Mortgage Loans from the Loan Seller pursuant to the terms of
the related Loan Sale Agreement. On the Closing Date, pursuant to a loan
purchase agreement between ______ and CCC (the "Purchase Agreement"), ______
will assign and convey the Mortgage Loans to CCC and CCC will, in turn, assign
and convey the Mortgage Loans, together with all of CCC's rights and benefits
under the Purchase Agreement, to the Issuer. The Issuer will simultaneously
convey the Mortgage Loans, together with all of the Issuer's rights and
benefits under the Purchase Agreement to the Certificate Trustee, and the
Certificate Trustee will issue the Certificates in exchange therefor. The
Issuer will simultaneously convey the Certificates to the Indenture Trustee as
collateral for the Bonds.
Pursuant to the Sub-Servicing Agreement, the Sub-Servicer will remit
to its Protected Account payments (including prepayments) of principal received
on each related Mortgage Loan, together with interest thereon at a rate (the
"Net Rate") equal to the mortgage rate of interest borne by such Mortgage Loan
(the "Mortgage Rate"), less the Sub-Servicing Fee. See "Pooling and Servicing
Agreement--Protected Accounts" herein. On or before the 18th day of each month
or, if such day is not a Business Day, the preceding Business Day (each, a
"Sub-Servicer Remittance Date"), the Sub-Servicer, shall withdraw all amounts
from the related Protected Account (net of any amounts which the Sub-Servicer
is entitled to retain under the applicable Sub-Servicing Agreement) and shall
remit such amounts to the Master Servicer for deposit into an account (the
"Master Servicer Collection Account"). On or before each Distribution Date, the
Master Servicer shall withdraw from the Master Servicer Collection Account and
remit to the Certificate Trustee all amounts in the Master Servicer Collection
Account (net of the Master Servicer Compensation and all other amounts that the
Master Servicer is entitled to retain pursuant to the Pooling and Servicing
Agreement). The Certificate Trustee will deposit such funds into the
Certificate Account and will apply such funds on each Payment Date to make
distributions to the Indenture Trustee, as the sole Certificateholder, in
respect of the Available Funds (as defined herein). The Indenture Trustee shall
deposit such funds into the collection account (the "Collection Account")
established in accordance with the Indenture and maintained with the Indenture
Trustee, and such funds will be available to make payments on the Bonds. Each
Certificate will evidence the entire beneficial ownership interest in a
separate trust (each a "Trust") consisting of, among other things, the Mortgage
Loans and all proceeds in respect thereof.
The Certificates will evidence the entire beneficial interest in the
Mortgage Loans. The Mortgage Loans will be transferred and assigned to the
Certificate Trustee for the benefit of the Indenture Trustee, as sole
Certificateholder. The Certificates will be issued by the Certificate Trustee,
transferred to the Issuer in exchange for the Mortgage Loans and pledged by the
Issuer to the Indenture Trustee as collateral for the Bonds. Thereafter, the
Certificates will at all times be registered in the name of the Indenture
Trustee and held as security for the benefit of the Bondholders until released
as described herein.
Pursuant to the Purchase Agreement, ______ will make certain
representations and warranties with respect to the related Mortgage Loans
thereunder and will be obligated to (i) repurchase Mortgage Loans as to which
there has been a breach of such representations and warranties that materially
and adversely affects the interests of the holders of the Certificates (the
"Certificateholders") or as to which the related documentation is found to
contain a material defect or (ii) substitute a new mortgage loan for such
Mortgage Loan which satisfies the conditions set forth in the Pooling and
Servicing Agreement. Such representations and warranties are described herein
under "Pooling and Servicing Agreement--Representations and Warranties". The
Certificate Trustee, on behalf of the Indenture Trustee, as sole
Certificateholder, will have no other remedies for any breaches of the
representations and warranties regarding the Mortgage Loans made by ______
under the Purchase Agreement. The Master Servicer's obligations with respect to
the Mortgage Loans will generally consist of (i) the obligation to notify the
Certificate Trustee if the documentation for any such Mortgage Loan is found by
the Master Servicer to be defective, (ii) its monitoring and supervisory
obligations under the Pooling and Servicing Agreement, (iii) its obligation to
make certain cash advances in the event of delinquencies in payments on or with
respect to such Mortgage Loans, if the related Sub-Servicer fails to make such
advances and (iv) the obligation to make certain payments with respect to
Interest Shortfalls as described under "Pooling and Servicing
Agreement--Servicing Compensation, Compensating Interest and Payment of
Expenses" herein. See "Pooling and Servicing Agreement" herein.
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DESCRIPTION OF THE MORTGAGE LOANS
The Mortgage Pool will consist of approximately _____ Mortgage Loans.
In general, these are, fixed rate, fully amortizing mortgage loans secured by
deeds of trust or other similar security agreements (each, a "Mortgage")
creating a first lien on one- to four-family residences and individual
condominium units (the "Mortgaged Properties") and having original terms to
stated maturity ranging from __ to __ years. All of the Mortgage Loans are
conventional mortgage loans. All of the Mortgage Loans with Loan-to-Value
Ratios (as defined herein) at origination in excess of 80% have primary
mortgage insurance. The Cut-off Date Scheduled Principal Balance of each set
forth herein is subject to a permitted variance of up to__%. The following
paragraphs and the tables set forth in Annex A set forth additional information
with respect to the Mortgage Pool in the aggregate.* All percentages set forth
herein are based on the aggregate Scheduled Principal Balance of the Mortgage
Loans as of the Cut-off Date unless otherwise indicated.
Approximately ____% of the Mortgage Loans (the "_____ Mortgage Loans")
were originated or acquired by _________________ ("_____"). As of the Cut-off
Date, none of the Mortgage Loans was more than 30 days delinquent.
Approximately ____% of the Mortgage Loans are Jumbo Loans.
As used herein, the term "Loan-to-Value Ratio" means, with respect to
a Mortgage Loan, a ratio, expressed as a percentage, equal to the original
principal amount of such Mortgage Loan divided by the lesser of (i) the
appraised value determined in an appraisal obtained at origination and (ii) the
sales price (if applicable) of the related Mortgaged Property.
THE MASTER SERVICER AND THE SUB-SERVICER
GENERAL
Pursuant to the Pooling and Servicing Agreement, ______ will act as
Master Servicer with respect to the Mortgage Loans. Pursuant to a sub-servicing
agreement between the Sub-Servicer and ______ (the "Sub-Servicing Agreement"),
_______ will service the _____ Mortgage Loans (in such capacity,
_____________is referred to as the "Sub-Servicer"). On the Closing Date, ______
will convey all of its right, title and interest under the Sub-Servicing
Agreement to CCC pursuant to the Purchase Agreement and CCC will, in turn,
simultaneously convey all of its right, title and interest therein to the
Issuer pursuant to the CCC Assignment Agreement. The Issuer will simultaneously
convey all of its right, title and interest in and to the Sub-Servicing
Agreement to the applicable Trust pursuant to the Pooling and Servicing
Agreement. The Master Servicer will not ultimately be responsible for the
performance of the servicing activities of the Sub-Servicer except as described
under "The Pooling and Servicing Agreement--Servicing Compensation,
Compensating Interest and Payment of Expenses" and "--Monthly Advances." If the
Sub-Servicer fails to fulfill its obligations under the applicable
Sub-Servicing Agreement and such failure results in a material breach, the
Master Servicer shall be entitled, for and on behalf of the Certificateholders,
to terminate the Sub-Servicer and appoint a successor servicer that satisfies
the eligibility requirements set forth in the Sub-Servicing Agreement.
The Mortgage Loans were originated under the applicable programs
described under "--_______ Underwriting Standards" below.
- -----------------------------
* The description herein and in Annex A hereof of the Mortgage Loans
is based upon estimates of the composition thereof as of the Cut-off-Date, as
adjusted to reflect the Scheduled Principal Balance as of the Cut-off-Date.
Prior to the issuance of the Bonds, Mortgage Loans may be removed as a result
of (i) principal prepayments thereof in full prior to the dates on which the
Issuer acquired the Mortgage Loans, (ii) requirements of _______ or ________ or
(iii) delinquencies or otherwise. In any such event, other mortgage loans may
be included in the Trusts. The Issuer believes that the estimated information
set forth herein with respect to the Mortgage Loans as presently constituted is
representative of the characteristics thereof at the time the Bonds are issued,
although certain characteristics of the Mortgage Loans may vary.
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The information set forth in the following paragraphs with respect to
__________ and ________ has been provided by the respective party. None of the
Issuer, ______, the Underwriter, the Certificate Trustee, the Indenture Trustee
or any of their respective affiliates has made or will make any representation
as to the accuracy or completeness of such information.
[MASTER SERVICER]
__________ is a ___________, with executive offices located at
________________________ and its master servicing offices located at
________________________.
The Master Servicer is engaged in the business of master servicing
single family residential mortgage loans secured by properties located in
_______ states. As of _________, the Master Servicer master serviced more than
_______ mortgage loans with an aggregate outstanding principal balance of
approximately $________.
[LOAN SELLER]
[Describe Loan Seller]
___________ executive offices are located at ______________________,
and its telephone number is (___)_____________.
Delinquency and Foreclosure Experience.
Delinquency and Foreclosure Experience in [Loan Seller's] Portfolio of One-to
Four-Family, Residential Mortgage Loan(1)
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[LOAN SELLER] UNDERWRITING STANDARDS
The underwriting standards of _________ generally allow Loan-to-Value
Ratios at origination of up to __% for mortgage loans with original principal
balances of up to $_______, up to __% for mortgage loans with original
principal balances of up to $______, up to __% for mortgage loans with original
principal balances of up to $650,000 and up to ___% for mortgage loans with
principal balances of up to $________. In determining whether a prospective
borrower has sufficient monthly income available (i) to meet the borrower's
monthly obligation on the proposed mortgage loan and (ii) to meet monthly
housing expenses and other financial obligations including the borrower's
monthly obligations on the proposed mortgage loan, _________ generally applies
ratios of up to __% and __%, respectively, of the proposed borrower's
acceptable stable monthly gross income. From time to time, _________ makes
loans where these ratios are exceeded. In those instances, _________'s
underwriters typically look at mitigating factors such as the liquidity of the
mortgagor, the stability of the real estate market where the mortgaged property
is located, and local economic conditions. In addition, with respect to
mortgage loans secured by owner-occupied condominium units, _________ generally
will fund up to the lesser of __ units or __% of the total units in a project.
_________ also originates mortgage loans pursuant to alternative sets
of underwriting criteria under its reduced documentation program ("Reduced
Documentation Program"), no asset, no income program ("No Asset, No Income
Program"), and rate term refinance limited documentation program ("Streamlined
Documentation Program"). Each of these programs is designed to facilitate the
loan approval process. Under the Reduced Documentation Program and the No
Asset, No Income Program, certain documentation concerning income/employment
and asset verification is reduced or excluded. Loans underwritten under the
Reduced Documentation Program and the No Asset, No Income Program are generally
limited to borrowers who have demonstrated an established ability and
willingness to repay the mortgage loans in a timely fashion. Permitted maximum
Loan-to-Value Ratios under the Reduced Documentation Program and the No Asset,
No Income Program are generally more restrictive than those under the standard
underwriting criteria of ---------.
Under the Streamlined Documentation Program, which is generally
available only to _________ portfolio refinances having an original
Loan-to-Value Ratio of __% or less and no mortgage delinquencies in the past __
months, rate and term refinance loans are underwritten based solely on the
original appraisal and limited credit verification, if any. Although no current
appraisal of the property is obtained with respect to the origination of these
mortgage loans, a "drive-by" appraisal may be obtained in certain cases.
From time to time, exceptions to _________'s underwriting policies may
be made. Such exceptions may be made on a loan-by-loan basis at the discretion
of the ________ underwriter. Exceptions may be made only after consideration of
certain mitigating factors such as borrower capacity, liquidity, employment and
residential stability and local economic conditions.
DESCRIPTION OF THE BONDS
The following summaries describing certain provisions of the Bonds do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, the Prospectus and the provisions of the Indenture
relating to the Bonds offered hereby.
GENERAL
The Bonds will be issued pursuant to the Indenture between the Issuer
and the Indenture Trustee. Copies of the Indenture will be available following
the Closing Date from the Indenture Trustee and will be filed with the
Commission after the Closing Date. See "Indenture" herein and in the
Prospectus.
The Bonds constitute a Series of Bonds as described in the Prospectus
and will be non-recourse obligations of the Issuer. Proceeds of the Trust
Estate are the sole source of payments on the Bonds. The Trust Estate will
include all of the Issuer's right, title and interest in and to (i) the
Certificates and (ii) such assets as from time to time are identified as
deposited in respect of the Certificates in the Collection Account established
by the Indenture Trustee for the benefit of the Bondholders, including an
amount deposited in the Collection Account in an amount equal to the
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aggregate of the Class A-20 Incremental Interest Amounts, as defined under
"--Available Funds". The Certificates will represent the entire beneficial
ownership interest in (i) the Mortgage Loans and all rights pertaining thereto;
(ii) such assets as from time to time may be held by the Certificate Trustee
(or its duly appointed agent) in the Certificate Account; (iii) property which
secured a Mortgage Loan and which has been acquired by foreclosure or deed in
lieu of foreclosure after the Cut-Off Date; (iv) amounts paid or payable by the
insurer under any Primary Mortgage Insurance Policy and any other insurance
policy to any Mortgage Loan ; and (v) the rights and benefits of the Issuer and
the Certificate Trustee in and under each Loan Sale Agreement.
Payments on the Offered Bonds will be made on each Payment Date,
commencing in ________, to Bondholders of record on the immediately preceding
Record Date.
The Offered Bonds (with the exception of the Residual Bonds) will be
issued as Book-Entry Bonds, maintained and transferred on the book-entry
records of DTC and its participants. DTC is a "Clearing Agency" as referred to
in the Prospectus. The Book-Entry Bonds will be represented by one or more
certificates registered in the name of the nominee of DTC. The Issuer has been
informed by DTC that DTC's nominee will be Cede. Payments on the Book- Entry
Bonds will be made by or on behalf of the Indenture Trustee to DTC (as
described below) by wire transfer. No person acquiring a beneficial interest in
a Book-Entry Bond (each a "Beneficial Owner") will be entitled to receive a
definitive bond representing such person's interest, except as set forth below
under "--Book Entry Registration--Definitive Bonds". Unless and until
definitive bonds are issued for the Book-Entry Bonds under the limited
circumstances described herein, all references to actions by Bondholders with
respect to the Book-Entry Bonds shall refer to actions taken by DTC upon
instructions from Clearing Agency Participants, and all references herein to
payments, notices, reports and statements to Bondholders with respect to the
Book-Entry Bonds shall refer to payments, notices, reports and statements to
DTC or Cede, as the registered holder of the Book-Entry Bonds, for distribution
to Beneficial Owners by DTC in accordance with DTC procedures.
The Residual Bonds will be issued in certificated, fully-registered
form. Payments on the Offered Bonds that are issued in certificated form will
be made to each registered holder entitled thereto, either (i) by check mailed
to the address of the applicable Bondholder as it appears on the books of the
Indenture Trustee or (ii) at the request, submitted to the Indenture Trustee in
writing at least five business days prior to the related Record Date, of any
holder of such an Offered Bond having an initial Current Principal Balance or
Class Notional Balance of not less than $______, by wire transfer in
immediately available funds, provided that the final payment in respect of any
Offered Bond will be made only upon presentation and surrender of such Bond at
the Corporate Trust Office of the Indenture Trustee. See "Indenture--General"
herein.
The Offered Bonds will be issued in minimum denominations of (i) in
the case of the Senior Bonds (other than the Retail Bonds and the Residual
Bonds), $____ and increments of $____ in excess thereof, (ii) in the case of
the Retail Bonds, $_____ and increments of $_____ in excess thereof and (iii)
in the case of the Offered Subordinate Bonds, $_____ and integral multiples of
$____ in excess thereof. In addition, one Bond of each Class of Senior Bonds
and Offered Subordinate Bonds may be issued in a different principal or
notional amount to accommodate the remainder of the initial principal or
notional amount of the Bonds of such Class. The Class R-1 and Class R-2 Bonds
will be issued in minimum denominations of $__.
BOOK-ENTRY REGISTRATION
General. Beneficial Owners that are not participants or indirect
participants of DTC but desire to purchase, sell or otherwise transfer
ownership of, or other interests in, the related Book-Entry Bonds may do so
only through participants and indirect participants. In addition, Beneficial
Owners will receive all payments of principal of and interest on the related
Book-Entry Bonds through DTC and its participants and indirect participants.
Accordingly, Beneficial Owners may experience delays in their receipt of
payments. Unless and until definitive bonds are issued for the related
Book-Entry Bonds, it is anticipated that the only registered holder of such
Book-Entry Bonds will be Cede, as nominee of DTC. Beneficial Owners will not be
recognized by the Indenture Trustee as Bondholders, as such term is used in the
Indenture, and Beneficial Owners will be permitted to receive information
furnished to Bondholders and to exercise the rights of Bondholders only
indirectly through DTC, its participants and indirect participants.
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Under the rules, regulations and procedures creating and affecting DTC
and its operations (the "Rules"), DTC is required to make book-entry transfers
of Book-Entry Bonds among participants and to receive and transmit payments of
principal of and interest on such Book-Entry Bonds. Participants and indirect
participants with which Beneficial Owners have accounts with respect to such
Book-Entry Bonds similarly are required to make book-entry transfers and
receive and transmit such payments on behalf of their respective Beneficial
Owners. Accordingly, although Beneficial Owners will not possess physical
certificates evidencing their interests in the Book-Entry Bonds, the Rules
provide a mechanism by which Beneficial Owners, through their participants and
indirect participants, will receive payments and will be able to transfer their
interests in the Book-Entry Bonds.
None of the Issuer, the Loan Seller, ______, the Master Servicer, the
Underwriter, the Certificate Trustee, the Indenture Trustee or any of their
respective affiliates will have any liability for any actions taken by DTC or
its nominee, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the Book-Entry Bonds held by Cede, as nominee for DTC, or for
maintaining, supervising or reviewing any records relating to such beneficial
ownership interests.
Definitive Bonds. Each Class of the Book-Entry Bonds will be issued in
definitive, registered form to Beneficial Owners or their nominees, and
thereupon such Beneficial Owners will become Bondholders, if, and only if, one
of the following events shall occur (any such event being referred to as
"Book-Entry Termination"): (i) DTC or the Issuer advises the Indenture Trustee
in writing that DTC is no longer willing or able properly to discharge its
responsibilities as a clearing corporation with respect to such Book-Entry
Bonds and the Issuer and the Indenture Trustee are unable to engage a qualified
successor to serve as DTC, or (ii) an event of default under the Indenture (an
"Indenture Event of Default") shall occur and be continuing and DTC and its
participants or indirect participants, at the direction of Beneficial Owners
representing a majority of the outstanding principal amount of such Book-Entry
Bonds, advise the Indenture Trustee in writing that the continuation of a
book-entry system is no longer in the best interests of Beneficial Owners. Upon
Book-Entry Termination, Beneficial Owners will become registered Bondholders
and will deal directly with the Indenture Trustee with respect to transfers,
notices, payments and requests for redemption.
DTC has advised the Issuer and the Indenture Trustee that, prior to
Book-Entry Termination, DTC will take any action permitted to be taken by a
Bondholder under the Indenture only at the direction of one or more DTC
participants to whom the Book-Entry Bonds are credited in an account maintained
by DTC. The DTC has advised that it will take such action with respect to any
principal amount of the Book-Entry Bonds only at the direction of and on behalf
of DTC Participants with respect to that principal amount of such Book-Entry
Bonds. For example, if a vote of Beneficial Owners is required to accelerate
maturity of one or more Classes of the Book-Entry Bonds following an Indenture
Event of Default, DTC, acting at the direction of its participants or indirect
participants (which in turn are acting at the direction of Beneficial Owners),
may vote in favor of acceleration of maturity with respect to the portion of
the principal amount of such Class or Classes of the Book-Entry Bonds owned by
a group of Beneficial Owners and against acceleration with respect to other
principal amounts of such Class or Classes of the Book-Entry Bonds owned by a
different group of Beneficial Owners.
Retail Bonds. Each Class of Retail Bonds will be represented by one or
more certificates held by or on behalf of DTC. DTC will maintain each Class of
Retail Bonds through its book-entry facilities in principal amounts of $____
each ("Retail Bond Units"). DTC will record the positions held by each Clearing
Agency Participant in Retail Bond Units, whether held for the Clearing Agency
Participant's own account or for another person.
Investors in each Class of Retail Bonds will be subject to the rules
and procedures of DTC and Clearing Agency Participants in effect from time to
time. Investors in Retail Bonds will not receive certificates representing such
Bonds. Rather, each investor's ownership interest in a Class of Retail Bonds
will be recorded, in Retail Bond Units, on the records of the brokerage firm,
bank, thrift institution or other financial intermediary where the investor
maintains an account for this purpose. In turn, the financial intermediary's
interest in a Class of Retail Bonds will be recorded, in Retail Bond Units, on
the records of DTC (or of a Clearing Agency Participant that acts as agent for
the financial intermediary, if the intermediary is not itself a Clearing Agency
Participant). Investors may transfer their Retail Bond Units only through their
brokers or other financial intermediaries, in compliance with their procedures.
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Issuance of the Book-Entry Bonds offered hereby in book-entry form
rather than as physical certificates may adversely affect the liquidity of the
Book-Entry Bonds in the secondary market and the ability of Beneficial Owners
to pledge them. In addition, as described above, prior to Book-Entry
Termination payments on the Book-Entry Bonds will be made by the Indenture
Trustee to DTC and DTC will credit such payments to the accounts of its
participants, which will further credit them to the accounts of indirect
participants or Beneficial Owners. As a result, Beneficial Owners may
experience delays in the receipt of such payments. See "Risk Factors--Book
Entry Registration" and "Description of the Bonds-- Book Entry Registration" in
the Prospectus.
AVAILABLE FUNDS
Available Funds for any Payment Date will be determined and in each
case will be an amount generally equal to the aggregate of the following with
respect to the related Mortgage Loans: (a) all previously undistributed
payments on account of principal (including the principal portion of Monthly
Payments, principal prepayments and the principal amount of Liquidation
Proceeds) and all previously undistributed payments on account of interest
received after the Cutoff Date and on or prior to the related Determination
Date, (b) any Monthly Advances (including Certificate Account Advances, as
defined under "Pooling and Servicing Agreement--Monthly Advances" herein) and
Compensating Interest Payments (as defined under "Pooling and Servicing
Agreement--Servicing Compensation, Compensating Interest and Payment of
Expenses" herein) by the Master Servicer and (c) any amount reimbursed by the
Master Servicer in connection with losses on certain eligible investments,
except:
(i) all payments that were due on or before the Cut-off Date;
(ii) all principal prepayments and Liquidation Proceeds
received after the applicable Prepayment Period;
(iii) all payments, other than principal prepayments, that
represent early receipt of scheduled payments due on a date or dates
subsequent to the related Due Date;
(iv) amounts received on particular Mortgage Loans as late
payments of principal or interest and respecting which, and to the
extent that, there are any unreimbursed Monthly Advances or
Certificate Account Advances;
(v) amounts of Monthly Advances or Certificate Account
Advances determined to be nonrecoverable;
(vi) amounts permitted to be withdrawn from the Certificate
Account pursuant to clauses (i) through (xii) of the third paragraph
under the caption "Pooling and Servicing Agreement--Certificate
Account" herein; and
(vii) amounts retained by the Sub-Servicer as described under
"Pooling and Servicing Agreement--Protected Accounts" herein.
In addition, on each Payment Date through the first twelve Payment Dates, the
Available Funds will be increased by an amount of cash in the Collection
Account, deposited on the Closing Date, equal to the excess of the Accrued Bond
Interest on the Class A-20 Bonds for each such Payment Date over the amount of
such Accrued Bond Interest calculated as if such Class A-20 Bonds had a Bond
Interest Rate of ____% (such amount, the "Class A-20 Incremental Interest
Amount" with respect to such Payment Date).
PRINCIPAL PAYMENTS ON RETAIL BONDS
General. The Class A-14, Class A-15, Class A-16, Class A-17, Class
A-18, Class A-19 and Class A-20 Bonds are Retail Bonds. The Issuer has arranged
to make principal payments on each Class of Retail Bonds before the CrossOver
Date in $_____ increments. These arrangements are intended to accommodate
retail investors who may not wish to receive their principal payments in
amounts smaller than $_____, to give a limited payment priority to investors
who request early payment, and to give the first limited payment priority to
the requesting estates of deceased investors.
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In summary, principal payments on the Retail Bonds will be made as
follows:
o The Indenture Trustee will determine the amount of
principal, if any, payable on a Class of Retail Bonds (as a
whole) on each Payment Date as described below under
"Description of the Bonds--Payments on the Bonds".
o The principal payment on a Class of Retail Bonds will be
rounded to a multiple of $_____ using the Retail Rounding
Accounts, and the Indenture Trustee will pay the rounded
amount to DTC.
o DTC will remit the principal payment for a Class of Retail
Bonds, in multiples of $_____, to the applicable Clearing
Agency Participants. The Clearing Agency Participants and
other financial intermediaries in turn will remit principal
payments, also in multiples of $_____, to investors in a
Class of Retail Bonds.
o Investors in a Class of Retail Bonds who have properly
requested early payment will be paid first, to the extent of
available principal, with a first priority given to Deceased
Owners (as defined below) of that Class and a second priority
to "Living Owners" of that Class.
o If more principal is available for payment on a Class of
Retail Bonds than the amount covered by valid requests for
early payment, non-requesting investors in that Class will
receive principal payments in multiples of $_____ under
procedures described below.
