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PROSPECTUS SUPPLEMENT FILED PURSUANT TO RULE 424(b)(5)
(TO PROSPECTUS DATED MARCH 30, 2000) REGISTRATION NO. 33-47913
$230,440,604
(Approximate)
CMC SECURITIES CORPORATION III
ISSUER
COLLATERALIZED MORTGAGE OBLIGATIONS, SERIES 2000-1
<TABLE>
<S> <C>
You should carefully consider the The issuer will issue:
risk factors beginning on page S-10 - one class of senior Class A Bonds.
of this prospectus supplement and on - one class of senior residual bonds.
page 14 of the accompanying - four classes of subordinate bonds.
prospectus. - one class of bonds that receives the prepayment premiums
on the mortgage loans.
THE BONDS WILL BE NONRECOURSE
OBLIGATIONS SOLELY OF THE ISSUER AND For a description of the classes of bonds offered by this
DO NOT REPRESENT AN OBLIGATION OF OR prospectus, see "Summary" on page S-5.
INTEREST IN THE SELLERS, THE MASTER
SERVICER, THE CERTIFICATE TRUSTEE, Credit enhancement for the bonds will be provided by
THE INDENTURE TRUSTEE, THE subordination, loss allocation and overcollateralization.
UNDERWRITER OR ANY OF THEIR Additional credit enhancement for the Class A Bonds will be
RESPECTIVE AFFILIATES. provided by a financial guaranty insurance policy issued by
[MBIA LOGO]
EXCEPT AS OTHERWISE DESCRIBED IN
THIS PROSPECTUS SUPPLEMENT, NEITHER The bonds will be secured by mortgage pass-through
THE BONDS NOR THE UNDERLYING certificates evidencing the beneficial ownership interest
MORTGAGE LOANS ARE INSURED OR in a pool of conventional, fixed and adjustable rate, fully
GUARANTEED BY ANY GOVERNMENTAL amortizing and balloon, first lien residential mortgage
ENTITY, THE ISSUER, THE SELLERS, THE loans that were originated generally in accordance with
MASTER SERVICER, THE CERTIFICATE underwriting guidelines that are not as strict as Fannie
TRUSTEE, THE INDENTURE TRUSTEE, THE Mae and Freddie Mac guidelines. As a result, these mortgage
UNDERWRITER OR ANY OF THEIR loans may experience higher rates of delinquency,
RESPECTIVE AFFILIATES, OR ANY OTHER foreclosure and bankruptcy than if they had been
PERSON. underwritten in accordance with higher standards.
</TABLE>
THE SEC AND STATE SECURITIES REGULATORS HAVE NOT APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS
IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The underwriter listed below will purchase the offered bonds from the issuer and
will offer them to investors at varying prices to be determined at the time of
sale. The proceeds to the issuer from the sale of the offered bonds will be
approximately 100% of the total principal balance of those bonds before
deducting expenses. The underwriter's commission will be the difference between
the price it pays for the offered bonds and the amount it receives from the sale
of those bonds to the public. The offered bonds will be available for delivery
to investors on or about March 31, 2000.
DONALDSON, LUFKIN & JENRETTE
March 30, 2000
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IMPORTANT NOTICE ABOUT INFORMATION PRESENTED IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS:
We provide information to you about the bonds offered by this
prospectus supplement in two separate documents that progressively provide more
detail: (1) the accompanying prospectus, which provides general information,
some of which may not apply to your bonds, and (2) this prospectus supplement,
which describes the specific terms of your bonds.
If information varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in this prospectus
supplement.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We have
not authorized anyone to provide you with different information.
We are not offering the bonds in any state where the offer is not
permitted. We do not claim that the information in this prospectus supplement
and prospectus is accurate as of any date other than the dates stated on their
respective covers.
We include cross-references in this prospectus supplement and the
accompanying prospectus to captions in these materials where you can find
further related discussions. The following table of contents and the table of
contents included in the accompanying prospectus provide the pages on which
these captions are located.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
Important notice about information presented in this
prospectus supplement and the accompanying prospectus.........................................S-2
SUMMARY ..............................................................................................S-5
RISK FACTORS..........................................................................................S-10
Underwriting Guidelines and Potential Delinquencies..........................................S-10
PNC Mortgage Securities Corp.'s Master Servicing Experience Does Not
Include Pools of Loans Similar to the Mortgage Loans......................................S-10
Mortgage Loan Interest Rates May Limit Interest Rates on the Bonds...........................S-11
Potential Inadequacy of Credit Enhancement...................................................S-11
Overcollateralization........................................................................S-11
Balloon Loans................................................................................S-13
Unpredictability and Effect of Prepayments...................................................S-13
Delay in Receipt of Liquidation Proceeds; Liquidation Proceeds May Be Less Than
Mortgage Loan Balance.....................................................................S-13
Geographic Concentration of Mortgage Loans...................................................S-14
Potential Disruption of Computer Systems.....................................................S-14
Limited Ability to Resell Bonds..............................................................S-14
DESCRIPTION OF THE CERTIFICATES.......................................................................S-15
DESCRIPTION OF THE MORTGAGE POOL......................................................................S-16
General ....................................................................................S-16
Adjustable Rate Mortgage Loans...............................................................S-17
The Indices..................................................................................S-18
Additional Information.......................................................................S-21
UNDERWRITING GUIDELINES OF THE ORIGINATORS............................................................S-21
UNDERWRITING GUIDELINES OF PNC........................................................................S-22
THE MASTER SERVICER...................................................................................S-23
PNC's Delinquency, Loss and Foreclosure Experience...........................................S-23
SERVICING OF THE MORTGAGE LOANS.......................................................................S-23
General ....................................................................................S-23
Servicing Compensation and Payment of Expenses...............................................S-23
Compensating Interest........................................................................S-24
Advances ....................................................................................S-24
Insurance Coverage...........................................................................S-24
Special Servicing Agreements.................................................................S-24
Repurchase of Delinquent Mortgage Loans......................................................S-25
DESCRIPTION OF INSURANCE..............................................................................S-25
Primary Mortgage Insurance Policies..........................................................S-25
Standard Hazard Insurance Policies and Flood Insurance Policies..............................S-25
Title Insurance Policies.....................................................................S-26
DESCRIPTION OF THE BONDS..............................................................................S-26
General ....................................................................................S-26
Book-Entry Registration......................................................................S-27
Payments of Interest.........................................................................S-28
Determination of LIBOR.......................................................................S-30
Payments of Principal........................................................................S-31
Acceleration of the Bonds Upon an Indenture Event of Default.................................S-34
Credit Enhancement...........................................................................S-34
Final Scheduled Payment Date.................................................................S-39
</TABLE>
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<TABLE>
<S> <C>
Optional Purchase of Mortgage Loans; Redemption of the Bonds.................................S-39
Voting Rights................................................................................S-39
Subrogation of the Bond Insurer..............................................................S-39
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE ..........................................................S-39
General ....................................................................................S-39
Principal Prepayments and Compensating Interest..............................................S-40
Overcollateralization........................................................................S-41
Subordination of the Offered Subordinate Bonds...............................................S-41
Weighted Average Life........................................................................S-41
THE INDENTURE.........................................................................................S-47
General ....................................................................................S-47
Indenture Event of Default...................................................................S-48
THE POOLING AND SERVICING AGREEMENT...................................................................S-48
General ....................................................................................S-48
Assignment of Mortgage Loans.................................................................S-48
Substitution of Mortgage Loans...............................................................S-49
Representations and Warranties Regarding the Mortgage Loans..................................S-49
Bond Administrator...........................................................................S-49
Payments on Mortgage Loans; Custodial Accounts for P&I, Investment Account
and Certificate Account...................................................................S-49
Advances ....................................................................................S-51
Servicing Compensation and Payment of Expenses...............................................S-51
Evidence as to Compliance....................................................................S-51
Certain Matters Regarding the Master Servicer, the Issuer and the Bond Administrator.........S-52
Events of Default............................................................................S-52
Rights upon Event of Default.................................................................S-52
Amendment....................................................................................S-53
Termination..................................................................................S-53
The Certificate Trustee......................................................................S-53
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS............................................................S-54
General ....................................................................................S-54
Taxation of Regular Interests................................................................S-54
Status of the Offered Bonds..................................................................S-55
The Basis Risk Reserve Fund..................................................................S-55
LEGAL INVESTMENT CONSIDERATIONS.......................................................................S-55
ERISA CONSIDERATIONS..................................................................................S-55
Prohibited Transactions......................................................................S-55
USE OF PROCEEDS.......................................................................................S-57
UNDERWRITING..........................................................................................S-57
EXPERTS .............................................................................................S-57
LEGAL MATTERS.........................................................................................S-57
RATINGS .............................................................................................S-57
INDEX OF DEFINED TERMS................................................................................S-58
</TABLE>
S-4
<PAGE> 5
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND
DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU NEED TO CONSIDER IN MAKING YOUR
INVESTMENT DECISION. TO UNDERSTAND ALL OF THE TERMS OF AN OFFERING OF THE BONDS,
YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT AND THE ACCOMPANYING PROSPECTUS.
WHILE THIS SUMMARY CONTAINS AN OVERVIEW OF CERTAIN CALCULATIONS, CASH
FLOW PRIORITIES, AND OTHER INFORMATION TO AID YOUR UNDERSTANDING, YOU SHOULD
READ CAREFULLY THE FULL DESCRIPTION OF THESE CALCULATIONS, CASH FLOW PRIORITIES
AND OTHER INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS BEFORE MAKING ANY INVESTMENT DECISION.
SOME OF THE INFORMATION THAT FOLLOWS CONSISTS OF FORWARD-LOOKING
STATEMENTS RELATING TO FUTURE ECONOMIC PERFORMANCE OR PROJECTIONS AND OTHER
FINANCIAL ITEMS. FORWARD-LOOKING STATEMENTS ARE SUBJECT TO A VARIETY OF RISKS
AND UNCERTAINTIES, SUCH AS GENERAL ECONOMIC AND BUSINESS CONDITIONS AND
REGULATORY INITIATIVES AND COMPLIANCE, MANY OF WHICH ARE BEYOND THE CONTROL OF
THE PARTIES PARTICIPATING IN THIS TRANSACTION. ACCORDINGLY, WHAT ACTUALLY
HAPPENS MAY BE VERY DIFFERENT FROM THE PROJECTIONS INCLUDED HEREIN.
WHENEVER WE REFER TO A PERCENTAGE OF SOME OR ALL OF THE MORTGAGE LOANS
EVIDENCED BY THE MORTGAGE PASS-THROUGH CERTIFICATES, THAT PERCENTAGE HAS BEEN
CALCULATED ON THE BASIS OF THE TOTAL "SCHEDULED PRINCIPAL BALANCE" OF THOSE
MORTGAGE LOANS AS OF MARCH 1, 2000, UNLESS WE SPECIFY OTHERWISE. WE EXPLAIN IN
THIS PROSPECTUS SUPPLEMENT UNDER "DESCRIPTION OF THE BONDS -- PAYMENTS OF
PRINCIPAL" HOW THE SCHEDULED PRINCIPAL BALANCE OF A MORTGAGE LOAN IS DETERMINED.
WHENEVER WE REFER IN THIS SUMMARY OR IN THE RISK FACTORS SECTION OF THIS
PROSPECTUS SUPPLEMENT TO THE TOTAL PRINCIPAL BALANCE OF ANY MORTGAGE LOANS, WE
MEAN THE TOTAL OF THEIR SCHEDULED PRINCIPAL BALANCES, UNLESS WE SPECIFY
OTHERWISE.
FOR AN INDEX OF CERTAIN CAPITALIZED TERMS USED IN THIS PROSPECTUS
SUPPLEMENT, SEE "INDEX OF DEFINED TERMS" ON PAGE S-58.
OFFERED BONDS
On the closing date, the issuer will issue seven classes of bonds, five of
which are being offered by this prospectus supplement and the accompanying
prospectus. The bonds will be secured by mortgage pass-through certificates
evidencing the entire beneficial ownership interest in a pool of mortgage loans
with an aggregate principal balance of approximately $230,440,654 as of March 1,
2000.
The rights of holders of the Class M1, M2, B and X Bonds to payments will
be subordinate to the rights of the holders of bonds having a higher priority of
payment, as described in this Summary under "-- Credit Enhancement" below. We
refer to the Class M1, M2, B and X Bonds as "SUBORDINATE" bonds, and we refer to
the Class A and R Bonds as "SENIOR" bonds.
The Class X Bonds, which are not offered by this prospectus supplement, are
not entitled to monthly payments of principal and interest, but rather solely to
certain excess cash flows remaining after all payments on the other classes of
the bonds and certain other fees and expenses of the trust estate have been made
on the related payment date.
The offered bonds will have an approximate total initial principal amount
of $230,440,604. Any difference between the total principal amount of the
offered bonds on the date they are issued and the approximate total principal
amount of the bonds on the date of this prospectus supplement will not exceed
5%.
The following table shows the approximate initial principal amount, annual
interest rate and type of each class of offered bonds:
<TABLE>
<CAPTION>
CLASS
CUSIP PRINCIPAL INTEREST
CLASS NO. AMOUNT(1) RATE TYPE
- -------------------- -------------- --------- -----------
<S> <C> <C> <C> <C>
Class A 125715 KN1 $195,874,506 (2) senior
Class M1 125715 KP6 $ 13,250,338 (2) subordinate
Class M2 125715 KQ4 $ 10,945,931 (2) subordinate
Class B 125715 KR2 $ 10,369,779 (2) subordinate
Class R 125715 KS0 $ 5(2) senior
residual
</TABLE>
(1) These balances are approximate, as described in this prospectus
supplement.
(2) Interest will accrue on the Class A, M1, M2, B and R Bonds based upon
one-month LIBOR plus a specified margin, subject to limitation, as
described in this prospectus supplement under "Description of the Bonds --
Payments of Interest."
All classes of the offered bonds (other than the Class R Bonds) will be
book-entry bonds. The Class R Bonds will be physical bonds.
See "Description of the Bonds -- General" in this prospectus supplement for
a discussion of the minimum denominations and the incremental denominations of
each class of offered bonds.
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THE PARTIES
THE ORIGINATORS. The originators of the mortgage loans evidenced by the
mortgage pass-through certificates underlying the bonds are various savings
banks, other mortgage lending institutions or their correspondents.
THE SELLERS. PNC Mortgage Securities Corp., Old Kent Mortgage Company and
certain other mortgage loan originators will have sold the mortgage loans to DLJ
Mortgage Capital, Inc. prior to the closing date pursuant to the terms of
various loan sale agreements. On the closing date, DLJ Mortgage Capital, Inc.
will convey all of its interest in the mortgage loans to Capstead Capital
Corporation, a limited purpose Delaware corporation and a wholly owned
subsidiary of Capstead Mortgage Corporation, a Maryland corporation. Capstead
Capital Corporation will simultaneously convey the mortgage loans to the issuer
and the issuer will convey the mortgage loans to the trust established by the
pooling and servicing agreement in exchange for the mortgage pass-through
certificates. Each of PNC Mortgage Securities Corp., Old Kent Mortgage Company,
and DLJ Mortgage Capital, Inc. are sometimes referred to as a "SELLER" or
collectively, as the "SELLERS."
See "The Pooling and Servicing Agreement -- Assignment of Mortgage Loans"
in this prospectus supplement.
THE ISSUER. CMC Securities Corporation III, a limited purpose Delaware
corporation and a wholly owned subsidiary of Capstead Mortgage Corporation. On
the closing date, the issuer will pledge the mortgage-pass-through certificates
and certain other assets as described in this prospectus supplement to the
indenture trustee as security for the bonds pursuant to the indenture.
See "The Indenture" in this prospectus supplement.
THE CERTIFICATE TRUSTEE AND INDENTURE TRUSTEE. Bank One, National
Association, a national banking association, will act as the certificate trustee
of the mortgage pass-through certificates under the pooling and servicing
agreement and as indenture trustee of the bonds under the indenture.
See "The Pooling and Servicing Agreement -- The Certificate Trustee" in
this prospectus supplement.
THE MASTER SERVICER. PNC Mortgage Securities
Corp., as master servicer, will master service the
mortgage loans pursuant to the pooling and servicing
agreement.
See "The Master Servicer" in this prospectus supplement.
CUT-OFF DATE
March 1, 2000.
CLOSING DATE
On or about March 31, 2000.
PAYMENT DATES
Payments on the bonds will be made on the 25th day of each month,
beginning in April 2000. However, if the 25th day is not a business day,
payments will be made on the next business day after the 25th day of the month.
INTEREST PAYMENTS
Interest will accrue on each class of bonds, other than the Class P and
Class X Bonds, at the applicable annual rate described in this prospectus
supplement.
See "Description of the Bonds -- Payments of Interest" in this prospectus
supplement.
PRINCIPAL PAYMENTS
The amount of principal payable on the bonds will be determined by (1)
funds actually received on the mortgage loans that are available to make
principal payments on the bonds and (2) the amount of excess interest available
to pay principal on the bonds as described below. Funds actually received on the
mortgage loans may consist of expected monthly scheduled payments, unexpected
payments resulting from prepayments or defaults by borrowers, and advances made
by the master servicer.
The manner of allocating payments of principal among the classes of bonds
will differ, as described in this prospectus supplement, depending upon whether
a payment date occurs before the payment date in April 2003 or on or after that
date, and depending upon whether the delinquency and loss performance of the
mortgage loans is worse than certain levels set by the rating agencies.
We explain how principal is paid on the bonds under "Description of the
Bonds -- Payments of Principal" in this prospectus supplement.
PREPAYMENT PREMIUMS ON THE MORTGAGE LOANS
The prepayment premiums received by the master servicer from collections
on the mortgage loans will not be available for payments of principal or
interest due on the offered bonds.
See "Description of the Bonds" and "Description of the Mortgage Pool --
General" in this prospectus supplement.
LIMITED RECOURSE
The only source of cash available to make interest and principal payments
on the bonds will be the assets of the trust estate and, in the case of the
Class A Bonds, the financial guaranty insurance policy issued by MBIA Insurance
Corporation as described below. The trust
S-6
<PAGE> 7
estate will have no other source of cash other than collections and recoveries
of the mortgage loans through insurance or otherwise and no other entity will be
required or expected to make any payments on the bonds.
CREDIT ENHANCEMENT
The credit enhancement for the bonds includes subordination, loss
allocation and overcollateralization features to enhance the likelihood that
holders of more senior classes of bonds will receive regular payments of
interest and principal. The Class B Bonds are more likely to experience losses
than the Class M2, M1 and A Bonds. The Class M2 Bonds are more likely to
experience losses than the Class M1 and A Bonds; and the Class M1 Bonds are more
likely to experience losses than the Class A Bonds. In addition, certain
payments of principal and interest on the Class A Bonds will be insured by a
financial guaranty insurance policy to be issued by MBIA Insurance Corporation
on the closing date.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Bonds -- Credit Enhancement" in this prospectus supplement
for a more detailed description of the subordination, loss allocation and
overcollateralization features and the financial guaranty insurance policy with
respect to the Class A Bonds.
SUBORDINATION. The Class A Bonds will have a payment priority over the
other bonds. The Class M1 Bonds will have a payment priority over the Class M2
and B Bonds; and the Class M2 Bonds will have a payment priority over the Class
B Bonds.
See "Description of the Bonds -- Credit Enhancement -- Subordination" in
this prospectus supplement.
LOSS ALLOCATION. As described in this prospectus supplement, amounts
representing losses on the mortgage loans (in excess of any excess interest and
any overcollateralization) will be applied to reduce the principal amount of the
subordinate class of bonds still outstanding that has the lowest payment
priority, until the principal amount of that class of bonds has been reduced to
zero. For example, losses in excess of the overcollateralization will first be
allocated in reduction of the principal amount of the Class B Bonds until it is
reduced to zero, then to the principal amount of the Class M2 Bonds until it is
reduced to zero, and finally to the principal amount of the Class M1 Bonds until
it is reduced to zero. If a loss has been allocated to reduce the principal
amount of your subordinate bonds, it is unlikely that you will receive any
payment in respect of that reduction. If the applicable subordination is
insufficient to absorb losses, and MBIA Insurance Corporation fails to perform
its obligations under the financial guaranty insurance policy, then holders of
the Class A Bonds will incur losses and may never receive all of their principal
payments.
See "Description of the Bonds -- Credit Enhancement -- Application of
Realized Losses" in this prospectus supplement.
OVERCOLLATERALIZATION. On the closing date, the total principal amount of
the bonds is expected to equal the total principal balance of the mortgage
loans. Any interest received on the mortgage loans in excess of the amount
needed to pay interest on the bonds and certain expenses and fees of the trust
estate will be used to reduce the total principal amount of the bonds until the
mortgage loans have a total principal balance that exceeds the total outstanding
principal amount of the bonds by the amount required by the rating agencies.
This condition is referred to as "overcollateralization." We cannot, however,
assure you that sufficient interest will be generated by the mortgage loans to
create overcollateralization or to maintain any level of overcollateralization
after it has been created.
See "Risk Factors -- Potential Inadequacy of Credit Enhancement" and
"Description of the Bonds -- Credit Enhancement -- Overcollateralization" in
this prospectus supplement.