Rounding of Principal Payments. With respect to each Class of Retail
Bonds, the Issuer will establish with the Indenture Trustee an account (each, a
"Retail Rounding Account"). On the Closing Date, the Issuer will deposit, or
will cause to be deposited, $_____ into each Retail Rounding Account. Whenever
principal payments are to be made on a Class of Retail Bonds, the amount
allocable to that Class will be rounded to a multiple of $_____. On the first
Payment Date when principal payments will be made on a Class of Retail Bonds,
the Indenture Trustee will withdraw from the Retail Rounding Account for such
Class any funds needed to round the allocable amount for such Class upward to
the next multiple of $_____ and will pay the rounded amount on that Class. On
the next Payment Date when principal payments will be made on such Class of
Retail Bonds, the Indenture Trustee will apply the allocable amount first to
repay any amount withdrawn for that Class from the applicable Retail Rounding
Account on the previous Payment Date; then it will round the remainder of such
allocable amount upward to the next multiple of $______, by making another
withdrawal from the applicable Retail Rounding Account, and will pay this
amount to such Class. This process will continue on subsequent Payment Dates
until such Class of Retail Bonds has been retired.
Principal Payment Requests and Withdrawals. Any Beneficial Owner of
Retail Bond Units may request that any or all of such Units be paid in full on
the earliest possible Payment Date. The Beneficial Owner must submit any
request for Retail Bond principal payments to his or her broker or other
financial intermediary, which must in turn make the request in writing to DTC.
DTC will date and time stamp all requests in accordance with its established
procedures and forward the requests to the Indenture Trustee. The Indenture
Trustee will maintain a list of those Clearing Agency Participants representing
Beneficial Owners that have requested Retail Bond principal payments, together
with the order of receipt and the amounts of the requests. Investors can get
information regarding the number of Retail Bond Units of the applicable Class
for which requests have been made and the status of their own requests by
writing the Indenture Trustee at the Corporate Trust Office.
A Beneficial Owner may withdraw a request for a Retail Bond principal
payment by notifying his or her broker or other financial intermediary, which
must in turn forward the notice of withdrawal in writing to the Indenture
Trustee. Any request for a Retail Bond principal payment will be deemed
withdrawn when the Indenture Trustee receives notice of the Beneficial Owner's
transfer of the related Retail Bond Units.
In order for a request or a notice of withdrawal to be effective for
any Payment Date, it must be received by DTC (in the case of a request) or the
Indenture Trustee (in the case of a withdrawal) by the last business day of the
preceding calendar month. Once effective, a request will remain effective for
all Payment Dates unless it is withdrawn.
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DTC will honor requests for Retail Bond principal payments to be made
on any Payment Date in accordance with the procedures described below. The
Indenture Trustee will notify DTC and the appropriate Clearing Agency
Participants which of the requests should be honored on each Payment Date. The
decisions of the Indenture Trustee and DTC concerning these matters, and any
related rules and procedures they establish, will be binding on all affected
persons.
Principal Payment Allocations--Payments to Requesting Beneficial
Owners. For any Payment Date, priority of payment on a Class of Retail Bonds
will be given to Beneficial Owners of that Class for whom principal payment
requests are in effect. DTC will honor requests in the following order of
priority:
First, DTC will honor requests submitted on behalf of
Deceased Owners of a Class of Retail Bonds in the order of their
receipt by DTC, until such requests have been honored in an amount up
to $_____ for each requesting Deceased Owner of that Class; and
Second, DTC will honor requests submitted on behalf of Living
Owners of a Class of Retail Bonds in the order of priority established
by the random lot procedures of the Indenture Trustee, until such
requests have been honored in an amount up to $_____ for each
requesting Living Owner of that Class.
Thereafter, DTC will honor requests submitted on behalf of each
Deceased Owner as provided in step First up to a second $______, and requests
submitted on behalf of each Living Owner as provided in step Second up to a
second $______. This sequence of priorities will be repeated until all
principal payment requests have been honored.
If the amount of principal available for payment on a Class of Retail
Bonds on a given Payment Date is insufficient to honor all requests, such
requests will be honored on succeeding Payment Dates as principal becomes
available. In the case of requests on behalf of Living Owners, the Indenture
Trustee will establish a new order of priority for each Payment Date by random
lot. This order will apply both to previously unsatisfied payment requests and
to newly submitted requests. A Retail Bond principal payment request submitted
on behalf of a Living Owner who later dies will become entitled to the priority
of a newly submitted request on behalf of a Deceased Owner. Such priority will
be effective for each subsequent Payment Date, if DTC has received appropriate
evidence of death and any requested tax waivers by the last business day of the
preceding calendar month.
Principal Payment Allocations--Payments to Non-Requesting Beneficial
Owners. If the amount of principal available for payments on a Class of Retail
Bonds on a given Payment Date exceeds the amount needed to honor all principal
payment requests, DTC will determine which Retail Bond Units will be paid,
using its established random lot procedures. Each Clearing Agency Participant
receiving such payments, and each financial intermediary in the chain to the
Beneficial Owners, will remit payments to their customers according to their
own procedures, which may or may not be by random lot. A Clearing Agency
Participant or financial intermediary could decide to allot Retail Bond
principal payments to certain customers (which could include such Clearing
Agency Participant or intermediary) without allotting payments to others.
Investors may ask their brokers or other intermediaries what allocation
procedures they use.
Beneficial Owners. A "Deceased Owner" is the estate of an individual
who beneficially owned one or more Retail Bond Units of the applicable Class at
the time of death, provided the executor or other authorized representative of
the estate furnishes to DTC evidence of death satisfactory to the Indenture
Trustee and any tax waivers requested by the Indenture Trustee. A "Living
Owner" is any other Beneficial Owner of one or more Retail Bond Units.
The following rules will apply to determine beneficial ownership in
the case of Deceased Owners:
o Retail Bond Units beneficially owned by tenants by the
entirety, joint tenants or tenants in common will be regarded
as beneficially owned by a single owner. The death of a
tenant by the entirety, joint tenant or tenant in common will
be deemed the death of the Beneficial Owner, and the Retail
Bond Units beneficially owned will become eligible for the
principal payment priority described above.
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o Retail Bond Units beneficially owned by a trust will be
regarded as beneficially owned by each beneficiary of the
trust to the extent of that beneficiary's interest in the
trust (however, a trust's beneficiaries collectively cannot
be Beneficial Owners of more Retail Bond Units than are owned
by the trust). The death of a beneficiary of a trust will be
deemed the death of a Beneficial Owner of the Retail Bond
Units beneficially owned by the trust to the extent of that
beneficiary's interest in the trust.
o The death of an individual who was a tenant by the
entirety, joint tenant or tenant in common in a tenancy which
is the beneficiary of a trust will be deemed the death of the
beneficiary of the trust.
o The death of a person who, during his or her lifetime, was
entitled to substantially all of the beneficial interest in a
Retail Bond Unit will be deemed the death of the Beneficial
Owner of that Retail Bond Unit, regardless of the
registration of ownership, if such beneficial interest can be
established to the satisfaction of the Indenture Trustee.
Such beneficial interest will exist in many cases of street
name or nominee ownership, ownership by a trustee, ownership
under the Uniform Gifts to Minors Act and community property
or other joint ownership arrangements between spouses.
Beneficial interest will be evidenced by such factors as the
power to sell or otherwise dispose of a Retail Bond Unit, the
right to receive the proceeds of sale or disposition and the
right to receive interest and principal payments on a Retail
Bond Unit.
After Cross-Over Date. After the Cross-Over Date, if any, payments on
each Class of Retail Bonds will be made pro rata, without regard to the
priorities described above.
PAYMENTS ON THE BONDS
Allocation of Available Funds. Interest and principal on the Bonds
will be paid monthly on each Payment Date, commencing in ___________, in an
aggregate amount equal to the Available Funds for such Payment Date.
Senior Bonds. On each Payment Date prior to the acceleration, if any,
of the Bonds, the Available Funds will be paid in the following order of
priority among the Senior Bonds, except as otherwise noted, and provided that
on each of the first twelve Payment Dates the Class A-20 Incremental Interest
Amount with respect to such Payment Dates will be applied solely to make
payments of Accrued Bond Interest on the Class A-20 Bonds for such Payment
Dates:
first, (a) to the interest-bearing Classes of the Senior Bonds, the
Accrued Bond Interest on each such Class for such Payment Date (as
described below, the Accrued Bond Interest on each such Class of Bonds
is subject to reduction in the event of certain Net Interest
Shortfalls allocable thereto and any Net Interest Shortfalls shall be
allocated among the Senior Bonds as described below), provided,
however, that no such payments will be made to the Class A-8 Bonds on
or before the Class A-8 Accretion Termination Date (as defined below)
or to the Class A-12 Bonds on or before the Class A-12 Accretion
Termination Date (as defined below); (b) on or before the Class A-8
Accretion Termination Date, to the Class A-6, Class A-7 and Class A-8
Bonds, in the manner described below, as principal, the Class A-8
Accrual Amount for such Payment Date; and (c) on or before the Class
A-12 Accretion Termination Date, to the Class A-6, Class A-11 and
Class A-12 Bonds, in the manner described below, as principal, the
Class A-12 Accrual Amount for such Payment Date;
second, to the interest-bearing Classes of the Senior Bonds, any
Accrued Bond Interest thereon remaining unpaid from previous Payment
Dates to the extent of remaining Available Funds, with any shortfall
in available amounts being allocated among such Classes in proportion
to the amount of such Accrued Bond Interest remaining unpaid for each
such Class for such Payment Date, subject to the proviso in subclause
(a) of clause first, subclause (b) of clause first and subclause (c)
of clause first;
third, on each Payment Date on or before the Cross-Over Date, to the
Senior Bonds (other than the Class A-5, Class A-10 and Class X Bonds)
in reduction of the Class Current Principal Balances thereof, as
applicable:
(a) the Senior P&I Optimal Principal Amount (as defined herein)
for such Payment Date, in the following order of priority:
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(i) to the Class R-1 and Class R-2 Bonds, pro rata, until
their respective Class Current Principal Balances have
been reduced to zero;
(ii) to the Class A-23 Bonds up to the Class A-23 Optimal
Principal Amount (as defined herein) for such Payment
Date, until the Class Current Principal Balance thereof
has been reduced to zero;
(iii) the portion of the Senior P&I Optimal Principal Amount
remaining after payments as described above,
concurrently, as follows:
(A) ___________% sequentially as follows:
(1) to the Class A-13 Bonds until the Class
Current Principal Balance of the Class A-13
Bonds has been reduced to zero;
(2) concurrently to the Class A-14, Class A-15 and
A-16 Bonds, pro rata, based upon their
respective Class Current Principal Balances,
until their respective Class Current Principal
Balances have been reduced to zero, allocated
among the Retail Bond Units of each such Class
as described above under "--Principal Payments
on Retail Bonds";
(3) concurrently to the Class A-17, Class A-18,
Class A-19 and Class A-20 Bonds, pro rata,
based upon their respective Class Current
Principal Balances, until their respective
Class Current Principal Balances have been
reduced to zero, allocated among the Retail
Bond Units of each such Class as described
above under "--Principal Payments on Retail
Bonds"; and
(4) concurrently to the Class A-21 and Class A-22
Bonds, pro rata, based upon their respective
Class Current Principal Balances, until their
respective Class Current Principal Balances
have been reduced to zero;
(B) ____________% sequentially as follows:
(1) sequentially, to the Class A-1 and Class A-2
Bonds, in that order, until their respective
Class Current Principal Balances have been
reduced to their respective Planned Balances
(as set forth in Annex B hereto) for such
Payment Date;
(2) concurrently to the Class A-3 and Class A-4
Bonds, pro rata, based on their respective
Class Current Principal Balances, until their
respective Class Current Principal Balances
have been reduced to their respective Planned
Balances (as set forth in Annex B hereto) for
such Payment Date;
(3) concurrently,
(x) ___% of the amount remaining after the
payments referred to in sub-clauses (1)
and (2) of this clause (B),
sequentially, as follows:
(I) to the Class A-9 Bonds until the
Class Current Principal Balance
thereof has been reduced to its
Planned Balance (as set forth in
Annex B hereto) for such Payment
Date;
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<PAGE> 40
(II) concurrently to the Class A-6 and
Class A-11 Bonds, pro rata, based
on their respective Class Current
Principal Balances, until their
respective Class Current Principal
Balance have been reduced to their
respective Targeted Balances (as
set forth in Annex C hereto) for
such Payment Date;
(III) to the Class A-12 Bonds until the
Class Current Principal Balance
thereof has been reduced to zero;
(IV) concurrently to the Class A-6 and
Class A-11 Bonds, pro rata, based
on their respective Class Current
Principal Balance, without regard
to their respective Targeted
Balances for such Payment Date,
until their respective Class
Current Principal Balances have
been reduced to zero; and
(V) to the Class A-9 Bonds, without
regard to their Planned Balance
for such Payment Date, until the
Class Current Principal Balance
thereof has been reduced to zero;
and
(y) __% of the amount remaining after the
payments referred to in sub-clauses (1)
and (2) of this clause (B),
sequentially, as follows:
(I) if on any Payment Date, the
Adjusted Non-PO Mortgage Pool
Balance is less than the 250% SPA
Balance for such Payment Date,
then on such Payment Date, and on
each Payment Date thereafter, to
the Class A-8 Bonds until the
Class Current Principal Balance
thereof has been reduced to zero;
(II) concurrently to the Class A-6 and
Class A-7 Bonds, pro rata, based
on their respective Class Current
Principal Balances, until their
respective Class Current Principal
Balances have been reduced to
zero;
(III) to the Class A-8 Bonds until the
Class Current Principal Balance
thereof has been reduced to zero;
(4) sequentially to the Class A-1 and Class A-2
Bonds, in that order, without regard to their
respective Planned Balances for such Payment
Date, until their respective Class Current
Principal Balances have been reduced to zero;
(5) concurrently to the Class A-3 and Class A-4
Bonds, pro rata, based on their respective
Class Current Principal Balances, without
regard to their respective Planned Balances
for such Payment Date, until their respective
Class Current Principal Balances have been
reduced to zero;
(b) the PO Principal Payment Amount (as defined herein) for such
Payment Date, to the Class P Bonds, until the Class Current
Principal Balance of the Class P Bonds has been reduced to
zero; and
fourth, the PO Deferred Amount for such Payment Date, to the Class P
Bonds; provided that (i) on any Payment Date, payments pursuant to
this priority fourth shall not exceed the excess, if any, of (x) the
Available
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<PAGE> 41
Funds remaining after giving effect to payments pursuant to clauses
first through third above over (y) the sum of the amount of Accrued
Bond Interest for such Payment Date and Accrued Bond Interest
remaining unpaid from previous Payment Dates on all Classes of
Subordinate Bonds then outstanding, (ii) such payments shall not
reduce the Class Current Principal Balance of the Class P Bonds and
(iii) no payment will be made in respect of the PO Deferred Amount for
the Class P Bonds after the Cross-Over Date.
On each Payment Date prior to the acceleration, if any, of the Bonds
and after the Cross-Over Date, payments of principal on the outstanding Senior
Bonds (other than the Class P, Class A-5, Class A-10, and Class X Bonds) will
be made pro rata among all such Senior Bonds, regardless of the allocation, or
sequential nature, of principal payments described in priority third (a) above,
and the PO Principal Payment Amount for such Payment Date shall be paid to the
Class P Bonds until the Class Current Principal Balance of the Class P Bonds
has been reduced to zero.
If, after payments have been made pursuant to priorities first and
second under "--Senior Bonds" above on any Payment Date, the remaining
Available Funds are less than the sum of the Senior P&I Optimal Principal
Amount and the PO Principal Payment Amount for such Payment Date, such amounts
shall be proportionately reduced, and such remaining Available Funds will be
paid on the Senior Bonds (other than the Class A-5, Class A-10 and Class X
Bonds) on the basis of such reduced amounts. Notwithstanding any reduction in
principal payable to the Class P Bonds pursuant to this paragraph, the Class
Current Principal Balance of the Class P Bonds shall be reduced not only by
principal so paid but also by the difference between (i) principal payable to
the Class P Bonds in accordance with clause (b) of priority third above and
(ii) principal actually paid to the Class P Bonds after giving effect to this
paragraph (such difference, the "Class P Cash Shortfall" with respect to such
Payment Date). The Class P Cash Shortfall with respect to any Payment Date will
be added to the PO Deferred Amount applicable to the Class P Bonds.
The "Class A-23 Optimal Principal Amount" for any Payment Date
occurring prior to the Payment Date in __________ will equal zero. The Class
A-23 Optimal Principal Amount for any Payment Date occurring after the first
five years following the Closing Date will be as follows: for any Payment Date
during the sixth, seventh, eighth and ninth years after the Closing Date, __%,
__%, __% and __%, respectively, of the Class A-23 Pro Rata Optimal Principal
Amount (as defined below) for such Payment Date; and, for any Payment Date
thereafter, 100% of the Class A-23 Pro Rata Optimal Principal Amount for such
Payment Date. Notwithstanding the foregoing, if on any Payment Date the Class
Current Principal Balance of each Class of Senior Bonds (other than the Class P
and Class A-23 Bonds) has been reduced to zero, the Class A-23 Optimal
Principal Amount shall equal the Senior P&I Optimal Principal Amount to the
extent not paid on such Payment Date to other Classes of Senior Bonds.
For any Payment Date, the "Class A-23 Pro Rata Optimal Principal
Amount" shall be an amount equal to the product of (x) the sum of the Senior
P&I Optimal Principal Amount and the Subordinate Optimal Principal Amount for
such Payment Date multiplied by (y) a fraction, the numerator of which is the
Class Current Principal Balance of the Class A-23 Bonds immediately prior to
such Payment Date and the denominator of which is the aggregate Class Current
Principal Balances of all Classes of Bonds (other than the Class P Bonds)
immediately prior to such Payment Date.
For any Payment Date, the "___% SPA Balance" means the amount for such
Payment Date shown in the table of the ___% SPA Adjusted Non-PO Mortgage Pool
Balances as of the Cut-off Date set forth in Annex D attached hereto. The
percentages set forth in such table were derived assuming that the Mortgage
Loans and the Bonds have the characteristics described below in the second
paragraph under "Yield and Prepayment Considerations--Decrement Tables" herein
as used for the computation of weighted average lives and assuming the Mortgage
Loans prepay at a constant rate of ___% SPA.
The "Adjusted Non-PO Mortgage Pool Balance" means the sum for each
Mortgage Loan of the product of (i) the Scheduled Principal Balance as of such
Payment Date and (ii) the Non-PO Percentage for such Mortgage Loan.
Class A-8 Accrual. The "Class A-8 Accretion Termination Date" is the
earlier to occur of (i) the Payment Date on which the Class Current Principal
Balances, respectively, of the Class A-6 and Class A-7 Bonds have been reduced
to zero and (ii) the Cross-Over Date. On each Payment Date on or before the
Class A-8 Accretion Termination Date, an amount (the "Class A-8 Accrual
Amount") equal to the accrued interest that would otherwise be payable in
respect of the Class A-8 Bonds on such Payment Date will be added to the Class
Current Principal Balance of the Class A-8
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<PAGE> 42
Bonds (such amount to thereafter accrue interest at the Class A-8 Bond Interest
Rate) and such amount will be paid, as principal, as follows:
first, concurrently to the Class A-6 and Class A-7 Bonds, pro rata,
based on their respective Class Current Principal Balances, until
their respective Class Current Principal Balance have been reduced to
zero; and
second, to the Class A-8 Bonds, until the Class Current Principal
Balance thereof has been reduced to zero.
Class A-12 Accrual. The "Class A-12 Accretion Termination Date" is the
earlier to occur of (i) the Payment Date on which the Class Current Principal
Balance, respectively, of the Class A-6 and Class A-11 Bonds have been reduced
to zero and (ii) the Cross-Over Date. On each Payment Date on or before the
Class A-12 Accretion Termination Date, an amount (the "Class A-12 Accrual
Amount") equal to the accrued interest that would otherwise be payable in
respect of the Class A-12 Bonds on such Payment Date will be added to the Class
Current Principal Balance of the Class A-12 Bonds (such amount to thereafter
accrue interest at the Class A-12 Bond Interest Rate) and such amount will be
paid, as principal, as follows:
first, concurrently to the Class A-6 and Class A-11 Bonds, pro rata,
based on their respective Class Current Principal Balances, until
their respective Class Current Principal Balances have been reduced to
zero; and
second, to the Class A-12 Bonds, until the Class Current Principal
Balance thereof has been reduced to zero.
Subordinate Bonds. On each Payment Date prior to the acceleration, if
any, of the Bonds, the Available Funds remaining after the payments described
above under "--Senior Bonds" will be paid to the Subordinate Bonds
sequentially, in the following order, to the Class B-1, Class B-2, Class B-3,
Class B-4, Class B-5 and Class B-6 Bonds, in each case up to an amount equal to
and in the following order: (a) the Accrued Bond Interest thereon for such
Payment Date, (b) any Accrued Bond Interest thereon remaining unpaid from
previous Payment Dates and (c) such Class's Allocable Share (as defined herein)
for such Payment Date.
Acceleration of the Bonds. If the maturity of the Bonds is accelerated
as described in this paragraph, payments will be made on the Bonds as described
in this paragraph. Upon the occurrence of an event of default under the
Indenture (an "Indenture Event of Default"), holders of Senior Bonds
representing 100% of the Class Current Principal Balances of each Class of
Senior Bonds then outstanding may exercise their remedies pursuant to the terms
of the Indenture; provided, however, that after the aggregate of the Class
Current Principal Balances of the Senior Bonds has been reduced to zero,
holders representing 662/3% of the Class Current Principal Balances of the
Class or Classes of Subordinate Bonds then outstanding with the lowest
numerical Class designation may exercise such remedies. Such Class or Classes
of Subordinate Bonds constitute the "Highest Priority Junior Class" for
purposes of "The Indenture--Rights Upon Event of Default" in the Prospectus.
These remedies include the right to cause the payments of accrued interest on
the Bonds to be paid in proportion to the amount of unpaid accrued interest and
payments of principal on the outstanding Bonds (other than the Interest Only
Bonds) to be paid (either in lump sum from proceeds of the sale of the Trust
Estate or from monthly collections on the Certificates), pro rata out of
remaining Available Funds, regardless of the allocation, or sequential nature,
of principal payments described above, based upon the Class Current Principal
Balances of the Bonds (technically, an "acceleration"). Since the entitlement
to such amounts is based on the Class Current Principal Balances of the Bonds,
after the Cross-Over Date, the Subordinate Bonds would not share in such
payments, except as provided in the following sentence. On each Payment Date on
and after such acceleration of the Bonds, and following the reduction to zero
of the Class Current Principal Balances of all Classes of Bonds, any remaining
Available Funds will be applied in repayment first of any unpaid accrued
interest on the Bonds and then to repay any previously unpaid Realized Losses
allocated to the Bonds, pro rata. However, it is expected that in such case
there would not be any remaining Available Funds.
"Pro rata" payments or allocations among Classes of Bonds will be made
in proportion to the then Class Current Principal Balance of such Classes.
Interest. With respect to each Payment Date, interest will accrue
during the related Interest Accrual Period for each Class of Bonds (other than
the Class P Bonds) at its then applicable Bond Interest Rate on the Class
Current Principal Balance or Class Notional Balance of such Class immediately
preceding such Payment Date. The Bond
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<PAGE> 43
Interest Rate for each Class of Bonds is set forth or described on the cover
page hereof. The effective yield to the holders of Bonds other than the LIBOR
Bonds will be lower than the yield otherwise produced by the applicable Bond
Interest Rate and purchase price, because interest will not be paid to such
Bondholders of such Bonds until the 25th day (or if such day is not a Business
Day, then on the next succeeding Business Day) of the month following the month
in which interest accrues on the Mortgage Loans. See "Yield and Prepayment
Considerations" herein.
The Class P Bonds are principal only Bonds and will not bear interest.
The "Accrued Bond Interest" for any interest-bearing Class of Bonds
for any Payment Date will equal the interest accrued during the related
Interest Accrual Period at the applicable Bond Interest Rate on the Class
Current Principal Balance (or in the case of a Class of Interest Only Bonds,
the Class Notional Balance) of such Class immediately prior to such Payment
Date less (i) in the case of an interest-bearing Class of Senior Bonds, such
Class's share of any Net Interest Shortfall (as defined below) and the interest
portion of any Excess Special Hazard Losses and, after the Payment Date on
which the aggregate of Class Current Principal Balances of the Subordinate
Bonds is reduced to zero, giving effect to all payments on such Payment Date
(the "Cross-Over Date"), the interest portion of any Realized Losses and (ii)
in the case of a Class of Subordinate Bonds, such Class's share of any Net
Interest Shortfall and the interest portion of any Realized Losses. Such Net
Interest Shortfalls will be allocated among the Classes of Bonds in proportion
to the amount of Accrued Bond Interest that would have been allocated thereto
in the absence of such shortfalls. The interest portion of Realized Losses will
be allocated first to the Classes of Subordinate Bonds in reverse order of
their numerical Class designations commencing with the Class B-6 Bonds and
following the applicable CrossOver Date, such Realized Losses will be allocated
to the Classes of interest-bearing Senior Bonds in proportion to the amount of
Accrued Bond Interest that would have been allocated thereto in the absence of
such Realized Losses. Accrued Bond Interest is calculated on the basis of a
360-day year consisting of twelve 30-day months. No Accrued Bond Interest will
be payable with respect to any Class of Bonds after the Payment Date on which
the Class Current Principal Balance or Class Notional Balance of such Class has
been reduced to zero.
The "Current Principal Balance" of any Bond (other than a Class of
Interest Only Bonds) as of any Payment Date will equal such Bond's initial
principal amount on the Closing Date, as reduced by (i) all amounts paid on
previous Payment Dates on such Bond on account of principal, (ii) the principal
portion of all Realized Losses previously allocated to such Bond (taking
account of the Loss Allocation Limitation of such Bond) and (iii) in the case
of a Subordinate Bond, such Bond's pro rata share, if any, of the applicable
Subordinate Bond Writedown Amount and/or any applicable PO Deferred Payment
Writedown Amount, in each case for previous Payment Dates, and as increased by,
in the case of an Accrual Bond, amounts added to the principal balance of such
Bond as described under "--Senior Bonds". With respect to any Class of Bonds
(other than the Interest Only Bonds), the "Class Current Principal Balance"
thereof will equal the sum of the Current Principal Balances of all Bonds in
such Class.
As of any Payment Date, the "Subordinate Bond Writedown Amount" will
equal the amount by which (a) the sum of the Class Current Principal Balances
of all of the Bonds (after giving effect to the payment of principal and the
allocation of applicable Realized Losses and any applicable PO Deferred Payment
Writedown Amount and PO Cash Shortfall in reduction of the Class Current
Principal Balances of such Bonds on such Payment Date) exceeds (b) the
Scheduled Principal Balances of Mortgage Loans on the Due Date related to such
Payment Date. The applicable Subordinate Bond Writedown Amount and any
applicable PO Deferred Payment Writedown Amount will be allocated to the
Classes of Subordinate Bonds in inverse order of their numerical Class
designations, until the Class Current Principal Balance of each such Class has
been reduced to zero. From and after the Cross-Over Date, the Subordinate Bond
Writedown Amount not allocated to the Subordinate Bonds will be allocated among
the Senior Bonds, pro rata.
The "Class Notional Balance" of a Bond is an amount used as a
reference to calculate the amount of interest due on an Interest Only Bond. The
Class Notional Balance of the Class A-5 Bonds (the "Class A-5 Notional
Balance") on any date will be equal to the sum of (i) the product of (A)
________% and (B) the Class Current Principal Balance of the Class A-1 Bonds,
(ii) the product of (A) __________% and (B) the Class Current Principal Balance
of the Class A-2 Bonds, (iii) the product of (A) ________% and (B) the Class
Current Principal Balance of the Class A-3 Bonds and (iv) the product of (A)
__________% and (B) the Class Current Principal Balance of the Class A-4 Bonds.
The Class Notional Balance of the Class A-10 Bonds (the "Class A-10 Notional
Balance") on any date will be equal to the Class Current Principal Balance of
the Class A-9 Bonds.
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The Class Notional Balance of the Class X Bonds (the "Class X Notional
Balance") immediately prior to a given Payment Date will be equal to the
aggregate of the Scheduled Principal Balances of each Non-Discount Mortgage
Loan on the second preceding Due Date, after giving effect to payments due on
such date.
With respect to any Payment Date, the "Interest Shortfall" is equal to
the aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Rates) on Mortgage Loans resulting from (a) prepayments in full
received during the related Prepayment Period, (b) partial prepayments received
during the related Prepayment Period to the extent applied prior to the Due
Date in the month of the Payment Date and (c) interest payments on certain of
the Mortgage Loans being limited pursuant to the provisions of the Soldiers'
and Sailors' Civil Relief Act of 1940 (the "Relief Act"). Interest Shortfalls
will result because (i) Mortgagors are obligated to pay interest on prepayments
in full only to the date of prepayment by the Mortgagor, (ii) (a) partial
prepayments are generally not required to be accompanied by interest on the
amount of such partial prepayment and (b) partial prepayments applied prior to
the Due Date in the month of the Payment Date will result in a reduction of the
Scheduled Principal Balance of the related Mortgage Loan without a
corresponding reduction of the Current Principal Balance of any Bond and (iii)
the Relief Act limits, in certain circumstances, the interest rate required to
be paid by a Mortgagor in the military service to 6% per annum. Interest
Shortfalls resulting from prepayments in full or in part will be offset to the
extent of certain Compensating Interest Payments (as defined under "Pooling and
Servicing Agreement--Servicing Compensation, Compensating Interest and Payment
of Expenses" herein). Interest Shortfalls net of Compensating Interest Payments
are referred to herein as "Net Interest Shortfalls".
If on any Payment Date the applicable Available Funds for the Senior
Bonds is less than the Accrued Bond Interest on such Senior Bonds for such
Payment Date prior to reduction for Net Interest Shortfall and the interest
portion of Realized Losses, the shortfall will be allocated among the holders
of each Class of interest-bearing Senior Bonds in proportion to the respective
amounts of Accrued Bond Interest that would have been allocated thereto in the
absence of such Net Interest Shortfall and/or Realized Losses for such Payment
Date. In addition, the amount of any interest shortfalls that are covered by
subordination will constitute unpaid Accrued Bond Interest and will be payable
to holders of the Bonds of the related Classes entitled to such amounts on
subsequent Payment Dates, to the extent of the applicable Available Funds after
current interest payments as required herein. Any such amounts so carried
forward will not bear interest. Shortfalls in interest payments will not be
offset by a reduction in the servicing compensation of the Master Servicer, the
Sub-Servicers or otherwise, except to the extent of applicable Compensating
Interest Payments.
Calculation of LIBOR. Commencing on ___________, with respect to the
Class A-6, Class A-7, Class A-11, Class A-21 and Class A-22 Bonds, and monthly
thereafter on the second business day prior to the first day of the related
Interest Accrual Period for such Classes of Bonds (each, a "LIBOR Determination
Date"), until the Class Current Principal Balances of such Classes of Bonds
have been reduced to zero, the Master Servicer will request each of the
designated reference banks meeting the criteria set forth herein (the
"Reference Banks") to inform the Master Servicer of the quotation offered by
its principal London office for making one-month United States dollar deposits
in leading banks in the London interbank market, as of 11:00 a.m. (London time)
on such LIBOR Determination Date. (For purposes of calculating LIBOR, "business
day" means a day on which banks are open for dealing in foreign currency and
exchange in London and New York City). In lieu of making a request of the
Master Servicer, the Indenture Trustee may rely on the quotations for those
Reference Banks that appear at such time on the Reuters Screen LIBO Page (as
defined in the International Swap Dealers Association Inc. Code of Standard
Wording, Assumptions and Provisions for Swaps, 1986 Edition), to the extent
available.
LIBOR will be established by the Master Servicer on each LIBOR
Determination Date as follows:
(1) If on any LIBOR Determination Date two or more Reference
Banks provide such offered quotations, LIBOR for the next Interest
Accrual Period shall be the arithmetic mean of such offered quotations
(rounded upwards if necessary to the nearest whole multiple of 1/32%).
(2) If on any LIBOR Determination Date only one or none of
the Reference Banks provides such offered quotations, LIBOR for the
next Interest Accrual Period shall be whichever is the higher of (i)
LIBOR as determined on the previous LIBOR Determination Date or (ii)
the Reserve Interest Rate. The "Reserve Interest Rate" shall be the
rate per annum which the Master Servicer determines to be either (i)
the arithmetic mean (rounded upwards if necessary to the nearest whole
multiple of 1/32%) of the one-month United States
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dollar lending rates that New York City banks selected by the
Indenture Trustee are quoting, on the relevant LIBOR Determination
Date, to the principal London offices of at least two of the Reference
Banks to which such quotations are, in the opinion of the Master
Servicer, being so made, or (ii) in the event that the Master Servicer
can determine no such arithmetic mean, the lowest one-month United
States dollar lending rate which New York City banks selected by the
Master Servicer are quoting on such LIBOR Determination Date to
leading European banks.
(3) If on the first LIBOR Determination Date, the Master
Servicer is required but is unable to determine the Reserve Interest
Rate in the manner provided in paragraph (b) above, LIBOR shall be
5.65625%. If on any subsequent LIBOR Determination Date, the Master
Servicer is required but is unable to determine the Reserve Interest
Rate in the manner provided in paragraph (b) above, LIBOR shall be
LIBOR for the immediately preceding LIBOR Determination Date.
Each Reference Bank shall (i) be a leading bank engaged in
transactions in Eurodollar deposits in the international Eurocurrency market,
(ii) not control, be controlled by, or be under common control with the Issuer,
and (iii) have an established place of business in London. If any such
Reference Bank should be unwilling or unable to act as such or if the Master
Servicer should terminate the appointment of any such Reference Bank, the
Master Servicer will promptly appoint another leading bank meeting the criteria
specified above.
The establishment of LIBOR on each LIBOR Determination Date by the
Indenture Trustee and the Master Servicer's calculation of the rate of interest
applicable to the Class A-6, Class A-7, Class A-11, Class A-21 and Class A-22
Bonds for the related Interest Accrual Period shall (in the absence of manifest
error) be final and binding. Each such rate of interest may be obtained by
telephoning the Indenture Trustee at _____________.
Principal. All payments and other amounts received in respect of the
Scheduled Principal Balance of the Mortgage Loans will be allocated between (i)
the Senior P&I Bonds and the Subordinate Bonds, on the one hand, and (ii) the
Class P Bonds on the other, in each case based on the applicable Non-PO
Percentage and the applicable PO Percentage, respectively, of such amounts.
The "Non-PO Percentage" with respect to any Mortgage Loan with a Net
Rate less than___% per annum (each such Mortgage Loan, a "Discount Mortgage
Loan") will be equal to the Net Rate thereof divided by___%. The "Non- PO
Percentage" with respect to any Mortgage Loan with a Net Rate equal to or
greater than___% per annum (each such Mortgage Loan, a "Non-Discount Mortgage
Loan") will be 100%. The "PO Percentage" with respect to any Discount Mortgage
Loan will be the fraction, expressed as a percentage, equal to___%, minus the
Net Rate thereof divided by ___%. The "PO Percentage" with respect to any
Non-Discount Mortgage Loan will be 0%.
Payments in reduction of the Class Current Principal Balance of each
Class of the Senior P&I Bonds and will be made on each Payment Date as
described under priority third above under "--Senior Bonds". In accordance with
such priority third, the Available Funds remaining after payment of interest on
the interest-bearing Senior P&I Bonds will be allocated to such Senior P&I
Bonds and Class P Bonds in an aggregate amount not to exceed the sum of the
Senior P&I Optimal Principal Amount and the PO Principal Payment Amount for the
Class P Bonds for such Payment Date.
Payments in reduction of the Class Current Principal Balances of each
Class of Subordinate Bonds will be made as described under "--Subordinate
Bonds" above. In accordance therewith, the Available Funds, if any, remaining
after payments of principal and interest on the Senior Bonds and payments in
respect of the PO Deferred Amounts for the Class P Bonds on such Payment Date
will be allocated to the Subordinate Bonds in an amount equal to each such
Class's Allocable Share for such Payment Date, provided that no payment of
principal will be made on any such Class until any Class ranking prior thereto
has received payments of interest and principal, and such Class has received
payments of interest, on such Payment Date.
The "Senior P&I Optimal Principal Amount" with respect to the Payment
Date will be an amount equal to the sum of the following (but in no event
greater than the aggregate of the Class Current Principal Balances of each
Class of the Senior P&I Bonds immediately prior to such Payment Date):
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(i) the applicable Senior Percentage of the applicable Non-PO
Percentage of all scheduled payments of principal due on each Mortgage
Loan on the Due Date, as specified in the amortization schedule at the
time applicable thereto (after adjustment for previous principal
prepayments but before any adjustment to such amortization schedule by
reason of any bankruptcy or similar proceeding or any moratorium or
similar waiver or grace period);
(ii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of the Scheduled Principal Balance of
each Mortgage Loan which was the subject of a voluntary prepayment in
full received by the related Sub-Servicer during the preceding
Prepayment Period;
(iii) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments allocated to
principal received by the related Sub-Servicer during the applicable
Prepayment Period with respect to each Mortgage Loan ;
(iv) the lesser of (a) the applicable Senior Prepayment
Percentage of the applicable Non-PO Percentage of the sum of (A) all
Net Liquidation Proceeds (as defined herein) allocable to principal
received in respect of each Mortgage Loan which became a Liquidated
Mortgage Loan during the immediately preceding calendar month (other
than Mortgage Loans described in the immediately following clause (B))
and (B) the Scheduled Principal Balance of each such Mortgage Loan
purchased by an insurer from the Certificate Trustee during the
immediately preceding calendar month pursuant to the related Primary
Mortgage Insurance Policy, if any, or otherwise; and (b) the
applicable Senior Percentage of the applicable Non-PO Percentage of
the sum of (A) the Scheduled Principal Balance of each Mortgage Loan
which became a Liquidated Mortgage Loan during the immediately
preceding calendar month (other than the Mortgage Loans described in
the immediately following clause (B)) and (B) the Scheduled Principal
Balance of each such Mortgage Loan that was purchased by an insurer
from the Certificate Trustee during the related Prepayment Period
pursuant to the related Primary Mortgage Insurance Policy, if any, or
otherwise, less (C) in the case of clause (b), the then applicable
Senior Percentage of the applicable Non-PO Percentage of the principal
portion of Excess Special Hazard Losses on each Mortgage Loan incurred
during the related Prepayment Period; and
(v) the applicable Senior Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Scheduled Principal
Balance of each Mortgage Loan or REO Property which was repurchased by
______ in connection with such Payment Date and (b) the excess, if
any, of the Scheduled Principal Balance of a Mortgage Loan that has
been replaced by ______ with a substitute Mortgage Loan pursuant to
the Pooling and Servicing Agreement in connection with such Payment
Date over the Scheduled Principal Balance of such substitute Mortgage
Loan.
The Senior P&I Optimal Principal Amounts are referred to herein as the
"Senior P&I Optimal Principal Amount".
The "Senior Percentage" for the Senior Bonds on any Payment Date will
equal the lesser of (i) 100% and (ii) the percentage (carried to six places
rounded up) obtained by dividing the aggregate of the Class Current Principal
Balances of all the Senior P&I Bonds immediately preceding the Payment Date by
the aggregate Scheduled Principal Balance of the Mortgage Loans (other than the
PO Percentage of each Discount Mortgage Loan) as of the beginning of the
related Due Period. The initial Senior Percentages for the Bonds are expected
to be approximately ____%.
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The "Senior Prepayment Percentage" for the Senior Bonds on any Payment
Date occurring during the periods set forth below will be as follows:
<TABLE>
<CAPTION>
Period (months inclusive) Senior Prepayment Percentage
<S> <C>
[____________].................................. 100%
[____________].................................. Senior Percentage plus __% of the Subordinate
Percentage
[____________].................................. Senior Percentage plus __% of the Subordinate
Percentage
[____________].................................. Senior Percentage plus __% of the Subordinate
Percentage
[____________].................................. Senior Percentage plus __% of the Subordinate
Percentage
[____________] and thereafter................... Senior Percentage
</TABLE>
Notwithstanding the foregoing, if on any Payment Date the Senior
Percentage exceeds the Senior Percentage as of the Closing Date, the Senior
Prepayment Percentage for such Payment Date will equal 100%.
In addition, no reduction of the Senior Prepayment Percentage shall
occur on any Payment Date (such limitation being the "Senior Prepayment
Percentage Stepdown Limitation") unless, as of the last day of the month
preceding such Payment Date, (i) the aggregate Scheduled Principal Balance of
Mortgage Loans delinquent 60 days or more (including for this purpose any such
Mortgage Loans in foreclosure and Mortgage Loans with respect to which the
related Mortgaged Property has been acquired by the related Trust), averaged
over the last six months, as a percentage of the sum of the aggregate of the
Class Current Principal Balances of the Subordinate Bonds does not exceed __%
and (ii) cumulative Realized Losses on such Mortgage Loans do not exceed (a)
__% of the aggregate of the Class Current Principal Balances of the Subordinate
Bonds as of the Closing Date (the "Original Subordinate Principal Balance") if
such Payment Date occurs between and including ________ and ________, (b) __%
of the applicable Original Subordinate Principal Balance if such Payment Date
occurs between and including __________ and ___________, (c) __% of the
applicable Original Subordinate Principal Balance if such Payment Date occurs
between and including __________ and ___________, (d) __% of the applicable
Original Subordinate Principal Balance if such Payment Date occurs between and
including __________ and __________, and (e) __% of the applicable Original
Subordinate Principal Balance if such Payment Date occurs during or after
____________.
With respect to any Mortgage Loan and any Payment Date, the
"Prepayment Period" is the period from the first day through the last day of
the month preceding the month of such Payment Date.
The "PO Principal Payment Amount" for the Class P Bonds with respect
to each Payment Date will be an amount equal to the sum of:
(i) the applicable PO Percentage of all scheduled payments of
principal due on each Discount Mortgage Loan on the related Due Date
as specified in the amortization schedule at the time applicable
thereto (after adjustment for previous principal prepayments but
before any adjustment to such amortization schedule by reason of any
bankruptcy or similar proceeding or any moratorium or similar waiver
or grace period);
(ii) the applicable PO Percentage of the Scheduled Principal
Balance of each Discount Mortgage Loan which was the subject of a
voluntary prepayment in full received by the Sub-Servicer during the
preceding Prepayment Period;
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<PAGE> 48
(iii) the applicable PO Percentage of all partial prepayments
allocated to principal of each Discount Mortgage Loan received by the
Sub-Servicer during the preceding Prepayment Period;
(iv) the lesser of (a) the applicable PO Percentage of the
sum of (A) all Net Liquidation Proceeds allocable to principal
received with respect to each Discount Mortgage Loan which became a
Liquidated Mortgage Loan during the immediately preceding calendar
month (other than a Discount Mortgage Loan described in the
immediately following clause (B)) and (B) the Scheduled Principal
Balance of each such Discount Mortgage Loan purchased by an insurer
from the Certificate Trustee during the immediately preceding calendar
month pursuant to the related Primary Mortgage Insurance Policy, if
any, or otherwise; and (b) the applicable PO Percentage of the sum of
(A) the Scheduled Principal Balance of each Discount Mortgage Loan
which became a Liquidated Mortgage Loan during the immediately
preceding calendar month (other than a Discount Mortgage Loan
described in the immediately following clause (B)) and (B) the
Scheduled Principal Balance of each such Discount Mortgage Loan that
was purchased by an insurer from the Certificate Trustee during the
related Prepayment Period pursuant to the related Primary Mortgage
Insurance Policy, if any, or otherwise, less (C) in the case of clause
(b), the applicable PO Percentage of the principal portion of Excess
Special Hazard Losses with respect to Discount Mortgage Loans incurred
during the related Prepayment Period; and
(v) the applicable PO Percentage of the sum of (a) the
Scheduled Principal Balance of each Discount Mortgage Loan or REO
Property (which previously secured a Discount Mortgage Loan) which was
repurchased by ______ in connection with such Payment Date and (b) the
excess, if any, between the Scheduled Principal Balance of a Discount
Mortgage Loan that has been replaced by ______ with a substitute
Discount Mortgage Loan pursuant to the Pooling and Servicing Agreement
in connection with such Payment Date and the Scheduled Principal
Balance of such substitute Discount Mortgage Loan.
The "Subordinate Percentage" for the Subordinate Bonds on any Payment
Date will equal 100% minus the Senior Percentage for the Senior Bonds. The
"Subordinate Prepayment Percentage" for the Subordinate Bonds on any Payment
Date will equal 100% minus the applicable Senior Prepayment Percentage, except
that on any Payment Date after the aggregate of the Class Current Principal
Balances of the Senior Bonds have each been reduced to zero, the Subordinate
Prepayment Percentage will equal 100%. The initial Subordinate Percentages for
the Subordinate Bonds are expected to be approximately ____%.
The "Subordinate Optimal Principal Amount" for the Subordinate Bonds
with respect to each Payment Date will be an amount, in no event greater than
the aggregate of the Class Current Principal Balances of the Subordinate Bonds
immediately prior to such Payment Date, equal to the excess, if any, of (a) the
sum of
(i) the applicable Subordinate Percentage of the applicable
Non-PO Percentage of all scheduled payments of principal due on each
Mortgage Loan on the related Due Date, as specified in the
amortization schedule at the time applicable thereto (after adjustment
for previous principal prepayments but before any adjustment to such
amortization schedule by reason of any bankruptcy or similar
proceeding or any moratorium or similar waiver or grace period);
(ii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the Scheduled Principal Balance of
each Mortgage Loan which was the subject of a voluntary prepayment in
full received by the related Sub-Servicer during the preceding
Prepayment Period;
(iii) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of all partial prepayments of principal
received by the related Sub-Servicer during the immediately preceding
Prepayment Period with respect to each Mortgage Loan ;
(iv) the excess, if any, of (A) the applicable Non-PO
Percentage of all Net Liquidation Proceeds allocable to principal
received on each Mortgage Loan which became a Liquidated Mortgage Loan
during the related Prepayment Period over (B) the amount payable to
Senior Bondholders as described under clause (iv) of the definition of
"Senior P&I Optimal Principal Amount";
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(v) the applicable Subordinate Prepayment Percentage of the
applicable Non-PO Percentage of the sum of (a) the Scheduled Principal
Balance of each Mortgage Loan or REO Property which was repurchased by
______ in connection with such Payment Date and (b) the excess, if
any, of the Scheduled Principal Balance of a Mortgage Loan that has
been replaced by ______ with a substitute Mortgage Loan pursuant to
the Pooling and Servicing Agreement in connection with such Payment
Date over the Scheduled Principal Balance of such substitute Mortgage
Loan; and
(vi) on the Payment Date on which the aggregate of the Class
Current Principal Balances of the Senior P&I Bonds has been reduced to
zero, 100% of any applicable Senior P&I Optimal Principal Amount
over (b) the PO Deferred Payment Writedown Amount payable on such Payment Date
with respect to (x) in the case of the Subordinate Bonds and Class P Bonds.
The "Allocable Share" with respect to any Class of Subordinate Bonds
on any Payment Date will generally equal such Class's pro rata share (based on
the Class Current Principal Balances of each Class entitled thereto) of the
Subordinate Optimal Principal Amount; provided that, except as described in the
second succeeding sentence, no Class of Subordinate Bonds (other than the Class
of Subordinate Bonds outstanding with the lowest numerical Class designation)
shall be entitled on any Payment Date to receive payments pursuant to clauses
(ii), (iii) and (v) of the definition of the Subordinate Optimal Principal
Amount unless the Class Prepayment Payment Trigger for the related Class is
satisfied for such Payment Date. The "Class Prepayment Payment Trigger" for a
Class of Subordinate Bonds for any Payment Date is satisfied if the fraction
(expressed as a percentage), the numerator of which is the Class Current
Principal Balances of such Class and each Class subordinate thereto, if any,
and the denominator of which is the aggregate of the Scheduled Principal
Balances of all of the applicable Mortgage Loans as of the related Due Date,
equals or exceeds such percentage calculated as of the Closing Date. If the
Class Prepayment Payment Trigger is not satisfied for any Class of Subordinate
Bonds on any Payment Date, this may have the effect of accelerating the
amortization of the Classes of Subordinate Bonds having lower numerical Class
designations. If on any Payment Date the Class Current Principal Balance of any
Class of Subordinate Bonds for which the related Class Prepayment Payment
Trigger was satisfied on such Payment Date is reduced to zero, any amounts
payable to such Class pursuant to clauses (ii), (iii) and (v) of the definition
of "Subordinate Optimal Principal Amount", to the extent of such Class's
remaining Allocable Share, shall be paid to the remaining Classes of
Subordinate Bonds in reduction of their respective Class Current Principal
Balances, sequentially, in the order of their numerical Class designations.
"Determination Date" means the 18th day of the month of the Payment
Date, or if such day is not a Business Day, the following Business Day (but in
no event less than two Business Days prior to the related Payment Date).
"Insurance Proceeds" are amounts paid by an insurer under any Primary
Mortgage Insurance Policy, standard hazard insurance policy, flood insurance
policy or title insurance policy covering any Mortgage Loan or Mortgaged
Property other than amounts required to be paid over to the Mortgagor pursuant
to law or the related Mortgage Note and other than amounts used to repair or
restore the Mortgaged Property or to reimburse certain expenses. "Repurchase
Proceeds" are proceeds of any Mortgage Loan repurchased by ______ and any cash
deposit in connection with the substitution of a Mortgage Loan pursuant to the
provisions described under "Pooling and Servicing Agreement--Assignment of
Mortgage Loans" and "-- Representations and Warranties" herein.
A "principal prepayment" is any payment or other recovery of principal
on a Mortgage Loan which is received in advance of its scheduled Due Date to
the extent that it is not accompanied by an amount as to interest representing
scheduled interest due on any date or dates in any month or months subsequent
to the month of prepayment, including Insurance Proceeds and Repurchase
Proceeds, but excluding Liquidation Proceeds received at the time a Mortgage
Loan becomes a Liquidated Mortgage Loan.
"Monthly Payment" with respect to any Mortgage Loan and any month is
the scheduled payment or payments of principal and interest due during such
month on such Mortgage Loan which either is payable by a Mortgagor in such
month under the related Mortgage Note or, in the case of any Mortgaged Property
acquired through foreclosure or deed- in-lieu of foreclosure (each such
Mortgaged Property, an "REO Property"), would otherwise have been payable under
the related Mortgage Note.
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<PAGE> 50
Payments in Reduction of the Class Current Principal Balances of the
PAC Bonds. The Class A-1, Class A-2, Class A-3, Class A-4 and Class A-9 Bonds
are planned amortization class securities and are sometimes collectively
referred to as the "PAC Bonds". On each Payment Date, the Available Funds will
be allocated among the Senior Bonds, including, but not limited to, the PAC
Bonds, as described under "Description of the Bonds--Payments on the
Bonds--Allocations of Available Funds" herein. To the extent that funds are
available to make payments in reduction of the Class Current Principal Balances
of each of the Classes of the PAC Bonds on each Payment Date, each such Class
will be entitled to receive the amount, if any, required to reduce the
outstanding Class Current Principal Balance thereof for such Payment Date to
the planned balance (each, a "Planned Balance") for such Class set forth in
Annex B hereof.
Payments in Reduction of the Class Current Principal Balance of the
TAC Bonds. The Class A-6 and Class A-11 Bonds are targeted amortization class
securities and are sometimes collectively referred to as the "TAC Bonds". On
each Payment Date, the Available Funds will be allocated among the Senior
Bonds, including, but not limited to, the TAC Bonds, as described under
"Description of the Bonds--Payments on the Bonds--Allocations of Available
Funds" herein. To the extent that funds are available to make payments in
reduction of the Class Current Principal Balance of the TAC Bonds on each
Payment Date, each Class of the TAC Bonds will be entitled to receive the
amount, if any, required to reduce the outstanding Class Current Principal
Balance thereof for such Payment Date to the targeted balance (each, a
"Targeted Balance") for such Class set forth in Annex C hereof.