CLASS A BOND INSURANCE POLICY. In addition to the credit enhancement
provided by the subordination, loss allocation and overcollateralization
features described above, the Class A Bonds will also have the benefit of a
financial guaranty insurance policy issued by MBIA Insurance Corporation. This
insurance policy will, in general, guarantee the payment of certain principal
and interest payments to which the Class A Bonds are entitled. HOWEVER, THIS
INSURANCE POLICY WILL NOT COVER ANY PREPAYMENT INTEREST SHORTFALLS AND WILL NOT
COVER CERTAIN OTHER INTEREST SHORTFALLS WITH RESPECT TO THE CLASS A BONDS AND
WILL NOT PROVIDE CREDIT ENHANCEMENT FOR ANY CLASS OF BONDS OTHER THAN THE CLASS
A BONDS.
See "Description of the Bonds -- Credit Enhancement -- The Class A Bond
Insurance Policy and the Bond Insurer" in this prospectus supplement.
THE MORTGAGE LOANS
The mortgage loans will be secured by mortgages, deeds of trust, or other
security instruments, all of which are referred to in this prospectus supplement
as mortgages.
The mortgage loans include conventional, adjustable and fixed rate, fully
amortizing and balloon, first lien residential mortgage loans, all of which have
original terms to stated maturity of up to 30 years.
The mortgage loans were generally originated or acquired in accordance
with underwriting guidelines that are less strict than Fannie Mae and Freddie
Mac guidelines. As a result, such mortgage loans are likely to experience higher
rates of delinquency, foreclosure and bankruptcy than mortgage loans
underwritten in accordance with higher standards.
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<PAGE> 8
The mortgage loans in the trust fund will not be insured or guaranteed by
any government agency.
See "Description of the Mortgage Pool," "Underwriting Guidelines of the
Originators" and "Underwriting Guidelines of PNC" in this prospectus supplement
for a general description of the mortgage loans, the underwriting guidelines
applied in their origination and certain statistical data with respect to the
characteristics of the mortgage pool.
SERVICING OF THE MORTGAGE LOANS
PNC Mortgage Securities Corp., as master servicer, will service the
mortgage loans in accordance with the terms set forth in the pooling and
servicing agreement. The master servicer may perform any of its obligations
under the pooling and servicing agreement through one or more servicers.
Notwithstanding any servicing arrangement, the master servicer will remain
liable for its servicing duties and obligations under the pooling and servicing
agreement as if the master servicer alone were servicing the mortgage loans.
See "The Master Servicer" and "Servicing of the Mortgage Loans" in this
prospectus supplement.
OPTIONAL PURCHASE OF MORTGAGE LOANS
At its option, the Class X holder may repurchase the mortgage loans and
effect an early termination of the mortgage pass-through certificates and a
redemption of the bonds after the total principal balance of the mortgage loans
declines to less than or equal to 10% of the initial aggregate principal balance
of the mortgage loans on the closing date. In addition, the master servicer will
have the option to purchase the mortgage loans if the Class X holder does not
exercise its optional purchase right as described in this prospectus supplement.
If the mortgage loans are purchased by the Class X holder or the master
servicer pursuant to this option, the bondholders will be entitled to accrued
interest and principal equal to the outstanding principal amount of the bonds.
If neither the Class X holder nor the master servicer exercises its option
to purchase the mortgage loans as described above when it is first entitled to
do so, the interest rates of the Class A, M1, M2, B and R Bonds will be
increased as described in this prospectus supplement.
See "Description of the Bonds -- Optional Purchase of Mortgage Loans;
Redemption of the Bonds" in this prospectus supplement for a description of the
purchase price to be paid for the mortgage loans upon an optional purchase.
TAX STATUS
The indenture trustee will elect to treat all or a portion of the assets of
the trust estate as multiple REMICs for federal income tax purposes. Each of the
bonds, other than the Class R Bonds, will represent ownership of "regular
interests" in a REMIC. The Class R Bonds will be designated as the sole class of
"residual interest" in each of the REMICs. In addition, the Class A, Class M1,
Class M2 and Class B Bonds will represent a beneficial ownership interest in an
interest rate cap agreement.
Certain of the bonds may be issued with original issue discount for federal
income tax purposes.
See "Material Federal Income Tax Considerations" in this prospectus
supplement and "Certain Federal Income Tax Consequences" in the accompanying
prospectus for additional information concerning the application of federal
income tax laws to the bonds.
ERISA CONSIDERATIONS
Generally, the Class A, M1 and M2 Bonds may, but the Class B and R Bonds
may not, be purchased by employee benefit plans or individual retirement
accounts subject to the Employee Retirement Income Security Act of 1974 or
Section 4975 of the Internal Revenue Code of 1986. A fiduciary of an employee
benefit plan or an individual retirement account must determine that the
purchase of a bond is consistent with its fiduciary duties under applicable law
and does not result in a nonexempt prohibited transaction under applicable law.
See "ERISA Considerations" in this prospectus supplement and "ERISA
Matters" in the prospectus for a more complete discussion of these issues.
LEGAL INVESTMENT CONSIDERATIONS
The Class A, M1 and R 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 of at
least one nationally recognized statistical rating organization 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 Class M2 and B Bonds
will not constitute "mortgage related securities" under SMMEA.
There are other restrictions on the ability of certain types of investors
to purchase the bonds that prospective investors should consider.
See "Legal Investment Considerations" in this prospectus supplement and
"Legal Investment" in the prospectus.
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RATINGS OF THE BONDS
The bonds offered by this prospectus supplement
will initially have the following ratings from Standard
& Poor's Rating Services, a division of The McGraw
Hill Companies, Inc., Duff & Phelps Credit Rating
Co., and Moody's Investors Service, Inc.:
<TABLE>
<CAPTION>
MOODY'S
CLASS S&P RATING DCR RATING RATING
<S> <C> <C> <C>
Class A AAA AAA Aaa
Class M1 AA AA Aa2
Class M2 A A A2
Class B BBB- BBB- Baa3
Class R AAA AAA
</TABLE>
A rating is not a recommendation to buy, sell or hold securities. These
ratings may be lowered or withdrawn at any time by either of the rating
agencies.
See "Ratings" in this prospectus supplement for a further explanation of
the ratings, the limitations and restrictions on the ratings and the conclusions
that may not be drawn from a rating.
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RISK FACTORS
THE FOLLOWING INFORMATION, WHICH YOU SHOULD CAREFULLY CONSIDER,
IDENTIFIES CERTAIN SIGNIFICANT SOURCES OF RISK ASSOCIATED WITH AN INVESTMENT IN
THE BONDS. YOU SHOULD ALSO CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER
"RISK FACTORS" IN THE PROSPECTUS.
<TABLE>
<S> <C>
UNDERWRITING GUIDELINES AND
POTENTIAL DELINQUENCIES............. The mortgage loans were originated or acquired by various
banks, other mortgage lending institutions or their
correspondents generally in accordance with the underwriting
guidelines described in this prospectus supplement. In
general, these guidelines are not as strict as Fannie Mae or
Freddie Mac guidelines and are generally intended to assess
the credit risk of mortgage loans made to borrowers with
imperfect credit histories, ranging from minor delinquencies
to bankruptcy, or borrowers with relatively high ratios of
monthly mortgage payments to income or relatively high ratios
of total monthly credit payments to income. In addition, such
guidelines also evaluate the value and adequacy of the
underlying mortgaged property as collateral.
Consequently, the mortgage loans are likely to experience
rates of delinquency, foreclosure and bankruptcy that are
higher, and that may be substantially higher, than those
experienced by mortgage loans underwritten in accordance
with higher standards.
Changes in the values of mortgaged properties related to the
mortgage loans may have a greater effect on the delinquency,
foreclosure, bankruptcy and loss experience of the mortgage
loans in the trust fund than on mortgage loans originated
under stricter guidelines. We cannot assure you that the
values of the mortgaged properties have remained or will
remain at levels in effect on the dates of origination of
the related mortgage loans.
See "Description of the Mortgage Pool -- General" in this
prospectus supplement for a description of the
characteristics of the mortgage pool and "Underwriting
Guidelines of the Originators" and "Underwriting Guidelines
of PNC" for a general description of the underwriting
guidelines applied in originating the mortgage loans.
PNC MORTGAGE SECURITIES CORP.'S
MASTER SERVICING EXPERIENCE
DOES NOT INCLUDE POOLS OF LOANS
SIMILAR TO THE MORTGAGE LOANS...... PNC Mortgage Securities Corp. does not currently master
service or service subprime mortgage loans. To the extent that
the servicing of these mortgage loans requires different
procedures than PNC Mortgage Securities Corp. currently
employs for other mortgage pools, and PNC Mortgage
Securities Corp. fails to successfully implement those
different procedures in a timely manner, the bondholders may
be adversely affected by any resulting losses on the mortgage
loans.
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MORTGAGE LOAN INTEREST RATES
MAY LIMIT INTEREST RATES ON
THE BONDS........................... One-month LIBOR, the index used to calculate the interest
rates of the Class A, M1, M2, B and R Bonds, may increase or
decrease at different times and in different amounts than the
indices applicable to the adjustable rate mortgage loans
included in the trust fund.
In addition, because the interest rates on the mortgage
loans which have adjustable mortgage rates adjust at
different times and in different amounts, and because the
interest rates on the remaining mortgage loans are fixed, if
the interest rates of the Class A, M1, M2, B and R Bonds
were not capped as described in this prospectus supplement
under "Description of the Bonds -- Payments of Interest,"
there may be times when those rates would exceed the
weighted average of the interest rates on the mortgage loans
(after deduction of fees). If that happens, the caps will
have the effect of reducing the interest rates on those
bonds, at least temporarily. The difference will be paid to
you on future payment dates only if there is enough cashflow
generated from excess interest on the mortgage loans under
the priority set forth herein. See "Description of the Bonds
-- Payments of Interest" and " -- Credit Enhancement --
Overcollateralization" in this prospectus supplement. For
detailed information on the interest rates of the mortgage
loans, see "Description of the Mortgage Pool" in this
prospectus supplement.
POTENTIAL INADEQUACY OF
CREDIT ENHANCEMENT.................. The Class A Bonds are insured by a financial guaranty
insurance policy issued by MBIA Insurance Corporation.
None of the other classes of bonds are insured under such
policy.
The subordination, loss allocation and overcollateralization
features described in this prospectus supplement are
intended to enhance the likelihood that bondholders of more
senior classes will receive regular payments of interest and
principal, but such credit enhancements are limited in
nature and may be insufficient to cover all losses on the
mortgage loans.
OVERCOLLATERALIZATION................ In order to create overcollateralization, it will be necessary
that the mortgage loans generate more interest than is needed
to pay interest on the bonds and the fees and expenses of the
trust estate. We expect that the mortgage loans will generate
more interest than is needed to pay those amounts, at least
during certain periods, because the weighted average of the
interest rates on the mortgage loans is higher than the
weighted average interest rate on the bonds. We cannot
assure you, however, that enough excess interest will be
generated to reach the overcollateralization level required by
the rating agencies. The following factors will affect the
amount of excess interest that the mortgage loans will
generate:
o Prepayments. Each time a mortgage loan is prepaid,
total excess interest after the date of prepayment will
be reduced because that mortgage loan will no longer be
outstanding and generating interest. Prepayment of a
disproportionately high number of high interest rate
mortgage loans would have a greater adverse effect on
future excess interest.
</TABLE>
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o Defaults. The rate of defaults on the mortgage loans
may turn out to be higher than expected. Defaulted
mortgage loans may be liquidated, and liquidated
mortgage loans will no longer be outstanding and
generating interest.
o Level of LIBOR. If LIBOR increases, more money will be
needed to pay interest to the bondholders, so less
money will be available as excess interest.
See "Description of the Bonds -- Credit Enhancement --
Overcollateralization" in this prospectus supplement.
SUBORDINATION........................ If the applicable subordination is insufficient to absorb losses,
then bondholders will likely incur losses and may never
receive all of their principal payments. You should consider
the following:
o if you buy a Class B Bond and losses on the mortgage
loans exceed excess interest and any
overcollateralization that has been created, the
principal amount of your bond will be reduced
proportionately with the principal amounts of the other
Class B Bonds by the amount of that excess;
o if you buy a Class M2 Bond and losses on the mortgage
loans exceed excess interest and any
overcollateralization that has been created plus the
total principal amount of the Class B Bonds, the
principal amount of your bond will be reduced
proportionately with the principal amounts of the other
Class M2 Bonds by the amount of that excess;
o if you buy a Class M1 Bond and losses on the mortgage
loans exceed excess interest and any
overcollateralization that has been created plus the
total principal amount of the Class B and M2 Bonds, the
principal amount of your bond will be reduced
proportionately with the principal amounts of the other
Class M1 Bonds by the amount of that excess.
Losses on the mortgage loans will not reduce the principal
amount of the Class A Bonds, which will be insured under a
financial guaranty insurance policy issued by MBIA Insurance
Corporation. However, if losses occur on the mortgage loans
after the principal amounts of the subordinate bonds are no
longer outstanding and MBIA Insurance Corporation defaults
under the financial guaranty insurance policy, holders of
the Class A Bonds will suffer a loss.
If, after overcollateralization is created and maintained in
the required amount, the mortgage loans generate interest in
excess of the amount needed to pay interest and principal on
the bonds and fees and expenses of the trust estate, the
excess interest will be used to pay you and other
bondholders the amount of any reduction in the principal
balances of the bonds caused by application of losses. These
payments will be made in order of seniority. We cannot
assure you, however, that any excess interest will be
generated and, in any event, no interest will be paid to you
on the amount by which your principal balance was reduced
because of the application of losses.
See "Description of the Bonds -- Credit Enhancement --
Subordination" and "-- Application of Realized Losses" in
this prospectus supplement.
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BALLOON LOANS........................ Approximately 15.75% of the mortgage loans are balloon
loans. Balloon loans pose a special payment risk because the
borrower must pay a large lump sum payment of principal at
the end of the loan term. If the borrower is unable to pay the
lump sum or refinance such amount, you may suffer a loss if
the collateral for such loan is insufficient and the other forms
of credit enhancement are insufficient or unavailable to cover
the loss. See "Description of the Mortgage Pool" in this
prospectus supplement.
UNPREDICTABILITY AND EFFECT
OF PREPAYMENTS...................... The rate of prepayments on the mortgage loans will be
sensitive to prevailing interest rates. Generally, if prevailing
interest rates decline, mortgage loan prepayments may
increase due to the availability of fixed rate mortgage loans or
other adjustable rate mortgage loans at lower interest rates.
Conversely, if prevailing interest rates rise significantly, the
prepayments on the mortgage loans may decrease.
o If you purchase your bonds at a discount and principal
is repaid slower than you anticipate, then your yield
may be lower than you anticipate.
o If you purchase your bonds at a premium and principal
is repaid faster than you anticipate, then your yield
may be lower than you anticipate.
Borrowers may prepay their mortgage loans in whole or in
part at any time; however, approximately 53.30% of the
mortgage loans require the payment of a prepayment premium
in connection with any voluntary full and certain partial
prepayments made during periods ranging from one to five
years after the mortgage loan was originated. Such
prepayment premiums may discourage these borrowers from
prepaying their mortgage loans during the applicable period.
The prepayment premiums received by the master servicer from
collections on the mortgage loans will not be available for
payments of principal or interest due on the offered bonds.
Prepayments of principal may also be caused by liquidations
of or insurance payments on the mortgage loans. In addition,
the sellers may be required to purchase mortgage loans from
the trust in the event that certain breaches of
representations and warranties made by the sellers with
respect to the mortgage loans have not been cured. These
purchases will have the same effect on the holders of the
bonds as a prepayment of the mortgage loans. A prepayment of
a mortgage loan will result in a prepayment on the bonds.
See "Yield, Prepayment, and Weighted Average Life" in this
prospectus supplement for a description of factors that may
influence the rate and timing of prepayments on the mortgage
loans.
DELAY IN RECEIPT OF
LIQUIDATION PROCEEDS;
LIQUIDATION PROCEEDS
MAY BE LESS THAN
MORTGAGE LOAN BALANCE............... Substantial delays could be encountered in connection with
the liquidation of delinquent mortgage loans. Further,
reimbursement of advances made on a mortgage loan and
liquidation expenses such as legal fees, real estate taxes and
maintenance and preservation expenses may reduce the
portion of liquidation proceeds payable to you. If a mortgaged
</TABLE>
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<S> <C>
property fails to provide adequate security for the related
mortgage loan, you could incur a loss on your investment if
the credit enhancements are insufficient to cover the loss.
GEOGRAPHIC CONCENTRATION OF
MORTGAGE LOANS...................... Approximately 26.50% of the mortgage loans are secured by
property in California. Delinquencies, defaults and losses on
the mortgage loans may be higher than if fewer of the
mortgaged properties were concentrated in California because
the following conditions will have a disproportionate impact
on the mortgage loans in general:
o property in California may be more susceptible than
homes located in other parts of the country to certain
types of hazards, such as earthquakes, floods,
wildfires, mudslides and other natural disasters.
o weak economic conditions, which may or may not affect
real property values, may affect the ability of
borrowers to repay their loans on time.
o declines in the residential real estate market may
reduce the values of properties located in that state,
which would result in an increase in the loan-to-value
ratios.
For additional information regarding the geographic
distribution of the mortgage loans in the mortgage pool, see
the applicable table under "Description of the Mortgage
Pool" in this prospectus supplement.
POTENTIAL DISRUPTION OF COMPUTER
SYSTEMS............................. There is a continuing risk that the transition from the year
1999 to the year 2000 may interfere with the ability of
computer systems used by the master servicer, the servicers,
the certificate trustee, the indenture trustee, The Depository
Trust Company and other parties to process information. All
problems associated with this transition may not yet have been
identified and this risk may persist for some time. This could
disrupt collection of payments on the mortgage loans and the
calculation and payment of principal and interest, if
applicable, due on the bonds.
LIMITED ABILITY TO RESELL
BONDS............................... The underwriter is not required to assist in resales of the
bonds, although it may do so. A secondary market for any
class of bonds may not develop. If a secondary market does
develop, it might not continue or it might not be sufficiently
liquid to allow you to resell any of your bonds.
CONSEQUENCES OF OWNING
BOOK-ENTRY BONDS................... Limit on Liquidity of Bonds. Issuance of the offered bonds
(other than the Class R Bonds) in book-entry form may reduce
the liquidity of such bonds in the secondary trading market
since investors may be unwilling to purchase bonds for which
they cannot obtain physical bonds.
Limit on Ability to Transfer or Pledge. Since transactions
in the book-entry bonds can be effected only though certain
depositories, participating organizations, indirect
participants and certain banks, your ability to transfer or
pledge a book- entry bond to persons or entities that are
not affiliated with these organizations or otherwise to take
actions in respect of such bonds, may be limited due to lack
of a physical bond representing the book-entry bonds.
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Delays in Payments. You may experience some delay in the
receipt of payments on the book-entry bonds since the
payments will be forwarded by the indenture trustee to a
depository to credit the accounts of its participants which
will thereafter credit them to your account either directly
or indirectly through indirect participants, as applicable.
See "Description of the Bonds -- Book-Entry Registration" in
this prospectus supplement for more detail.
THERE ARE RISKS INHERENT IN THE
NATURE OF THE MORTGAGE LOANS........ Approximately 57.77% of the mortgage loans are of sub-
prime credit quality. In addition, certain of the mortgage loans
have been severely delinquent or have been in bankruptcy or a
forbearance period. Delinquencies and liquidation
proceedings are more likely with these mortgage loans than
with mortgage loans that do not have such histories. In the
event these mortgage loans do become delinquent or subject to
liquidation, you may face delays in receiving payment and
losses if, in the case of the Class A Bonds, MBIA Insurance
Corporation is unable to pay on the financial guaranty
insurance policy and, in the case of all the bonds, the other
credit enhancements are insufficient to cover the delays and
losses.
THERE ARE RISKS RELATING TO
ALTERNATIVES TO FORECLOSURE......... The mortgage loans may become delinquent after the closing
date. The master servicer may either foreclose on a delinquent
mortgage loan or work out an agreement with the related
mortgagor, which may involve waiving or modifying any term
of the mortgage loan. If the master servicer extends the
payment period or accepts a lesser amount than stated in the
mortgage note in satisfaction of the mortgage note, your yield
may be reduced.
</TABLE>
DESCRIPTION OF THE CERTIFICATES
The mortgage pass-through certificates securing the Bonds (the
"CERTIFICATES") will be created pursuant to a pooling and servicing agreement
(the "POOLING AND SERVICING AGREEMENT") by and among CMC Securities Corporation
III (the "ISSUER"), PNC Mortgage Securities Corp. ("PNC", the "MASTER SERVICER"
or a "SELLER"), Old Kent Mortgage Company ("OLD KENT" or a "SELLER"), DLJ
Mortgage Capital, Inc. ("DLJMCI" or a "SELLER"), and Bank One, National
Association, as certificate trustee (the "CERTIFICATE TRUSTEE"). The
Certificates will evidence the entire beneficial ownership interest in a pool of
mortgage loans (each, a "MORTGAGE LOAN" and collectively, the "MORTGAGE LOANS"
or the "MORTGAGE POOL"). On or prior to the Closing Date, DLJMCI will have
acquired the Mortgage Loans from various banks, other mortgage lending
institutions or their correspondents, including Old Kent (collectively, the
"ORIGINATORS"), and from PNC pursuant to the terms of various loan sale
agreements (each, a "LOAN SALE AGREEMENT"). On the Closing Date, DLJMCI will
assign and convey the Mortgage Loans, together with all of its rights and
benefits under the Loan Sale Agreements, to Capstead Capital Corporation ("CCC")
and CCC will, in turn, assign and convey the Mortgage Loans, together with all
of CCC's rights and benefits under the Loan Sale Agreements, to the Issuer. The
Issuer will simultaneously convey the Mortgage Loans, together with all of the
Issuer's rights and benefits under the Loan Sale Agreements, to the trust
established by the Pooling and Servicing Agreement (the "TRUST") and the Trust
will issue the Certificates in exchange therefor.