ALLOCATION OF LOSSES; SUBORDINATION
A "Realized Loss" with respect to a Mortgage Loan is (i) a Deficient
Valuation (as defined below) or (ii) as to any Liquidated Mortgage Loan, the
unpaid principal balance thereof plus accrued and unpaid interest thereon at
the Mortgage Rate through the last day of the month of liquidation less the Net
Liquidation Proceeds with respect to such Mortgage Loan and the related
Mortgaged Property. A "Liquidated Mortgage Loan" is any defaulted Mortgage Loan
as to which the applicable Sub-Servicer has determined that all amounts which
it expects to recover from or on account of such Mortgage Loan have been
recovered.
"Liquidation Proceeds" are amounts received by the Sub-Servicer in
connection with the liquidation of a defaulted Mortgage Loan whether through
trustee's sale, foreclosure sale, proceeds of insurance policies, condemnation
proceeds or otherwise.
"Net Liquidation Proceeds" with respect to a Mortgage Loan are
Liquidation Proceeds net of unreimbursed advances by the Sub-Servicer or the
Master Servicer, as the case may be, Monthly Advances and expenses incurred by
the Sub-Servicer or the Master Servicer, as the case may be, in connection with
the liquidation of such Mortgage Loan and the related Mortgaged Property.
In the event of a personal bankruptcy of a Mortgagor, the bankruptcy
court may establish the value of the Mortgaged Property at an amount less than
the then Outstanding Principal Balance of the Mortgage Loan secured by such
Mortgaged Property and could reduce the secured debt to such value. In such
case, the holder of such Mortgage Loan would become an unsecured creditor to
the extent of the difference between the Outstanding Principal Balance of such
Mortgage Loan and such reduced secured debt (such difference, a "Deficient
Valuation"). In addition, certain other modifications of the terms of a
Mortgage Loan can result from a bankruptcy proceeding, including the reduction
of the amount of the monthly payment on the related Mortgage Loan (a "Debt
Service Reduction").
A "Special Hazard Loss" is a Realized Loss attributable to damage or a
direct physical loss suffered by a Mortgaged Property (including any Realized
Loss due to the presence or suspected presence of hazardous wastes or
substances on a Mortgaged Property) other than any such damage or loss covered
by a hazard policy or a flood insurance policy required to be maintained in
respect of such Mortgaged Property under the applicable Sub-Servicing Agreement
or any loss due to normal wear and tear or certain other causes.
On each Payment Date, the applicable PO Percentage of the principal
portion of any Realized Loss on a Discount Mortgage Loan and any PO Cash
Shortfall relating to the Class P Bonds will be allocated to the Class P Bonds
until the Class Current Principal Balance of the Class P Bonds, is reduced to
zero. With respect to any Payment Date through the Cross-Over Date, the
aggregate of all amounts so allocable to the Class P Bonds on such date in
respect of any Realized Losses (other than Excess Special Hazard Losses) on
Mortgage Loans, and any related PO Cash Shortfalls
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and all amounts previously allocated in respect of such Realized Losses or
related PO Cash Shortfalls and not paid on prior Payment Dates will be the
applicable "PO Deferred Amount" for the Class P Bonds. To the extent funds are
available therefor on any Payment Date through the applicable Cross-Over Date,
payments in respect of the related PO Deferred Amount will be made in
accordance with priority fourth under "--Payments on the Bonds--Senior Bonds"
above (any amount so paid, a "PO Deferred Payment Writedown Amount"). No
interest will accrue on any PO Deferred Amount. On each Payment Date through
the applicable Cross-Over Date, the Class Current Principal Balance of the
Class of Subordinate Bonds with the highest numerical Class designation then
outstanding will be reduced by the amount of any payments in respect of the
applicable PO Deferred Amount on such Payment Date in accordance with priority
fourth under "--Payments on the Bonds--Senior Bonds". After the Cross-Over
Date, no more payments will be made in respect of, and applicable Realized
Losses and PO Cash Shortfalls allocable to the Class P Bonds will not be added
to, the PO Deferred Amount for the Class P Bonds.
On any Payment Date, the Non-PO Percentage of the principal portion of
Realized Losses ("Non-PO Realized Losses") with respect to a Mortgage Loan
which suffered Realized Losses during the immediately preceding calendar month
(other than Excess Special Hazard Losses) will be allocated among the
outstanding Classes of Subordinate Bonds in inverse order of their numerical
Class designations, until the Class Current Principal Balance of each such
Class has been reduced to zero (i.e., such Realized Losses will be allocated
first to the Class B-6 Bonds, while such Bonds are outstanding, second, to the
Class B-5 Bonds, and so on). After the Cross-Over Date, such Non-PO Realized
Losses will be allocated, pro rata based on their Class Current Principal
Balances, among the Senior Bonds (excluding the Class P Bonds). The applicable
Non-PO Percentage of the principal portion of any Excess Special Hazard Loss
with respect to a Mortgage Loan for any Payment Date will be allocated pro rata
among all outstanding Classes of Bonds (other than the Class P, Class A-5,
Class A-10 and Class X Bonds) based on their Class Current Principal Balances.
An "Excess Special Hazard Loss" is any Special Hazard Loss occurring after the
Special Hazard Termination Date, as described more fully below.
No reduction of the Class Current Principal Balance of any Class of
Bonds shall be made on any Payment Date on account of Realized Losses to the
extent that such reduction would have the effect of reducing the aggregate of
the Class Current Principal Balances of all of the Classes of Bonds as of such
Payment Date to an amount less than the aggregate of the Scheduled Principal
Balances of the Mortgage Loans as of the preceding Due Date (such limitation
being the applicable "Loss Allocation Limitation".
The principal portion of Debt Service Reductions will not be allocated
in reduction of the Class Current Principal Balance of any Bond. However,
regardless of when they occur, Debt Service Reductions may reduce the amount of
Available Funds that would otherwise be available for payment on a Payment
Date. As a result of the subordination of the Subordinate Bonds in right of
payment, any Debt Service Reductions relating to Mortgage Loans, prior to the
applicable Cross-Over Date, will be borne by such Subordinate Bonds (to the
extent then outstanding) in inverse order of their numerical Class designation
and, after the Cross-Over Date, will be borne by the Senior Bonds.
All allocations of the principal portion of Realized Losses will be
accomplished on a Payment Date by reducing the Class Current Principal Balances
of the applicable Classes by their appropriate shares of any such losses
occurring during the month preceding the month of such Payment Date and,
accordingly, will be taken into account in determining the payments of
principal and interest on the Bonds commencing on the following Payment Date,
except that the aggregate amount of the principal portion of any Realized
Losses on the Mortgage Loans to be allocated to the Class P Bonds on any
Payment Date through the applicable Cross-Over Date will also be taken into
account in determining payments in respect of the related PO Deferred Amount
for such Payment Date.
The interest portion of Realized Losses will be allocated among the
outstanding Classes of Offered Bonds to the extent described under "--Payments
on the Bonds--Interest" above.
Any Special Hazard Loss will on each Payment Date be allocated solely
to the Subordinate Bonds until the Special Hazard Termination Date. The
"Special Hazard Termination Date" is the Payment Date upon which the Special
Hazard Loss Amount has been reduced to zero or a negative number (or the
Cross-Over Date, if earlier). Upon the initial issuance of the Bonds, the
"Special Hazard Loss Amount" will equal _% of the aggregate of the Scheduled
Principal Balances as of the Cut-off Date of the Mortgage Loans (or
approximately $______). As of any Payment Date, the Special Hazard Loss Amount
will equal the initial Special Hazard Loss Amount minus the sum of (i) the
aggregate
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amount of Special Hazard Losses that would have been previously allocated to
the Subordinate Bonds in the absence of the Loss Allocation Limitation and (ii)
the Adjustment Amount. For each anniversary of the Cut-off Date, the
"Adjustment Amount" shall be equal to the amount, if any, by which the
applicable Special Hazard Loss Amount (without giving effect to the deduction
of the Adjustment Amount for such anniversary) exceeds the lesser of (A) an
amount calculated by the Certificate Trustee and approved by each of ______ and
______, which amount shall not be less than $______, and (B) the greater of (x)
__% (or if greater than __%, the highest percentage of Mortgage Loans by
principal balance secured by Mortgaged Properties in any _________ five-digit
ZIP code area) of the outstanding principal balance of all the Mortgage Loans
on the Payment Date immediately preceding such anniversary and (y) twice the
outstanding principal balance of the Mortgage Loan which has the largest
outstanding principal balance on the Payment Date immediately preceding such
anniversary.
SUBORDINATION
Priority of Senior Bonds. As of the Closing Date, the aggregate Class
Current Principal Balances of the Offered Subordinate Bonds which are part of
the Subordinate Bonds and of the Other Subordinate Bonds which are part of the
Subordinate Bonds will equal approximately ____% and ___%, respectively, of the
aggregate Class Current Principal Balances of all of the Classes of Bonds.
The rights of the holders of each Class of the Subordinate Bonds to
receive payments with respect to the Mortgage Loans will be subordinated to
such rights of the holders of the Senior Bonds and to each Class of Subordinate
Bonds having a lower numerical designation than such Class. The subordination
of the Subordinate Bonds to the Senior Bonds, and the further subordination
among the Subordinate Bonds, are each intended to increase the likelihood of
timely receipt by the holders of the Bonds with higher relative payment
priority of the maximum amount to which they are entitled on any Payment Date
and to provide such holders protection against losses resulting from defaults
on Mortgage Loans to the extent described above.
However, in certain circumstances, the amount of available
subordination (including the limited subordination provided for Excess Special
Hazard Losses) may be exhausted and shortfalls in payments on the Offered Bonds
could result. Holders of Senior Bonds will bear their proportionate share of
Realized Losses on Mortgages Loans in excess of the total subordination amount,
and of Excess Special Hazard Losses on Mortgage Loans. The allocation of Non-PO
Realized Losses and the applicable PO Deferred Payment Writedown Amounts to the
Subordinate Bonds on any Payment Date will decrease the protection provided to
the Senior Bonds then outstanding on future Payment Dates by reducing the
aggregate of the Class Current Principal Balances of the related Subordinate
Bonds then outstanding.
In addition, in order to extend the period during which the
Subordinate Bonds remain available as credit enhancement for the Senior Bonds,
the entire amount of any prepayment or other unscheduled recovery of principal
with respect to the Non-PO Percentage of a Mortgage Loan will be allocated to
the applicable Senior Bonds to the extent described herein during the first
five years after the Closing Date (with such allocation being subject to
reduction thereafter as described herein). This allocation has the effect of
accelerating the amortization of the applicable Senior Bonds while, in the
absence of losses in respect of the Mortgage Loans, increasing the percentage
interest in the principal balance of the Mortgage Loans evidenced by the
related Subordinate Bonds.
After the payment of amounts payable in respect of the Senior Bonds on
each Payment Date, the Subordinate Bonds will be entitled on such date to the
remaining portion, if any, of the Available Funds in an aggregate amount equal
to the Accrued Bond Interest on the Subordinate Bonds for such date, any
remaining unpaid Accrued Bond Interest thereon from previous Payment Dates and
the sum of the Allocable Shares of the Subordinate Bonds. Amounts so paid to
Subordinate Bondholders will not be available to cover any delinquencies or any
Realized Losses on Mortgage Loans in respect of subsequent Payment Dates.
Priority Among Subordinate Bonds. On each Payment Date, the holders of
any particular Class of Subordinate Bonds will have a preferential right to
receive the amounts due them on such Payment Date out of Available Funds, prior
to any payment being made on such date on each Class of Subordinate Bonds with
a higher numerical designation. In addition, except as described herein, Non-PO
Realized Losses and the applicable PO Deferred Payment Writedown Amounts will
be allocated, to the extent set forth herein, in reduction of the Class Current
Principal Balances of the related Classes of Subordinate Bonds in the inverse
order of their numerical Class designation. The effect of the
S-51
<PAGE> 53
allocation of such Non-PO Realized Losses and any applicable PO Deferred
Payment Writedown Amounts to a Class of Subordinate Bonds will be to reduce
future payments allocable to such Class and increase the relative portion of
payments allocable to the Classes of Subordinate Bonds with a lower numerical
Class designation.
In order to maintain the relative levels of subordination among the
related Classes of Subordinate Bonds, the applicable Non-PO Percentage of
prepayments and certain other unscheduled recoveries of principal in respect of
the Mortgage Loans (which generally will not be payable to such Bonds for at
least the first five years after the Cut-off Date) will not be payable to the
holders of any Class of Subordinate Bonds on any Payment Date for which the
related Class Prepayment Payment Trigger is not satisfied, except as described
above. See "--Payments on the Bonds--Principal" above. If the Class Prepayment
Payment Trigger is not satisfied with respect to any Class of Subordinate
Bonds, the amortization of the Classes of Subordinate Bonds with a lower
numerical Class designation may occur more rapidly than would otherwise have
been the case and, in the absence of losses in respect of the related Mortgage
Loans, the percentage interest in the principal balance of the Mortgage Loans
evidenced by such Subordinate Bonds may increase.
As a result of the subordination of any Class of Subordinate Bonds,
such Class of Bonds will be more sensitive than the Classes of Bonds with a
lower numerical Class designation to the rate of delinquencies and defaults on
the Mortgage Loans, and under certain circumstances investors in such Bonds may
not recover their initial investment.
YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The yields to maturity and weighted average lives of the Bonds will be
affected by the amount and timing of principal payments and the allocation of
the Available Funds to various related Classes of Bonds. Investors should
carefully consider the associated risks discussed under the headings "Yield and
Prepayment Considerations" and "Legal Investment" in the "Summary of Terms"
herein and under the heading "Legal Investment" in the Prospectus.
STATED MATURITY
The "Stated Maturity" for payments on each Class of Bonds, is the
Payment Date in __________, which is the Payment Date in the month following
the latest scheduled maturity date of all of the Mortgage Loans. Because the
rate of payment (including prepayments) of principal on the Mortgage Loans can
be expected to exceed the scheduled rate of payments, and could exceed the
scheduled rate by a substantial amount, the disposition of the last remaining
Mortgage Loan may be earlier, and could be substantially earlier, than the
applicable Stated Maturity. In addition, ______ or its designee may, at its
option, repurchase all the Mortgage Loans from the related Trust on an Optional
Redemption Date. See "Pooling and Servicing Agreement--Termination" herein.
WEIGHTED AVERAGE LIVES
The weighted average life of a security refers to the average amount
of time that will elapse from the date of its issuance until each dollar of
principal of such security will be paid to the investor. The weighted average
life of a Bond is determined by (a) multiplying the amount of the reduction, if
any, of the Class Current Principal Balance of such Bond from one Payment Date
to the next Payment Date by the number of years from the date of issuance to
the second such Payment Date, (b) summing the results and (c) dividing the sum
by the aggregate amount of the reductions in the Class Current Principal
Balance or Class Notional Balance of such Bond referred to in clause (a). The
weighted average lives of the Bonds will be influenced by, among other factors,
the rate at which principal is paid on Mortgage Loans. Principal payments of
Mortgage Loans may be in the form of scheduled amortization or prepayments
including as a result of foreclosure proceedings or by virtue of the purchase
of a Mortgage Loan in advance of its stated maturity as required or permitted
by the Pooling and Servicing Agreement. In general, the Mortgage Loans may be
prepaid by the Mortgagors at any time without payment of any prepayment fee or
penalty. The actual weighted average life and term to maturity of each Class of
Bonds, in general, will be shortened if the level of such prepayments with
respect to principal increases.
S-52
<PAGE> 54
INTEREST ONLY BONDS
Because the Class X Notional Balance will be based upon the Scheduled
Principal Balances of the Non- Discount Mortgage Loans, the yield on the Class
X Bonds will be sensitive to the rate and timing of principal payments of the
Non-Discount Mortgage Loans. The yield on the Class A-5 and Class A-10 Bonds
also will be sensitive to the rate and timing of principal payments on the
Mortgage Loans, because the Class A-5 Notional Balance is based on the Class
Current Principal Balances of the Class A-1 through Class A-4 Bonds, and the
Class A-10 Notional Balance is based on the Class Current Principal Balance of
the Class A-9 Bonds. The Class A-1 through A-4 Bonds and the Class A-9 Bonds
are PAC Bonds. See "--Yield on the PAC Bonds" below. A rapid rate of principal
payments may have a materially negative effect on the yield to investors in the
related Class or Classes of Interest Only Bonds. Moreover, as a result of the
method of calculation of the Bond Interest Rate of the Class X Bonds to the
extent the Non-Discount Mortgage Loans, with relatively higher Net Rates prepay
faster than those with relatively lower Net Rates, the yield on the Classes of
Bonds will be reduced. Investors should fully consider the associated risks,
including the risk that a rapid rate of principal payments could result in the
failure of investors in such Classes of Bonds to recover fully their initial
investments.
CLASS A-8 BONDS
Because of the payment priorities of the Senior Bonds, the weighted
average life of Class A-8 Bonds will be extremely sensitive to the rate of
principal prepayments on the Mortgage Loans.
CLASS A-23 BONDS
As described herein, during certain periods, no principal payments or
a disproportionately small or large portion of principal payments will be paid
to the Class A-23 Bonds. Unless the Class Current Principal Balances of all
other Senior P&I Bonds have been reduced to zero, the Class A-23 Bonds will not
be entitled to receive any payments of principal prior to the Payment Date
occurring in ___________.
CLASS P BONDS
The amounts payable with respect to the Class P Bonds derive from
principal payments on the Discount Mortgage Loans. As a result, the yield on
the Class P Bonds will be adversely affected by slower than expected payments
of principal (including prepayments, defaults and liquidations) on the Discount
Mortgage Loans. Because the Discount Mortgage Loans have lower Net Rates than
the Non-Discount Mortgage Loans, and because the Mortgage Loans with lower Net
Rates are likely to have lower Mortgage Rates, the Discount Mortgage Loans are
generally likely to prepay at a slower rate than the Non-Discount Mortgage
Loans.
PREPAYMENT MODEL
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The prepayment model used in this Prospectus
Supplement ("SPA") represents an assumed rate of prepayment each month of the
then outstanding principal balance of a pool of new mortgage loans. SPA does
not purport to be either a historical description of the prepayment experience
of any pool of mortgage loans or a prediction of the anticipated rate of
prepayment of any pool of mortgage loans, including the Mortgage Loans. A 100%
SPA assumes prepayment rates of __% per annum of the then outstanding principal
balance of such mortgage loans in the first month of the life of the mortgage
and an additional __% per annum in each month thereafter (for example, __% per
annum in the second month) until the thirtieth month. Beginning in the
thirtieth month and in each month thereafter during the life of the mortgage
loans, 100% SPA assumes a constant prepayment rate of _% per annum. Multiples
will be calculated from this prepayment rate series. For example, ___% SPA
assumes prepayment rates will be __% per annum in month one, _% per annum in
month two, reaching __% per annum in month 30 and remaining constant at __% per
annum thereafter. A 0% SPA assumes no prepayments.
S-53
<PAGE> 55
PRICING ASSUMPTIONS
The Bonds were structured assuming, among other things, a ___% SPA.
The prepayment assumptions to be used for pricing purposes for the respective
Classes may vary as determined at the time of sale. The actual rate of
prepayment may vary considerably from the rate used for any prepayment
assumption.
DECREMENT TABLES
The following tables entitled "Percent of Initial Class Principal
Balance or Class Notional Balance Outstanding" indicate the percentages of the
initial Class Current Principal Balance or Class Notional Balance of each Class
of Offered Bonds that would be outstanding after each of the dates shown at
various constant percentages of SPA and the corresponding weighted average
lives of such Classes of Offered Bonds.
The following tables have been prepared based on the assumptions that
Mortgage Loans have the characteristics set forth below:
<TABLE>
<CAPTION>
Cut-off Date Original Term Remaining Term to
Scheduled to Maturity Maturity Mortgage
Principal Balance (in months) (in months) Rate Net Rate
<S> <C> <C> <C> <C> <C>
Mortgage Loans $ % %
</TABLE>
(ii) the Mortgage Loans prepay at the specified percentages of SPA, (iii) no
defaults in the payment by Mortgagors of principal of and interest on the
Mortgage Loans are experienced, (iv) scheduled payments on the Mortgage Loans
are received on the first day of each month commencing in ________ and are
computed prior to giving effect to prepayments received on the last day of the
prior month, (v) prepayments are allocated as described herein without giving
effect to loss and delinquency tests, (vi) there are no Net Interest Shortfalls
and prepayments represent prepayments in full of individual Mortgage Loans that
are received on the last day of each month, commencing in _________, (vii)
scheduled Monthly Payments of principal and interest on the Mortgage Loans are
calculated with respect to their respective principal balances (prior to giving
effect to prepayments received thereon during the preceding calendar month),
Mortgage Rate and remaining terms to stated maturity such that the Mortgage
Loans will fully amortize by their stated maturities, (viii) the initial Class
Current Principal Balances or Class Notional Balances of the Bonds are as set
forth on the cover page hereof and under "Summary of Terms--Other Subordinate
Bonds", (ix) payments in respect of the Bonds are received in cash on the 25th
day of each month, commencing in _________, (x) the Offered Bonds are purchased
on ____________ and (xi) neither ______, its designee nor the Master Servicer
exercises its option to repurchase the Mortgage Loans described under the
caption "Pooling and Servicing Agreement--Termination". While it is assumed
that each of the Mortgage Loans prepays at the specified constant percentages
of the SPA, this is not likely to be the case.
Discrepancies will exist between the characteristics of the actual
Mortgage Loans which will be delivered to the Certificate Trustee and
characteristics of the Mortgage Loans assumed in preparing the tables. To the
extent that the Mortgage Loans have characteristics which differ from those
assumed in preparing the tables, the Bonds may mature earlier or later than
indicated by the tables.
Based on the foregoing assumptions, the tables below indicate the
weighted average life of each Class of Offered Bonds and set forth the
percentages of the initial Class Current Principal Balance or Class Notional
Balance of each such Class that would be outstanding after the Payment Date in
_______ of each of the years indicated, assuming that the Mortgage Loans prepay
at the percentage of SPA indicated therein. Neither SPA nor any other
prepayment model or assumption purports to be an historical description of
prepayment experience or a prediction of the anticipated rate of prepayment of
any pool of mortgage loans, including the Mortgage Loans. Variations in the
actual prepayment experience and the balance of the Mortgage Loans that prepay
may increase or decrease the percentage of initial Class Current Principal
Balance or Class Notional Balance (and weighted average life) shown in the
following tables. Such variations may occur even if the average prepayment
experience of all such Mortgage Loans equals any of the specified percentages
of SPA.
S-54
<PAGE> 56
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class P Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028.................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-55
<PAGE> 57
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-1 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-56
<PAGE> 58
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-2 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-57
<PAGE> 59
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-3 and Class A-4 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-58
<PAGE> 60
PERCENT OF INITIAL CLASS NOTIONAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-5 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-59
<PAGE> 61
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-6 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-60
<PAGE> 62
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-7 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-61
<PAGE> 63
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-8 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-62
<PAGE> 64
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE
OR CLASS NOTIONAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-9 and A-10 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-63
<PAGE> 65
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-11 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-64
<PAGE> 66
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-12 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004 ...............................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-65
<PAGE> 67
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-13 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-66
<PAGE> 68
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-14, Class A-15 and Class A-16 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-67
<PAGE> 69
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-17, Class A-18, Class A-19 and Class A-20 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-68
<PAGE> 70
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-21 and A-22 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-69
<PAGE> 71
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class A-23 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-70
<PAGE> 72
PERCENT OF INITIAL CLASS NOTIONAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class X Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-71
<PAGE> 73
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class B-1, Class B-2 and Class B-3 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999................................................
2000................................................
2001................................................
2002................................................
2003................................................
2004................................................
2005................................................
2006................................................
2007................................................
2008................................................
2009................................................
2010................................................
2011................................................
2012................................................
2013................................................
2014................................................
2015................................................
2016................................................
2017................................................
2018................................................
2019................................................
2020................................................
2021................................................
2022................................................
2023................................................
2024................................................
2025................................................
2026................................................
2027................................................
2028................................................
Weighted Average Life (in years)**...................
</TABLE>
* Represents a percentage greater than 0% but less than 0.5%.
** The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-72
<PAGE> 74
PERCENT OF INITIAL CLASS PRINCIPAL BALANCE OUTSTANDING
<TABLE>
<CAPTION>
Class R-1 and R-2 Bonds
<S> <C> <C> <C> <C> <C>
Payment Date 0% 100% 275% 450% 600%
Initial Percentage...................................
1999.................................................
Weighted Average Life (in years)*....................
</TABLE>
* The weighted average life of a Bond is determined by (a) multiplying
the amount of the reduction, if any, of the principal balance (or
notional amount) of such Bond from one Payment Date to the next
Payment Date by the number of years from the date of issuance to the
second such Payment Date, (b) summing the results and (c) dividing the
sum by the aggregate amount of the reductions in the principal balance
(or notional amount) of such Bond referred to in clause (a).
S-73
<PAGE> 75
YIELD ON THE CLASS P BONDS
The Class P Bonds will be "principal only" Bonds, will not bear
interest and will be offered at a substantial discount to their respective
initial Class Current Principal Balances. As indicated in the table below, a
low rate of principal payments (including prepayments) will have a material
negative effect on the yield to investors in the Class P Bonds.
The significance of the effects of prepayments on the Class P Bonds is
illustrated in the following tables entitled "Sensitivity of the Class P Bonds
to Prepayments", which shows the pre-tax yield (on a corporate bond equivalent
basis) to the holders of the applicable Bonds under different constant
percentages of SPA. The yields of such Bonds set forth in the following tables
were calculated using the assumptions specified above under "--Decrement
Tables" and assuming that (i) in the case of the Class P Bonds, the purchase
price of the Class P Bonds is approximately __% of the initial Class Current
Principal Balance of the Class P Bonds and (ii) in either case, such Bonds are
purchased on ________________.