Pursuant to the terms of its servicing agreement with the Master
Servicer (each, a "SERVICING AGREEMENT"), each servicer will remit from its
Custodial Account for P&I to the Master Servicer, for deposit into the
Investment Account maintained by the Master Servicer, payments (including
prepayments) of principal received on each related Mortgage Loan, together with
interest thereon at a rate (the "REMITTANCE RATE") equal to the mortgage rate of
interest borne by such Mortgage Loan (the "MORTGAGE RATE"), less the applicable
Servicing Fee. Funds in the Investment Account will be invested by the Master
Servicer from time to time in permitted instruments maturing on or before the
next Payment Date. Funds in the Investment Account will be transferred to the
Certificate Account maintained with the Certificate Trustee and will be applied
on each Payment Date to make distributions to the Indenture Trustee, as the sole
Certificateholder. The Indenture Trustee shall deposit such funds into the
Collection
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Account and such funds will be available to make payments on the Bonds and to
provide for payment of fees of, and reimbursements to, the Master Servicer.
On the Closing Date, the Issuer will transfer and assign the Mortgage Loans
to the Certificate Trustee for the benefit of the Indenture Trustee, as sole
Certificateholder, in exchange for the Certificates, which will be issued by the
Certificate Trustee pursuant to the Pooling and Servicing Agreement. The Issuer
will simultaneously pledge the Certificates to the Indenture Trustee as
collateral for the Bonds pursuant to the terms of an Indenture by and between
the Issuer and Bank One, National Association, as indenture trustee (the
"INDENTURE TRUSTEE"), as supplemented by a series supplement by and among the
Issuer, PNC, as bond administrator (the "BOND ADMINISTRATOR"), and the Indenture
Trustee (collectively, the "INDENTURE"). 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.
Pursuant to the Pooling and Servicing Agreement, each of PNC, Old Kent and
DLJMCI (collectively, the "SELLERS') will make certain representations and
warranties with respect to the related Mortgage Loans thereunder and will be
obligated to (i) cure any breaches of such representations or warranties that
materially and adversely affect the interests of the holders of the Certificates
(the "CERTIFICATEHOLDERS"), (ii) 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 Certificateholders or as to which the
related documentation is found to contain a material, non-cured defect, or (iii)
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 will be different for each Seller but will
generally conform to the representations and warranties described herein under
"The Pooling and Servicing Agreement -- Representations and Warranties Regarding
the Mortgage Loans." The only recourse that the Certificate Trustee, on behalf
of the Indenture Trustee, as sole Certificateholder, will have with respect to
the Mortgage Loans will be against the related Seller for defective mortgage
documents and breaches of the representations and warranties regarding the
Mortgage Loans made by such Seller under the Pooling and Servicing Agreement.
The Mortgage Loans will be serviced by the Master Servicer pursuant to the
Pooling and Servicing Agreement. See "Servicing of the Mortgage Loans" and "The
Pooling and Servicing Agreement" herein.
DESCRIPTION OF THE MORTGAGE POOL
Wherever reference is made herein to a percentage of some or all of the
Mortgage Loans, such percentage is determined (unless otherwise specified) on
the basis of the aggregate Cut-off Date Balance of such Mortgage Loans.
GENERAL
The Mortgage Pool consists of approximately 1,632 conventional, adjustable
and fixed-rate, fully-amortizing and balloon, first lien residential Mortgage
Loans with original terms to maturity of not more than 30 years, having an
aggregate Cut-off Date Balance of approximately $230,440,654. Substantially all
of the Mortgage Loans will have principal and interest payable on the first day
of each month (the "DUE DATE").
The Mortgage Loans were originated or acquired by the Originators generally
in accordance with the underwriting guidelines described herein. See
"Underwriting Guidelines of the Originators" and "Underwriting Guidelines of
PNC" below. Because, in general, such underwriting guidelines do not conform to
Fannie Mae or Freddie Mac guidelines, the Mortgage Loans are likely to
experience higher rates of delinquency, foreclosure and bankruptcy than if they
had been underwritten to a higher standard.
The Mortgage Loans to be included in the Trust Fund will consist of
Mortgage Loans which bear fixed interest rates (collectively, "FIXED RATE
MORTGAGE LOANS") or interest rates that adjust in accordance with an index
(collectively, "ADJUSTABLE RATE MORTGAGE LOANS"), as described below under "--
Adjustable Rate Mortgage Loans" and "-- The Indices."
Approximately 915 (or 60.51%) of the Mortgage Loans are Fixed Rate Mortgage
Loans and approximately 717(or 39.49%) are Adjustable Rate Mortgage Loans as
described in more detail under "--Adjustable Rate Mortgage Loans" below.
Interest on both the Fixed Rate Mortgage Loans and the Adjustable Rate Mortgage
Loans accrues on the basis of a 360-day year consisting of twelve 30-day months.
All of the Mortgage Loans are secured by first mortgages or similar
security instruments, creating first liens on residential properties consisting
of one-to-four family dwelling units, individual condominium units, townhouses,
individual units in planned unit developments, cooperative apartments or
manufactured houses that have been permanently affixed to the ground.
Pursuant to its terms, each Mortgage Loan, other than a Mortgage Loan
secured by a condominium unit, is required to be covered by a standard hazard
insurance policy in an amount equal to the lesser of the unpaid principal
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amount thereof or the replacement value of the improvements on the property
securing such Mortgage Loan (the "MORTGAGED PROPERTY"). Generally, a condominium
association is responsible for maintaining hazard insurance covering the entire
building.
Approximately 48.37% of the Mortgage Loans have original Loan-to-Value
Ratios in excess of 80%. The "LOAN-TO-VALUE RATIO" of a Mortgage Loan at any
time is the ratio of the principal balance of such Mortgage Loan at the date of
determination to (a) in the case of a purchase, the lesser of the sales price of
the Mortgaged Property and its appraised value at the time of sale or (b) in the
case of a refinance or modification, the appraisal value of the Mortgaged
Property at the time of such refinance or modification.
Approximately 26.44% of the Mortgage Loans with original Loan-to-Value
Ratios in excess of 80% are not covered by an existing primary insurance policy.
None of the Mortgage Loans were more than one Scheduled Payment delinquent
as of the Cut-off Date.
All of the Adjustable Rate Mortgage Loans and approximately 73.96% of the
Fixed Rate Mortgage Loans are fully amortizing. However, approximately 26.04% of
the Fixed Rate Mortgage Loans will have original terms to maturity that are
shorter than their amortization schedules, leaving final payments ("BALLOON
PAYMENTS") due on their maturity dates that are significantly larger than other
monthly payments (such loans, "BALLOON LOANS"). The Balloon Loans are generally
expected to have original terms to maturity of 15 years. The ability of the
borrower to repay a Balloon Loan at maturity frequently will depend on such
borrower's ability to refinance such loan. Any loss on a Balloon Loan as a
result of the borrower's inability to refinance such loan will be borne by
Bondholders, to the extent not covered by the applicable credit enhancement.
However, if the borrower fails to repay a Balloon Loan at maturity, the Master
Servicer will be obligated to advance an amount equal to the assumed monthly
payment that would have been due on the Balloon Loans based upon the original
amortization schedule for those loans, unless the Master Servicer determines
that the Advance would not be recoverable. None of the servicers, the Master
Servicer, the Certificate Trustee or the Indenture Trustee will make any
Advances with respect to delinquent Balloon Payments.
Approximately 53.30% of the Mortgage Loans provide for payment by the
mortgagor of a prepayment premium (each, a "PREPAYMENT PREMIUM") in connection
with certain full or partial prepayments of principal. Generally, each such
Mortgage Loan provides for payment of a Prepayment Premium in connection with
certain voluntary, full or partial prepayments made within the period of time
specified in the related Mortgage Note, ranging from one to five years from the
date of origination of such Mortgage Loan, as described herein. The amount of
the applicable Prepayment Premium, to the extent permitted under applicable
state law, is as provided in the related Mortgage Note; generally, such amount
is equal to six months' interest on any amounts prepaid during any 12-month
period in excess of 20% of the original principal balance of the related
Mortgage Loan or a specified percentage of the amounts prepaid. Such Prepayment
Premiums will not be part of available funds applied to pay interest or
principal on the Offered Bonds.
ADJUSTABLE RATE MORTGAGE LOANS
Approximately 97.43% of the Adjustable Rate Mortgage Loans provide for
semi-annual adjustment of the related Mortgage Rate based on the Six-Month LIBOR
Index (as described below under "-- The Indices"), as specified in the related
Mortgage Note, and for corresponding adjustments to the monthly payment amount
due thereon, in each case on each adjustment date applicable thereto (each such
date, an "ADJUSTMENT DATE"); provided that the first such adjustment for
approximately 84.72% of the Adjustable Rate Mortgage Loans will occur after an
initial period of two years following origination; in the case of approximately
9.06% of the Adjustable Rate Mortgage Loans, three years after origination; and
approximately 6.22% of such Adjustable Rate Mortgage Loans have no delayed
Adjustment Date. On each Adjustment Date for each Adjustable Rate Mortgage Loan,
the Mortgage Rate thereon will be adjusted to equal the sum, rounded generally
to the next highest or nearest multiple of 1/8%, of the Index (as described
below) and a fixed percentage amount (the "GROSS MARGIN"), provided that in the
substantial majority of cases the Mortgage Rate on each such Adjustable Rate
Mortgage Loan generally will not increase or decrease by more than a fixed
percentage ranging from 1.00% to 2.00% specified in the related Mortgage Note
(the "PERIODIC CAP") on any related Adjustment Date, except in the case of the
first such Adjustment Date, and will not exceed a specified maximum Mortgage
Rate over the life of such Adjustable Rate Mortgage Loan (the "MAXIMUM RATE") or
be less than a specified minimum Mortgage Rate over the life of such Adjustable
Rate Mortgage Loan (the "MINIMUM RATE"). The Mortgage Rate generally will not
increase or decrease on the first Adjustment Date by more than a fixed
percentage specified in the related Mortgage Note (the "INITIAL CAP"); the
Initial Cap ranges from 1.00% to 5.00% annually for substantially all such
Adjustable Rate Mortgage Loans. Effective with the first monthly payment due on
each Adjustable Rate Mortgage Loan after each related Adjustment Date, the
monthly payment amount will be adjusted to an amount that will amortize fully
the outstanding principal balance of the related Adjustable Rate Mortgage Loan
over its remaining term, and pay interest at the Mortgage Rate as so adjusted.
Due to the application of the Initial Caps, Periodic Caps and Maximum Rates, the
Mortgage Rate on each such Adjustable Rate Mortgage Loan, as adjusted on any
related Adjustment
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Date, may be less than the sum of the Index and the related Gross Margin,
rounded as described herein. See "-- The Indices" herein. The Adjustable Rate
Mortgage Loans generally do not permit the related mortgagor to convert the
adjustable Mortgage Rate thereon to a fixed Mortgage Rate.
THE INDICES
The index applicable to the determination of the Mortgage Rates for
approximately 97.43% of the Adjustable Rate Mortgage Loans will be the average
of the interbank offered rates for six-month United States dollar deposits in
the London market, calculated as provided in the related Mortgage Note (the
"SIX-MONTH LIBOR INDEX") and as most recently available either (1) as of the
first business day a specified period of time prior to such Adjustment Date, (2)
as of the first business day of the month preceding the month of such Adjustment
Date or (3) the last business day of the second month preceding the month in
which such Adjustment Date occurs, as specified in the related Mortgage Note.
Approximately 2.57% of the Adjustable Rate Mortgage Loans adjust their Mortgage
Rates on the basis of the "ONE-YEAR CMT INDEX" calculated based upon yields on
actively traded issues of U.S. Treasury securities adjusted to a constant
maturity of one year. The LIBOR Index and the One-Year CMT Index are sometimes
referred to herein individually as an "INDEX" and collectively as the "INDICES."
The Mortgage Loans are expected to have the following approximate aggregate
characteristics as of the Cut-off Date. Prior to the issuance of the Bonds,
Mortgage Loans may be removed from the Trust Fund as a result of incomplete
documentation or otherwise, if the Issuer deems such removal necessary or
appropriate. In addition, a limited number of other mortgage loans may be
included in the Trust Fund prior to the issuance of the Bonds.
<TABLE>
<CAPTION>
<S> <C>
Number of Mortgage Loans 1,632
Number of Fixed Rate Mortgage Loans 915
Number of Adjustable Rate Mortgage Loans 717
Aggregate Scheduled Principal Balance $230,440,654.39
Mortgage Rates:
Weighted Average 9.9804%
Range 7.05% to 14.875%
Weighted Average Remaining
Term to Maturity (in months) 324
</TABLE>
The Scheduled Principal Balances of the Mortgage Loans range from
approximately $11,982.69 to approximately $997,565.98. The Mortgage Loans had an
average Scheduled Principal Balance of approximately $141,201.38 as of the
Cut-off Date.
The weighted average Loan-to-Value Ratio at origination of the Mortgage
Loans is approximately 80.58%, and approximately 48.37% of the Mortgage Loans
have a Loan-to-Value Ratio at origination exceeding 80%.
No more than approximately 0.54% of the Mortgage Loans are secured by
Mortgaged Properties located in any one zip code area.
The following tables set forth as of the Cut-off Date the number, aggregate
Scheduled Principal Balance and percentage of the Mortgage Loans having the
stated characteristics shown in the tables in each range. (The sum of the
amounts of the aggregate Scheduled Principal Balances and the percentages in the
following tables may not equal the totals due to rounding.)
<TABLE>
<CAPTION>
ORIGINAL LOAN-TO-VALUE RATIOS(1)
- --------------------------------------------------------------------------------
Aggregate
Number of Scheduled Percent of
Original Loan-to-Value Mortgage Principal Mortgage
Ratios (%) Loans Balance Loans
<S> <C> <C> <C>
0.00- 60.00......... 97 $ 11,665,730.62 5.06%
60.01- 65.00......... 64 10,865,646.49 4.72
65.01- 70.00......... 105 16,000,508.07 6.94
70.01- 75.00......... 196 25,957,413.53 11.26
75.01- 80.00......... 401 54,458,073.38 23.63
80.01- 85.00......... 226 30,836,333.72 13.38
85.01- 90.00......... 379 54,943,917.45 23.84
90.01- 95.00......... 122 20,266,016.72 8.79
95.01-100.00......... 42 5,447,014.41 2.36
---- --------------- ------
Totals......... 1,632 $230,440,654.39 100.00%
===== =============== ======
</TABLE>
- ---------------------
(1) The weighted average original Loan -to-Value Ratio of the Mortgage
Loans is expected to be approximately 80.58%
<TABLE>
<CAPTION>
CURRENT MORTGAGE LOAN PRINCIPAL BALANCES(1)
- --------------------------------------------------------------------------------
Current Aggregate
Mortgage Loan Number of Scheduled Percent of
Principal Mortgage Principal Mortgage
Balances ($) Loans Balance Loans
<S> <C> <C> <C>
0 - 100,000...... 786 $ 52,512,654.75 22.79%
100,001 - 200,000...... 494 67,238,340.24 29.18
200,001 - 300,000...... 229 58,492,299.17 25.38
300,001 - 400,000...... 88 30,405,096.26 13.19
400,001 - 500,000...... 14 6,433,934.33 2.79
500,001 - 600,000...... 6 3,365,043.80 1.46
600,001 - 700,000...... 4 2,519,909.15 1.09
700,001 - 800,000...... 3 2,256,618.35 0.98
800,001 - 900,000...... 4 3,325,629.33 1.44
900,001 - 1,000,000...... 4 3,891,129.01 1.69
----- --------------- ------
Totals........... 1,632 $230,440,654.39 100.00%
===== =============== ======
</TABLE>
- ---------------------
(1) As of the Cut-off Date, the average current principal balance of the
Mortgage Loans is expected to be approximately $141,201.38.
S-18
<PAGE> 19
<TABLE>
<CAPTION>
MORTGAGE RATES(1)
- --------------------------------------------------------------------------------
Aggregate
Number of Scheduled Percent of
Mortgage Principal Mortgage
Mortgage Rates (%) Loans Balance Loans
<S> <C> <C> <C>
7.000- 7.500..... 3 $ 523,928.43 0.23%
7.501- 8.000..... 11 2,393,657.13 1.04
8.001- 8.500..... 49 11,848,747.86 5.14
8.501- 9.000..... 115 23,088,679.78 10.02
9.001- 9.500..... 175 32,924,728.59 14.29
9.501-10.000..... 394 67,303,952.60 29.21
10.001-10.500..... 294 35,104,050.46 15.23
10.501-11.000..... 313 33,404,505.40 14.50
11.001-11.500..... 112 9,085,466.21 3.94
11.501-12.000..... 93 8,749,802.86 3.80
12.001-12.500..... 29 2,757,071.09 1.20
12.501-13.000..... 21 1,609,309.39 0.70
13.001-13.500..... 12 942,227.84 0.41
13.501-14.000..... 7 469,663.29 0.20
14.001-14.500..... 1 71,050.25 0.03
14.501-15.000..... 3 163,813.21 0.07
----- --------------- ------
Totals...... 1,632 $230,440,654.39 100.00%
===== =============== ======
- ---------------------
(1) As of the Cut-off Date, the weighted average Mortgage Rate of the Mortgage
Loans is expected to be approximately 9.980% per annum.
<CAPTION>
OCCUPANCY TYPES(1)
- --------------------------------------------------------------------------------
Number Aggregate
of Scheduled Percent of
Mortgage Principal Mortgage
Occupancy Types Loan Balance Loans
Primary.............. 1465 $212,086,601.54 92.04%
Investment/Non-Owner. 152 15,916,221.83 6.91
Second Home.......... 15 2,437,831.02 1.06
------ --------------- ------
Totals......... 1,632 $230,440,654.39 100.00%
====== =============== ======
- ---------------------
(1) Based on representations of the related mortgagors at the time of
origination.
<CAPTION>
ORIGINAL TERMS TO MATURITY(1)
- --------------------------------------------------------------------------------
Aggregate
Number of Scheduled Percent of
Original Term to Mortgage Principal Mortgage
Maturity (Months) Loans Balance Loans
48-60........... 1 $ 155,639.78 0.07%
108-120.......... 9 1,874,707.93 0.81
168-180........... 394 37,156,014.76 16.12
228-240........... 4 268,209.47 0.12
348-360........... 1224 190,986,082.45 82.88
----- --------------- ------
Totals...... 1,632 $230,440,654.39 100.00%
===== =============== ======
- ---------------------
(1) As of the Cut-off Date, the weighted average remaining term to maturity of
the Mortgage Loans is expected to be approximately 324 months
<CAPTION>
PURPOSE OF MORTGAGE LOANS
Aggregate
Number of Scheduled Percent of
Mortgage Principal Mortgage
Loan Purpose Loans Balance Loans
Cash-out Refinance.. 522 $ 68,971,961.69 29.93%
Purchase............ 843 128,859,904.94 55.92
Rate/Term Refinance. 267 32,608,787.76 14.15
----- --------------- ------
Totals........ 1,632 $230,440,654.39 100.00%
===== =============== ======
<CAPTION>
DOCUMENTATION PROGRAMS FOR MORTGAGE LOANS
Aggregate
Number of Scheduled Percent of
Mortgage Principal Mortgage
Type of Program Loans Balance Loans
Full Documentation....... 1079 $138,135,569.99 59.94%
Limited Documentation ... 298 50,931,113.17 22.10
No Documentation......... 255 41,373,971.23 17.95
----- --------------- ------
Totals............. 1,632 $230,440,654.39 100.00%
===== =============== ======
<CAPTION>
STATE DISTRIBUTION OF MORTGAGED PROPERTIES(1)
- --------------------------------------------------------------------------------
Number Aggregate
of Scheduled Percent of
Mortgage Principal Mortgage
State Loans Balance Loans
Alabama................ 10 $ 993,644.14 0.43%
Alaska................. 1 69,471.38 0.03
Arizona................ 104 11,148,081.29 4.84
Arkansas............... 3 266,295.23 0.12
California............. 266 61,055,665.74 26.50
Colorado............... 53 7,854,116.10 3.41
Connecticut............ 15 3,308,249.43 1.44
Delaware............... 3 433,415.77 0.19
District of Columbia... 7 540,163.63 0.23
Florida................ 140 13,971,024.09 6.06
Georgia................ 85 9,503,324.82 4.12
Hawaii................. 2 247,991.94 0.11
Idaho.................. 12 979,040.92 0.42
Illinois............... 61 7,722,764.06 3.35
Indiana................ 14 951,856.60 0.41
Iowa................... 8 792,381.06 0.34
Kansas................. 18 1,337,652.92 0.58
Kentucky............... 8 924,676.85 0.40
Louisiana.............. 4 379,712.37 0.16
Maine.................. 3 220,604.00 0.10
Maryland............... 56 8,059,902.04 3.50
Massachusetts.......... 23 3,243,627.13 1.41
Michigan............... 80 6,678,242.74 2.90
Minnesota.............. 9 1,113,915.58 0.48
Missouri............... 21 2,187,547.78 0.95
Montana................ 5 526,016.78 0.23
Nebraska............... 4 225,877.49 0.10
Nevada................. 46 7,778,553.95 3.38
New Hampshire.......... 7 611,449.38 0.27
New Jersey............. 35 7,405,749.48 3.21
New Mexico............. 20 2,154,030.31 0.93
New York............... 30 10,439,045.93 4.53
North Carolina......... 38 4,321,643.15 1.88
Ohio................... 84 6,395,866.35 2.78
Oklahoma............... 11 931,093.94 0.40
Oregon................. 25 3,466,805.42 1.50
Pennsylvania........... 68 6,621,884.89 2.87
Rhode Island........... 4 431,221.18 0.19
South Carolina......... 15 1,856,844.39 0.81
South Dakota........... 2 80,271.95 0.03
Tennessee.............. 11 818,059.74 0.35
Texas.................. 31 3,335,761.98 1.45
Utah................... 62 9,482,136.39 4.11
Virginia............... 41 7,700,293.87 3.34
Washington............. 78 11,030,938.05 4.79
West Virginia.......... 2 200,529.59 0.09
Wisconsin.............. 6 468,374.71 0.20
Wyoming................ 1 174,837.86 0.08
----- --------------- ------
Totals........... 1,632 $230,440,654.39 100.00%
===== =============== ======
</TABLE>
- ---------------------
(1) No more than approximately 0.54% of the Mortgage Loans will be secured by
Mortgaged Properties located in any one postal zip code area.