It is not likely that the Discount Mortgage Loans will prepay at a
constant rate until maturity or that all such Mortgage Loans will prepay at the
same rate or that they will have the characteristics assumed. There can be no
assurance that the Discount Mortgage Loans will prepay at any of the rates
shown in the table or at any other particular rate. The timing of changes in
the rate of prepayments may affect significantly the yield realized by a holder
of a Class P Bond and there can be no assurance that the pre-tax yield to an
investor in the Class P Bonds will correspond to any of the pre-tax yields
shown herein. Each investor must make its own decision as to the appropriate
prepayment assumptions to be used in deciding whether or not to purchase a
Class P Bond.
Sensitivity of the Class P Bonds to Prepayments
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
% of SPA
0% 100% 275% 450% 600%
<S> <C> <C> <C> <C> <C>
Pre-Tax Yields to Maturity.................. ___% ___% ___% ____% ___%
</TABLE>
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flows to be paid on the Class P Bonds, as applicable, would
cause the discounted present value of such assumed stream of cash flows to
equal the assumed purchase price of the Class P Bonds, as applicable, indicated
above and converting such monthly rates to corporate bond equivalent rates.
Such calculation does not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by
them as payments on the Class P Bonds, as applicable, and consequently does not
purport to reflect the return on any investment in the Class P Bonds when such
reinvestment rates are considered.
YIELD ON THE INTEREST ONLY BONDS
The significance of the effects of prepayments on the Class A-5, Class
A-10 and Class X Bonds is illustrated in the following table entitled
"Sensitivity of the Class A-5, Class A-10, and Class X Bonds to Prepayments",
which shows the pre-tax yield (on a corporate bond equivalent basis) to holders
of such Bonds under different constant percentages of SPA. The yields of such
Bonds set forth in the following table were calculated using the assumptions
specified above under "--Decrement Tables" and assuming that the purchase
prices of the Class A-5, Class A-10 and Class X Bonds are approximately __%,
___% and ___%, respectively, of the related initial Class Notional Balance
(plus accrued interest) and such Bonds are purchased on _____________.
As indicated in the following tables, the yield to investors in the
Class A-5, Class A-10 and Class X Bonds will be highly sensitive to the rate of
principal payments (including prepayments) on in the case of the Class A-5,
Class A-10 and Class X Bonds, the Mortgage Loans (especially, in the case of
the Class X Bonds, those with high Net Rates) which generally can be prepaid at
any time without penalty. On the basis of the assumptions described above, the
yield to maturity on the Class A-5, Class A-10 and Class X Bonds would be __%
if prepayments were to occur at a constant rate of approximately ___%, ___% and
___% SPA, respectively.
S-74
<PAGE> 76
It is not likely that the Mortgage Loans will prepay at a constant
rate until maturity or that all of the Mortgage Loans will prepay at the same
rate or that they will have the characteristics assumed. There can be no
assurance that the Mortgage Loans will prepay at any of the rates shown in the
tables or at any other particular rate. The timing of changes in the rate of
prepayments may affect significantly the yield realized by a holder of a Class
A-5, Class A-10 and Class X Bond and there can be no assurance that the pre-tax
yield to an investor in the Class A-5, Class A-10 and Class X Bonds will
correspond to any of the pre-tax yields shown herein. Each investor must make
its own decision as to the appropriate prepayment assumptions to be used in
deciding whether or not to purchase a Class A-5, Class A-10 and Class X Bond.
Sensitivity of the Class A-5, Class A-10 and Class X Bonds to Prepayments
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
% of SPA
0% 100% 275% 450% 600%
<S> <C> <C> <C> <C> <C>
Class A-5 Bonds.................... % % % % %
Class A-10 Bonds................... % % % % %
Class X Bonds...................... % % % % %
</TABLE>
The yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flows to be paid on the Class A-5, Class A-10 and Class X Bonds,
respectively, would cause the discounted present value of such assumed stream
of cash flows to equal the assumed purchase price of such Bonds indicated
above, and converting such monthly rates to corporate bond equivalent rates.
Such calculation does not take into account variations that may occur in the
interest rates at which investors may be able to reinvest funds received by
them as payments of interest on the Class A-5, Class A-10 and Class X Bonds and
consequently does not purport to reflect the return on any investment in the
Class A-5, Class A-10 and Class X Bonds when such reinvestment rates are
considered.
YIELD ON THE CLASS A-7, CLASS A-11 AND CLASS A-22 BONDS
The significance of the effects of prepayments and changes in LIBOR on
the Class A-7, Class A-11 and Class A-22 Bonds is illustrated in the following
tables, which show the pre-tax yield (on a corporate bond equivalent basis) to
the holders of such Bonds under different constant percentages of SPA and
constant levels of LIBOR. The yields of such Bonds set forth in the following
tables were calculated using the assumptions specified above under "--Decrement
Tables" and assuming that (i) on each LIBOR Determination Date, LIBOR will be
at the level shown, (ii) the purchase prices of the Class A-7, Class A-11 and
Class A-22 Bonds are approximately ____%, __% and __% of their initial
respective Class Current Principal Balances (plus accrued interest), and (iii)
such Bonds are purchased on __________.
The yield to investors in the Class A-7, Class A-11 and Class A-22
Bonds will be highly sensitive to the level of LIBOR and to the rate and timing
of principal payments (including prepayments) of the Mortgage Loans, which in
each case can be prepaid at any time without penalty.
Changes in LIBOR may not correlate with changes in prevailing mortgage
interest rates. It is possible that lower prevailing mortgage interest rates,
which might be expected to result in faster prepayments, could occur
concurrently with an increased level of LIBOR.
S-75
<PAGE> 77
Sensitivity of the Class A-7 Bonds
to Prepayments and LIBOR
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
% of SPA
LIBOR 0% 100% 275% 450% 600%
<S> <C> <C> <C> <C> <C>
% % % % % %
% % % % % %
% % % % % %
% % % % % %
% and higher % % % % %
</TABLE>
Sensitivity of the Class A-11 Bonds
to Prepayments and LIBOR
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
% of SPA
LIBOR 0% 100% 275% 450% 600%
<S> <C> <C> <C> <C> <C>
% % % % % %
% % % % % %
% % % % % %
% % % % % %
% and higher % % % % %
</TABLE>
Sensitivity of the Class A-22 Bonds
to Prepayments and LIBOR
(Pre-Tax Yields to Maturity)
<TABLE>
<CAPTION>
% of SPA
LIBOR 0% 100% 275% 450% 600%
<S> <C> <C> <C> <C> <C>
% % % % % %
% % % % % %
% % % % % %
% % % % % %
% and higher % % % % %
</TABLE>
The yields set forth in the preceding tables were calculated by
determining the monthly discount rates which, when applied to the assumed
stream of cash flows to be paid on the Class A-7, Class A-11 and Class A-22
Bonds would cause the discounted present value of such assumed stream of cash
flows to equal the assumed purchase prices of the Class A-7, Class A-11 and
Class A-22 Bonds indicated above and converting such monthly rates to corporate
bond equivalent rates. Such calculation does not take into account variations
that may occur in the interest rates at which investors may be able to reinvest
funds received by them as payments of principal of and interest on the Class
A-7, Class A-11 and Class A-22 Bonds and consequently does not purport to
reflect the return on any investment in the Class A-7, Class A-11 and Class
A-22 Bonds when such reinvestment rates are considered.
YIELD ON THE PAC BONDS
The Planned Balances of each Class of PAC Bonds on each Payment Date
were calculated assuming that (i) the Mortgage Loans and the Bonds have the
characteristics described in the second paragraph under "Yield and Prepayment
Considerations--Decrement Tables" herein as used for the computation of
weighted average lives, (ii) with respect to the PAC Bonds, such Mortgage Loans
are prepaid at any constant rate within the range of approximately ___% to
approximately ___% SPA and (iii) the initial Class Current Principal Balances
of the PAC Bonds are as set forth on the cover page hereof.
S-76
<PAGE> 78
It is extremely unlikely that the Mortgage Loans will prepay at a
constant percentage of SPA. In addition, some or all of the other assumptions
that are used in preparing the table in Annex B are unlikely to reflect actual
experience. Accordingly, there is no assurance that the Class Current Principal
Balance of any Class of PAC Bonds will conform on any Payment Date to the
applicable level set forth in such table. In addition, if the Senior P&I
Optimal Principal Amount exceeds the amount necessary to pay the amounts
necessary to reduce the PAC Bonds to their respective Planned Balances, on any
Payment Date, the excess will be allocated on such Payment Date to payments in
reduction of the Current Principal Balances of the Bonds in accordance with the
priorities described herein, and will not be retained for payment on subsequent
Payment Dates. Accordingly, if principal prepayments on the Mortgage Loans do
not occur at a constant rate within the applicable ranges in the case of the
PAC Bonds, the amount available on subsequent Payment Dates for payment of each
Class of the PAC Bonds may be less than the amounts necessary to reduce their
Class Current Principal Balances to their Planned Balances for such Payment
Dates, even if on average prepayments on the Mortgage Loans do occur at such a
constant rate. Payments in reduction of the Class Current Principal Balance of
any Class of PAC Bonds may reduce the Current Principal Balance of such Bonds
to zero significantly earlier or later than the Payment Date specified herein.
YIELD ON THE TAC BONDS
The Targeted Balances of each Class of TAC Bonds on each Payment Date
were calculated assuming that (i) the Mortgage Loans and the Bonds have the
characteristics described in the second paragraph under "Yield and Prepayment
Considerations--Decrement Tables" herein as used for the computation of
weighted average lives, (ii) such Mortgage Loans are prepaid at constant rate
of ___% SPA and (iii) the initial Class Current Principal Balance of the TAC
Bonds are as set forth on the cover page hereof.
It is extremely unlikely that the Mortgage Loans will prepay at a
constant percentage of SPA. In addition, some or all of the other assumptions
that are used in preparing the table in Annex B are unlikely to reflect actual
experience. Accordingly, there is no assurance that the Class Current Principal
Balance of any Class of the TAC Bonds will conform on any Payment Date to the
applicable level set forth in such table. If the Mortgage Loans prepay at rates
that are generally below ___% of the SPA, the TAC Bonds will not be reduced to
their Targeted Balances schedules and the weighted average lives of the TAC
Bonds may be extended, perhaps significantly. If the Mortgage Loans prepay at
rates that are generally above___% of the SPA, the weighted average lives of
the TAC Bonds may be shortened, perhaps significantly. In addition, if the
Senior P&I Optimal Principal Amount exceeds the amount necessary to pay the
amounts necessary to reduce the TAC Bonds to their respective Targeted
Balances, on any Payment Date, the excess will be allocated on such Payment
Date to payments in reduction of the Class Current Principal Balances of the
Bonds in accordance with the priorities described herein, and will not be
retained for payment on subsequent Payment Dates. Accordingly, if principal
prepayments on the Mortgage Loans do not occur at a constant rate of ___% SPA,
the amount available on subsequent Payment Dates for payment of each Class of
the TAC Bonds may be less than the amounts necessary to reduce their Class
Current Principal Balance to their Targeted Balances for such Payment Dates,
even if on average prepayments on the Mortgage Loans do occur at such a
constant rate. Payments in reduction of the Class Current Principal Balance of
any Class of TAC Bonds may reduce the Current Principal Balance of such TAC
Bonds to zero significantly earlier or later than the Payment Date specified
herein.
INDENTURE
GENERAL
The Bonds will be issued pursuant to the Indenture. Reference is made
to the Prospectus for important information in addition to that set forth
herein regarding the terms and conditions of the Indenture. The Offered Bonds
will be transferable and exchangeable at the Corporate Trust Office of the
Indenture Trustee. The Indenture Trustee will provide a prospective or actual
Bondholder, on written request, a copy (without exhibits) of the Indenture.
Requests should be addressed to the Corporate Trust Office of the Indenture
Trustee at _______________________________ (the "Corporate Trust Office").
S-77
<PAGE> 79
INDENTURE EVENT OF DEFAULT
Under the Indenture, an Indenture Event of Default will not occur
solely by reason of the allocation of Realized Losses to any Class of
Subordinate Bonds or the Principal Balance of any Class of Subordinate Bonds
being reduced to zero by reason of the allocation thereto of Realized Losses or
by failure to pay the amount of accrued interest on any Class of the
Subordinate Bonds or the Subordinate Optimal Principal Amount for the
Subordinate Bonds on any Payment Date as long as all Available Funds are paid
on the Bonds on such Payment Date. In addition, an Indenture Event of Default
will not occur solely by the failure to pay the amount of accrued interest on
the Senior Bonds or the Senior P&I Optimal Principal Payment Amount for the
Senior Bonds on any Payment Date, or by the allocation of any Realized Losses
on any Payment Date, so long as all Available Funds are paid on the Bonds on
such Payment Date. For purposes of determining whether an Indenture Event of
Default occurs under the Indenture, a default in the payment of principal of
any Bonds, or a default for five days or more in the payment of interest on any
Bond will occur only if all Available Funds for such Payment Date were not paid
on the Bonds as required by the Indenture. For purposes of determining whether
an Event of Default has occurred, the Stated Maturity Date of each Class of
Bonds shall be deemed to be the Payment Date occurring in ____________.
For a description of payments on the Bonds after an acceleration of
the Bonds following the occurrence of an Indenture Event of Default, see
"Description of the Bonds--Payments on the Bonds--Acceleration of the Bonds"
herein.
REPORTS TO BONDHOLDERS
On each Payment Date, a written report will be provided to each holder
of Bonds setting forth certain information with respect to the composition of
the payment being made, the Class Current Principal Balance or Class Notional
Balance represented by an individual Bond following the payment and certain
other information relating to the Bonds and the Mortgage Loans.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to the Pooling and Servicing
Agreement. The Pooling and Servicing Agreement will be subject to amendment
without the consent of the Certificateholders in certain circumstances. The
Certificate Trustee will provide a prospective or actual Bondholder, on written
request, a copy (without exhibits) of the Pooling and Servicing Agreement.
Requests should be addressed to the Corporate Trust Office of the Certificate
Trustee at _____________________________________.
SERVICING
The Mortgage Loans will be serviced by the Sub-Servicer, under the
supervision of the Master Servicer, in accordance with the provisions of the
Sub-Servicing Agreement.
Notwithstanding anything to the contrary in the Prospectus, the Master
Servicer will not ultimately be responsible for the performance of the
servicing activities by the Sub-Servicers, except as described under
"--Servicing Compensation, Compensating Interest and Payment of Expenses" and
"--Monthly Advances" below. If the Sub- Servicer fails to fulfill its
obligations under the Sub-Servicing Agreement and such failure results in a
material breach, the Master Servicer shall be entitled, for and on behalf of
the Certificateholders, to terminate the Sub-Servicer and appoint a successor
servicer that satisfies the eligibility requirements set forth in the
Sub-Servicing Agreement.
ASSIGNMENT OF MORTGAGE LOANS
The Issuer will cause the Mortgage Loans, together with all principal
and interest on the Mortgage Loans other than principal and interest due on or
before the Cut-off Date to be assigned to the Certificate Trustee. The
Certificate Trustee will, concurrently with such assignment, authenticate and
deliver the Certificates or cause the Certificates to
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be authenticated and delivered to or upon the order of the Issuer. Each
Mortgage Loan will be identified in a schedule appearing as an exhibit to the
Pooling and Servicing Agreement. Such schedule will include, among other
things, information as of the close of business on the Cut-off Date as to the
principal balance of each Mortgage Loan, the Mortgage Rate and the maturity of
each Mortgage Note, the Sub-Servicing Fee, whether a Primary Mortgage Insurance
Policy has been obtained for each Mortgage Loan, and the original value of each
Mortgaged Property.
In addition, ______ will, as to each Mortgage Loan, deliver or cause
to be delivered to the Master Servicer, as the custodian for the Certificate
Trustee (the "Custodian"), the original Mortgage Note, endorsed without
recourse to the order of the Certificate Trustee and showing an unbroken chain
of endorsements from the original payee thereof to the person endorsing it to
the Certificate Trustee; the original Mortgage which shall have been recorded,
with evidence of such recording indicated thereon; the assignment (which may be
in the form of a blanket assignment) to the Certificate Trustee of the
Mortgage; all intervening assignments of the Mortgage available to ______, if
any, with evidence of recording thereon; the original or a copy of the policy
or certificate of primary mortgage guaranty insurance, if any; originals of all
available assumption and modification agreements, if applicable (collectively,
the "Mortgage File"); provided, however, that in lieu of the foregoing, ______
may deliver certain other documents under the circumstances set forth in the
Purchase Agreement. In particular, with respect to approximately ___ Mortgage
Loans with an aggregate Scheduled Principal Balance of approximately $_________
as of the Cut-off Date, ______ will not deliver original mortgage notes but
will provide lost note affidavits in lieu thereof. ______ will cause the
Mortgage and intervening assignments, if any, and the assignment of the
Mortgage to be recorded not later than 180 days after the Closing Date.
The Custodian will review each item of the Mortgage File within 45
days of the Closing Date (and will review each document permitted to be
delivered to the Custodian after the Closing Date, if received by the
Certificate Trustee after the initial 45-day period, promptly after its deliver
to the Custodian). If, as a result of its review, the Custodian determines that
any document is missing, does not appear regular on its face, or appears to be
unrelated to the Mortgage Loans identified in the Mortgage Loan schedules (a
"Material Defect"), the Custodian shall notify ______ and the Certificate
Trustee of such Material Defect. ______ shall correct or cure any such Material
Defect within 90 days from the date of notice from the Custodian of the
Material Defect and if ______ does not correct or cure such Material Defect
within such period and such defect materially and adversely affects the
interests of the Certificateholders in the related Mortgage Loan, ______ will,
within 180 days of the date of notice, provide the Custodian with a substitute
Mortgage Loan (if within two years of the Closing Date) or purchase the related
Mortgage Loan at the applicable Repurchase Price. The foregoing repurchase
obligation shall not apply in the event that ______ cannot deliver such
original or copy of any document submitted for recording to the appropriate
recording office in the applicable jurisdiction because such document has not
been returned by such office; provided that ______ shall instead deliver a
recording receipt of such recording office or, if such receipt is not
available, a certificate of a Servicing Officer confirming that such documents
have been accepted for recording, and delivery to the Custodian shall be
effected by ______ within 30 days after its receipt of the original recorded
document.
The Custodian also will review the Mortgage Files within 180 days
after the Closing Date. If the Custodian discovers a Material Defect, the
Custodian shall notify ______ of such Material Defect. ______ shall correct or
cure any such Material Defect within 90 days from the date of notice from the
Custodian of the Material Defect and if ______ does not correct or cure such
Material Defect within such period and such defect materially and adversely
affects the interests of the Certificateholders in the related Mortgage Loan,
______ will, within 120 days after the date of notice, provide the Custodian
with a substitute Mortgage Loan (if within two years of the Closing Date) or
purchase the related Mortgage Loan at the applicable Repurchase Price.
Notwithstanding the foregoing, if a Mortgage Loan is discovered to
have a defect which, had such defect been discovered before the Closing Date,
would have prevented the Mortgage Loan from being eligible to be included in a
REMIC, ______ shall within 90 days after the date such defect is discovered
purchase such Mortgage Loan at the applicable Repurchase Price, unless ______
delivers to the Custodian and the Certificate Trustee an opinion of counsel to
the effect that continuing to hold such Mortgage Loan will not adversely affect
the status of each of REMIC I and REMIC II as a REMIC for federal income tax
purposes.
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The "Repurchase Price" means, with respect to any Mortgage Loan
required to be repurchased, an amount equal to (i) 100% of the Outstanding
Principal Balance of such Mortgage Loan plus accrued but unpaid interest on the
Outstanding Principal Balance at the related Mortgage Rate through and
including the last day of the month of repurchase and (ii) all advances
(excluding Monthly Advances) relating to such Mortgage Loan.
As of any time of determination, the "Outstanding Principal Balance"
of a Mortgage Loan is the principal balance of such Mortgage Loan remaining to
be paid by the related Mortgagor or, in the case of an REO Property, the
principal balance of the related Mortgage Loan remaining to be paid by the
Mortgagor at the time such property was acquired by the applicable Trust, less
any insurance proceeds with respect thereto to the extent such proceeds are
applied to principal.
SUBSTITUTION OF MORTGAGE LOANS
______ may, at its option, substitute an eligible mortgage loan for a
defective Mortgage Loan in lieu of repurchasing such defective Mortgage Loan or
the related Mortgaged Property within two years after such Closing Date. Any
mortgage loan, to be eligible for substitution, must fit within the general
description of the Mortgage Loans set forth herein and must be a "qualified
replacement mortgage" for purposes of the REMIC Regulations (as defined
herein).
REPRESENTATIONS AND WARRANTIES
In the Purchase Agreement pursuant to which CCC purchased the Mortgage
Loans from ______, ______ made certain representations and warranties to CCC
concerning the Mortgage Loans. CCC will assign to the Issuer all of its right,
title and interest in such Purchase Agreement insofar as it relates to such
representations and warranties, as well as the remedies provided for breach of
such representations and warranties and the Issuer will, in turn, assign such
right, title and interest to the Certificate Trustee. The representations and
warranties of ______ include, among other things, that as of the Closing Date
or such other date as may be specified below:
(i) The information set forth in the Mortgage Loan Schedule
is true, complete and correct in all material respects as of the
Cut-off Date;
(ii) The related Mortgage creates a first lien or a first
priority ownership interest in an estate in fee simple in real
property securing the related promissory note or other evidence of
indebtedness with respect to the related Mortgage Loan (the "Mortgage
Note"), free and clear of all adverse claims, liens and encumbrances
having priority over the first lien of the Mortgage subject only to
certain permitted exceptions;
(iii) The Mortgage Loan has not been delinquent 30 days or
more on more than one occasion during the twelve months preceding the
Cut-off Date. As of the Closing Date, the Mortgage Loan is not
delinquent in payment more than 30 days and has not been dishonored;
there are no material defaults under the terms of the Mortgage Loan
(except for payment defaults of not more than 30 days); and ______ has
not advanced funds, or induced, solicited or knowingly received any
advance of funds from a party other than the owner of the Mortgaged
Property subject to the related mortgage, directly or indirectly, for
the payment of any amount required by the Mortgage Loan;
(iv) There are no delinquent taxes, assessments or other
outstanding charges affecting the related Mortgaged Property;
(v) The related Mortgage Note and Mortgage are not subject to
any right of rescission, set-off, counterclaim or defense, including
the defense of usury, nor will the operation of any of the terms of
the related Mortgage Note and Mortgage, or the exercise of any right
thereunder, render the related Mortgage Note or Mortgage
unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of
usury, and no such right of rescission, set-off, counterclaim or
defense has been asserted with respect thereto;
(vi) The related Mortgage has not been satisfied, canceled or
subordinated, in whole or in part, or rescinded, and the Mortgaged
Property has not been released from the lien of such Mortgage, in
whole or
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in part, except with respect to certain releases in part that do not
materially affect the value of the Mortgaged Property, nor has any
instrument been executed that would effect any such satisfaction,
release, cancellation, subordination or rescission;
(vii) Immediately prior to the transfer and assignment to
CCC, the related Mortgage Note and Mortgage were not subject to an
assignment or pledge, and ______ had good and marketable title to and
was the sole owner of, and had full right to transfer and sell, the
Mortgage Loan to CCC free and clear of any encumbrance, equity, lien,
pledge, charge, claim or security interest;
(viii) There is no default, breach, violation or event of
acceleration existing under the related Mortgage or Mortgage Note and
no event, which, with the passage of time or with notice and the
expiration of any grace or cure period, would constitute a default,
breach, violation or event permitting acceleration; and neither ______
nor any prior mortgagee has waived any default, breach, violation or
event permitting acceleration;
(ix) There are no mechanics' or similar liens or claims which
have been filed for work, labor or material affecting the related
Mortgaged Property which are or may be liens prior to or equal to the
lien of the related Mortgage;
(x) All improvements subject to the related Mortgage lie
wholly within the boundaries and building restriction lines of the
Mortgaged Property (and wholly within the project with respect to a
condominium unit) except for de minimis encroachments permitted by the
Fannie Mae Guide (MBS Special Servicing Option) and noted on the
appraisal, and no improvements on adjoining properties encroach upon
the Mortgaged Property except those which are insured against by a
title insurance policy and all improvements on the property comply
with all applicable zoning and subdivision laws and ordinances;
(xi) The Mortgaged Property at origination of the Mortgage
Loan was and currently is free of material damage and waste or any
such damage and waste is adequately covered by an insurance policy,
and at origination of the Mortgage Loan there was, and there currently
is, no proceeding pending for the total or partial condemnation
thereof; and
(xii) The original Loan-to-Value Ratio of each Mortgage Loan
either was not more than ____% or, with the exception of one Mortgage
Loan, the excess over ____% is insured as to payments defaults by a
Primary Mortgage Insurance Policy issued by a primary mortgage insurer
acceptable to Fannie Mae and Freddie Mac until the Loan-to-Value Ratio
of such Mortgage Loan is reduced to ____%.
Upon any substitution for a Mortgage Loan, the representations and
warranties set forth above shall be deemed to be made as to any substitute
Mortgage Loan as of the date of substitution.
Upon discovery or receipt of notice by ______, the Issuer, the Master
Servicer or the Certificate Trustee of a breach of any representation or
warranty set forth above which materially and adversely affects the value of
the interests of Bondholders or the Certificate Trustee in any of the Mortgage
Loans, the party discovering or receiving notice of such breach shall give
prompt written notice to the others. In the case of any such breach, within 90
days from the date of discovery by ______, or the date ______ is notified by
the party discovering or receiving notice of such breach (whichever occurs
earlier), ______ will (i) cure such breach in all material respects, (ii)
purchase or cause to be purchased the affected Mortgage Loan at the applicable
Repurchase Price or (iii) if within two years of the Closing Date, substitute a
qualifying substitute Mortgage Loan in exchange for such Mortgage Loan. The
obligations of ______ to cure, purchase or substitute a qualifying substitute
Mortgage Loan shall constitute the Issuer's, Certificate Trustee's and the
Certificateholders' sole and exclusive remedy respecting a breach of such
representations or warranties.