<TABLE>
<CAPTION>
TYPES OF MORTGAGED PROPERTIES(1)
- --------------------------------------------------------------------------------
Aggregate
Number of Scheduled Percent of
Mortgage Principal Mortgage
PROPERTY TYPE Loans Balance Loans
<S> <C> <C> <C>
2-4 Family............. 84 $ 12,168,462.78 5.28%
Condominium............ 69 8,963,789.21 3.89
Cooperative............ 1 53,497.26 0.02
Manufactured Housing... 54 5,232,733.54 2.27
Other.................. 10 1,951,538.63 0.85
PUD.................... 121 25,390,304.55 11.02
Single Family.......... 1293 176,680,328.42 76.67
----- --------------- ------
Totals........... 1,632 $230,440,654.39 100.00%
===== =============== ======
</TABLE>
- ---------------------
(1) Based on representations of the related Mortgagors at the time of
origination.
S-19
<PAGE> 20
<TABLE>
<CAPTION>
GROSS MARGINS(1)
- --------------------------------------------------------------------------------
Aggregate
Number of Scheduled Percent of
RANGE OF Mortgage Principal Mortgage
GROSS MARGINS Loans Balance Loans
<S> <C> <C> <C>
2.500-3.000........ 1 $ 124,999.99 0.14%
3.501-4.000........ 6 956,096.86 1.05
4.001-4.500........ 42 6,299,389.24 6.92
4.501-5.000........ 21 3,928,455.49 4.32
5.001-5.500........ 62 11,026,202.65 12.12
5.501-6.000........ 152 19,861,951.70 21.82
6.001-6.500........ 142 16,430,209.96 18.05
6.501-7.000........ 153 18,096,178.47 19.88
7.001-7.500........ 100 10,673,103.99 11.73
7.501-8.000........ 24 2,267,090.58 2.49
8.001-8.500........ 11 1,039,707.24 1.14
8.501-9.000........ 3 308,196.94 0.34
---- -------------- -------
Totals....... 717 $91,011,583.09 100.00%
=== ============= ======
</TABLE>
- ---------------------
(1) For Adjustable Rate Mortgage Loans only.
<TABLE>
<CAPTION>
TYPES OF INDICES(1)
- --------------------------------------------------------------------------------
Aggregate
Number of Scheduled Percent of
Mortgage Principal Mortgage
TYPE OF INDEX Loans Balance Loans
<S> <C> <C> <C>
Six-Month LIBOR..... 707 $88,675,948.31 97.43%
One-Year CMT........ 10 2,335,634.78 2.57
---- -------------- -------
Totals........ 717 $91,011,583.09 100.00%
==== ============== =======
</TABLE>
- ---------------------
(1) For Adjustable Rate Mortgage Loans only.
<TABLE>
<CAPTION>
MAXIMUM MORTGAGE RATES(1)
- --------------------------------------------------------------------------------
RANGE OF Number of Scheduled Percent of
MAXIMUM Mortgage Principal Mortgage
MORTGAGE RATES Loans Balance Loans
<S> <C> <C> <C>
12.000-12.500..... 1 $ 167,507.11 0.18%
13.001-13.500..... 2 503,897.05 0.55
13.501-14.000..... 5 800,916.14 0.88
14.001-14.500..... 19 5,004,691.92 5.50
14.501-15.000..... 56 9,041,933.58 9.93
15.001-15.500..... 86 10,636,715.46 11.69
15.501-16.000..... 128 16,932,555.41 18.60
16.001-16.500..... 135 17,215,281.56 18.92
16.501-17.000..... 175 19,985,413.23 21.96
17.001-17.500..... 47 4,657,521.11 5.12
17.501-18.000..... 30 3,036,212.06 3.34
18.001-18.500..... 10 1,174,590.73 1.29
18.501-19.000..... 12 819,724.01 0.90
19.001-19.500..... 4 512,350.19 0.56
19.501-20.000..... 4 428,544.39 0.47
20.001-20.500..... 3 93,729.14 0.10%
---- -------------- ------
Totals... 717 $91,011,583.09 100.00%
==== ============== ======
</TABLE>
- ---------------------
(1) For Adjustable Rate Mortgage Loans only.
<TABLE>
<CAPTION>
MINIMUM MORTGAGE RATES(1)
- --------------------------------------------------------------------------------
Aggregate
Number of Scheduled Percent of
RANGE OF MINIMUM Mortgage Principal Mortgage
MORTGAGE RATEs Loans Balance Loans
<S> <C> <C> <C>
4.000 - 4.500.... 1 $ 608,314.64 0.67%
4.501 - 5.000.... 2 230,190.06 0.25
5.001 - 5.500.... 19 4,146,466.94 4.56
5.501 - 6.000.... 22 2,649,569.34 2.91
6.001 - 6.500.... 6 1,247,915.25 1.37
6.501 - 7.000.... 5 572,415.67 0.63
7.001 - 7.500.... 3 475,331.68 0.52
7.501 - 8.000.... 5 981,705.53 1.08
8.001 - 8.500.... 16 4,163,394.46 4.57
8.501 - 9.000.... 40 6,008,303.48 6.60
9.001 - 9.500.... 86 11,342,436.01 12.46
9.501 - 10.000.... 154 19,658,387.99 21.60
10.001 - 10.500.... 136 15,673,027.91 17.22
10.501 - 11.000.... 150 16,662,503.50 18.31
11.001 - 11.500.... 31 2,997,754.27 3.29
11.501 - 12.000.... 20 1,730,271.79 1.90
12.001 - 12.500.... 5 469,202.22 0.52
12.501 - 13.000.... 8 616,399.73 0.68
13.001 - 13.500.... 4 389,534.58 0.43
13.501 - 14.000.... 4 388,458.04 0.43
---- -------------- -------
Totals.... 717 $91,011,583.09 100.00%
==== ============== =======
</TABLE>
- ---------------------
(1) For Adjustable Rate Mortgage Loans only.
<TABLE>
<CAPTION>
MONTHS TO NEXT ADJUSTMENT DATE(1)
- --------------------------------------------------------------------------------
Number of Aggregate Scheduled Percent of
NUMBER OF Mortgage Principal Mortgage
MONTHS Loans Balance Loans
<S> <C> <C> <C>
1 1 $ 187,529.41 0.21%
2 5 448,386.68 0.49
3 9 871,550.58 0.96
4 9 1,800,970.56 1.98
5 3 735,299.50 0.81
7 3 287,204.67 0.32
8 5 884,843.61 0.97
9 11 1,092,715.89 1.20
10 6 1,348,591.78 1.48
11 4 587,088.60 0.65
13 2 167,880.02 0.18
14 4 328,634.43 0.36
15 5 606,427.88 0.67
16 31 3,424,445.89 3.76
17 18 1,908,968.13 2.10
18 28 3,383,913.37 3.72
19 58 6,702,593.53 7.36
20 61 6,550,063.46 7.20
21 129 15,760,422.86 17.32
22 66 8,721,350.38 9.58
23 122 17,808,025.50 19.57
24 49 6,063,743.89 6.66
25 29 3,707,948.63 4.07
26 2 271,254.99 0.30
27 1 60,918.92 0.07
28 4 359,586.77 0.40
30 2 167,282.21 0.18
31 5 525,378.87 0.58
32 5 804,093.59 0.88
33 21 2,892,729.44 3.18
34 18 2,269,385.79 2.49
35 1 282,353.26 0.31
--- -------------- ------
Totals 717 $91,011,583.09 100.00%
=== ============== ======
</TABLE>
- ---------------------
(1) For Adjustable Rate Mortgage Loans only.
S-20
<PAGE> 21
<TABLE>
<CAPTION>
PERIODIC ADJUSTMENT CAPS(1)
- --------------------------------------------------------------------------------
Aggregate
Number of Scheduled Percent of
RANGE OF PERIODIC Mortgage Principal Mortgage
ADJUSTMENT CAPS Loans Balance Loans
<S> <C> <C> <C>
1.0000 - 1.4999......... 655 $79,909,648.16 87.80%
1.5000 - 1.9999......... 52 8,766,300.15 9.63
2.0000 - 2.4999......... 10 2,335,634.78 2.57
--- -------------- ------
Totals......... 717 $91,011,583.09 100.00%
=== ============== ======
</TABLE>
- ---------------------
(1) For Adjustable Rate Mortgage Loans only.
ADDITIONAL INFORMATION
The description herein of the Mortgage Loans and the Mortgaged Properties
is based upon the Mortgage Pool as constituted at the close of business on the
Cut-off Date, as adjusted for Scheduled Payments due on or before such date. A
Current Report on Form 8-K will be available to purchasers of the Offered Bonds
and will be filed, together with the Pooling and Servicing Agreement and the
Indenture, with the Securities and Exchange Commission after the initial
issuance of the Offered Bonds. In the event that Mortgage Loans are removed from
or added to the Mortgage Pool as set forth herein under "Description of the
Mortgage Pool," such removal or addition will be noted in the Current Report on
Form 8-K.
Pursuant to the Indenture, the Indenture Trustee will prepare a monthly
statement to Bondholders and the Bond Insurer which will set forth certain
information regarding the Bonds and the Mortgage Pool.
UNDERWRITING GUIDELINES OF THE ORIGINATORS
The Mortgage Loans have been originated or acquired by the Originators in
accordance with the underwriting guidelines established by each of them
(collectively, the "UNDERWRITING GUIDELINES"). Such Underwriting Guidelines
differ among the Originators in various particulars. The following is a general
summary of the Underwriting Guidelines believed by the Issuer to be generally
applied, with some variation, by each Originator. This does not purport to be a
complete description of the underwriting standards of any of the Originators.
The Underwriting Guidelines also evaluate the value and adequacy of the
Mortgaged Property as collateral. On a case-by-case basis, the Originators may
determine that, based upon compensating factors, a prospective mortgagor not
strictly qualifying under the applicable underwriting guidelines warrants an
underwriting exception. Compensating factors may include, but are not limited
to, a relatively low loan-to-value ratio, a relatively low debt- to-income
ratio, a good credit history, stable employment, financial reserves, and time in
residence at the applicant's current address. A significant number of the
Mortgage Loans may represent such underwriting exceptions.
The Underwriting Guidelines applicable to a substantial majority of the
Mortgage Loans are generally intended to evaluate the credit risk of mortgage
loans made to borrowers with imperfect credit histories, ranging from minor
delinquencies to bankruptcy, or borrowers with relatively high ratio of monthly
mortgage payments to income or relatively high ratios of total monthly credit
payments to income.
Under the Underwriting Guidelines, the Originators review and verify the
loan applicant's sources of income (except under the "Stated Income
Documentation" programs described below), calculate the amount of income from
all such sources indicated on the loan application or similar documentation,
review the credit history of the applicant and calculate the debt-to-income
ratio to determine the applicant's ability to repay the loan, and review the
mortgaged property for compliance with the Underwriting Guidelines. The
Underwriting Guidelines are applied in accordance with a procedure that
generally requires (i) an appraisal of the mortgaged property that conforms to
Fannie Mae and Freddie Mac standards and (ii) a review of such appraisal, which
review may be conducted by the Originator's staff appraiser or representative
and, depending upon the original principal balance, loan-to-value ratio of the
mortgage loan and the type of mortgage loan, may include a review of the
original appraisal or a drive-by review appraisal of the mortgaged property.
With respect to purchase money mortgage loans, an independent appraisal may or
may not be reviewed by the Originator. The Underwriting Guidelines generally
permit single- family loans with loan-to-value ratios at origination of up to
90% (or, with respect to certain mortgage loans, up to 95%) for the highest
credit grading category (80% under the stated income programs), depending on the
creditworthiness of the mortgagor and, in some cases, the type and use of the
property and the debt-to-income ratio. Under the Underwriting Guidelines, the
maximum loan-to-value ratio for purchase money mortgage loans may differ from
those applicable to refinancings.
The mortgage loans are originated on the basis of loan application packages
submitted through mortgage brokerage companies or at the related Originator's
retail branches or were purchased from originators approved by the Originators.
Loan application packages submitted through mortgage brokerage companies,
containing in each case relevant credit, property and underwriting information
on the loan request, are compiled by the applicable mortgage brokerage company
and submitted to the Originator for approval and funding. The mortgage brokerage
companies receive all or a portion of the loan origination fee charged to the
mortgagor at the time the loan is made.
S-21
<PAGE> 22
Each prospective borrower completes an application that includes
information with respect to the applicant's liabilities, income (except with
respect to certain "No Documentation" mortgage loans described below) and
employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The report typically contains information relating to such matters as
credit history with local and national merchants and lenders, installment debt
payments and (to the extent reported) any record of payment defaults,
bankruptcy, repossession, suits or judgments.
The mortgaged properties are generally appraised by qualified independent
appraisers. Each appraisal includes a market data analysis based on recent sales
of comparable homes in the area and, where deemed appropriate, replacement cost
analysis based on the current cost of constructing a similar home.
The Underwriting Guidelines are less stringent than the standards generally
acceptable to Fannie Mae and Freddie Mac. Mortgagors who qualify under the
Underwriting Guidelines generally have payment histories and debt ratios that
would not satisfy Fannie Mae and Freddie Mac underwriting guidelines and may
have a record of major derogatory credit items such as outstanding judgments or
prior bankruptcies. The Underwriting Guidelines establish the maximum permitted
loan-to-value ratio for each loan type based upon these and other risk factors.
Because such Underwriting Guidelines do not conform to Fannie Mae or Freddie Mac
guidelines, the mortgage loans originated or acquired by the Originators are
likely to experience higher rates of delinquency, foreclosure and bankruptcy
than if they had been underwritten to a higher standard. See "Risk Factors --
Underwriting Guidelines and Potential Delinquencies" herein.
In general, a substantial majority of the Mortgage Loans were originated
consistent with and generally conform to "Full Documentation," "Limited
Documentation," or "Stated Income Documentation" residential loan programs.
Certain of the Mortgage Loans, however, were originated under "No Documentation"
programs pursuant to which no information was obtained regarding the borrower's
income or employment and there was no verification of the borrower's assets.
Under the Full Documentation programs, applicants generally are required to
submit two written forms of verification of stable income for 12 to 24 months,
depending on the particular Originator and its guidelines. Under the Limited
Documentation programs, generally one such form of verification is required for
six or 12 months, depending upon the practices of the applicable Originator.
Under the Stated Income Documentation programs, generally an applicant may be
qualified based upon monthly income as stated on the mortgage loan application
if the applicant meets certain criteria. All the foregoing programs typically
require that with respect to each applicant, there be a telephone verification
of the applicant's employment. Verification of the source of funds (if any)
required to be deposited by the applicant into escrow in the case of a purchase
money loan is generally required under the Full Documentation program
guidelines, except, with respect to certain Originators, in the case of mortgage
loans with loan-to-value ratios below a specified level. Generally, no such
verification is required under the other programs.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These categories establish the maximum permitted loan-
to-value ratio and loan amount, given the occupancy status of the mortgage
property and the mortgagor's credit history and debt-to-income ratio. In
general, higher credit risk mortgage loans are graded in categories that permit
higher debt-to-income ratios and more (or more recent) major derogatory credit
items such as outstanding judgments or prior bankruptcies; however, the
Underwriting Guidelines establish lower maximum loan-to-value ratios and maximum
loan amounts for loans graded in such categories.
A substantial portion of the Mortgage Loans were classified by the related
Originators in relatively low (i.e., relatively higher risk) credit categories.
The incidence of delinquency, default and bankruptcy with respect to such
Mortgage Loans is expected to be greater than if such Mortgage Loans had been
classified in relatively higher categories.
UNDERWRITING GUIDELINES OF PNC
The Mortgage Loans for which PNC is Seller will be subject to the various
credit, appraisal and underwriting standards described under "Underwriting
Guidelines of PNC." PNC's credit, appraisal and underwriting standards in its
selling guide may apply to certain of the Mortgage Loans. Those credit,
appraisal and underwriting standards are continuously reviewed based on
opportunities and prevailing conditions in the residential mortgage market and
the market for PNC's own mortgage pass-through certificates. For any such
Mortgage Loans, underwriting may be performed by PNC or by designated third
parties. For the other Mortgage Loans for which PNC is Seller, the underwriting
guidelines do not conform to the standards set forth in PNC's selling guide.
Such Mortgage Loans have been purchased in negotiated transactions in accordance
with credit appraisal and underwriting standards agreed to by PNC. PNC will
generally review only a limited portion of such Mortgage Loans in any delivery
of those Mortgage Loans to PNC for conformity with the applicable credit,
appraisal and underwriting standards. Such Mortgage Loans may include Mortgage
Loans that were originated pursuant to credit, appraisal and underwriting
standards determined by a mortgage insurance company acceptable to PNC for which
it has accepted a certification from such insurance company as to insurability
in a mortgage pool as of the date of certification as evidence that such
Mortgage Loans conform to applicable underwriting standards. PNC performs only
random quality assurance reviews on such Mortgage Loans. The credit, appraisal
and underwriting standards utilized in negotiated transactions and the credit,
appraisal and underwriting standards of insurance companies issuing
certifications may vary substantially from the credit, appraisal and
underwriting standards set forth in the PNC guide. Due to the variety of
underwriting standards and review procedures that may be applicable to the
Mortgage Loans for which PNC is a Seller, this prospectus supplement does not
distinguish among the various credit,
S-22
<PAGE> 23
appraisal and underwriting standards applicable to such Mortgage Loans nor does
it describe any review for compliance with applicable credit, appraisal and
underwriting standards in all material respects, or that the quality or
performance of such Mortgage Loans underwritten pursuant to the varying
standards described above will be equivalent under all circumstances.
The underwriting standards in the PNC guide are intended to evaluate
the prospective borrower's credit standing and repayment ability, and the value
and adequacy of the proposed Mortgaged Property as collateral. In the loan
application process in such cases, prospective borrowers will be required to
provide information regarding such factors as their assets, liabilities, income,
credit history, employment history and other related items. Each such
prospective borrower will also provide an authorization to apply for a credit
report which summarizes the borrower's credit history. With respect to
establishing the prospective borrower's ability to make timely payments, PNC's
guide requires evidence regarding the borrower's employment and income, and of
the amount of deposits made to financial institutions where the borrower
maintains a demand account. In some instances, PNC purchases Mortgage Loans
under its guide under a limited documentation origination program, in which the
prospective borrower must have a good credit history and be financially capable
of making a larger cash down payment in a purchase or be willing to finance less
of the appraised value in a refinancing than would otherwise be required by the
PNC guide. Currently, the underwriting standards in the PNC guide only provide
for certain loan-to-value ratios in order for PNC to waive some of its
documentation requirements and to eliminate verification of income and
employment for the prospective borrower.
The underwriting standards in PNC's guide generally follow guidelines
acceptable to Fannie Mae and Freddie Mac. In determining the adequacy of the
property as collateral, an independent appraisal is made of each property
considered for financing pursuant to the guide. In those cases, the appraiser is
required to inspect the property and verify that it is in good condition and
that construction, if new has been completed. Such an appraisal is based on the
appraiser's judgment of values, giving appropriate weight to both the market
value of comparable homes and the cost of replacement property.
No assurance can be given as to which of the Mortgage Loans for which
PNC is Seller were originated pursuant to PNC's guide and which were acquired in
negotiated transactions, with or without an insurance certification.