COLLECTION AND OTHER SERVICING PROCEDURES
The Sub-Servicer shall follow collection procedures comparable to the
collection procedures of prudent mortgage lenders servicing mortgage loans for
its own account, to the extent such procedures shall be consistent with the
Pooling and Servicing Agreement. Consistent with the foregoing, the
Sub-Servicer may in its discretion waive or
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permit to be waived any late payment charge, assumption fee or any penalty
interest in connection with the prepayment of a Mortgage Loan and (ii) suspend
or temporarily reduce or permit to be suspended or temporarily reduced regular
monthly payments for a period of up to six months or arrange or permit an
arrangement with a Mortgagor for a schedule for the liquidation of
delinquencies. In the event the Sub-Servicer shall consent to the deferment of
due dates for payments due on a Mortgage Note, the Sub-Servicer shall
nonetheless continue to make advances through liquidation of the Mortgaged
Property as described herein to the same extent as if such installment were
due, owing and delinquent and had not been deferred, but the obligation of the
Sub-Servicer to advance shall apply only to the extent that the Sub- Servicer
believes, in good faith, that such advances are recoverable from future
payments on any Mortgage Loan.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor and the Sub-Servicer or its designee has knowledge thereof, the
Sub-Servicer will accelerate the maturity of the Mortgage Loan, to the extent
permitted by the terms of the related Mortgage Note and applicable law. If it
reasonably believes that the due-on-sale clause cannot be enforced under
applicable law, the Sub-Servicer may enter into, or cause to be entered into,
an assumption agreement with the person to whom such property has been or is
about to be conveyed, pursuant to which such person becomes liable under the
Mortgage Note and the Mortgagor, to the extent permitted by applicable law,
remains liable thereon. The Sub-Servicer will retain any fee collected for
entering into an assumption agreement, as additional servicing compensation. In
regard to circumstances in which the Sub-Servicer may be unable to enforce, or
cause to be enforced, due-on-sale clauses, see "Certain Legal Aspects of
Mortgage Loans--Enforceability of Certain Provisions " in the Prospectus. In
connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note may not be changed. No Mortgage Loan may be assumed unless
coverage under any existing Primary Mortgage Insurance Policy continues as to
that Mortgage Loan after such assumption.
The Sub-Servicer will establish and maintain, in addition to the
Protected Account described below under "--Protected Account", one or more
accounts (each, a "Servicing Account"), each of which generally must satisfy
the criteria for Protected Accounts as described in "--Protected Accounts"
below. The Sub-Servicer will deposit and retain therein all collections from
the applicable Mortgagors for the payment of taxes, assessments, insurance
premiums or comparable items as agent of the Mortgagors as provided in the
Sub-Servicing Agreement. Amounts in any Servicing Account may relate to
mortgage loans in more than one mortgage pool or to mortgage loans not yet
included in a mortgage pool. Withdrawals of amounts from the Servicing Accounts
may be made to effect timely payment of taxes, assessments, insurance premiums,
or comparable items, to reimburse the Sub-Servicer for any advances made with
respect to such items, to refund to any Mortgagors any sums as may be
determined to be overages, to pay interest, if required, to Mortgagors on
balances in the Servicing Accounts, to pay earnings not required to be paid to
Mortgagors to the Sub-Servicer or to clear and terminate the Servicing Accounts
at or at any time after the termination of the Pooling and Servicing Agreement.
For each Mortgage Loan which as of the Cut-off Date was covered by a
primary mortgage insurance policy (each, a "Primary Mortgage Insurance
Policy"), the Sub-Servicer will maintain and keep, or cause to be maintained
and kept, with respect to each such Mortgage Loan, in full force and effect a
Primary Mortgage Insurance Policy with respect to the portion of each such
Mortgage Loan, if any, in excess at origination of the percentage of value set
forth in the Sub-Servicing Agreement, at least until such excess has been
eliminated. Pursuant to applicable state law, the Sub-Servicer may permit the
Primary Mortgage Insurance Policy to be terminated if a reappraisal of the
Mortgaged Property indicates a new appraised value of which the then
outstanding principal balance of the Mortgage Loan does not exceed __%. Primary
Insurance Policies may be replaced by substantially equivalent insurance but
such replacement is subject to the condition, to be evidenced by a writing from
each Rating Agency, that it would not cause the ratings on the Bonds to be
downgraded or withdrawn.
The Master Servicer and the Sub-Servicer will maintain errors and
omissions insurance and fidelity bonds in certain specified amounts as required
under the Pooling and Servicing Agreement or the Sub-Servicing Agreements.
HAZARD INSURANCE
The Sub-Servicer will maintain and keep in full force and effect for
each Mortgaged Property a hazard insurance policy equal to at least the lesser
of the Outstanding Principal Balance of the Mortgage Loan or the current
replacement cost of the Mortgaged Property and containing a standard mortgagee
clause; provided, however, that the amount of hazard insurance may not be less
than the amount necessary to prevent loss due to the application of any
co-
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insurance provision of the related policy. Unless a higher deductible is
required by law, the deductible on such hazard insurance policy may be no more
than $1,000 or 1% of the applicable amount of coverage, whichever is less. In
the case of a condominium unit or a unit in a planned unit development,
required hazard insurance will take the form of a multiple policy covering the
entire condominium project or planned unit development, in an amount equal to
at least 100% of the insurable value based on replacement cost. Any amounts
collected by the Sub-Servicer under any such hazard insurance policy (other
than amounts to be applied to the restoration or repair of the Mortgaged
Property or amounts released to the Mortgagor in accordance with normal
servicing procedures) shall be deposited in a Protected Account. Any cost
incurred in maintaining any such hazard insurance policy shall not be added to
the amount owing under the Mortgage Loan for the purpose of calculating monthly
payments to Bondholders, notwithstanding that the terms of the Mortgage Loan so
permit. Such costs shall be recoverable by the Sub-Servicer out of related late
payments by the Mortgagor or out of Insurance Proceeds or Liquidation Proceeds
or any other amounts in the Certificate Account. The right of the Sub-Servicer
to reimbursement for such costs incurred will be prior to the right of
Bondholders to receive any related Insurance Proceeds or Liquidation Proceeds
or any other amounts in the Certificate Account.
In general, the standard form of fire and extended coverage policy
covers physical damage to or destruction of the improvements on the mortgaged
property by fire, lightning, explosion, smoke, windstorm and hail, riot, strike
and civil commotion, subject to the conditions and exclusions particularized in
each policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and therefore will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other
water-related causes, earth movement (including earthquakes, landslides and mud
flows), nuclear reactions, wet or dry rot, vermin, rodents, insects or domestic
animals, theft and, in certain cases, vandalism and malicious mischief. The
foregoing list is merely indicative of certain kinds of uninsured risks and is
not intended to be all-inclusive. Unless required under applicable law or
regulations, no earthquake or additional insurance will be maintained in
respect of a Mortgaged Property.
Hazard insurance policies covering properties similar to the Mortgaged
Properties typically contain a clause which in effect requires the insured at
all times to carry insurance of a specified percentage (generally 80% to 90%)
of the full replacement value of the improvements on the property in order to
recover the full amount of any partial loss. If the insured's coverage falls
below this specified percentage, such clause provides that the insurer's
liability in the event of partial loss does not exceed the greater of (i) the
replacement cost of the improvements less physical depreciation, or (ii) such
proportion of the loss as the amount of insurance carried bears to the
specified percentage of the full replacement cost of such improvements.
Since the amount of hazard insurance to be maintained on the
improvements securing the Mortgage Loans may decline as the principal balances
owing thereon decrease, and since residential properties have historically
appreciated in value over time, in the event of partial loss, hazard insurance
proceeds may be insufficient to restore fully the damaged property.
Where the Mortgaged Property securing a Mortgage Loan is located at
the time of origination in a federally designated flood area, the Sub-Servicer
will cause flood insurance, to the extent available and in accordance with
industry practices, to be maintained. Such flood insurance will be in an amount
equal to the lesser of (i) the Outstanding Principal Balance of the related
Mortgage Loan and (ii) the minimum amount required under the terms of coverage
to compensate for any damage or loss on a replacement cost basis, but not more
than the maximum amount of such insurance available for the related Mortgaged
Property under either the regular or emergency programs of the National Flood
Insurance Program (assuming that the area in which such Mortgaged Property is
located is participating in such program). Unless applicable state law requires
a higher deductible, the deductible on such flood insurance may not exceed
$1,000 or 1% of the applicable amount of coverage, whichever is less.
The Sub-Servicer, on behalf of the Certificate Trustee and
Bondholders, will present, or cause to be presented, claims to the insurer
under any applicable Primary Mortgage Insurance Policy or hazard insurance
policy. As set forth above, all collections under such policies that are not
applied to the restoration or repair of the related Mortgaged Property or
released to the Mortgagor in accordance with normal servicing procedures are to
be deposited in a Protected Account.
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REALIZATION UPON DEFAULTED MORTGAGE LOANS; PURCHASES OF DEFAULTED MORTGAGE LOANS
The Sub-Servicer will use its reasonable efforts to maximize the
receipt of principal and interest on Defaulted Mortgage Loans and foreclose
upon or otherwise comparably convert the ownership of properties securing such
Defaulted Mortgage Loans as to which no satisfactory collection arrangements
can be made. The Sub-Servicer will service, or cause to be serviced, the
property acquired by a Trust through foreclosure or deed in lieu of foreclosure
and use its reasonable efforts to maximize the receipt of principal and
interest on each Mortgage Loan as to which the related Mortgagor has failed to
make unexcused payment in full of three or more consecutive scheduled payments
(a "Defaulted Mortgage Loan"); provided, however, that the Sub-Servicer will
not be required to expend its own funds in connection with any foreclosure or
towards the restoration of any property unless it determines in good faith (i)
that such foreclosure or restoration will increase the proceeds of liquidation
of the Mortgage Loan to the Bondholders after reimbursement to itself for such
expenses and (ii) that such expenses will be recoverable to it through
Liquidation Proceeds or insurance proceeds (respecting which it shall have
priority for purposes of reimbursements from the Certificate Account).
Since Insurance Proceeds cannot exceed deficiency claims and certain
expenses incurred by or on behalf of the Sub-Servicer, no insurance payments
will result in a recovery to Bondholders which exceeds the principal balance of
the Defaulted Mortgage Loan together with accrued interest thereon at its Net
Rate.
SERVICING COMPENSATION, COMPENSATING INTEREST AND PAYMENT OF EXPENSES
The Sub-Servicer will be entitled to a fee (the "Sub-Servicing Fee")
which will generally be ___% per annum of the Outstanding Principal Balance of
each Mortgage Loan, payable from full payments of accrued interest on each
Mortgage Loan, as compensation for its activities under the Sub-Servicing
Agreement.
Interest Shortfalls on Mortgage Loans resulting from prepayments in
full or in part in the related Prepayment Period will be offset by the
Sub-Servicer on the Payment Date in the following calendar month to the extent
such Interest Shortfalls do not exceed the Sub-Servicing Fees in connection
with such Payment Date. Any amounts required to be offset or paid by the
Sub-Servicer with respect to Interest Shortfalls resulting from voluntary
prepayment in full, as described above, and not so offset or paid by the
Sub-Servicer will be paid by the Master Servicer, to the extent the aggregate
of such amounts does not exceed the compensation payable to the Master Servicer
for the applicable Payment Date, through a reduction in the amount of such
compensation. The amounts offset by the Sub-Servicer against and the amounts
paid by the Sub-Servicer and the Master Servicer with respect to Interest
Shortfalls as described above are referred to herein as "Compensating Interest
Payments". The remaining amount of Interest Shortfalls after applying
Compensating Interest Payments is referred to herein as "Net Interest
Shortfalls".
In addition to the primary compensation described above, the
Sub-Servicer will retain all prepayment charges, if any, all assumption fees,
tax service fees, fees for statement of account payoff and late payment
charges, all to the extent collected from Mortgagors. The Sub-Servicer will
also be entitled to retain, as additional servicing compensation, any Excess
Liquidation Proceeds (i.e., the amount, if any, by which Liquidation Proceeds
with respect to a Liquidated Mortgage Loan exceeds the sum of (i) the
Outstanding Principal Balance of such Mortgage Loan and accrued but unpaid
interest at the related Mortgage Rate through the related Liquidation Date,
plus (ii) related liquidation expenses, to the extent that such amount is not
required by law to be paid to the related Mortgagor), but only to the extent
that transfers or withdrawals from the Certificate Account with respect thereto
are permitted under the Pooling and Servicing Agreement.
The Sub-Servicer will pay all expenses incurred in connection with its
servicing responsibilities (subject to limited reimbursement as described
herein). The Master Servicer will pay the Certificate Trustee and the Indenture
Trustee the fees to which they are entitled.
In the event a successor Certificate Trustee is appointed by the
Bondholders pursuant to the Pooling and Servicing Agreement, that portion, if
any, of the successor Certificate Trustee's fees which exceeds the Certificate
Trustee's fees established at the time of issuance of the Bonds will be borne
by the Bondholders.
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PROTECTED ACCOUNTS
The Sub-Servicer will establish and maintain an account or accounts
(collectively, the "Protected Account") into which it will deposit, or cause to
be deposited, within two Business Days after receipt all collections of
principal and interest on any Mortgage Loan, including principal prepayments,
Insurance Proceeds, Liquidation Proceeds, the Repurchase Price for any such
Mortgage Loans repurchased, and advances made from the Sub-Servicer's own funds
(less servicing compensation as permitted above). Each Protected Account must
be maintained in accordance with the terms of the Sub-Servicing Agreement,
which generally requires that (i) Protected Accounts must be (a) established
with depository institutions whose short term debt obligations or deposit
ratings are in one of the two highest rating categories of __________ or (b)
whose deposits are fully insured by the FDIC or the National Credit Union Share
Insurance Fund (the "NCUSIF"); (ii) if such Protected Account is not maintained
with a depository institution as described in clause (i)(a) above, deposits in
such Protected Account must be fully insured by the FDIC or the NCUSIF or, to
the extent not so insured, invested in certain investments permitted by the
Sub-Servicing Agreement ("Permitted Investments") or remitted to the Master
Servicer. In addition, the Master Servicer may permit the Sub-Servicer to
establish a Protected Account not conforming to the foregoing requirements to
the extent that such Protected Account meets the requirements of each of the
Rating Agencies for the maintenance of the ratings on the Bonds.
The Sub-Servicer may, from time to time, make withdrawals from its
Protected Account for the following purposes:
(i) to make payments to the Master Servicer as described below;
(ii) to reimburse itself for Monthly Advances, the Sub-Servicer's
right to reimburse itself pursuant to this subclause (ii) being limited to
amounts received on the related Mortgage Loan which represent late collections
(net of the related Sub-Servicing Fees) of principal and/or interest respecting
which any such advance was made;
(iii) to reimburse itself for unreimbursed advances (including Monthly
Advances) and any such unpaid Servicing Fees, the Sub-Servicer's right to
reimburse itself pursuant to this subclause (iii) with respect to any Mortgage
Loan being limited to liquidation proceeds, condemnation proceeds and insurance
proceeds related to such Mortgage Loan;
(iv) to pay to itself as servicing compensation (a) any interest
earned on funds in the Protected Account and (b) the Sub-Servicing Fee from
that portion of any payment or recovery which represents interest with respect
to a particular Mortgage Loan;
(v) to pay to itself with respect to each Mortgage Loan that has been
repurchased by the Sub-Servicer pursuant to the Sub-Servicing Agreement all
amounts received thereon and not distributed (or proposed to be included in the
Repurchase Price) as of the date on which the related Repurchase Price is
determined;
(vi) to remove funds inadvertently placed in the Protected Account in
error by the Sub-Servicer;
(vii) to clear and terminate the Protected Account.
On the 18th day of each month, or if such day is not a Business Day,
the preceding Business Day (each a "Sub- Servicer Remittance Date"), the
Sub-Servicer shall withdraw from the related Protected Account and any other
permitted accounts and shall remit to the Master Servicer, for deposit into an
account (the "Master Servicer Collection Account"), amounts on deposit in the
Sub-Servicer's Protected Account (excluding principal of or interest on the
Mortgage Loans due on or before the Cut-off Date and amounts permitted to be
retained by the Sub-Servicer as described above or as otherwise permitted by
the Sub-Servicing Agreement), which will be generally equal to:
(i) Scheduled payments on the related Mortgage Loans received or
advanced by the Sub-Servicer which were due on the related Due Date, net of the
portion of the Sub-Servicing Fee due the Sub-Servicer that exceeds the related
Compensating Interest Payments;
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(ii) Full principal prepayments and any Liquidation Proceeds received
by or on behalf of the Sub-Servicer with respect to such Mortgage Loans in the
related Prepayment Period, with interest to the date of prepayment or
liquidation, net of the portion of the Sub-Servicing Fee due the Sub-Servicer
that exceeds the related Compensating Interest Payments; and
(iii) Partial prepayments of principal received by or on behalf of the
Sub-Servicer for such Mortgage Loans in the related Prepayment Period.
The Master Servicer Collection Account shall be an Eligible Account.
An "Eligible Account" is either (i) an account or accounts maintained with a
federal or state chartered depository institution or trust company acceptable
to the Rating Agencies or (ii) an account or accounts the deposits in which are
insured by the FDIC to the limits established by such corporation, provided
that any such deposits not so insured shall be maintained in an account at a
depository institution or trust company whose commercial paper or other short
term debt obligations (or, in the case of a depository institution or trust
company which is the principal subsidiary of a holding company, the commercial
paper or other short term debt or deposit obligations of such holding company
or depository institution, as the case may be) have been rated by each Rating
Agency in its highest short-term rating category, or (iii) a segregated trust
account or accounts (which shall be a "special deposit account") maintained
with the Certificate Trustee or any other federal or state chartered depository
institution or trust company, acting in its fiduciary capacity, in a manner
acceptable to the Certificate Trustee and the Rating Agencies. Eligible
Accounts may bear interest.
As its compensation (the "Master Servicer Compensation"), the Master
Servicer shall be entitled to receive all investment earnings on amounts in the
Master Servicer Collection Account and the Certificate Account. On or before
each Payment Date, the Master Servicer shall withdraw from the Master Servicer
Collection Account and remit to the Certificate Trustee for deposit in the
Certificate Account all amounts in the Master Servicer Collection Account, net
of the Master Servicer Compensation and other amounts permitted to be withdrawn
by the Master Servicer pursuant to the Pooling and Servicing Agreement.
CERTIFICATE ACCOUNT
The Certificate Trustee shall establish and maintain in the name of
the Certificate Trustee, for the benefit of the Certificateholders, an account
(the "Certificate Account") as an Eligible Account. The Certificate Account
shall have two separate subaccounts, one each for all funds. The Certificate
Trustee will deposit in the appropriate subaccount of the Certificate Account,
as received, the following amounts:
(i) Any amounts withdrawn from a Protected Account, the
Master Servicing Collection Account or other permitted account;
(ii) Any Monthly Advance and Compensating Interest Payments;
(iii) Any Insurance Proceeds or Liquidation Proceeds received
by or on behalf of the Master Servicer which were not deposited in a
Protected Account or other permitted account;
(iv) The Repurchase Price with respect to any Mortgage Loans
or REO Property repurchased and all proceeds of any Mortgage Loans or
property acquired in connection with the optional termination of the
Trust;
(v) Any amounts required to be deposited with respect to
losses on Permitted Investments; and
(vi) Any other amounts received by or on behalf of the Master
Servicer, a Sub-Servicer or the Certificate Trustee and required to be
deposited in the Certificate Account pursuant to the Pooling and
Servicing Agreement.
All amounts deposited to the Certificate Account shall be held by the
Certificate Trustee in the name of the Certificate Trustee in trust for the
benefit of the Certificateholders in accordance with the terms and provisions
of the Pooling and Servicing Agreement, subject to the right of the Master
Servicer to require the Certificate Trustee to make
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withdrawals therefrom as provided below. The amount at any time credited to the
Certificate Account shall be in general (i) fully insured by the FDIC to the
maximum coverage provided thereby or (ii) invested, in the name of the
Certificate Trustee, in such Permitted Investments as the Certificate Trustee
may select or deposited in demand deposits with such depository institutions as
selected by the Certificate Trustee, provided that time deposits of such
depository institutions would be a Permitted Investment.
The Certificate Trustee will, from time to time on demand of the
Master Servicer, make or cause to be made such withdrawals or transfers from
the appropriate subaccount of the Certificate Account as the Master Servicer
has designated for such transfer or withdrawal for the following purposes:
(i) to reimburse the Master Servicer or the Sub-Servicer for
any Monthly Advance of its own funds, the right of the Master Servicer
or Sub-Servicer to reimbursement pursuant to this subclause (i) being
limited to amounts received on a particular Mortgage Loan (including,
for this purpose, the Repurchase Proceeds, Insurance Proceeds and
Liquidation Proceeds) which represent late payments or recoveries of
the principal of or interest on such Mortgage Loan respecting which
such Monthly Advance or advance was made;
(ii) to reimburse the Master Servicer or the Sub-Servicer
from Insurance Proceeds or Liquidation Proceeds relating to a
particular Mortgage Loan for amounts expended by the Master Servicer
or the Sub- Servicer in good faith in connection with the restoration
of the related Mortgaged Property which was damaged by an uninsured
cause or in connection with the liquidation of such Mortgage Loan;
(iii) to reimburse the Master Servicer or the Sub-Servicer to
the extent permitted by the Pooling and Servicing Agreement or the
Sub-Servicing Agreement from Insurance Proceeds relating to a
particular Mortgage Loan for expenses incurred with respect to such
Mortgage Loan and to reimburse the Master Servicer or Sub-Servicer
from Liquidation Proceeds from a particular Mortgage Loan for
liquidation expenses incurred with respect to such Mortgage Loan;
(iv) to pay the Sub-Servicer to the extent permitted by the
Pooling and Servicing Agreement or the Sub-Servicing Agreement from
Liquidation Proceeds or Insurance Proceeds received in connection with
the liquidation of a Mortgage Loan, the amount which Sub-Servicer
would have been entitled to receive under subclause (ix) below as
servicing compensation on account of each defaulted scheduled payment
on such Mortgage Loan if paid in a timely manner by the related
Mortgagor;
(v) to pay the Sub-Servicer to the extent permitted by the
Pooling and Servicing Agreement or the Sub-Servicing Agreement from
the Repurchase Price for any Mortgage Loan, the amount which the Sub-
Servicer would have been entitled to receive under subclause (ix)
below as servicing compensation;
(vi) to reimburse the Master Servicer or the Sub-Servicer for
certain advances of funds made to protect a Mortgaged Property, the
right to reimbursement pursuant to this subclause being limited to
amounts received on the related Mortgage Loan (including, for this
purpose, Repurchase Proceeds, Insurance Proceeds and Liquidation
Proceeds) which represent late recoveries of the payments for which
such advances were made;
(vii) to pay the Sub-Servicer with respect to each Mortgage
Loan that has been repurchased, all amounts received thereon
representing recoveries of principal that reduce the Outstanding
Principal Balance of the related Mortgage Loan below the Outstanding
Principal Balance used in calculating the Repurchase Price or
representing interest included in the calculation of the Repurchase
Price or accrued after the end of the month during which such
repurchase occurs;
(viii) to reimburse the Master Servicer or the Sub-Servicer
for any Monthly Advance or advance, if a Realized Loss is to be
allocated with respect to the related Mortgage Loan on the related
Payment Date, if such Monthly Advance or advance has not been
reimbursed pursuant to subclauses (i) and (vi) above;
(ix) to pay the Sub-Servicer servicing compensation as set
forth above;
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(x) to reimburse the Master Servicer, the Sub-Servicer or the
Certificate Trustee for expenses, costs and liabilities incurred by
and reimbursable to it pursuant to the Pooling and Servicing
Agreement, which, shall be allocated to each subaccount, pro rata,
based on the Scheduled Principal Balances of the Mortgage Loans;
(xi) to pay to the Sub-Servicer, as additional servicing
compensation, any Excess Liquidation Proceeds;
(xii) to reimburse the Sub-Servicer for any amounts to which
it is entitled to reimbursement under the terms of the Sub-Servicing
Agreement;
(xiii) to clear and terminate the Certificate Account; and
(xiv) to remove amounts deposited in error.
Amounts to be paid or reimbursed to the Sub-Servicer as described above will
only be paid or reimbursed to the Sub- Servicer to the extent such amounts were
not previously retained by the Sub-Servicer as described under "--Protected
Accounts" above.
On each Payment Date, Available Funds for such Payment Date will be
transferred from the Certificate Account to the Collection Account as
distributions on the Certificates, and the amount payable to the Bondholders on
such Payment Date shall be paid by the Indenture Trustee from amounts on
deposit in the Collection Account in accordance with the provisions set forth
under "Description of the Bonds--Payments on the Bonds" herein.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Pooling and Servicing Agreement will provide that the Master
Servicer may not resign from its obligations and duties thereunder, except upon
determination that the performance of such duties is no longer permissible
under applicable law. No such resignation will become effective until the
Certificate Trustee or a successor has assumed the obligations and duties of
the Master Servicer to the extent required under the Pooling and Servicing
Agreement. The Master Servicer, however, has the right to assign, sell or
transfer its rights and delegate its duties and obligations under the Pooling
and Servicing Agreement; provided that the rating of the Bonds in effect
immediately prior to such assignment, sale, transfer or delegation is not
qualified, downgraded or withdrawn as a result of such assignment, sale,
transfer or delegation and the purchaser or transferee accepting such
assignment, sale, transfer or delegation (i) is qualified to service mortgage
loans for Fannie Mae or Freddie Mac, (ii) is reasonably satisfactory to the
Certificate Trustee, (iii) has a net worth of not less than $10,000,000 and
(iv) executes and delivers to the Certificate Trustee an agreement, in form and
substance reasonably satisfactory to the Certificate Trustee, which contains an
assumption by such purchaser or transferee of the due and punctual performance
and observance of each covenant and condition to be performed or observed by
the Master Servicer under the Pooling and Servicing Agreement from and after
the date of such agreement.