THE MASTER SERVICER
The information set forth under "The Master Servicer" has been provided
by PNC and none of the Issuer, DLJMCI, Donaldson, Lufkin & Jenrette Securities
Corporation (the "UNDERWRITER" or "DLJ"), the Certificate Trustee, the Indenture
Trustee, the Bond Insurer or any of their respective affiliates makes any
representations or warranties as to the accuracy or completeness of such
information.
PNC, a Delaware corporation, is a wholly-owned indirect subsidiary of
The PNC Financial Services Group, Inc., a bank holding company. PNC was
organized for the purpose of providing mortgage lending institutions, including
affiliated institutions, with greater financing and lending flexibility, by
purchasing mortgage loans from such institutions and issuing mortgage-backed
securities. PNC's principal executive offices are located at 75 North Fairway
Drive, Vernon Hills, Illinois, 60061, and its telephone number is (847)
549-6500.
PNC'S DELINQUENCY, LOSS AND FORECLOSURE EXPERIENCE
PNC receives reports for various mortgage pools underlying its mortgage
pass-through certificates with respect to which one or more classes of
certificates were publicly offered. These reports summarize recent delinquency,
loss and foreclosure experience on mortgage loans included in those pools. To
the extent that the Mortgage Loans in the Trust Fund are generally underwritten
to different standards than the mortgage loans in PNC's pools, PNC does not
believe that the delinquency, loss and foreclosure experience data for those
pools would be representative of the results that may be experienced with
respect to the Mortgage Loans included in the Trust Fund.
SERVICING OF THE MORTGAGE LOANS
GENERAL
PNC, as Master Servicer, will service the Mortgage Loans in accordance
with the terms set forth in the Pooling and Servicing Agreement. The Master
Servicer may perform any of its obligations under the Pooling and Servicing
Agreement through one or more servicers. Notwithstanding any servicing
arrangement, the Master Servicer will remain liable for its servicing duties and
obligations under the Pooling and Servicing Agreement as if the Master Servicer
alone were servicing the Mortgage Loans.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Each servicer will be paid a monthly fee (a "SERVICING FEE") with
respect to each Mortgage Loan serviced by it calculated as 1/12 of 0.50% per
annum (the "SERVICING FEE RATE") on the outstanding principal balance of each
such Mortgage Loan. Each servicer will also be entitled to receive, to the
extent provided in the Pooling and Servicing Agreement, additional compensation,
in the form of any interest or other income earned on funds it has deposited in
a custodial account pending remittance to the Master Servicer, as well as
certain customary fees and charges paid by borrowers (other than Prepayment
Premiums).
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The Master Servicer will be paid a monthly fee (the "MASTER SERVICING
FEE") with respect to each Mortgage Loan calculated as 1/12 of 0.05% per annum
(the "MASTER SERVICING FEE RATE") on the outstanding principal balance of each
such Mortgage Loan. The Master Servicer will also be entitled to receive, to the
extent provided in the Pooling and Servicing Agreement, additional compensation
in the form of investment earnings on funds on deposit in the Investment Account
maintained by the Master Servicer prior to remittance of such funds to the
Certificate Account maintained by the Certificate Trustee.
The Master Servicing Fee is subject to reduction as described below
under "-- Compensating Interest." See "The Pooling and Servicing Agreement --
Servicing Compensation and Payment of Expenses" for information regarding
servicing-related expenses payable by the Master Servicer. The Master Servicer
will be entitled to reimbursement for certain expenses prior to payment of any
amounts to Bondholders. See "The Pooling and Servicing Agreement -- Servicing
Compensation and Payment of Expenses."
COMPENSATING INTEREST
The Master Servicer is obligated to remit to the Certificate Account on
the day before each Payment Date an amount equal to the lesser of (a) any
shortfall for the previous month in interest collections resulting from the
timing of Payoffs (as defined herein) on the Mortgage Loans made from the 15th
day of the Collection Period for such Payment Date to the last day of such month
and (b) the applicable monthly Master Servicing Fee, any reinvestment income
realized by the Master Servicer relating to Payoffs made during the Prepayment
Period (as defined herein) and interest payments on such Payoffs received during
the period of the first day through the 14th day of the month of such Payment
Date ("COMPENSATING INTEREST"). Compensating Interest will be added to the
Interest Remittance Amount. Any remaining shortfall in interest collections
resulting from Curtailments (as defined herein) and the timing of Payoffs, to
the extent not covered by excess interest collections, may result in a shortfall
in interest payments on the bonds.
See "Yield, Prepayment and Weighted Average Life -- Principal
Prepayments and Compensating Interest" herein.
ADVANCES
The Master Servicer will be obligated to make advances with respect to
delinquent payments of principal of and interest on the Mortgage Loans (other
than Balloon Payments), adjusted to the related Mortgage Rate less the
applicable Master Servicing Fee Rate (each, an "ADVANCE"), to the extent that
such Advances, in its judgment, are reasonably recoverable from future payments
and collections, insurance payments or proceeds of liquidation of a Mortgage
Loan. Subject to the foregoing, Advances will be made by the Master Servicer
through the liquidation of the related Mortgaged Property. The Master Servicer
will also be obligated to make Advances with respect to the assumed monthly
payments that would have been due on Balloon Loans based upon the original
amortization schedule for those loans, unless the Master Servicer determines
that the Advance would not be recoverable. The Master Servicer will be entitled
to recover any Advances made by it with respect to a Mortgage Loan out of late
payments thereon or out of related liquidation, condemnation and insurance
proceeds or, if such amounts are insufficient, from collections on other
Mortgage Loans. Such reimbursements may result in Realized Losses.
The purpose of making such Advances is to maintain a regular cash flow
to the Bondholders, rather than to guarantee or insure against losses. Neither
the Master Servicer nor the servicers will be obligated to make any Advances
with respect to reductions in the amount of the monthly payments on Mortgage
Loans due to reductions made by a bankruptcy court in the amount of a Scheduled
Payment owed by a borrower or a reduction of the applicable Mortgage Rate by
application of the Soldiers' and Sailors' Civil Relief Act of 1940 (the "RELIEF
ACT"). THE CLASS A BOND INSURANCE POLICY WILL NOT COVER ANY INTEREST SHORTFALLS,
INCLUDING THOSE DUE TO THE APPLICATION OF THE RELIEF ACT.
INSURANCE COVERAGE
The Master Servicer is required to obtain and thereafter maintain in
effect a bond, corporate guaranty or similar form of insurance coverage (which
may provide blanket coverage), or any combination thereof, insuring against loss
occasioned by the errors and omissions of its officers and employees.
SPECIAL SERVICING AGREEMENTS
The Pooling and Servicing Agreement permits the Master Servicer to
enter into one or more special servicing agreements with unaffiliated owners of
one or more classes of Subordinate Bonds or of a class of securities
representing interests in one or more classes of Subordinate Bonds. Pursuant to
the terms of those agreements, the owner may, with respect to delinquent
Mortgage Loans:
o instruct the Master Servicer to commence or delay foreclosure
proceedings, provided that the owner deposits a specified
amount of cash with the Master Servicer, which will be
available for payment to Bondholders if Liquidation Proceeds
are less than they otherwise may have been had the Master
Servicer acted pursuant to its normal servicing procedures;
o purchase those delinquent Mortgage Loans from the Trust
immediately before the commencement of foreclosure proceedings
at a price (the "REPURCHASE PRICE") equal to 100% of the
outstanding principal balance of each such Mortgage Loan, plus
accrued interest thereon at the applicable Mortgage Rate from
the date through which interest was last paid by the Mortgagor
to the date of repurchase; and/or
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o assume all of the servicing rights and obligations with
respect to the delinquent Mortgage Loans so long as (i) the
Master Servicer has the right to transfer the servicing rights
and obligations of the Mortgage Loans to another servicer and
(ii) the owner will service the Mortgage Loans according to
terms of the Pooling and Servicing Agreement.
REPURCHASE OF DELINQUENT MORTGAGE LOANS
Under the Pooling and Servicing Agreement, PNC may purchase from the
Trust any delinquent Mortgage Loan that has been delinquent for 90 consecutive
days or more, subject to any limitations that may be set forth in the Pooling
and Servicing Agreement. Pursuant to the Pooling and Servicing Agreement, PNC
may also direct the Certificate Trustee to sell any delinquent Mortgage Loan
that has been delinquent for 90 consecutive days or more to a third party, on
receipt by the Certificate Trustee of the purchase price of the delinquent
Mortgage Loan. The purchase price of each delinquent Mortgage Loan purchased by
PNC or a third party will equal the sum of (i) the outstanding principal balance
of the Mortgage Loan on the date of repurchase, (ii) unpaid accrued interest
thereon at the applicable Mortgage Rate (reduced by the Aggregate Expense Rate)
from the date through which interest was last paid by the Mortgagor through the
date of repurchase and (iii) in the case of a purchase by a third party, the
amount of any related unreimbursed Advances by the Master Servicer. The proceeds
of the purchase (except for the amount of any related unreimbursed Advances,
which will be paid to the Master Servicer) will be treated as a prepayment of
the Mortgage Loans for purposes of payments to Bondholders.
DESCRIPTION OF INSURANCE
PRIMARY MORTGAGE INSURANCE POLICIES
Approximately 21.93% of the Mortgage Loans with Loan-to-Value Ratios at
origination in excess of 80% are insured by a primary mortgage insurance policy
(each, a "PRIMARY INSURANCE POLICY") insuring a portion of the balance of each
such Mortgage Loan generally equal to the product of the original principal
balance of such Mortgage Loan and a fraction, the numerator of which is the
excess of the original principal balance of such Mortgage Loan over 75% of the
lesser of the appraised value or selling price of the related Mortgaged Property
and the denominator of which is the original principal balance of the related
Mortgage Loan plus accrued interest thereon and related foreclosure expenses.
The Pooling and Servicing Agreement requires the Master Servicer to use its best
reasonable efforts to keep in full force and effect such Primary Insurance
Policies until such policies are no longer required.
With respect to certain of the Mortgage Loans, the lender (rather than
the Mortgagor) acquired the Primary Insurance Policy and charged the related
borrower an interest premium (such Mortgage Loans, the "LENDER PMI MORTGAGE
LOANS" and such premium, the "LENDER PMI PREMIUM"). Except with respect to the
Lender PMI Mortgage Loans, no such Primary Insurance Policy will be required
with respect to any such Mortgage Loan (i) after the date on which the related
Loan-to-Value Ratio is 80% or less or, based on a new appraisal, the principal
balance of such Mortgage Loan represents 80% or less of the new appraised value
or (ii) if maintaining such policy is prohibited by applicable law. With respect
to the Lender PMI Mortgage Loans, the Primary Insurance Policy will be
maintained for the life of such Mortgage Loans, unless otherwise prohibited by
applicable law.
Claim payments, if any, under each Primary Insurance Policy will be
required to be remitted by the Master Servicer to the Certificate Trustee and
will be treated in the same manner as a prepayment of a Mortgage Loan.
STANDARD HAZARD INSURANCE POLICIES AND FLOOD INSURANCE POLICIES
The Pooling and Servicing Agreement requires the Master Servicer to
cause to be maintained for each related Mortgage Loan a hazard insurance policy
(each, a "STANDARD HAZARD POLICY") providing for no less than the coverage of
the standard form of fire insurance policy with extended coverage customary in
the state in which the Mortgaged Property is located. Such coverage will
generally be in an amount which is not less than the original principal balance
of such Mortgage Loan, except in cases approved by the Master Servicer in which
such amount exceeds the value of the improvements to the related Mortgaged
Property. In general, the standard form of Standard Hazard Policy covers
physical damage to or destruction of the Mortgaged Property by fire, lightning,
explosion, smoke, windstorm, hail, riot, strike and civil commotion, subject to
the conditions and exclusions specified in each policy. Although the Standard
Hazard Policies relating to the Mortgage Loans will be underwritten by different
insurers under different state laws in accordance with different applicable
state forms and therefore will not contain identical terms and conditions, the
basic terms thereof are dictated by respective state laws, and most such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mudflows), nuclear
reactions, wet or dry rot, vermin, rodents, insects, domestic animals, theft
and, in certain cases, vandalism. The foregoing list is merely indicative of
certain kinds of uninsured risks and is not intended to be all-inclusive. In
addition, whenever any part of any improvement to the related Mortgaged Property
is located in a federally designated special flood hazard area and in a
community which participates in the national flood insurance program at the time
of origination of the related Mortgage Loan, the Pooling and Servicing Agreement
requires the Master Servicer to cause a flood insurance policy (each, a "FLOOD
POLICY") to be maintained in respect thereof. The amount of coverage under such
Flood Policy shall generally be equal to the lesser of (i) the replacement cost
of the
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improvements which are part of the related Mortgaged Property, and (ii) the
maximum amount of insurance available for such Mortgaged Property under the
national flood insurance program (assuming that the area in which such Mortgaged
Property is located is participating in such program). The ability of the Master
Servicer to assure that insurance proceeds are appropriately applied may be
dependent on its being named as an additional insured under any Standard Hazard
Policy or Flood Policy, or upon the extent to which information in this regard
is furnished to the Master Servicer by the related Mortgagors. All amounts
collected by the Master Servicer under any Standard Hazard Policy or Flood
Policy (other than amounts to be applied to the restoration or repair of the
related Mortgaged Property) will be deposited in the Certificate Account.
Since the amount of insurance to be maintained on the Mortgaged
Properties may decline over time as the principal balances owing on the related
Mortgage Loans decrease, and since residential properties have generally
appreciated in value over time, in the event of partial loss, insurance proceeds
under any Special Hazard Policy or Flood Policy may be insufficient to restore
fully the damaged property.
TITLE INSURANCE POLICIES
The Pooling and Servicing Agreement requires that a policy of title
insurance ("TITLE INSURANCE POLICY") be in effect on each of the Mortgaged
Properties and that such Title Insurance Policy contain no coverage exceptions,
except those permitted pursuant to the guidelines heretofore established by
Fannie Mae.
DESCRIPTION OF THE BONDS
GENERAL
The CMC Securities Corporation III Collateralized Mortgage Obligations,
Series 2000-1 will consist of the following Classes: Class A, Class M1, Class
M2, Class B, Class P, Class X and Class R (together, the "BONDS").
The Class A and Class R Bonds are referred to herein as the "SENIOR
BONDS," and the Class M1, Class M2 and Class B Bonds are collectively referred
to herein as the "OFFERED SUBORDINATE BONDS." Only the Class A, Class M1, Class
M2, Class B and Class R Bonds (collectively, the "OFFERED BONDS") are offered
hereby. The Class M1, Class M2, Class B and Class X Bonds are collectively
referred to herein as the "SUBORDINATE BONDS."
Each of the Class P, Class X and Class R Bonds will be issued as a
single certificate in fully registered, definitive form.
The Bonds will be secured by a series of mortgage pass-through
certificates (the "CERTIFICATES") which evidence the entire beneficial ownership
interests in a trust fund (the "TRUST FUND") , the assets of which consist
primarily of:
o conventional, adjustable and fixed rate, fully amortizing and
balloon, first lien residential mortgage loans (the "MORTGAGE
LOANS"),
o such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in the Investment Account
maintained by the Master Servicer,
o such assets as from time to time are identified as deposited in
respect of the Mortgage Loans in a certificate account maintained
by the Certificate Trustee (the "CERTIFICATE ACCOUNT"),
o property acquired by foreclosure of such Mortgage Loans or deed
in lieu of foreclosure, and
o certain insurance policies covering the mortgage loans and all
proceeds thereof.
The Bonds will be issued pursuant to the Indenture and will be secured
by the assets of the trust estate (the "TRUST ESTATE") which will consist
primarily of:
o the Certificates,
o such assets as from time to time are identified as deposited in
respect of the Certificates in a collection account maintained by
the Indenture Trustee (the "COLLECTION ACCOUNT"),
o the Class A Bond Insurance Policy, and
o such assets as from time to time are deposited into the Basis
Risk Reserve Fund (as defined herein).
Each Class of Offered Bonds will be issued in the respective
approximate initial aggregate principal amount (a "CLASS PRINCIPAL AMOUNT") set
forth on page S-5. The Class X Bonds will be issued without principal or
notional amounts or interest rates, and will be entitled only to such amounts as
are described herein. The aggregate initial Class Principal Amount of each Class
of Offered Bonds may be increased or decreased by up to five percent to the
extent that the Cut-off Date Balance (as defined herein) is increased or
decreased by the addition or withdrawal of Mortgage Loans from the Mortgage Pool
as described under "Description of the Mortgage Pool" herein.
Payments on the Bonds will be made on the 25th day of each month or, if
such 25th day is not a Business Day, on the next succeeding Business Day,
commencing in April 2000 (each a "PAYMENT DATE"), to Bondholders of record on
the applicable Record Date. The "RECORD DATE" for the Bonds and each Payment
Date will be the close of business on the Business Day immediately preceding
such Payment Date. A "BUSINESS DAY" is generally
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any day other than a Saturday or Sunday or a day on which the Bond Insurer or
banks in New York or Illinois are closed.
Payments on the Offered Bonds will be made to each registered holder
entitled thereto, either (1) by check mailed to the address of such Bondholder
as it appears on the books of the Indenture Trustee (as defined herein), or (2)
at the request, submitted to the Indenture Trustee in writing at least five
Business Days prior to the related Record Date, any holder of an Offered Bond
having an initial class principal balance of not less than $2,500,000, by wire
transfer (at the expense of such holder) in immediately available funds;
provided, that the final payment in respect of any Bond will be made only upon
presentation and surrender of such Bond at the Corporate Trust Office of the
Indenture Trustee. See "The Indenture" herein.
The Offered Bonds, other than the Class R Bonds (the "BOOK-ENTRY
BONDS"), will be issued, maintained and transferred on the book-entry records of
The Depository Trust Company ("DTC") and its participants (each, a
"PARTICIPANT"). The Book-Entry Bonds will be issued in minimum denominations in
principal amount of $25,000 and integral multiples of $1 in excess thereof.
Each Class of Book-Entry Bonds will be represented by one or more bonds
registered in the name of the nominee of DTC. The Issuer has been informed by
DTC that DTC's nominee will be Cede & Co. No person acquiring an interest in a
Book-Entry Bond (each, a "BENEFICIAL OWNER") will be entitled to receive a bond
representing such person's interest (a "DEFINITIVE BOND"), 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 its 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 &
Co., as the registered holder of the Book-Entry Bonds, for payment to Beneficial
Owners by DTC in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION
General. Beneficial Owners of Book Entry Bonds that are not
participants or indirect participants 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 & Co., as nominee of DTC. Beneficial Owners
will not be recognized by the Indenture Trustee or the Master Servicer 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.
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 Originators, DLJMCI, the Master Servicer, the
Underwriter, the Certificate Trustee, the Indenture Trustee, the Bond Insurer 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 & Co., 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, (ii) the Issuer, in its sole discretion but with the
consent of the Indenture Trustee, elects to terminate the book entry system by
notice to DTC and the Indenture Trustee, or (iii) 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
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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 a 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.
ISSUANCE OF THE BOOK-ENTRY BONDS IN BOOK ENTRY FORM RATHER THAN AS
PHYSICAL BONDS 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 TO 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.
For additional information regarding DTC and the Book-Entry Bonds, see
"Description of the Bonds -- Book Entry Registration" in the Prospectus.
PAYMENTS OF INTEREST
The amount of interest payable on each Payment Date in respect of each
Class of Offered Bonds will equal the sum of (1) Current Interest (as defined
herein) for such Class on such date and (2) any Carryforward Interest (as
defined herein) for such Class and date. Interest will accrue on each Class of
Offered Bonds on the basis of a 360- day year and the actual number of days
elapsed in each Accrual Period.
o The "INTEREST RATE" for each Class of Bonds will be the
applicable annual rate described below:
o Class A Bonds: the lesser of (i) LIBOR plus 0.35% (the "A
SPREAD") and (ii) the Net Funds Cap (as defined below).
o Class M1 Bonds: the lesser of (i) LIBOR plus 0.70% (the "M1
SPREAD") and (ii) the Net Funds Cap.
o Class M2 Bonds: the lesser of (i) LIBOR plus 1.00% (the "M2
SPREAD") and (ii) the Net Funds Cap.
o Class B Bonds: the lesser of (i) LIBOR plus 2.50% (the "B
SPREAD") and (ii) the Net Funds Cap.
o Class R Bonds: the lesser of (i) LIBOR plus 0.35% (the "R
SPREAD") and (ii) the Net Funds Cap.