The Pooling and Servicing Agreement will further provide that neither
the Master Servicer, the Sub-Servicer nor any of their directors, officers,
employees and agents shall be under any liability to the Certificate Trustee, a
Trust or the Certificateholders for taking any action or for refraining from
taking any action in good faith pursuant to the Pooling and Servicing
Agreement, or for errors in judgment; provided, however, that neither the
Master Servicer, the Sub-Servicer nor any such person will be protected against
any breach of warranties or representations made in the Pooling and Servicing
Agreement or any liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of duties or by
reason of reckless disregard of obligations and duties thereunder. The Pooling
and Servicing Agreement will further provide that the Master Servicer and the
Sub-Servicer and its directors, officers, employees and agents are entitled to
indemnification from each Trust and will be held harmless thereby against any
loss, liability or expense incurred in connection with any legal proceeding
relating to the Pooling and Servicing Agreement or the Certificates, other than
any loss, liability or expense (i) related to its failure to perform its duties
in strict compliance with the Pooling and Servicing Agreement (except as
otherwise reimbursable under the Pooling and Servicing Agreement) or (ii)
incurred by reason of willful misfeasance, bad faith or negligence in the
performance of duties thereunder or by reason of reckless disregard of
obligations and duties. In addition, the
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Pooling and Servicing Agreement will provide that neither the Master Servicer
nor the Sub-Servicer is under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its duties under the Pooling and
Servicing Agreement and which in its opinion may involve it in any expense or
liability. The Master Servicer and the Sub-Servicer may, however, in their
discretion, with the consent of the Certificate Trustee, undertake any such
action which they may deem necessary or desirable in respect of the Pooling and
Servicing Agreement or the Sub-Servicing Agreement and the rights and duties of
the parties thereto and the interests of the Certificateholders thereunder. In
such event, the legal expenses and costs of such action and any liability
resulting therefrom will be expenses, costs and liabilities of the applicable
Trust, and the Master Servicer and the Sub-Servicer will be entitled to be
reimbursed therefor from the related Protected Account, the Master Servicer
Collection Account or the Certificate Account. Any such indemnification or
reimbursement to the Master Servicer or the Sub-Servicer which is not
specifically related to the Mortgage Loans shall be charged against the
subaccounts of the Certificate Account pro rata based upon the respective
Scheduled Principal Balances of the Mortgage Loans.
Any corporation into which the Master Servicer may be merged or
consolidated, or any corporation resulting from any merger, conversion or
consolidation to which the Master Servicer is a party, or any corporation
succeeding to the business of the Master Servicer will be the successor of the
Master Servicer under the Pooling and Servicing Agreement, provided that any
such successor to the Master Servicer shall be qualified to service Mortgage
Loans on behalf of Fannie Mae or Freddie Mac.
EVENTS OF DEFAULT
"Events of Default" under the Pooling and Servicing Agreement consist
of (i) failure by the Master Servicer to cause to be deposited in the
Certificate Account amounts required to be deposited by the Master Servicer
pursuant to the Pooling and Servicing Agreement, and such failure continues
unremedied for two Business Days, (ii) failure by the Master Servicer to
observe or perform in any material respect any other material covenants and
agreements set forth in the Pooling and Servicing Agreement to be performed by
it, and such failure continues unremedied for 60 days after the date on which
written notice of such failure has been given to the Master Servicer by the
Certificate Trustee or to the Master Servicer and the Certificate Trustee by
the Indenture Trustee as the sole Certificateholder, (iii) the entry against
the Master Servicer of a decree or order by a court or agency or supervisory
authority having jurisdiction in the premises for the appointment of a
conservator, receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings, or for the winding
up or liquidation of its affairs, and the continuance of any such decree or
order unstayed and in effect for a period of 60 consecutive days, or the
commencement of an involuntary case against the Master Servicer under any
applicable insolvency or reorganization statute which case is not dismissed
within 60 days, (iv) consent by the Master Servicer to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of debt,
marshaling of assets and liabilities or similar proceedings of or relating to
the Master Servicer or substantially all of its property, admission by the
Master Servicer in writing of its inability to pay its debts generally as they
become due, filing of a petition to take advantage of any applicable insolvency
or reorganization statute, any assignment for the benefit of its creditors, or
voluntary suspension of payment of its obligations or (v) assignment or
delegation by the Master Servicer of its duties or rights under the Pooling and
Servicing Agreement in contravention of the provisions permitting such
assignment or delegation under the Pooling and Servicing Agreement.
In each and every such case, so long as such Event of Default with
respect to the Master Servicer shall not have been remedied, the Certificate
Trustee or the Indenture Trustee as the sole Certificateholder may in each case
by notice in writing to the Master Servicer (and to the Certificate Trustee if
given by the Indenture Trustee as sole Certificateholder), with a copy to the
Rating Agencies, terminate all of the rights and obligations (but not the
liabilities) of the Master Servicer under the Pooling and Servicing Agreement
and in and to the Mortgage Loans and the proceeds thereof. Upon the receipt by
the Master Servicer of such written notice, all authority and power of the
Master Servicer under the Pooling and Servicing Agreement, whether with respect
to the Certificates, the Mortgage Loans or under any other related agreements
(but only to the extent that such other agreements relate to the Mortgage
Loans) shall, subject to the provisions of the Pooling and Servicing Agreement,
automatically and without further action pass to and be vested in the
Certificate Trustee.
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Upon the receipt by the Master Servicer of a notice of termination or
an opinion of counsel to the effect that the Master Servicer is legally unable
to act or to delegate its duties to a person which is legally able to act, the
Certificate Trustee shall automatically become the successor in all respects to
the Master Servicer in its capacity under the Pooling and Servicing Agreement
and the transactions set forth or provided for therein and shall thereafter be
subject to all the responsibilities, duties, liabilities and limitations on
liabilities relating thereto placed on the Master Servicer by the terms and
provisions hereof; provided, however, that the Certificate Trustee (i) shall be
under no obligation to repurchase any Mortgage Loan (nor will the Master
Servicer at any time have such an obligation) and (ii) shall have no obligation
whatsoever with respect to any liability incurred by the Master Servicer at or
prior to the time of receipt by the Master Servicer of such notice or of such
opinion of counsel. As compensation therefor, the Certificate Trustee shall be
entitled to all funds relating to the Mortgage Loans which the Master Servicer
would have been entitled to retain if the Master Servicer had continued to act
as such, except for those amounts due the Master Servicer prior to the date of
termination. Notwithstanding the above, the Certificate Trustee may, if it
shall be unwilling so to act, or shall, if it is legally unable so to act,
appoint, or petition a court of competent jurisdiction to appoint, any
established housing and home finance institution which is a Fannie Mae or
Freddie Mac approved servicer having a net worth of not less than $10,000,000,
as the successor to such Master Servicer under the Pooling and Servicing
Agreement in the assumption of all or any part of the responsibilities, duties
or liabilities of the Master Servicer under the Pooling and Servicing
Agreement. Pending appointment of a successor to the Master Servicer under the
Pooling and Servicing Agreement, the Certificate Trustee shall act in such
capacity as provided under the Pooling and Servicing Agreement. In connection
with such appointment and assumption, the Certificate Trustee may make such
arrangements for the compensation of such successor out of payments on Mortgage
Loans as it and such successor shall agree; provided, however, that no such
compensation shall be in excess of that permitted the Certificate Trustee as
provided above, and that such successor shall undertake and assume the
obligations of the Certificate Trustee to pay compensation to any third person
acting as an agent or independent contractor in the performance of master
servicing responsibilities under the Pooling and Servicing Agreement.
MONTHLY ADVANCES
If the scheduled payment on an a Mortgage Loan which was due on a
related Due Date is delinquent other than as a result of application of the
Relief Act, the Sub-Servicer will remit to the Master Servicer for deposit in
the Master Servicer Collection Account on the Sub-Servicer Remittance Date an
amount equal to such deficiency, net of the Sub-Servicing Fee, except to the
extent the Sub-Servicer determines any such advance to be nonrecoverable from
Liquidation Proceeds, Insurance Proceeds or from future payments on the
Mortgage Loan for which such advance was made. On each Payment Date, the Master
Servicer will be obligated to make any unpaid Monthly Advance, required to be
made by the Sub-Servicer but which the Sub-Servicer fails to make, except to
the extent that the Master Servicer determines any such advance to be
nonrecoverable from Liquidation Proceeds, Insurance Proceeds or from future
payments on the Mortgage Loan for which such advance was made. Subject to the
foregoing, such advances by the Sub- Servicer, or upon the failure of the
Sub-Servicer to make such advances, by the Master Servicer, will be made
through liquidation of the related Mortgaged Property. If applicable, on the
Business Day preceding each Payment Date, the Master Servicer shall present an
officer's certificate to the Certificate Trustee (i) stating that the Master
Servicer elects not to make a Monthly Advance in a stated amount and (ii)
detailing the reason it deems the advance to be nonrecoverable. Failure by a
Master Servicer to deposit in the Certificate Account any advance required to
be deposited by such Master Servicer under the Pooling and Servicing Agreement,
which failure goes unremedied for two Business Days, would constitute an Event
of Default with respect to such Master Servicer as discussed under "--Events of
Default" above.
TERMINATION
The obligations of the Master Servicer and the Certificate Trustee
created by the Pooling and Servicing Agreement will terminate upon the later of
(i) the making of the final payment or other liquidation, or any advance with
respect thereto, of the last Mortgage Loan subject thereto or the disposition
of all property acquired upon foreclosure or acceptance of a deed in lieu of
foreclosure of any such Mortgage Loans and (ii) the distribution to
Certificateholders of all amounts required to be distributed on the
Certificates pursuant to such Pooling and Servicing Agreement.
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On any Payment Date on which the aggregate Outstanding Principal
Balance of the Mortgage Loans is less than _% of the aggregate Cut-off Date
Scheduled Principal Balance of the Mortgage Loans , ______ or its designee may
repurchase from the applicable Trust all Mortgage Loans remaining outstanding
and any REO Property remaining in such Trust at the applicable Redemption
Price. If on any Payment Date ______ or its designee has not exercised such
option and the aggregate outstanding principal balance of the Mortgage Loans is
equal to or less than __% of the aggregate outstanding principal balance of the
Mortgage Loans as of the Cut-off Date, the Master Servicer shall also have such
option. Any such repurchase will result in the retirement of such Bonds (except
that all Residual Bonds will remain outstanding until all other Bonds are
retired). A Trust may also be terminated and the related Bonds retired on any
Payment Date upon the Issuer's determination, based upon an opinion of counsel,
that the real estate mortgage investment conduit status of the related REMIC
has been lost or that a substantial risk exists that such status will be lost
for the then current taxable year.
THE CERTIFICATE TRUSTEE
The Certificate Trustee may resign at any time, in which event the
Master Servicer will be obligated to appoint a successor Certificate Trustee.
The Master Servicer may also remove the Certificate Trustee if the Certificate
Trustee ceases to be eligible to continue as such under the Pooling and
Servicing Agreement or if the Certificate Trustee becomes incapable of acting,
bankrupt, insolvent or if a receiver or public officer takes charge of the
Certificate Trustee or its property. Upon becoming aware of such circumstances,
the Master Servicer will be entitled to appoint a successor Certificate
Trustee. The Certificate Trustee may also be removed at any time by the
Indenture Trustee as the sole Certificateholder. Any resignation or removal of
the Certificate Trustee and appointment of a successor Certificate Trustee will
not become effective until acceptance of the appointment by the successor
Certificate Trustee.
SPECIAL TAX CONSIDERATIONS
RESIDUAL BONDHOLDERS
The Class R-1 and Class R-2 Bonds, which represent the residual
interest in REMIC 1 and REMIC 2, respectively, may experience a highly negative
after-tax return. Accordingly, prospective investors are urged to consult their
own tax advisers and consider the after-tax effect of ownership of a Residual
Bond and the suitability of the Residual Bonds to their investment objectives.
Holders of Class R-1 and Class R-2 Bonds will be treated as owners of
the "residual interest" in REMIC 1 and REMIC 2, respectively, for federal
income tax purposes. Accordingly, Residual Bondholders will not be treated as
holders of debt instruments for such purposes, and their taxable income will
not be computed with reference to the stated interest or amortization of
premium on the Residual Bonds, but rather will be computed as described in
"Certain Federal Income Tax Consequences--Special Tax Considerations Applicable
to Residual Bonds" in the Prospectus. Taxable income to Residual Bondholders
may exceed principal and interest payments received by such Bondholders with
respect to their Residual Bonds for the corresponding period, which would
result in a highly negative after-tax return for such period. See "Certain
Federal Income Tax Consequences--Special Tax Considerations Applicable to
Residual Bonds" in the Prospectus. Consequently, such Bondholders should have
other sources of funds sufficient to pay any federal or state income taxes due
as a result of ownership of the Residual Bonds.
Each of REMIC 1 and REMIC 2 may generate income, a portion of which
will be treated as "excess inclusion" income. Excess inclusion income (a) is
taxable to a tax-exempt Class R-1 or Class R-2 Bondholder, respectively, as
unrelated business taxable income ("UBTI"), (b) in the case of foreign holders,
is subject to withholding tax at a rate of 30% (regardless of any statutory of
treaty exemptions or rate reduction that otherwise would apply), and (c)
generally cannot be offset by any net operating losses or current deductions of
Residual Bondholders. Furthermore, Residual Bondholders who are individuals,
estates or trusts may be subject to limitations on the deductibility of
administrative expenses of REMIC 1 or REMIC 2, as applicable, for purposes of
determining their taxable income and alternative minimum taxable income. See
"Certain Federal Income Tax Consequences--Special Tax Considerations Applicable
to Residual Bonds--Restrictions on Transfer of a Residual Bond" in the
Prospectus.
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Prospective purchasers of Residual Bonds should be aware that the
REMIC Regulations provide that the transfer of noneconomic residual interests
to United States persons may be disregarded for federal income tax purposes if
any significant purpose of the transfer was to impede the assessment and
collection of tax. For purposes of the REMIC Regulations, a residual interest
is considered to be a noneconomic residual interest if, at the time of
transfer, either (a) the present value of the expected payments is less than
the present value of the expected tax on the excess inclusions or (b) the
transferee is not to receive cash payments at or after the time that tax
accrues on the anticipated excess inclusions in an amount sufficient to pay the
accrued tax. See "Certain Federal Income Tax Consequences--Special Tax
Considerations Applicable to Residual Bonds" in the Prospectus. If a transfer
of a Residual Bond is disregarded, the transferor would be liable for any
federal income tax imposed upon taxable income derived by the transferee from
REMIC 1 or REMIC 2, as applicable. A significant purpose to impede the
assessment or collection of tax will exist if the transferor fails to establish
that it neither knew nor should have known that the transferee would be
unwilling or unable to pay taxes due on its share of the taxable income of such
REMIC. See "Certain Federal Income Tax Consequences--Special Tax Considerations
Applicable to Residual Bonds" in the Prospectus. It is expected that the Class
R-2 Bonds would be treated as noneconomic residual interests for purposes of
the REMIC Regulations on the Closing Date. Each Class R-2 Bondholder
considering the transfer of such Bond to a United States person (i.e., a
citizen or resident of the United States, a domestic corporation, partnership,
estate or trust) should consult with its tax advisor to determine whether (a)
the Class R-2 Bond to be transferred would be considered to be a noneconomic
residual interest at the time of the transfer thereof and (b) any significant
purpose of the transfer is to impede the collection and assessment of tax
within the meaning of the REMIC Regulations.
The REMIC Regulations also provide that the transfer of a residual
interest to a foreign person will be disregarded if the residual interest has
tax avoidance potential (is a "TAPRI") and the income derived from the residual
interest is not effectively connected with the conduct of a United States trade
or business. A Residual Bond will be deemed to have tax avoidance potential
under the REMIC Regulations unless, at the time of the transfer, the transferor
reasonably expects that the applicable REMIC will pay to the transferee amounts
that are sufficient to pay the tax on the excess inclusion accruing during each
calendar year with respect to the related residual interest not later than the
close of the calendar year following the calendar year of accrual. Moreover, if
a foreign person transfers a Residual Bond to a United States person and
otherwise would avoid withholding tax on accrued excess inclusion income, the
transfer will be disregarded for tax purposes and payments with respect to the
Residual Bond will continue to be subject to 30% withholding as though the
foreign person still owned the Residual Bond. See "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to Residual
Bonds--Restrictions on Transfer of a Residual Bond" in the Prospectus. It is
expected that the Class R-2 Bonds would be treated as TAPRIs for purposes of
the REMIC Regulations on the Closing Date. A Class R-2 Bondholder should
consult with its tax counsel, before transferring the Class R-2 Bond to a
foreign person, to determine whether the Class R-2 Bond would be considered a
TAPRI under the REMIC Regulations at the time of the proposed transfer. A
transferee that is a foreign person will be required to deliver to the
Indenture Trustee certain certifications (and to satisfy certain other
conditions) in connection with the transfer of the Class R-2 Bond.
The Taxpayer Relief Act of 1997 provides, for taxable years beginning
after December 31, 1997, that if an "electing large partnership" holds a
Residual Bond, all interests in the electing large partnership are treated as
held by disqualified organizations for purposes of the tax imposed upon a
pass-through entity by section 860E(e) of the Code. An exception to this tax,
otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity that does not know such
affidavits are false, is not available to an electing large partnership. An
"electing large partnership" is a partnership that had 100 or more partners
during the preceding taxable year and that has filed an election with the
Internal Revenue Service to be so treated.
REGULAR BONDHOLDERS
Under section 166 of the Code, both corporate holders of the
Subordinate Bonds and noncorporate holders that acquire such Bonds in
connection with a trade or business should be allowed to deduct, as ordinary
losses, any losses sustained during a taxable year in which their Subordinate
Bonds become wholly or partially worthless as the result of one or more
Realized Losses. However, a noncorporate holder that does not acquire a
Subordinate Bond in connection with its trade or business will not be entitled
to deduct a loss under Code section 166 until its Subordinate Bond becomes
wholly worthless, and the loss will be characterized as a short-term capital
loss.
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Each holder of a Subordinate Bond will be required to accrue interest
and original issue discount income ("Current Income") with respect to such Bond
without giving effect to any reduction in payments attributable to a default or
delinquency on the Mortgage Loans until a related Realized Loss is allocated to
such Bond or until such earlier time as it can be established that any such
reduction ultimately will not be recoverable. As a result, the amount of
Current Income reported in any period by the holder of a Subordinate Bond could
exceed significantly the amount of economic income actually realized by the
holder in such period. Although the holder of a Subordinate Bond eventually
will recognize a loss or a reduction in income attributable to previously
included Current Income that, as the result of a Realized Loss, ultimately will
not be realized, the law is unclear with respect to the timing of such loss or
reduction in income. Accordingly, holders of the Subordinate Bonds should
consult their own tax advisors with respect to the federal income tax
consequences of Realized Losses on Current Income.
The Indenture Trustee intends to adjust the accrual of Current Income
on the Subordinate Bonds in a manner that it believes to be appropriate to take
account of Realized Losses. However, there can be no assurance that the
Internal Revenue Service will not contend successfully that a different method
of accounting for the effect of Realized Losses is correct and that such method
will not have an adverse effect upon the holders of the Subordinate Bonds.
NON-U.S. HOLDERS
Final regulations dealing with withholding tax on income paid to
foreign persons and related matters (the "New Withholding Regulations") were
issued by the Treasury Department on October 6, 1997. The New Withholding
Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective Non-U.S. Holders are
strongly urged to consult their own tax advisors with respect to the New
Withholding Regulations.
RESTRICTIONS ON PURCHASE AND TRANSFER OF THE
RESIDUAL BONDS
The Residual Bonds are not offered for sale to any investor that is
(a) a "disqualified organization" as described in "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to Residual
Bonds--Restrictions on Transfer of a Residual Bond" in the Prospectus or (b) a
Plan or a Plan Investor.
A Residual Bond may not be transferred except in compliance with the
restrictions on transfer set forth in the Indenture. As a prerequisite to any
such transfer, the proposed transferee must provide the Indenture Trustee with
(a) a transferee affidavit and agreement to the effect that the transferee is
not a disqualified organization or a Non-U.S. Person, (b) one or more investor
representation letters to the effect that the transferee is not a Plan Investor
described in or subject to the Plan Asset Regulations (as defined herein), and
that the proposed transferee either is not an insurance company or is an
insurance company and that none of the funds used by it in connection with its
purchase of the Residual Bonds will constitute "plan assets" as defined in the
Plan Asset Regulations, and (c) a certificate, signed by transferor, stating
that the purpose of the proposed transfer is not to impede the assessment or
collection of taxes, confirming its investigation of the transferee and absence
of actual knowledge on the part of the transferor that the proposed transferee
is a disqualified organization or a Non-U.S. Person. A "Non-U.S. Person" is a
person other than (a) a citizen or resident of the United States, (b) a
corporation or partnership entity treated as a corporation or partnership for
U.S. federal income tax purposes created in the United States or organized
under the laws of the United States or any state thereof or the District of
Columbia (except, in the case of a partnership, as otherwise provided by
Treasury regulations), (c) an estate, the income of which is includible in
gross income for United States federal income tax purposes regardless of its
source, or (d) a trust whose administration is subject to the primary
supervision of a United States Court and which has one or more United States
persons who have authority to control all substantial decisions of the trust.
Notwithstanding the fulfillment of the prerequisites described above, the
Indenture Trustee may withhold registration of a proposed transfer if it has
actual knowledge that the proposed transferee is a Non-U.S. Person or a
disqualified organization. A transfer in violation of the restrictions set
forth herein may subject a Residual Bondholder to taxation and the payment of
certain fees to the Indenture Trustee. See "Certain Federal Income Tax
Consequences--Special Tax Considerations Applicable to Residual
Bonds--Restrictions on Transfer of a Residual Bond" in the Prospectus.
S-93
<PAGE> 95
ERISA CONSIDERATIONS
Fiduciaries of employee benefit plans and certain other retirement
plans and arrangements that are subject to ERISA or corresponding provisions of
the Code, including individual retirement accounts and annuities, Keogh plans
and collective investment funds in which such plans, accounts, annuities or
arrangements are invested (any of the foregoing a "Plan"), persons acting on
behalf of a Plan, or persons using the assets of a Plan ("Plan Investors"),
should review carefully with their legal advisors whether the purchase or
holding of the Bonds could either give rise to a transaction that is prohibited
under ERISA or the Code or cause the collateral securing the Bonds to be
treated as plan assets for purposes of regulations of the Department of Labor
set forth in 29 C.F.R. 2510.3-101 (the "Plan Asset Regulations").
PROHIBITED TRANSACTIONS
General. Section 406 of ERISA prohibits parties in interest or
disqualified persons ("Parties in Interest") with respect to a Plan from
engaging in certain transactions (including loans) involving a Plan and its
assets unless a statutory, regulatory or administrative exemption applies to
the transaction. Section 4975 of the Code imposes certain excise taxes (or, in
some cases, a civil penalty may be assessed pursuant to section 502(i) of
ERISA) on Parties in Interest which engage in non-exempt prohibited
transactions.
Plan Asset Regulation and the Bonds. The United States Department of
Labor (the "DOL") has issued the Plan Asset Regulations concerning the
definition of what constitutes the assets of a Plan for purposes of ERISA and
the prohibited transaction provisions of the Code. The Plan Asset Regulations
describe the circumstances under which the assets of an entity in which a Plan
invests will be considered to be "plan assets" such that any person who
exercises control over such assets would be subject to ERISA's fiduciary
standards. Under the Plan Asset Regulations, generally when a Plan invests in
another entity, the Plan's assets do not include, solely by reason of such
investment, any of the underlying assets of the entity. However, the Plan Asset
Regulations provide that, if a Plan acquires an "equity interest" in an entity,
the assets of the entity will be treated as assets of the Plan investor unless
certain exceptions not applicable here apply.
Under the Plan Asset Regulations, the term "equity interest" is
defined as any interest in an entity other than an instrument that is treated
as indebtedness under "applicable local law" and which has no "substantial
equity features". If the Bonds are not treated as equity interests in the
Issuer for purposes of the Plan Asset Regulation, a Plan's investment in the
Bonds would not cause the assets of the Issuer to be deemed Plan assets.
However, the Issuer, the Master Servicer, a Sub-Servicer, the Certificate
Trustee, the Indenture Trustee and the Underwriter may be the sponsor of or
investment advisor with respect to one or more Plans. Because such parties may
receive certain benefits in connection with the sale of Bonds, the purchase of
Bonds using Plan assets over which any such parties have investment authority
might be deemed to be a violation of the prohibited transaction rules of ERISA
and the Code for which no exemption may be available.
The Bonds may not be purchased with the assets of a Plan if the
Issuer, the Master Servicer, a Sub-Servicer, the Certificate Trustee, the
Indenture Trustee, the Underwriter or any of their respective affiliates (a)
has investment or administrative discretion with respect to such Plan assets;
(b) has authority or responsibility to give, or regularly gives, investment
advice with respect to such Plan assets, for a fee and pursuant to an agreement
or understanding that such advice (i) will serve as a primary basis for
investment decisions with respect to such Plan assets and (ii) will be based on
the particular investment needs for such Plan; or (c) is an employer
maintaining or contributing to such Plan.
If the Bonds are deemed to be equity interests in the Issuer, the
Issuer could be considered to hold Plan assets by reason of a Plan's investment
in the Bonds. In such an event, the Master Servicer, the Sub-Servicer and other
persons exercising management or discretionary control over the assets of the
Issuer may be deemed to be fiduciaries with respect to investing Plans and thus
subject to the fiduciary responsibility provisions of Title I of ERISA,
including the prohibited transaction provisions of Section 406 of ERISA, and
Section 4975 of the Code with respect to transactions involving the Issuer's
assets. There can be no assurance that any statutory, regulatory or
administrative exemption will apply to all prohibited transactions that might
arise in connection with the purchase or holding of an equity interest in the
Issuer by a Plan.
S-94
<PAGE> 96
The Residual Bonds are expected to have "substantial equity
characteristics." Accordingly, no Residual Bond may be acquired by a Plan or
Plan Investor. Although the matter is not entirely clear, the Class B-3 Bonds
and the Interest Only Bonds may have "substantial equity characteristics."