However, if neither the Class X Bondholder nor the Master Servicer
exercises its option to purchase the Mortgage Loans when it is first entitled to
do so, as described under "-- Optional Purchase of Mortgage Loans; Redemption of
the Bonds" herein, then with respect to such Payment Date and each succeeding
Payment Date, the A Spread will be increased to 0.70%, the M1 Spread will be
increased to 1.20%, the M2 Spread will be increased to 1.50%, the B Spread will
be increased to 3.00%, and the R Spread will be increased to 0.70%.
o The "NET FUNDS CAP" with respect to each Payment Date will be the
annual rate equal to (a) a fraction, expressed as a percentage,
the numerator of which is the product of (1) the Optimal Interest
Remittance Amount (as defined below) for such date and (2) 12,
and the denominator of which is the Aggregate Loan Balance (as
defined under "-- Payments of Principal") for the immediately
preceding Payment Date, multiplied by (b) a fraction, the
numerator of which is 30 and the denominator of which is the
actual number of days in the immediately preceding calendar
month.
o The "OPTIMAL INTEREST REMITTANCE AMOUNT" with respect to each
Payment Date will be equal to the excess of (i) the product of
(1) (x) the weighted average of the Net Mortgage Rates (as
defined below) of the Mortgage Loans as of the first day of the
related Collection Period divided by (y) 12 and (2) the Aggregate
Loan Balance for the immediately preceding Payment Date, over
(ii) any expenses that reduce the Interest Remittance Amount that
did not arise as a result of a default or delinquency of the
Mortgage Loans.
o Each of the A Spread, the M1 Spread, the M2 Spread and the B
Spread is referred to herein as the "SPREAD" applicable to the
related Class. The "NET MORTGAGE RATE" for any Mortgage Loan at
any time equals the Mortgage Rate thereof minus the Bond
Insurer's Premium Rate, the Lender PMI Premium Rate, the Trustee
Fee Rate and the related Aggregate Expense Rate.
o The "BOND INSURER'S PREMIUM RATE" will be a per annum rate set
forth in the Indenture. As of the Cut-off Date, the "LENDER PMI
PREMIUM RATE" was a per annum rate equal to approximately
0.0353%. The "TRUSTEE FEE RATE" will be a per annum rate set
forth in the Indenture. The
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"TRUSTEE FEE" for any Payment Date will be equal to the product
of (i) 1/12th of the Trustee Fee Rate and (ii) the aggregate
Class Principal Amount of the Bonds as of the related
Determination Date.
o The "AGGREGATE EXPENSE RATE" for any Mortgage Loan equals the sum
of the Master Servicing Fee Rate and the related Servicing Fee
Rate (each as defined herein).
The "CLASS PRINCIPAL AMOUNT" of any Class of Offered Bonds with respect
to any date of determination will equal the principal amount of such Class on
the Closing Date as reduced by all amounts previously paid on such Class in
respect of principal and in the case of any Class of Subordinate Bonds, as
reduced by any Applied Loss Amount (as defined at "--Credit Enhancement --
Application of Realized Losses") previously allocated thereto.
With respect to each Payment Date, the "ACCRUAL PERIOD" applicable to
each Class of Bonds will be the period beginning on the immediately preceding
Payment Date (or on the Closing Date, in the case of the first Accrual Period)
and ending on the day immediately preceding the related Payment Date.
With respect to each Payment Date, to the extent that (a) the amount
payable if clause (i) of the definition of Interest Rate applicable to any Class
of the Offered Bonds exceeds (b) the applicable Net Funds Cap (such excess, a
"BASIS RISK SHORTFALL"), such Class, will be entitled to the amount of such
Basis Risk Shortfall or Unpaid Basis Risk Shortfall (as defined below) with
interest thereon at the applicable Interest Rate before the Class X Bond is
entitled to any payments. Such Class will be entitled to receive the amount of
such Basis Risk Shortfall from Monthly Excess Cashflow (as defined herein)
treated as paid from and to the extent of funds on deposit in a reserve fund
(the "BASIS RISK RESERVE FUND"). The source of funds on deposit in the Basis
Risk Reserve Fund will be limited to an initial deposit of $1,000 and amounts
that would otherwise be paid on the Class X Bond. Notwithstanding the foregoing,
the amount of Basis Risk Shortfall for any Class in respect of any Payment Date
may not exceed the excess of (x) the amount payable at the applicable Maximum
Interest Rate over (y) the amount payable at the applicable Net Funds Cap. THE
CLASS A BOND INSURANCE POLICY WILL NOT COVER ANY BASIS RISK SHORTFALLS.
o The "UNPAID BASIS RISK SHORTFALL" for any Class of Bonds on any
Payment Date will equal the aggregate of all Basis Risk
Shortfalls for such Class for all previous Payment Dates,
together with interest thereon at the applicable Interest Rate,
less all payments made with respect to such Class in respect of
such Basis Risk Shortfalls on or prior to such Payment Date.
o The "MAXIMUM INTEREST RATE" for any Class of Bonds and any
Payment Date will be an annual rate equal to the weighted average
of the Maximum Rates (as defined herein) of the Adjustable Rate
Mortgage Loans and the Mortgage Rates of the Fixed Rate Mortgage
Loans less the sum of the weighted average Aggregate Expense
Rate, the Bond Insurer's Premium Rate, the Lender PMI Premium
Rate and the Trustee Fee Rate.
o "CURRENT INTEREST" with respect to any Class of Offered Bonds
will equal, with respect to any Payment Date, the aggregate
amount of interest accrued at the applicable Interest Rate during
the related Accrual Period on the Class Principal Amount of such
Class.
o "CARRYFORWARD INTEREST" with respect to each Class of Bonds will
equal, with respect to any Payment Date, the sum of (1) the
amount, if any, by which (x) the sum of (A) Current Interest for
such Class for the immediately preceding Payment Date and (B) any
unpaid Carryforward Interest from previous Payment Dates exceeds
(y) the amount paid in respect of interest on such Class on such
immediately preceding Payment Date, and (2) interest on such
amount for the related Accrual Period at the applicable Interest
Rate.
o The "INTEREST REMITTANCE AMOUNT" with respect to any Payment Date
will equal (a) the sum of (1) all interest collected (other than
Payaheads (as defined herein)) or advanced in respect of
Scheduled Payments (as defined herein) on the Mortgage Loans
during the related Collection Period (as defined herein) and the
interest portion of Payaheads previously received and intended
for application in the related Collection Period, less (x) any
Prepayment Premiums received by the Master Servicer during such
Collection Period, (y) the Servicing Fee and Master Servicing Fee
with respect to such Mortgage Loans and (z) unreimbursed Advances
(as defined at "Servicing of the Mortgage Loans-- Advances") and
other amounts due to the Master Servicer, any servicer, the
Certificate Trustee or the Indenture Trustee with respect to such
Mortgage Loans, to the extent allocable to interest, (2) all
Compensating Interest (as defined herein) paid by the Master
Servicer with respect to the Mortgage Loans with respect to the
related Prepayment Period (as defined herein), (3) the portion of
any Substitution Amount (as defined herein) paid with respect to
such Mortgage Loans during the related Prepayment Period
allocable to interest, and (4) all Net Liquidation Proceeds and
any other recoveries (net of unreimbursed Advances, servicing
advances and expenses, to the extent allocable to interest, and
unpaid Servicing Fees) collected with respect to the Mortgage
Loans during the related Prepayment Period, to the extent
allocable to interest, as reduced by (b) any other amounts
reimbursable to the Certificate Trustee or the Indenture Trustee.
The Master Servicer will be entitled to any interest or other
income earned on funds on deposit in the Investment Account and
the Certificate Trustee will be entitled to any interest or other
income earned on funds on deposit in the Certificate Account
pending remittance of such funds to the
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Collection Account and payment of such funds to the Bondholders.
See "The Pooling and Servicing Agreement -- Servicing
Compensation and Payment of Expenses."
o A "PAYAHEAD" is generally any Scheduled Payment intended by the
related borrower to be applied in a Collection Period subsequent
to the Collection Period in which such payment was received.
o 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 Mortgage Rates) on Mortgage
Loans resulting from (a) Payoffs received during the related
Prepayment Period, (b) Curtailments 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 Relief Act. The Class A Bond Insurance Policy
will not cover any Interest Shortfalls.
o "NET INTEREST SHORTFALLS" for any Payment Date are Interest
Shortfalls net of Compensating Interest, in each case, in respect
of such Payment Date.
o The "SUBSTITUTION AMOUNT" will be generally equal to the amount,
if any, by which the Scheduled Principal Balance of a Mortgage
Loan required to be removed from the Trust Fund due to a breach
of representation or warranty or defective documentation exceeds
the principal balance of the related substitute Mortgage Loan,
plus unpaid interest accrued thereon.
On each Payment Date, the Interest Remittance Amount for such date
will be paid in the following order of priority:
(1) to the Bond Insurer, any premium due with respect to the Class A
Bond Insurance Policy for such Payment Date;
(2) to the Certificate Trustee and the Indenture Trustee, the Trustee
Fee for such Payment Date;
(3) to the Senior Bonds, Current Interest for each such Class and
such Payment Date and any Carryforward Interest for each such
Class and such Payment Date;
(4) to the Bond Insurer, any reimbursement amounts owing to the Bond
Insurer;
(5) to the Class M1 Bonds, Current Interest for such Class and such
Payment Date;
(6) to the Class M2 Bonds, Current Interest for such Class and such
Payment Date;
(7) to the Class B Bonds, Current Interest for such Class and such
Payment Date; and
(8) for application as part of Monthly Excess Cashflow for such
Payment Date, as described under "-- Credit Enhancement --
Overcollateralization" below, any such Interest Remittance Amount
remaining after application pursuant to clauses (1) through (7)
above (such amount, "MONTHLY EXCESS INTEREST") for such Payment
Date.
DETERMINATION OF LIBOR
On the second London Banking Day (as defined below) immediately
preceding the first day of each Accrual Period other than the first Accrual
Period (each, a "LIBOR DETERMINATION DATE"), the Bond Administrator will
determine the arithmetic mean of the LIBOR quotations for one-month Eurodollar
deposits ("LIBOR") for the succeeding Accrual Period on the basis of the offered
LIBOR quotations provided to the Bond Administrator as of 11:00 a.m. (London
time) on such LIBOR Determination Date. As used herein with respect to a LIBOR
Determination Date, "LONDON BANKING DAY" means any day on which commercial banks
and foreign exchange markets settle payments in London and New York City;
"Reference Banks" means four leading banks engaged in transactions in Eurodollar
deposits in the international Eurocurrency market (1) with an established place
of business in London, (2) whose quotations appear on the Bloomberg Screen
LIUS01M Index Page on the LIBOR Determination Date in question, and (3) which
have been designated as such by the Bond Administrator and are able and willing
to provide such quotations to the Bond Administrator on each LIBOR Determination
Date; and "BLOOMBERG SCREEN LIUS01M INDEX PAGE" means the display designated as
page "LIUS01M" on the Bloomberg Financial Markets Commodities News (or such
other pages as may replace such page on that service for the purpose of
displaying LIBOR quotations of major banks). If any Reference Bank is removed
from the Bloomberg Screen LIUS01M Index Page or in any other way fails to meet
the qualifications of a Reference Bank, the Bond Administrator may, in its sole
discretion, designate an alternative Reference Bank.
On each LIBOR Determination Date, LIBOR for the next succeeding Accrual
Period will be established by the Bond Administrator as follows:
(1) If on any LIBOR Determination Date two or more of the Reference
Banks provide offered LIBOR quotations on the Bloomberg Screen LIUS01M Index
Page, LIBOR for the next applicable Accrual Period will be the arithmetic mean
of such offered quotations (rounding such arithmetic mean if necessary to the
nearest five decimal places).
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(2) If on any LIBOR Determination Date only one or none of the
Reference Banks provides such offered quotations, LIBOR for the next applicable
Accrual Period will be the higher of (x) LIBOR as determined on the previous
LIBOR Determination Date and (y) the Reserve Interest Rate. The "RESERVE
INTEREST RATE" will be the annual rate that the Bond Administrator determines to
be either (A) the arithmetic mean (rounding such arithmetic mean if necessary to
the nearest five decimal places) of the one-month Eurodollar lending rate that
New York City banks selected by the Bond Administrator are quoting, on the
relevant LIBOR Determination Date, to the principal London offices of at least
two leading banks in the London interbank market or (B) in the event that the
Bond Administrator can determine no such arithmetic mean, the lowest one-month
Eurodollar lending rate that the New York City banks selected by the Bond
Administrator are quoting on such LIBOR Determination Date to leading European
banks.
(3) If on any LIBOR Determination Date the Bond Administrator is
required but is unable to determine the Reserve Interest Rate in the manner
provided in paragraph (2) above, LIBOR for the next applicable Accrual Period
will be LIBOR as determined on the previous LIBOR Determination Date.
Notwithstanding the foregoing, LIBOR for the next succeeding Accrual
Period shall not be based on LIBOR for the previous Accrual Period for two
consecutive LIBOR Determination Dates. If, under the priorities described above,
LIBOR for the next succeeding Accrual Period would be based on LIBOR for the
previous LIBOR Determination Date for the second consecutive LIBOR Determination
Date, the Bond Administrator shall select an alternative index (over which the
Bond Administrator has no control) used for determining Eurodollar lending rates
that is calculated and published (or otherwise made available) by an independent
third party.
The establishment of LIBOR by the Bond Administrator and the Bond
Administrator's subsequent calculation of the rate of interest applicable to the
Bonds for the relevant Accrual Period, in the absence of manifest error, will be
final and binding.
PAYMENTS OF PRINCIPAL
Payments of principal on the Class A and Class R Bonds will be made
primarily from the Principal Payment Amount, to the extent of available funds,
as described below. Payments of principal on the Class M1, Class M2 and Class B
Bonds will be made from the Principal Payment Amount after payments of principal
have been made on the Senior Bonds and any reimbursement due to the Bond
Insurer.
o The "PRINCIPAL PAYMENT AMOUNT" for any Payment Date will be
equal to the Principal Remittance Amount for such date minus
the Overcollateralization Release Amount, if any, for such
date.
o The "PRINCIPAL REMITTANCE AMOUNT" for any Payment Date will be
equal to the sum of (1) all principal collected (other than
Payaheads) or advanced in respect of Scheduled Payments on the
Mortgage Loans during the related Collection Period (less
unreimbursed Advances, servicing advances and other amounts
due to the Master Servicer, the servicers, the Certificate
Trustee or the Indenture Trustee with respect to the Mortgage
Loans, to the extent allocable to principal) and the principal
portion of Payaheads previously received and intended for
application in the related Collection Period, (2) all
Principal Prepayments received during the related Prepayment
Period, (3) the outstanding principal balance of each Mortgage
Loan that was repurchased by a Seller during the related
Prepayment Period, (4) the portion of any Substitution Amount
paid with respect to any replaced Mortgage Loans during the
related Prepayment Period allocable to principal, and (5) all
Net Liquidation Proceeds (as defined herein) and any other
recoveries (net of unreimbursed Advances, servicing advances
and other expenses, to the extent allocable to principal)
collected with respect to the Mortgage Loans during the
related Prepayment Period, to the extent allocable to
principal.
o The "COLLECTION PERIOD" with respect to each Payment Date is
the calendar month immediately preceding such Payment Date.
o "PRINCIPAL PREPAYMENTS" include prepayments in full on a
Mortgage Loan ("PAYOFFS") and partial prepayments on a
Mortgage Loan ("CURTAILMENTS").
o With respect to each Payment Date and each Payoff, the related
"PREPAYMENT PERIOD" will commence on the 15th day of the month
preceding the month in which the related Payment Date occurs
(or, in the case of the first Payment Date, beginning on the
Cut-off Date) and will end on the 14th day of the month in
which the Payment Date occurs. With respect to each Payment
Date and each Curtailment, the related "PREPAYMENT PERIOD"
will be the month preceding the month in which the related
Payment Date occurs.
The Principal Payment Amount will be paid on each Payment Date as
follows:
I. On each Payment Date (a) prior to the Stepdown Date or (b)
with respect to which a Trigger Event has occurred, the
Principal Payment Amount will be paid in the following order
of priority:
(i) sequentially, to the Class R and Class A Bonds, in that
order, until the Class Principal Amount of each such
Class has been reduced to zero;
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(ii) to the Bond Insurer, any reimbursement amounts due and owing
thereto;
(iii) to the Class M1 Bonds, until the Class Principal Amount of
such Class has been reduced to zero;
(iv) to the Class M2 Bonds, until the Class Principal Amount
of such Class has been reduced to zero;
(v) to the Class B Bonds, until the Class Principal Amount of
such Class has been reduced to zero; and
(vi) for application as part of Monthly Excess Cashflow for such
Payment Date, as described under "-- Credit Enhancement --
Overcollateralization" below, any such Principal Payment
Amount remaining after application pursuant to clauses (i)
through (v) above.
II. On each Payment Date (a) on or after the Stepdown Date and (b) with
respect to which a Trigger Event has not occurred, the Principal Payment Amount
for such date will be paid in the following order of priority:
(i) so long as the Class M1, Class M2, or Class B Bonds are
outstanding, to the Class A Bonds, an amount equal to the
lesser of (x) the Principal Payment Amount for such Payment
Date and (y) the Senior Principal Payment Amount for such
Payment Date, until the Class Principal Amount of such Class
has been reduced to zero;
(ii) to the Bond Insurer, any reimbursement amounts due and owing
thereto;
(iii) to the Class M1 Bonds, an amount equal to the lesser of (x)
the excess of (a) the Principal Payment Amount for such
Payment Date over (b) the amount paid to the Senior Bonds on
such Payment Date pursuant to clause (i) above, and (y) the
M1 Principal Payment Amount for such Payment Date, until the
Class Principal Amount of such Class has been reduced to
zero;
(iv) to the Class M2 Bonds, an amount equal to the lesser of (x)
the excess of (a) the Principal Payment Amount for such
Payment Date over (b) the amount paid to the Senior Bonds
and the Class M1 Bonds on such Payment Date pursuant to
clauses (i) and (iii) above, respectively, and (y) the M2
Principal Payment Amount for such Payment Date, until the
Class Principal Amount of such Class has been reduced to
zero;
(v) to the Class B Bonds, an amount equal to the lesser of (x)
the excess of (a) the Principal Payment Amount for such
Payment Date over (b) the amount paid to the Senior Bonds,
the Class M1 Bonds and the Class M2 Bonds on such Payment
Date pursuant to clauses (i), (iii) and (iv) above,
respectively, and (y) the B Principal Payment Amount for
such Payment Date, until the Class Principal Amount of such
Class has been reduced to zero;
(vi) after the Class Principal Amounts of all other outstanding
Bonds have been reduced to zero, to the Class P Bond, the
Class Principal Amount of such Class; and
(vii) for application as part of Monthly Excess Cashflow for such
Payment Date, as described under "-- Credit Enhancement --
Overcollateralization" below, any such Principal Payment
Amount remaining after application pursuant to clauses (i)
through (vi) above.
Notwithstanding the foregoing, on any Payment Date on which the Class
Principal Amount of each Class of Bonds having a higher priority of payment has
been reduced to zero, any remaining Principal Payment Amount will be paid to the
remaining Bonds, in the order of priority set forth above, until the Class
Principal Amount of each such Class has been reduced to zero.
o A "TRIGGER EVENT" has occurred with respect to any Payment Date
if the Rolling Three Month Delinquency Rate as of the last day of
the related Collection Period equals or exceeds 45% of the Senior
Enhancement Percentage for such Payment Date.
As provided in the Pooling and Servicing Agreement, the "ROLLING THREE
MONTH DELINQUENCY RATE" with respect to any Payment Date will be, generally, the
fraction, expressed as a percentage, equal to the average of the Delinquency
Rates for each of the three (or one and two, in the case of the first and second
Payment Dates) immediately preceding months.
The "DELINQUENCY RATE" for any month will be, generally, the fraction,
expressed as a percentage, the numerator of which is the aggregate outstanding
principal balance of all Mortgage Loans 60 or more days delinquent (including
all foreclosures and REO Properties) as of the close of business on the last day
of such month, and the denominator of which is the Aggregate Loan Balance as of
the close of business on the last day of such month.
o The "STEPDOWN DATE" is the later to occur of (x) the Payment Date
in April 2003 and (y) the first Payment Date on which the Senior
Enhancement Percentage (calculated for this purpose after
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giving effect to payments or other recoveries in respect of the
Mortgage Loans during the related Collection Period but before
giving effect to payments on any Bonds on such Payment Date) is
greater than or equal to approximately 36.40%.
o The "SENIOR PRINCIPAL PAYMENT AMOUNT" for any Payment Date on or
after the Stepdown Date and as long as a Trigger Event has not
occurred with respect to such Payment Date, will be the amount,
if any, by which (x) the Class Principal Amount of the Senior
Bonds immediately prior to such Payment Date exceeds (y) the
lesser of (A) the product of (i) approximately 63.60% and (ii)
the Aggregate Loan Balance for such Payment Date and (B) the
amount, if any, by which (i) the Aggregate Loan Balance for such
Payment Date exceeds (ii) 0.50% of the Cut-off Date Balance.
o The "M1 PRINCIPAL PAYMENT AMOUNT" for any Payment Date on or
after the Stepdown Date and as long as a Trigger Event has not
occurred with respect to such Payment Date, will be the amount,
if any, by which (x) the sum of (i) the aggregate Class Principal
Amount of the Senior Bonds after giving effect to payments on
such Payment Date and (ii) the Class Principal Amount of the
Class M1 Bonds immediately prior to such Payment Date exceeds (y)
the lesser of (A) the product of (i) approximately 75.10% and
(ii) the Aggregate Loan Balance for such Payment Date and (B) the
amount, if any, by which (i) the Aggregate Loan Balance for such
Payment Date exceeds (ii) 0.50% of the Cut-off Date Balance.
o The "M2 PRINCIPAL PAYMENT AMOUNT" for any Payment Date on or
after the Stepdown Date and as long as a Trigger Event has not
occurred with respect to such Payment Date, will be the amount,
if any, by which (x) the sum of (i) the aggregate Class Principal
Amount of the Senior Bonds and the Class Principal Amount of the
Class M1 Bonds, in each case, after giving effect to payments on
such Payment Date and (ii) the Class Principal Amount of the
Class M2 Bonds immediately prior to such Payment Date exceeds (y)
the lesser of (A) the product of (i) approximately 84.60% and
(ii) the Aggregate Loan Balance for such Payment Date and (B) the
amount, if any, by which (i) the Aggregate Loan Balance for such
Payment Date exceeds (ii) 0.50% of the Cut-off Date Balance.
o The "B PRINCIPAL PAYMENT AMOUNT" for any Payment Date on or after
the Stepdown Date and as long as a Trigger Event has not occurred
with respect to such Payment Date, will be the amount, if any, by
which (x) the sum of (i) the aggregate Class Principal Amount of
the Senior Bonds and the aggregate Class Principal Amounts of the
Class M1 and Class M2 Bonds, in each case, after giving effect to
payments on such Payment Date and (ii) the Class Principal Amount
of the Class B Bonds immediately prior to such Payment Date
exceeds (y) the lesser of (A) the product of (i) approximately
93.60% and (ii) the Aggregate Loan Balance for such Payment Date
and (B) the amount, if any, by which (i) the Aggregate Loan
Balance for such Payment Date exceeds (ii) 0.50% of the Cut-off
Date Balance.
o The "OVERCOLLATERALIZATION AMOUNT" with respect to any Payment
Date will be equal to the amount, if any, by which (x) the
Aggregate Loan Balance for such Payment Date exceeds (y) the
aggregate Class Principal Amount of the Offered Bonds after
giving effect to payments on such Payment Date.
o The "OVERCOLLATERALIZATION DEFICIENCY" with respect to any
Payment Date will be equal to the amount, if any, by which (x)
the Targeted Overcollateralization Amount for such Payment Date
exceeds (y) the Overcollateralization Amount for such Payment
Date, calculated for this purpose after giving effect to the
reduction on such Payment Date of the aggregate Class Principal
Amount of the Bonds resulting from the payment of the Principal
Payment Amount on such Payment Date, but prior to allocation of
any Applied Loss Amount on such Payment Date.
o The "OVERCOLLATERALIZATION RELEASE AMOUNT" with respect to any
Payment Date will be equal to the lesser of (x) the Principal
Remittance Amount for such Payment Date and (y) the amount, if
any, by which (1) the Overcollateralization Amount for such date,
calculated for this purpose on the basis of the assumption that
100% of the aggregate of the Principal Remittance Amounts for
such date is applied on such date in reduction of the aggregate
of the Bond Principal Amounts of the Bonds, exceeds (2) the
Targeted Overcollateralization Amount for such date.
o The "SENIOR ENHANCEMENT PERCENTAGE" with respect to any Payment
Date will be the fraction, expressed as a percentage, the
numerator of which is the sum of the aggregate Class Principal
Amount of the Offered Subordinate Bonds and the
Overcollateralization Amount (which, for purposes of this
definition only, shall not be less than zero), in each case after
giving effect to payments on such Payment Date (assuming no
Trigger Event has occurred), and the denominator of which is the
Aggregate Loan Balance for such Payment Date.
o The "TARGETED OVERCOLLATERALIZATION AMOUNT" with respect to any
Payment Date prior to the Step Down Date, 3.20% of the Cut-off
Date Balance; with respect to any Payment Date on or after the
Step Down Date and with respect to which a Trigger Event has not
occurred, the greater of (a) 6.40% of the Aggregate Loan Balance,
or (b) 0.50% of the Cut-off Date Balance; with respect to any
Payment Date on or after the Step Down Date with respect to which
a Trigger Event has occurred or is continuing, the Targeted
Overcollateralization Amount with respect to the Payment Date
immediately preceding such Payment Date.
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o The "SCHEDULED PRINCIPAL BALANCE" of any Mortgage Loan as of any
date of determination will be generally equal to its outstanding
principal balance as of the Cut-off Date, after giving effect to
Scheduled Payments due on or before such date, whether or not
received, reduced by (i) the principal portion of all Scheduled
Payments due on or before the Due Date in the Collection Period
immediately preceding such date of determination, whether or not
received, and (ii) all amounts allocable to unscheduled principal
payments received on or before the last day of the Collection
Period immediately preceding such date of determination.
o A "SCHEDULED PAYMENT" is the monthly scheduled payment of
interest and principal, as determined in accordance with the
provisions of the related Mortgage Note.
o The "AGGREGATE LOAN BALANCE" as of any date of determination will
be equal to the aggregate of the Scheduled Principal Balances of
the Mortgage Loans as of such date.
o The "CUT-OFF DATE BALANCE" means the aggregate of the Scheduled
Principal Balances of the Mortgage Loans as of the Cut-off Date.
o "NET LIQUIDATION PROCEEDS" means all amounts, net of (1)
unreimbursed, reasonable out-of- pocket expenses and (2)
unreimbursed Advances, received and retained in connection with
the liquidation of defaulted Mortgage Loans, through insurance or
condemnation proceeds, by foreclosure or otherwise, together with
any net proceeds received on a monthly basis with respect to any
properties acquired on behalf of the Bondholders by foreclosure
or deed in lieu of foreclosure.
ACCELERATION OF THE BONDS UPON AN INDENTURE EVENT OF DEFAULT
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 Indenture Event of Default, the Bond Insurer may
exercise the remedies of the holders of the Class A Bonds pursuant to the terms
of the Indenture so long as no event of default under the Class A Bond Insurance
Policy has occurred or is continuing; provided however, that no accelerated
payments will be due under the Class A Bond Insurance Policy unless such
acceleration is at the sole option of the Bond Insurer; provided, further
however, that after the Class Principal Amount of the Senior Bonds has been
reduced to zero, holders representing 66 2/3% of the Class Principal Amounts of
the Class of Subordinate Bonds then outstanding with the highest payment
priority may exercise such remedies. Such Class 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 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 Principal Amounts of
the Bonds (technically, an "acceleration"). On each Payment Date on and after
such acceleration of the Bonds, and following the reduction to zero of the Class
Principal Amount 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 Applied Loss Amounts 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 Class Principal Amount of such Classes.
CREDIT ENHANCEMENT
Credit enhancement for the Offered Bonds consists of the subordination
of the Subordinate Bonds, the priority of application of Realized Losses (as
defined herein) and overcollateralization, in each case as described herein.
SUBORDINATION. The rights of holders of the Subordinate Bonds to
receive payments with respect to the Mortgage Loans will be subordinated, to the
extent described herein, to such rights of holders of each Class of Offered
Bonds having a higher priority of payment, as described under "-- Payments of
Interest" and "-- Payments of Principal." This subordination is intended to
enhance the likelihood of regular receipt by holders of Offered Bonds having a
higher priority of payment of the full amount of interest and principal
distributable thereon, and to afford such Bondholders limited protection against
Realized Losses incurred with respect to the Mortgage Loans.
The limited protection afforded to holders of Class A, Class M1 and
Class M2 Bonds by means of the subordination of Subordinate Bonds having a lower
priority of payment will be accomplished by the preferential right of holders of
Offered Bonds to receive, prior to any payment in respect of interest or
principal, respectively, being made on any Payment Date in respect of Bonds
having a lower priority of payment, the amounts of interest due them and
principal available for payment, respectively, on such Payment Date.
APPLICATION OF REALIZED LOSSES. If a Mortgage Loan becomes a Liquidated
Mortgage Loan during the Collection Period for any Payment Date, the related Net
Liquidation Proceeds, to the extent allocable to principal, may be less than the
outstanding principal balance of such Mortgage Loan. The amount of such
insufficiency is a "REALIZED LOSS." Realized Losses on Mortgage Loans will have
the effect of reducing amounts payable in respect of, first, the Class X Bond
(both through the application of Monthly Excess Interest to fund such deficiency
and
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through a reduction in the Overcollateralization Amount for the related Payment
Date); second, the Class B Bonds; third, the Class M2 Bonds; and fourth, the
Class M1 Bonds, before reducing amounts payable in respect of the Senior Bonds.
A "LIQUIDATED MORTGAGE LOAN" is, in general, a defaulted Mortgage Loan as to
which the Master Servicer has determined that all amounts that it expects to
recover in respect of such Mortgage Loan have been recovered (exclusive of any
possibility of a deficiency judgment).
To the extent that Realized Losses occur, such Realized Losses will
reduce the Aggregate Loan Balance, and thus may reduce the Overcollateralization
Amount. As described herein, the Overcollateralization Amount is created,
increased and maintained by application of Monthly Excess Cashflow to make
payments of principal on the Offered Bonds.
If on any Payment Date, after giving effect to all Realized Losses
incurred with respect to Mortgage Loans during the Collection Period for such
Payment Date and payments of principal on such Payment Date, the aggregate Class
Principal Amount of the Bonds exceeds the Aggregate Loan Balance for such
Payment Date (such excess, an "APPLIED LOSS AMOUNT"), the Class Principal
Amounts of the Offered Subordinate Bonds then outstanding with the lowest
priority of payment will be reduced by application of the Applied Loss Amount.
Applied Loss Amounts will be allocated in reduction of the Class Principal
Amount of first, the Class B Bonds, until the Class Principal Amount thereof has
been reduced to zero; second, the Class M2 Bonds, until the Class Principal
Amount thereof has been reduced to zero; and third, the Class M1 Bonds, until
the Class Principal Amount thereof has been reduced to zero. The Class Principal
Amounts of the Class A Bonds will not be reduced by allocation of Applied Loss
Amounts.
Holders of Offered Subordinate Bonds will not receive any payments in
respect of Applied Loss Amounts, except to the extent of available Monthly
Excess Cashflow as described below.
OVERCOLLATERALIZATION. The weighted average Net Mortgage Rates of the
Mortgage Loans is generally expected to be higher than the weighted average of
the interest rates of the Bonds, thus generating certain excess interest
collections. To the extent described above, Monthly Excess Interest will be
applied on any Payment Date in reduction of the aggregate Class Principal Amount
of the Bonds. Such application of interest collections as payments of principal
will cause the aggregate Class Principal Amount of the Bonds to amortize more
rapidly than the Aggregate Loan Balance, thus creating and maintaining
overcollateralization. However, Realized Losses will reduce
overcollateralization, and could result in an Overcollateralization Deficiency.
As described herein, on and after the applicable Stepdown Date, to the
extent that a Trigger Event has not occurred and the Overcollateralization
Amount exceeds the Targeted Overcollateralization Amount, a portion of the
Principal Remittance Amount will not be applied in reduction of the aggregate
Class Principal Amount of the Bonds, but will instead, be applied as described
below.
The sum of Monthly Excess Interest for any Payment Date and the
Overcollateralization Release Amount for such date will be the "MONTHLY EXCESS
CASHFLOW" for such date, which will, on each Payment Date (except as noted in
(1) below), be paid in the following order of priority:
(1) until the aggregate Class Principal Amount of all of the Offered
Bonds equals the Aggregate Loan Balance for such Payment Date
minus the Targeted Overcollateralization Amount for such date, on
each Payment Date (a) prior to the Stepdown Date or (b) with
respect to which a Trigger Event has occurred, to the extent of
Monthly Excess Interest for such Payment Date, to the Offered
Bonds, in the following order of priority:
(a) sequentially, to the Class R and Class A Bonds, in that
order, until the Class Principal Amount of each such Class
has been reduced to zero;
(b) to the Bond Insurer, any reimbursement amounts due and owing
thereto;
(c) to the Class M1 Bonds, until the Class Principal Amount of
such Class has been reduced to zero;
(d) to the Class M2 Bonds, until the Class Principal Amount of
such Class has been reduced to zero; and
(e) to the Class B Bonds, until the Class Principal Amount of
such Class has been reduced to zero;
(2) to the Class A Bonds, any applicable Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Payment Date;
(3) to the Class M1 Bonds, any applicable Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Payment Date;
(4) to the Class M2 Bonds, any applicable Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Payment Date;
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<PAGE> 36
(5) to the Class B Bonds, any applicable Basis Risk Shortfall and
Unpaid Basis Risk Shortfall for such Class and such Payment Date;
(6) to the Class M1 Bonds, any Carryforward Interest for such Class
and such Payment Date;
(7) to the Class M1 Bonds, any Deferred Amount (as defined below) for
such Class and such Payment Date;
(8) to the Class M2 Bonds, any Carryforward Interest for such Class
and such Payment Date;
(9) to the Class M2 Bonds, any Deferred Amount for such Class and
such Payment Date;
(10) to the Class B Bonds, any Carryforward Interest for such Class
and such Payment Date;
(11) to the Class B Bonds, any Deferred Amount for such Class and such
Payment Date;
(12) to the Basis Risk Reserve Fund, any amounts required under the
Indenture to be deposited therein;
(13) to the Class X Bond, the amount distributable thereon under the
Indenture; and
(14) to the Class R Bond, any remaining amount.
With respect to each Payment Date, the "DEFERRED AMOUNT" for each
Subordinate Bond will be equal to the amount by which (x) the aggregate of
Applied Loss Amounts previously applied in reduction of the Class Principal
Amount thereof exceeds (y) the aggregate of amounts previously paid in
reimbursement thereof.
THE CLASS A BOND INSURANCE POLICY WILL NOT COVER ANY BASIS RISK
SHORTFALLS.
THE CLASS A BOND INSURANCE POLICY AND THE BOND INSURER. The following
information has been supplied by MBIA Insurance Corporation (the "BOND INSURER")
for inclusion herein. The Bond Insurer does not accept any responsibility for
the accuracy or completeness of this prospectus supplement or any information or
disclosure contained herein, or omitted herefrom, other than with respect to the
accuracy of the information regarding the Class A Bond Insurance Policy and the
Bond Insurer set forth under the heading "Description of the Bonds -- Credit
Enhancement -- The Class A Bond Insurance Policy and the Bond Insurer."
Additionally, the Bond Insurer makes no representation regarding the Offered
Bonds or the advisability of investing in the Offered Bonds.
The Bond Insurer, in consideration of the payment of a premium and
subject to the terms of the financial guaranty insurance policy (the "CLASS A
BOND INSURANCE POLICY") with respect to the Class A Bonds (the "INSURED BONDS"),
thereby unconditionally and irrevocably guarantees to any Class A Bondholder
that an amount equal to each full and complete Insured Payment will be received
from the Bond Insurer by the Indenture Trustee, or its successors, as trustee
for the Class A Bondholders on behalf of the Class A Bondholders, for payment by
the Indenture Trustee to each Class A Bondholder of that Class A Bondholder's
proportionate share of the Insured Payment.
The Bond Insurer's obligations under the Class A Bond Insurance Policy,
with respect to a particular Insured Payment, will be discharged to the extent
funds equal to the applicable Insured Payment are received by the Indenture
Trustee, whether or not those funds are properly applied by the Indenture
Trustee. Insured Payments will be made only at the time set forth in the Class A
Bond Insurance Policy and no accelerated Insured Payments will be made
regardless of any acceleration of the Insured Bonds, unless such acceleration is
at the sole option of the Bond Insurer. THE CLASS A BOND INSURANCE POLICY DOES
NOT PROVIDE CREDIT ENHANCEMENT FOR ANY CLASS OF BONDS OTHER THAN THE CLASS A
BONDS.
Notwithstanding the foregoing paragraph, the Class A Bond Insurance
Policy does not cover shortfalls, if any, attributable to the liability of the
Trust, the REMICs, the Certificate Trustee or the Indenture Trustee for
withholding taxes, if any (including interest and penalties in respect of any
liability for withholding taxes).
The Bond Insurer will pay any Insured Payment that is a Preference
Amount on the business day following receipt on a business day by the Bond
Insurer's fiscal agent of the following:
o a certified copy of the order requiring the return of a
preference payment;
o an opinion of counsel satisfactory to the Bond Insurer that the
order is final and not subject to appeal;
o an assignment in such form that is reasonably required by the
Bond Insurer, irrevocably assigning to the Bond Insurer all
rights and claims of the Class A Bondholder relating to or
arising under the Insured Bonds against the debtor which made the
preference payment or otherwise with respect to the preference
payment; and
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<PAGE> 37
o appropriate instruments to effect the appointment of the Bond
Insurer as agent for the Class A Bondholder in any legal
proceeding related to the preference payment, which instruments
are in a form satisfactory to the Bond Insurer;
provided, that if these documents are received after 12:00 p.m., New York time,
on that business day, they will be deemed to be received on the following
business day. Payments by the Bond Insurer will be disbursed to the receiver or
trustee in bankruptcy named in the final order of the court exercising
jurisdiction on behalf of the Class A Bondholder and not to any Class A
Bondholder directly unless the Class A Bondholder has returned principal or
interest paid on the Insured Bonds to the receiver or trustee in bankruptcy, in
which case that payment will be disbursed to the Class A Bondholder.
The Bond Insurer will pay any other amount payable under the Class A
Bond Insurance Policy no later than 12:00 p.m., New York time, on the later of
the Payment Date on which the related Deficiency Amount is due or the second
business day following receipt in New York, New York on a business day by State
Street Bank and Trust Company, N.A., as fiscal agent for the Bond Insurer or any
successor fiscal agent appointed by the Bond Insurer, of a notice from the
Indenture Trustee specifying the Insured Payment which is due and owing on the
applicable Payment Date, provided that if the notice is received after 12:00
p.m., New York time, on that business day, it will be deemed to be received on
the following business day. If any notice received by the Bond Insurer's fiscal
agent is not in proper form or is otherwise insufficient for the purpose of
making claim under the Class A Bond Insurance Policy, it will be deemed not to
have been received by the Bond Insurer's fiscal agent for purposes of this
paragraph, and the Bond Insurer or the fiscal agent, as the case may be, will
promptly so advise the Indenture Trustee and the Indenture Trustee may submit an
amended notice.
Insured Payments due under the Class A Bond Insurance Policy, unless
otherwise stated therein will be disbursed by the Bond Insurer's fiscal agent to
the Indenture Trustee, on behalf of the Class A Bondholders, by wire transfer of
immediately available funds in the amount of the Insured Payment less, in
respect of Insured Payments related to Preference Amounts, any amount held by
the Indenture Trustee for the payment of such Insured Payment and legally
available therefor.
The fiscal agent is the agent of the Bond Insurer only and the fiscal
agent will in no event be liable to the Class A Bondholders for any acts of the
fiscal agent or any failure of the Bond Insurer to deposit or cause to be
deposited sufficient funds to make payments due under the Class A Bond Insurance
Policy.
Subject to the terms of the Indenture, the Bond Insurer shall be
subrogated to the rights of each Class A Bondholder to receive payments under
the Class A Bonds to the extent of any payments by the Bond Insurer under the
Class A Bond Insurance Policy.
As used in the Class A Bond Insurance Policy, the following terms shall
have the following meanings:
"DEFICIENCY AMOUNT" means, with respect to any Payment Date, the sum of
(i) the amount, if any, by which the amount available to be paid as interest to
the Class A Bonds, pursuant to the priority of payment set forth in the
Indenture, is less than (A) the Current Interest plus any Carryforward Interest
allocable to the Class A Bonds, minus (B) any Interest Shortfalls, and (ii) to
the extent unpaid on the Final Scheduled Payment Date, after payment of all
other amounts due to the Class A Bonds, any remaining Class Principal Amount of
the Class A Bonds.
"INSURED PAYMENT" means (i) as of any Payment Date, any Deficiency
Amount and (ii) any Preference Amount.
"PREFERENCE AMOUNT" means any amount previously paid to a Class A
Bondholder on the Insured Bonds that is recoverable and sought to be recovered
as a voidable preference by a trustee in bankruptcy pursuant to the United
States Bankruptcy Code (11 U.S.C.), as amended from time to time, in accordance
with a final nonappealable order of a court having competent jurisdiction.
Capitalized terms used in the Class A Bond Insurance Policy and not
otherwise defined in the Class A Bond Insurance Policy shall have the respective
meanings set forth in the Indenture as of the date of execution of the Class A
Bond Insurance Policy, without giving effect to any subsequent amendments to or
modifications of the Indenture unless such amendment or modification has been
approved in writing by the Bond Insurer.
The Class A Bond Insurance Policy is not cancelable for any reason. The
premium on the Class A Bond Insurance Policy is not refundable for any reason
including payment, or provision being made for payment, prior to maturity of the
Insured Bonds.
The Class A Bond Insurance Policy is being issued under and pursuant
to, and will be construed under, the laws of the State of New York, without
giving effect to the conflict of laws principles thereof.
The insurance provided by the Class A Bond Insurance Policy is not
covered by the Property/Casualty Insurance Security Fund specified in Article 76
of the New York Insurance Law.
A form of the Class A Bond Insurance Policy is attached to this
prospectus supplement as Exhibit A.