Consequently, the Interest Only Bonds and the Class B-3 Bonds may not be
transferred to a Plan Investor unless the Plan Investor provides the Master
Servicer and the Indenture Trustee with a Benefit Plan Opinion. Each purchaser
of an Interest Only Bond or a Class B-3 Bond, by virtue of such purchaser's
receipt of such Bond, unless such purchaser provides a Benefit Plan Opinion,
will be deemed to have represented that it is not a Plan Investor, and will be
deemed to have agreed to indemnify and hold the Issuer, the Master Servicer,
each Sub-Servicer, the Certificate Trustee, the Indenture Trustee and the
Underwriter harmless against any losses, liabilities or expenses or resulting
from the breach of such representation. A "Benefit Plan Opinion" is an opinion
of counsel satisfactory to the Indenture Trustee and the Issuer to the effect
that the purchase and holding of the applicable Bonds will not constitute or
result in a prohibited transaction under ERISA or the Code and will not subject
the Issuer, the Master Servicer, any Sub-Servicer, the Certificate Trustee, the
Indenture Trustee or their respective affiliates to any obligation or liability
(including obligations or liabilities under ERISA or Section 4975 of the Code)
in addition to those undertaken in the Indenture.
In addition, without regard to whether the Bonds are considered to be
equity interests in the Issuer, certain affiliates of the Issuer, the Master
Servicer or a Sub-Servicer might be considered or might become Parties in
Interest with respect to a Plan. In either case, the acquisition or holding of
Bonds by or on behalf of such a Plan could be considered to give rise to an
indirect prohibited transaction within the meaning of ERISA and the Code,
unless it is subject to one or more exemptions such as Prohibited Transaction
Class Exemption ("PTCE") 84-14, which exempts certain transactions effected on
behalf of a Plan by a "qualified professional asset manager", PTCE 90-1, which
exempts certain transactions involving insurance company pooled separate
accounts, PTCE-91-38, which exempts certain transactions involving bank
collective investment funds, PTCE 95-60, which exempts certain transactions
involving insurance company general accounts, or PTCE 96-23, which exempts
certain transactions effected on behalf of a Plan by certain "in-house asset
managers". Each purchaser or transferee of a Senior Bond, other than the
Interest Only Bonds, or Class B-1, Class B-2 Bond that is a Plan Investor shall
be deemed to have represented that the relevant conditions for exemptive relief
under at least one of the foregoing exemptions have been satisfied.
The sale of Offered Bonds to a Plan is in no respect a representation
by the Issuer or the Underwriter that this investment meets all relevant legal
requirements with respect to investments by Plans generally or any particular
Plan, or that this investment is appropriate for Plans generally or any
particular Plan.
Any Plan Investor proposing to invest in the Bonds should consult with
its counsel to confirm that such investment will not result in a prohibited
transaction that is not subject to an exemption and will satisfy the other
requirements of ERISA and the Code applicable to Plans.
LEGAL INVESTMENT
The Senior Bonds and the Class B-1 Bonds will constitute "mortgage
related securities" for purposes of the Secondary Mortgage Market Enhancement
Act of 1984, as amended ("SMMEA"), so long as they are rated in at least the
second highest rating category by any Rating Agency or another nationally
recognized statistical rating organization.
The Class B-2 and Class B-3 Bonds will not constitute "mortgage
related securities" for purposes of SMMEA, because those Classes are not rated
in the two highest rating categories by a nationally recognized rating
organization.
Any financial institution that 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, the Office of Thrift
Supervision, the National Credit Union Administration, any state insurance
commission, or any other federal or state agencies with similar authority
should review any applicable rules, guidelines and regulations prior to
purchasing any Bonds. Financial institutions should review and consider the
applicability of the Federal Financial Institutions Examination Council
Supervisory Policy Statement on the Selection of Securities Dealers and
Unsuitable Investment Practices (to the extent adopted by their respective
federal regulators), which, among other things, sets forth guidelines for
investing in certain types of mortgage related securities and prohibits
investment in certain "high-risk" mortgage securities.
S-95
<PAGE> 97
Except as to the status of certain Classes of Offered Bonds as
"mortgage related securities", no representations are made as to the proper
characterization of any Class of Offered Bonds for legal investment, financial
institution registry or other purposes, or as to the ability of particular
investors to purchase any Class of Offered Bonds under applicable legal
investment restrictions. These uncertainties may adversely affect the liquidity
of the Offered Bonds. Accordingly, all institutions whose investment activities
are subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their own
legal advisors in determining whether and to what extent any Class of the
Offered Bonds constitutes a legal investment or is subject to investment,
capital or other restrictions.
See "Legal Investment" in the Prospectus.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") between the Issuer and _____________
(the "Underwriter"), the Issuer has agreed to sell to the Underwriter, and the
Underwriter has agreed to purchase from the Issuer, the Offered Bonds.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered Bonds is subject to,
among other things, the receipt of certain legal opinions and to the
conditions, among others, that no stop order suspending the effectiveness of
the Issuer's Registration Statement shall be in effect, and that no proceedings
for such purpose shall be pending before or threatened by the Commission.
The proceeds to the Issuer from the sale of the Offered Bonds to the
Underwriter will be in an amount set forth on the cover page hereof. The
distribution of the Offered Bonds by the Underwriter will be effected from time
to time in one or more negotiated transactions, or otherwise, at varying prices
to be determined, in each case, at the time of sale. The Underwriter may effect
such transactions by selling the Offered Bonds to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent. In
connection with the sale of the Offered Bonds, the Underwriter may be deemed to
have received compensation from the Issuer in the form of an underwriting
discount. The Underwriter and any dealers that participate with the Underwriter
in the payment of the Offered Bonds may be deemed to be underwriters and any
profit on the resale of the Offered Bonds positioned by them may be deemed to
be underwriting discounts and commissions under the Securities Act of 1933, as
amended.
The Underwriting Agreement provides that the Issuer and CMC will
indemnify the Underwriter, and under limited circumstances the Underwriter will
indemnify the Issuer and CMC, against certain civil liabilities under the
Securities Act of 1933, as amended, or, in each case, contribute to payments
required to be made in respect thereof.
There can be no assurance that a secondary market for the Offered
Bonds will develop or, if it does develop, that it will continue or will
provide investors with a sufficient level of liquidity. The primary source of
information available to investors concerning the Offered Bonds will be the
monthly statements discussed in the Prospectus under "The Indenture--Reports by
Indenture Trustee to Bondholders", which will include information as to the
outstanding principal balance of the Offered Bonds and the status of the
applicable form of credit enhancement. There can be no assurance that any
additional information regarding the Offered Bonds will be available through
any other source. In addition, the Issuer is not aware of any source through
which price information about the Offered Bonds will be generally available on
an ongoing basis. The limited nature of such information regarding the Offered
Bonds may adversely affect the liquidity of the Offered Bonds, even if a
secondary market for the Offered Bonds becomes available.
USE OF PROCEEDS
The Issuer will apply the net proceeds from the sale of the Offered
Bonds against the purchase price of the Mortgage Loans.
S-96
<PAGE> 98
LEGAL MATTERS
Certain legal matters relating to the Bonds will be passed upon for
the Issuer by Andrews & Kurth L.L.P., Dallas, Texas and for the Underwriter by
____________________.
RATING
It is a condition to the issuance of each Class of Offered Bonds that
it receives the ratings set forth below from ______ and ______.
Class ______ ______
Class P
Class A-1
Class A-2
Class A-3
Class A-4
Class A-5
Class A-6
Class A-7
Class A-8
Class A-9
Class A-10
Class A-11
Class A-12
Class A-13
Class A-14
Class A-15
Class A-16
Class A-17
Class A-18
Class A-19
Class A-20
Class A-21
Class A-22
Class A-23
Class X
Class B-1
Class B-2
Class B-3
Class R-1
Class R-2
The ratings assigned by ______ and ______ to collateralized mortgage
obligations address the likelihood of the receipt of all payments on the
underlying collateral by the related bondholders under the agreements pursuant
to which such bonds were issued. ______ and _____ ratings take into
consideration the credit quality of the related mortgage pool, structural and
legal aspects associated with such bonds, and the extent to which the payment
stream in the mortgage pool is adequate to make payments required under such
bonds. ______ and ____ ratings on such Bonds do not, however, constitute a
statement regarding frequency of prepayments on the mortgages.
The ratings of the Rating Agencies do not address the possibility
that, as a result of principal prepayments or recoveries (i) Bondholders might
suffer a lower than anticipated yield and (ii) if there is a rapid rate of
principal payments (including principal prepayments) on (A) the Mortgage Loans,
investors in the Class A-5 and Class A-10 Bonds could fail to fully recover
their investment or (B) the Non-Discount Mortgage Loans, investors in the Class
X Bonds could fail to fully recover their investment. The ratings on the Class
P Bonds only address the return of their
S-97
<PAGE> 99
principal balance. The ratings on the Residual Bonds address only the return of
their principal balance and interest thereon at their respective Bond Interest
Rates.
The ratings assigned to the Offered Bonds should be evaluated
independently from similar ratings on other types of securities. A rating is
not a recommendation to buy, sell or hold securities and may be subject to
revision or withdrawal at any time by the Rating Agencies.
The Issuer has not requested a rating of the Offered Bonds by any
rating agency other than the Rating Agencies. However, there can be no
assurance as to whether any other rating agency will rate the Offered Bonds or,
in such event, what rating would be assigned to the Offered Bonds by such other
rating agency. The ratings assigned by such other rating agency to the Offered
Bonds may be lower than the ratings assigned by the Rating Agencies.
S-98
<PAGE> 100
PRINCIPAL DEFINITIONS
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Accrued Bond Interest"........................................................................................S-42
"Adjustment Amount"............................................................................................S-51
"Aggregate Expense Rate".......................................................................................S-12
"Allocable Share" .............................................................................................S-48
"Beneficial Owner".............................................................................................S-32
"Benefit Plan Opinion".........................................................................................S-95
"Bond Interest Rate"...........................................................................................S-13
"Bonds"...............................................................................................S-1, S-3, S-9
"Book-Entry Termination".......................................................................................S-33
"CCC Assignment Agreement"......................................................................................S-3
"CCC"...........................................................................................................S-3
"Cede"..........................................................................................................S-6
"Certificate Account"..........................................................................................S-86
"Certificate Trustee"...........................................................................................S-3
"Certificateholders"...........................................................................................S-28
"Certificates"..................................................................................................S-3
"Class Current Principal Balance"..............................................................................S-42
"Class Notional Balance".......................................................................................S-42
"Class Prepayment Payment Trigger".............................................................................S-48
"Class X Notional Balance"................................................................................S-3, S-43
"Closing Date"..................................................................................................S-3
"CMC"...........................................................................................................S-3
"Code".........................................................................................................S-22
"Collection Account"...........................................................................................S-28
"Commission"....................................................................................................S-6
"Compensating Interest Payments"...............................................................................S-84
"Corporate Trust Office".......................................................................................S-78
"Cross-Over Date"..............................................................................................S-42
"Current Income"...............................................................................................S-93
"Current Principal Balance"....................................................................................S-42
"Custodian"....................................................................................................S-80
"Cut-off Date"..................................................................................................S-3
"Debt Service Reduction".......................................................................................S-49
"Deceased Owner"...............................................................................................S-36
"Defaulted Mortgage Loan"......................................................................................S-84
"Deficient Valuation"..........................................................................................S-49
"Determination Date"...........................................................................................S-48
"Discount Mortgage Loan".......................................................................................S-44
"DOL"..........................................................................................................S-94
"DTC"...........................................................................................................S-6
"Due Date".....................................................................................................S-12
"Due Period"...................................................................................................S-13
"ERISA"........................................................................................................S-24
"Events of Default"............................................................................................S-89
"Excess Special Hazard Loss".............................................................................S-15, S-50
"Fannie Mae" ..................................................................................................S-11
"Freddie Mac"..................................................................................................S-11
"Highest Priority Junior Class"................................................................................S-41
"Indenture Event of Default".............................................................................S-33, S-41
"Indenture Trustee".............................................................................................S-3
</TABLE>
S-99
<PAGE> 101
PRINCIPAL DEFINITIONS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Indenture" ..................................................................................S-3, S-11, S-31
"Insurance Proceeds"...........................................................................................S-48
"Interest Accrual Period"......................................................................................S-13
"Interest Shortfall"...........................................................................................S-43
"Issuer"...................................................................................................S-3, S-9
"Jumbo Loans"..................................................................................................S-11
"LIBOR Determination Date".....................................................................................S-43
"LIBOR"........................................................................................................S-14
"Liquidated Mortgage Loan".....................................................................................S-49
"Liquidation Proceeds".........................................................................................S-49
"Living Owner".................................................................................................S-36
"Loan Seller"...................................................................................................S-3
"Loan-to-Value Ratio"..........................................................................................S-29
"Loss Allocation Limitation"...................................................................................S-50
"Master Servicer Compensation".................................................................................S-86
"Master Servicer"...............................................................................................S-3
"Material Defect"..............................................................................................S-79
"Monthly Advance"..............................................................................................S-15
"Monthly Payment"..............................................................................................S-48
"Mortgage File"................................................................................................S-79
"Mortgage Loans"................................................................................................S-3
"Mortgage Note"................................................................................................S-80
"Mortgage pool"...........................................................................................S-3, S-11
"Mortgage Rate"..........................................................................................S-12, S-28
"Mortgaged Properties".........................................................................................S-29
"Mortgage".....................................................................................................S-29
"NERDs"........................................................................................................S-23
"Net Interest Shortfalls"................................................................................S-43, S-84
"Net Liquidation Proceeds".....................................................................................S-49
"Net Rate"...............................................................................................S-12, S-28
"New Withholding Regulations"..................................................................................S-93
"No Asset, No Income Program"..................................................................................S-31
"Non-Agency Certificates".......................................................................................S-3
"Non-Discount Mortgage Loan"...................................................................................S-44
"Non-PO Percentage"............................................................................................S-44
"Non-PO Realized Losses".......................................................................................S-50
"Non-SMMEA Bonds"..............................................................................................S-26
"Non-U.S. Person"..............................................................................................S-93
"Offered Bonds".................................................................................................S-1
"Optional Redemption Date".....................................................................................S-21
"Original Subordinate Principal Balance".......................................................................S-46
"Other Subordinate Bonds".......................................................................................S-9
"Outstanding Principal Balance"................................................................................S-80
"PAC Bonds"....................................................................................................S-49
"Parties in Interest"..........................................................................................S-94
"Payment Date"............................................................................................S-4, S-13
"Permitted Investments"........................................................................................S-85
"Plan Asset Regulations".......................................................................................S-94
"Plan Investor"...........................................................................................S-5, S-24
"Planned Balance"..............................................................................................S-49
"Plan"...................................................................................................S-24, S-94
"PO Deferred Payment Writedown Amount".........................................................................S-50
"PO Percentage"................................................................................................S-44
</TABLE>
S-100
<PAGE> 102
PRINCIPAL DEFINITIONS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
"PO Principal Payment Amount"..................................................................................S-46
"Pooling and Servicing Agreement".........................................................................S-3, S-28
"Prepayment Period"............................................................................................S-13
"Primary Mortgage Insurance Policy"............................................................................S-82
"principal prepayment".........................................................................................S-48
"pro rata".....................................................................................................S-41
"Prohibited Transaction Provisions"............................................................................S-24
"Protected Account"............................................................................................S-85
"PTCE".........................................................................................................S-95
"Purchase Agreement"......................................................................................S-3, S-28
"Rating Agencies"..............................................................................................S-25
"Realized Loss"................................................................................................S-49
"Record Date"..................................................................................................S-13
"Redemption Price".............................................................................................S-21
"Reduced Documentation Program"................................................................................S-31
"Reference Banks"..............................................................................................S-43
"REITs"........................................................................................................S-23
"Relief Act"...................................................................................................S-43
"REMIC Regulations"............................................................................................S-23
"REMIC".........................................................................................................S-5
"REO Property".................................................................................................S-48
"Repurchase Price".............................................................................................S-79
"Repurchase Proceeds"..........................................................................................S-48
"Reserve Interest Rate"........................................................................................S-44
"Residual Bondholders".........................................................................................S-23
"Retail Bond Units"............................................................................................S-33
"Rules"........................................................................................................S-33
"Scheduled Principal Balance"..................................................................................S-12
"Senior Bonds"..................................................................................................S-3
"Senior Class"..................................................................................................S-3
"Senior P&I Optimal Principal Amount"....................................................................S-45, S-47
"Senior Percentage"............................................................................................S-45
"Senior Prepayment Percentage Stepdown Limitation".............................................................S-46
"Senior Prepayment Percentage".................................................................................S-46
"Servicing Account"............................................................................................S-83
"SMMEA".............................................................................................S-5, S-26, S-95
"SPA"..........................................................................................................S-53
"Special Hazard Loss Amount"...................................................................................S-50
"Special Hazard Loss"..........................................................................................S-49
"Special Hazard Termination Date"..............................................................................S-50
"Stated Maturity" .......................................................................................S-25, S-52
"Streamlined Documentation Program"............................................................................S-31
"Subordinate Bond Writedown Amount"............................................................................S-42
"Subordinate Optimal Principal Amount"...................................................................S-47, S-48
"Subordinate Percentage".......................................................................................S-47
"Subordinate Prepayment Percentage"............................................................................S-47
"Sub-Servicer Remittance Date".................................................................................S-28
"Sub-Servicing Agreement"......................................................................................S-29
"Sub-Servicing Fee"............................................................................................S-84
"TAC Bonds"....................................................................................................S-49
"TAPRI"........................................................................................................S-92
"Targeted Balance".............................................................................................S-49
"Trust Estate"..................................................................................................S-3
</TABLE>
S-101
<PAGE> 103
PRINCIPAL DEFINITIONS
(Continued)
<TABLE>
<CAPTION>
Page
----
<S> <C>
"Trust" ........................................................................................S-3, S-28
"UBTI" .......................................................................................S-23, S-91
"Underwriter" ........................................................................................S-1, S-96
"Underwriting Agreement".......................................................................................S-96
</TABLE>
S-102
<PAGE> 104
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 MAY 21, 1999.
<PAGE> 105
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;
(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.
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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 ad 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, 1998, as filed with the Commission on March 30, 1999.
2. The Issuer's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999, as filed with the Commission on May 10, 1999.
All documents filed by the Issuer pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering of the Bonds shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Issuer will provide without charge to each person to whom a copy
of this Prospectus has been delivered, upon the request of such person, a copy
of any of or all the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference into
any such document). Requests for such copies should be directed to 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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GLOSSARY OF PRINCIPAL TERMS
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"1986 Act".................................................................35
"Administrator"............................................................26
"Agency Certificates"......................................................ii
"Assumed Reinvestment Rate"................................................ii
"Basic Principal Payment"...................................................3
"Beneficial Owners".........................................................8
"Bond Value Group".........................................................18
"Bond Value"................................................................3
"Bondholders"...............................................................8
"Bonds"....................................................................ii
"Book Entry Bonds"..........................................................3
"Certificate Trustee"......................................................26
"Certificates"..............................................................1
"Claim Ceiling"............................................................11
"Clearing Agency Participants"..............................................8
"Clearing Agency"...........................................................8
"Code"......................................................................8
"Collateral"................................................................6
"Collection Account"........................................................7
"Commission"...............................................................iv
"Committee Report".........................................................37
"Compound Interest Bonds"...................................................1
"Conventional Loans".......................................................18
"Due Period"................................................................3
"ERISA"....................................................................53
"Exchange Act".............................................................iv
"FDIC".....................................................................52
"FHA Loans"................................................................18
"FHLMC Act"................................................................24
"FHLMC Certificate Group"..................................................24
"FHLMC Certificate Pool"...................................................24
"FHLMC Certificates".......................................................ii
"FHLMC".....................................................................1
"Final REMIC Regulations"..................................................35
"Floating Interest Rate Bonds".............................................17
"FmHA Loans"...............................................................18
"FNMA Certificates"........................................................ii
"FNMA"......................................................................1
"Garn-St Germain Act"......................................................31
"GNMA Certificates"........................................................ii
"GNMA Servicer"............................................................21
"GNMA"......................................................................1
"GPM Certificates".........................................................26
"Guaranty Agreement".......................................................22
"Housing Act"..............................................................21
"Indenture Trustee".........................................................1
"Indenture".................................................................1
"Interest Accrual Period"...................................................2
"Inverse Floating Interest Rate Bonds".....................................17
"IRS"......................................................................40
"Issuer"...................................................................ii
"Maximum Variable Interest Rate"............................................6
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"Minimum Variable Interest Rate"...........................................17
"Mortgage Loans"............................................................6
"NCUA".....................................................................52
"Non-Agency Certificates"..................................................ii
"Non-Priority Bonds".......................................................12
"Non-REMIC Bonds"...........................................................8
"OID Regulations"..........................................................38
"Optional Variable Interest Rate Bond Redemption"...........................5
"OTS".......................................................................5
"Owner"....................................................................26
"Participating Series".....................................................11
"Pass-Through Entity"......................................................48
"Payment Date"..............................................................2
"Plan".....................................................................53
"Pooling and Administration Agreement".....................................26
"Premium REMIC Regular Bonds"..............................................42
"Prepayment Assumption"....................................................38
"Principal Payment Date"....................................................3
"Priority Bonds"...........................................................12
"PTCE".....................................................................53
"PTC"......................................................................23
"Registration Statement"...................................................iv
"Regular Bonds".............................................................8
"Regulations"..............................................................53
"REIT".....................................................................47
"REMIC Bonds"..............................................................ii
"REMIC Pool"...............................................................36
"REMIC Regular Bonds"......................................................ii
"REMIC"....................................................................ii
"Requisite Amount of the Special Hazard and Bankruptcy Account"............11
"Reserve Funds".............................................................7
"Residual Bondholders".....................................................13
"Residual Bonds"...........................................................ii
"Retail Class Bond"........................................................38
"Scheduled Amortization Amount".............................................4
"Scheduled Amortization Bonds"..............................................4
"Scheduled Principal"......................................................25
"Series Supplement".........................................................1
"Servicers"................................................................26
"Servicing Agreement"......................................................26
"SMMEA".....................................................................8
"Special Allocation Bonds".................................................12
"Special Redemption Date"...................................................5
"Spread"....................................................................3
"Startup Day"..............................................................36
"Tax-Exempt Investor"......................................................52
"TIA"......................................................................56
"Time-Out Period"...........................................................6
"TMP"......................................................................37
"Underlying Mortgage Loans"................................................10
"Underwriters".............................................................15
"VA Loans".................................................................18
"Variable Interest Rate Bonds".............................................17
"Variable Interest Rate Payment Date".......................................5
"Variable Interest Rate Period".............................................5
"Variable Interest Rate"....................................................2
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TABLE OF CONTENTS
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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
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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
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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
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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.
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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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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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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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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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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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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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"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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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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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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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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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
"TimeOut 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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<PAGE> 166
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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<PAGE> 167
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> 168
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 financial statements 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, 1998
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon included therein and
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<PAGE> 169
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such report given upon the authority of
such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates
prescribed by the Commission upon request to the Commission and inspected,
without charge, at the offices of the Commission.
Copies of FHLMC's most recent Offering Circular for FHLMC
Certificates, FHLMC's Information Statement and most recent Supplement thereto
and any quarterly report made available by FHLMC can be obtained by writing or
calling FHLMC's Investor Inquiry Department at 8200 Jones Branch Drive, McLean,
Virginia 22102 (800-336-FMPC). The Issuer did not participate in the
preparation of FHLMC's Offering Circular, Information Statement or any
Supplement thereto or any such quarterly report.
Copies of FNMA's most recent Prospectus for FNMA Certificates and
FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7585). The Issuer did not participate in the preparation of FNMA's
Prospectus or any such report, financial statement or other financial
information.
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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
Printing and Engraving Expenses........................... 240,000
Accounting Fees and Expenses.............................. 230,000
Legal Fees and Expenses................................... 745,000
Trustee Fees and Expenses................................. 125,000
Blue Sky Fees and Expenses................................ 10,000
Rating Agency Fees........................................ 800,000
Miscellaneous............................................. 25,000
Total........................................... $ 2,175,295
===================
</TABLE>
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.
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<PAGE> 171
ITEM 16. 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 Exhibits 5.1 and 8.1 to this Registration
Statement (3)
23.2 Consent of Independent Auditors (4)
24.1 Powers of Attorney (3)
25.1 Statement of Eligibility and Qualification of Trustee (bound
separately from other exhibits) (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) Previously filed with the Commission as exhibits to the Registrant's
Form S-3 Registration Statement (File No. 333-64481) on September 29,
1998, and incorporated by reference herein.
(4) 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.
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<PAGE> 172
(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.
(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.
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<PAGE> 173
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 Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on the 19th day of May, 1999.
CMC SECURITIES CORPORATION IV
By: /s/ Andrew F. Jacobs
----------------------------------
Andrew F. Jacobs
Executive Vice President - Finance
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>
* Director, Chairman, May 19, 1999
- ------------------------------------ Chief Executive Officer
(Ronn K. Lytle) and President (Principal
Executive Officer)
* Director May 19, 1999
- ------------------------------------
(Maurice E. McGrath)
* Director, Executive Vice May 19, 1999
- ------------------------------------ President - Finance
(Andrew F. Jacobs) (Principal Financial
and Accounting Officer)
</TABLE>
*By: /s/ Andrew F. Jacobs
--------------------------------
Andrew F. Jacobs
Attorney-in-Fact
II-4
<PAGE> 174
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 (4)
24.1 Powers of Attorney (3)
25.1 Statement of Eligibility and Qualification of Trustee (bound
separately from other exhibits) (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) Previously filed with the Commission as exhibits to the Registrant's Form
S-3 Registration Statement (file No. 333-64481) on September 29, 1998, and
incorporated by reference herein.
(4) Filed herewith.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated February 4, 1999, in Amendment No. 1 to the Registration
Statement (Form S-3 No. 333-64481) and related Prospectus of CMC Securities
Corporation IV for the Registration of $1,000,000 of Collateralized Mortgage
Obligations (Issuable in Series).
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Dallas, Texas
May 18, 1999