THE BOND INSURER. The Bond Insurer is the principal operating
subsidiary of MBIA Inc., a New York Stock Exchange listed company. MBIA Inc. is
not obligated to pay the debts of or claims against the Bond Insurer. The Bond
Insurer is domiciled in the State of New York and licensed to do business in and
is subject to regulation
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under the laws of all 50 states, the District of Columbia, the Commonwealth of
Puerto Rico, the Commonwealth of the Northern Mariana Islands, the Virgin
Islands of the United States and the Territory of Guam. The Bond Insurer has two
European branches, one in the Republic of France and the other in the Kingdom of
Spain. New York has laws prescribing minimum capital requirements, limiting
classes and concentrations of investments and requiring the approval of policy
rates and forms. State laws also regulate the amount of both the aggregate and
individual risks that may be insured, the payment of dividends by the Bond
Insurer, changes in control and transactions among affiliates. Additionally, the
Bond Insurer is required to maintain contingency reserves on its liabilities in
specified amounts and for specified periods of time.
BOND INSURER FINANCIAL INFORMATION. The consolidated financial
statements of the Bond Insurer, a wholly owned subsidiary of MBIA Inc., and its
subsidiaries as of December 31, 1999 and December 31, 1998 and for each of the
three years in the period ended December 31, 1999, prepared in accordance with
generally accepted accounting principles, included in the Annual Report on Form
10-K of MBIA Inc. for the year ended December 31, 1999, are hereby incorporated
by reference into this prospectus supplement and shall be deemed to be a part
hereof. Any statement contained in a document incorporated by reference herein
shall be modified or superseded for purposes of this prospectus supplement to
the extent that a statement contained herein or in any other subsequently filed
document which also is incorporated by reference herein modifies or supersedes
such statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus
supplement.
All financial statements of the Bond Insurer and its subsidiaries
included in documents filed by MBIA Inc. pursuant to Section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act of 1934, as amended, subsequent to the date
of this prospectus supplement and prior to the termination of the offering of
the Offered Bonds shall be deemed to be incorporated by reference into this
prospectus supplement and to be a part hereof from the respective dates of
filing those documents.
The tables below present selected financial information of the Bond
Insurer determined in accordance with statutory accounting practices prescribed
or permitted by insurance regulatory authorities and generally accepted
accounting principles:
<TABLE>
<CAPTION>
STATUTORY ACCOUNTING PRACTICES
------------------------------------------------
December 31, 1998 December 31, 1999
----------------- -----------------
(Audited) (Unaudited)
(in millions)
<S> <C> <C>
Admitted Assets................................. $6,521 $7,045
Liabilities..................................... 4,231 4,632
Capital and Surplus............................. 2,290 2,413
<CAPTION>
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
------------------------------------------------
December 31, 1998 December 31, 1999
----------------- -----------------
(Audited) (Audited)
(in millions)
<S> <C> <C>
Assets.......................................... $7,518 $7,446
Liabilities..................................... 3,241 3,218
Shareholder's Equity............................ 4,277 4,228
</TABLE>
WHERE YOU CAN OBTAIN ADDITIONAL INFORMATION ABOUT THE BOND INSURER.
Copies of the financial statements of the Bond Insurer incorporated by reference
herein and copies of the Bond Insurer's 1999 year-end audited financial
statements prepared in accordance with statutory accounting practices are
available, without charge, from the Bond Insurer. The address of the Bond
Insurer is 113 King Street, Armonk, New York 10504. The telephone number of the
Bond Insurer is (914) 273-4545.
FINANCIAL STRENGTH RATINGS OF THE BOND INSURER.
Moody's rates the financial strength of the Bond Insurer "Aaa."
S&P rates the financial strength of the Bond Insurer "AAA."
Fitch IBCA, Inc. rates the financial strength of the Bond Insurer
"AAA."
Each rating of the Bond Insurer should be evaluated independently. The
ratings reflect each respective rating agency's current assessment of the
creditworthiness of the Bond Insurer and its ability to pay claims on its
policies of insurance. Any further explanation as to the significance of the
above ratings may be obtained only from the applicable rating agency.
The above ratings are not recommendations to buy, sell or hold the
Insured Bonds, and the ratings may be subject to revision or withdrawal at any
time by the rating agencies. Any downward revision or withdrawal of any of
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the above ratings may have an adverse effect on the market price of the Insured
Bonds. The Bond Insurer does not guaranty the market price of the Insured Bonds
nor does it guaranty that the ratings on the Insured Bonds will not be revised
or withdrawn.
FINAL SCHEDULED PAYMENT DATE
The Final Scheduled Payment Date for the Offered Bonds has been
determined to be April 25, 2030, based on the month of scheduled maturity of the
latest maturing Mortgage Loan. As to each Class, the actual final Payment Date
may be earlier or later, and could be substantially earlier, than such Class's
Final Scheduled Payment Date.
OPTIONAL PURCHASE OF MORTGAGE LOANS; REDEMPTION OF THE BONDS
On any Payment Date on or after which the Aggregate Loan Balance is
less than or equal to 10% of the Cut-off Date Balance (such date the "INITIAL
PURCHASE DATE"), the Class X Bondholder will (subject to the terms of the
Pooling and Servicing Agreement) have the option to purchase the Mortgage Loans,
any REO Property and any other related property remaining in the Trust Fund for
a price equal to the greater of (A) sum of (i) 100% of the aggregate outstanding
principal balance of the Mortgage Loans plus accrued interest thereon at the
applicable Mortgage Rate to the date of purchase, (ii) the fair market value of
all other property of the Trust Fund, and (iii) any unreimbursed Monthly P&I
Advances, and Master Servicing Fees, Servicing Fees, and other amounts payable
to the servicers, the Master Servicer, the Bond Insurer, the Certificate Trustee
and the Indenture Trustee, and (B) the aggregate Class Principal Amount of each
Class of the then outstanding Bonds plus accrued interest thereon to the date of
purchase ( the "PURCHASE PRICE"). If the Class X Holder has not exercised such
option by the third Payment Date following the related Initial Purchase Date,
the Master Servicer will have the option to purchase the Mortgage Loans and
property for the Purchase Price. If either such option is exercised, each of the
Trust Fund, the Certificates and the Trust Estate will be terminated and the
Bonds will be redeemed (such event, an "OPTIONAL REDEMPTION"). Any remaining
assets in the Trust Estate after such an Optional Redemption will be released to
the purchasing party.
If neither the Class X Bondholder nor the Master Servicer exercises its
option as described above when it is first entitled to do so, the Spread of the
Bonds will be increased as described under "-- Payments of Interest" herein.
VOTING RIGHTS
At all times 98% of all voting rights will be allocated among the
holders of the Offered Bonds as provided below. The portion of such voting
rights allocated to a Class of Offered Bonds shall be based on the fraction,
expressed as a percentage, the numerator of which is the aggregate Class
Principal Amount of such Class then outstanding and the denominator of which is
the Class Principal Amount of all Classes then outstanding. At all times during
the term of the Bonds, the holders of the Class P Bonds shall be allocated 1% of
the voting rights and the holders of the Class X Bonds shall be allocated 1% of
the voting rights. The voting rights allocated to any class of Bonds shall be
allocated among all holders of each such class in proportion to the holder's
bond balance or percentage interest in that Class.
SUBROGATION OF THE BOND INSURER
The Bond Insurer shall be subrogated to the rights of each holder of a
Class A Bond to receive payments on those Class A Bonds to the extent of any
payment by the Bond Insurer under the Class A Bond Insurance Policy. Pursuant to
the terms of the Indenture, so long as an event of default has not occurred or
is continuing under the Class A Bond Insurance Policy, the Bond Insurer will be
entitled to exercise the voting rights of the Class A Bondholders without the
consent of the Class A Bondholders, and the Class A Bondholders may exercise
such rights only with the prior written consent of the Bond Insurer.
YIELD, PREPAYMENT AND WEIGHTED AVERAGE LIFE
GENERAL
The yields to maturity (or to early termination) on the Offered Bonds
will be affected by the rate of principal payments (including prepayments, which
may include amounts received by virtue of purchase, condemnation, insurance or
foreclosure) on the Mortgage Loans. Such yields will also be affected by the
extent to which Mortgage Loans bearing higher Mortgage Rates prepay at a more
rapid rate than Mortgage Loans with lower Mortgage Rates, the amount and timing
of mortgagor delinquencies and defaults resulting in Realized Losses, the
application of Monthly Excess Cashflow, the purchase price for the Offered Bonds
and other factors.
Principal prepayments may be influenced by a variety of economic,
geographic, demographic, social, tax, legal and other factors. In general, if
prevailing interest rates fall below the interest rates on the Mortgage Loans,
the Mortgage Loans are likely to be subject to higher prepayments than if
prevailing rates remain at or above the interest rates on the Mortgage Loans.
Conversely, if prevailing interest rates rise above the interest rates on the
Mortgage Loans, the rate of prepayment would be expected to decrease. Other
factors affecting prepayment of the Mortgage Loans include such factors as
changes in borrowers' housing needs, job transfers, unemployment, borrowers'
equity in the Mortgaged Properties, changes in the value of the Mortgaged
Properties, mortgage market interest rates and
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servicing decisions. The Mortgage Loans generally have due-on-sale clauses. The
enforcement of a due-on-sale clause will generally have the same effect as a
prepayment on a Mortgage Loan.
Approximately 53.30% of the Mortgage Loans are subject to Prepayment
Premiums during intervals ranging from one to five years following origination,
as described under "Description of the Mortgage Pool -- General" herein. Such
Prepayment Premiums may have the effect of reducing the amount or the likelihood
of prepayment of such Mortgage Loans during such intervals.
The rate of principal payments on the Mortgage Loans will also be
affected by the amortization schedules of the Mortgage Loans, the rate and
timing of prepayments thereon by the borrowers, liquidations of defaulted
Mortgage Loans, repurchases of Mortgage Loans due to certain breaches of
representations and warranties or defective documentation. The timing of changes
in the rate of prepayments, liquidations and purchases of the related Mortgage
Loans may, and the timing of Realized Losses, will significantly affect the
yield to an investor, even if the average rate of principal payments experienced
over time is consistent with an investor's expectation. Because the rate and
timing of principal payments on the Mortgage Loans will depend on future events
and on a variety of factors (as described herein), no assurance can be given as
to such rate or the timing of principal payments on the Offered Bonds. In
general, the earlier a prepayment of principal of the related Mortgage Loans,
the greater the effect on an investor's yield. The effect on an investor's yield
of principal payments occurring at a rate higher (or lower) than the rate
anticipated by the investor during the period immediately following the issuance
of the Bonds may not be offset by a subsequent like decrease (or increase) in
the rate of principal payments.
From time to time, areas of the United States may be affected by
flooding, severe storms, landslides, wildfires or other natural disasters. Under
the Pooling and Servicing Agreement, the related Seller will represent and
warrant that as of the Closing Date, each Mortgaged Property was free of
material damage. In the event of an uncured breach of such representation and
warranty that materially and adversely affects the interests of the Bondholders
(without regard to the Class A Bond Insurance Policy), the related Seller will
be required to repurchase the affected Mortgage Loan or substitute another
mortgage loan therefor. If any damage caused by flooding, storms, wildfires, or
landslides (or other cause) occurs after the Closing Date, the related Seller
will not have any such obligation. In addition, the standard hazard policies
covering the Mortgaged Properties generally do not cover damage caused by
flooding and landslides, and flood or landslide insurance may not have been
obtained with respect to such Mortgaged Properties. As a consequence, Realized
Losses could result. To the extent that the insurance proceeds received with
respect to any damaged Mortgage Properties are not applied to the restoration
thereof, such proceeds will be used to prepay the related Mortgage Loans in
whole or in part. Any repurchases or repayments of the Mortgage Loans may reduce
the weighted average lives of the Offered Bonds and will reduce the yields on
such Bonds to the extent they are purchased at a premium.
Prepayments, liquidations and purchases of the Mortgage Loans will
result in payments to holders of the related Bonds of principal amounts that
would otherwise be paid over the remaining terms of such Mortgage Loans. The
rate of defaults on the Mortgage Loans will also affect the rate and timing of
principal payments on the Mortgage Loans. In general, defaults on the Mortgage
Loans are expected to occur with greater frequency in their early years.
The yields to investors in the Offered Bonds will be affected by the
exercise by the Class X Bondholder or the Master Servicer of their respective
rights to purchase the Mortgage Loans, as described under "Description of the
Bonds -- Optional Purchase of Mortgage Loans; Redemption of the Bonds" herein,
or the failure of such parties to exercise such rights.
If the purchaser of a Bond offered at a discount from its initial
principal amount calculates its anticipated yield to maturity (or early
termination) based on an assumed rate of payment of principal that is faster
than that actually experienced on the related Mortgage Loans, the actual yield
may be lower than that so calculated. Conversely, if the purchaser of a Bond
offered at a premium calculates its anticipated yield based on an assumed rate
of payment of principal that is slower than that actually experienced on the
related Mortgage Loans, the actual yield may be lower than that so calculated.
The Interest Rates applicable to the Bonds will be affected by the
level of LIBOR from time to time, and by the Mortgage Rates of the Mortgage
Loans from time to time as described under "Risk Factors -- Mortgage Loan
Interest Rates May Limit Interest Rates on the Bonds."
PRINCIPAL PREPAYMENTS AND COMPENSATING INTEREST
When a Mortgagor prepays a Mortgage Loan in full between Due Dates, the
Mortgagor pays interest on the amount prepaid only to the date of prepayment
instead of for the entire month. Also, when a Curtailment is made on a Mortgage
Loan together with the Scheduled Payment for a month on or after the related Due
Date, the principal balance of the Mortgage Loan is reduced by the amount of the
Curtailment as of that Due Date, but the principal is not paid to the
Bondholders until the Payment Date in the next month; therefore, one month of
interest shortfall accrues on the amount of such Curtailment.
To reduce the adverse effect on Bondholders from the deficiency in
interest payable as a result of a Payoff on a Mortgage Loan between its Due
Dates, the Master Servicer will pay Compensating Interest to the limited extent
and in the manner described under "Servicing of the Mortgage Loans --
Compensating Interest."
To the extent that the amount allocated to pay Compensating Interest is
insufficient to cover the deficiency in interest payable as a result of the
timing of a Payoff, or to the extent that there is an interest deficiency from a
S-40
<PAGE> 41
Curtailment on a Mortgage Loan, such remaining deficiency will be covered by
excess interest collections. If excess interest collections are insufficient,
each Class of Bonds will be allocated the Net Interest Shortfall, to the extent
of interest due, beginning with the most subordinate Class of Bonds then
outstanding. The Class A Bond Insurance Policy does not cover any Interest
Shortfalls.
OVERCOLLATERALIZATION
The yields of the Offered Bonds will be affected by the application of
Monthly Excess Cashflow as described herein and by the amount of
overcollateralization. The amount of Monthly Excess Cashflow will be affected by
the delinquency, default and prepayment experience of the Mortgage Loans. There
can be no assurance as to the rate at which overcollateralization will be
created, or whether such overcollateralization will be maintained at the levels
described herein.
SUBORDINATION OF THE OFFERED SUBORDINATE BONDS
As described herein, the Senior Bonds are senior to the Offered
Subordinate Bonds, the Class M1 Bonds are senior to the Class M2 and Class B
Bonds, and the Class M2 Bonds are senior to the Class B Bonds. As a result, a
Class of Bonds with a higher payment priority will have a preferential right to
receive amounts in respect of interest to the extent of the Interest Remittance
Amount and amounts in respect of principal to the extent of the Principal
Payment Amount on any Payment Date prior to any Class with a lower payment
priority. In addition, Applied Loss Amounts will be allocated among the Class
M1, Class M2 and Class B Bonds in inverse order of priority of payment. As a
result, the yields of the Offered Subordinate Bonds will be more sensitive, in
varying degrees, to delinquencies and losses on the Mortgage Loans than the
yields of the Senior Bonds and Classes of Offered Subordinate Bonds which have a
relatively higher priority of payment.
WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will
elapse from the date of issuance of a security to the date of payment to the
investor of each dollar paid in net reduction of principal of such security
(assuming no losses). The weighted average lives of the Offered Bonds will be
influenced by, among other things, the rate at which principal of the related
Mortgage Loans is paid, which may be in the form of scheduled amortization,
prepayments or liquidations.
Prepayments of mortgage loans commonly are measured relative to a
prepayment standard or model. The two prepayment models used in this prospectus
supplement represent an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of mortgage loans. For the
Adjustable Rate Mortgage Loans, a 100% prepayment assumption assumes prepayment
rates of 6% per annum of the then outstanding principal balance of such Mortgage
Loans in the first month of the life of the Mortgage Loans and increasing by
24/17% per annum in each month thereafter until the twelfth month. Beginning in
the twelfth month and in each month thereafter during the life of the Mortgage
Loan, 100% of the prepayment assumption assumes a constant prepayment rate of
30% per annum. For the Fixed Rate Mortgage Loans, a 100% prepayment assumption
assumes prepayment rates of 4% per annum of the then outstanding principal
balance of such Mortgage Loans in the first month of the life of the Mortgage
Loans and increasing by 16/11% per annum in each month thereafter until the
twelfth month. Beginning in the twelfth month and in each month thereafter
during the life of the Mortgage Loan, 100% of the prepayment assumption assumes
a constant prepayment rate of 20% per annum. The prepayment assumption does not
purport to be a historical description of prepayment experience or a prediction
of the anticipated rate of prepayment of any pool of mortgage loans, including
the Mortgage Loans.
The tables on pages S-44 to S-47 were prepared based on the following
assumptions among other things (collectively, the "MODELING ASSUMPTIONS"): (1)
the initial Class Principal Amounts of the Offered Bonds are as set forth on
page S-5 of this prospectus supplement and the Interest Rates of each Class of
Offered Bonds are as described herein; (2) the initial Class Principal Amount of
the Class P Bonds is $50.00; (3) each Scheduled Payment of principal and
interest is timely received on the first day of each month commencing in April
2000; (4) principal prepayments are received in full on the last day of each
month commencing in March 2000 and there are no Net Interest Shortfalls; (5)
there are no defaults or delinquencies on the Mortgage Loans; (6) Payment Dates
occur on the 25th day of each month, commencing in April 2000; (7) there are no
purchases or substitutions of the Mortgage Loans; (8) the Mortgage Rate of each
Adjustable Rate Mortgage Loan is adjusted on the next applicable Adjustment Date
to equal the value of the Index set forth below plus the related Gross Margin,
subject to any Periodic Cap; (9) the Mortgage Rates of the Adjustable Rate
Mortgage Loans adjust either semi-annually based on Six-Month LIBOR or annually
based on the One-Year CMT Index as described at "Description of the Mortgage
Pool -- The Indices"; (10) the value of Six-Month LIBOR is 6.53% and the
One-Year CMT rate is 6.225%; (11) the applicable Index for the Bonds is
One-Month LIBOR calculated as described at "Description of the Bonds -- Payments
of Interest -- LIBOR"; (12) One-Month LIBOR is assumed to be equal to 6.1325%;
(13) the optional right to purchase the Mortgage Loans described herein is not
exercised by the Class X Bondholder or the Master Servicer; (14) the Bonds are
issued on March 31, 2000; (15) no Prepayment Premiums have been collected on the
Mortgage Loans; (16) the Master Servicing Fee Rate equals 0.05% annually; (17)
the Servicing Fee Rate equals 0.50% annually; (18) the Trustee Fee Rate equals
0.0065% annually; (19) the Lender PMI Premium Rate equals 0.0353% annually; and
(20) the Mortgage Loans were aggregated into assumed Mortgage Loans having the
following characteristics:
S-41
<PAGE> 42
ASSUMED MORTGAGE LOAN CHARACTERISTICS
<TABLE>
<CAPTION>
CURRENT GROSS NET ORIGINAL REMAINING REMAINING MAXIMUM MINIMUM
BALANCE COUPON COUPON AMORTIZATION AMORTIZATION BALLOON RATE RATE
($) (%) (%) TERM TERM TERM MARGIN (%) (%)
----- ---- ----- ------ ------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2,015,186.65 8.7814 8.2314 360 356 -- 5.1992 14.7814 8.7814
320,448.13 8.0500 7.1300 360 355 -- 4.6900 14.0500 8.0500
76,786,797.30 9.9921 9.4187 360 355 -- 6.2106 16.1011 9.5785
8,249,001.37 10.1558 9.5221 360 355 -- 6.3704 16.5603 9.9742
3,640,149.64 9.2221 8.6323 360 355 -- 5.0438 15.8838 9.1960
20,112.10 11.0250 10.4750 120 99 -- -- -- --
2,707,352.41 10.1725 9.6227 180 172 -- -- -- --
181,456.11 9.7502 9.2002 240 237 -- -- -- --
100,061,252.72 9.7532 9.1545 360 353 -- -- -- --
155,639.78 9.8750 9.3250 360 355 54 -- -- --
1,854,595.83 11.3526 10.8026 300 295 116 -- -- --
34,448,662.35 10.6526 10.0248 360 352 174 -- -- --
</TABLE>
<TABLE>
<CAPTION>
CURRENT RATE MONTHS TO PERIODIC INITIAL
BALANCE CHANGE RATE RATE PERIODIC TYPE OF
($) FREQUENCY CHANGE CAP RATE CAP INDICES
----- --------- ------ ----- -------- -------
<S> <C> <C> <C> <C> <C>
2,015,186.65 12 9 2.0000 2.0000 One-Year CMT
320,448.13 12 22 2.0000 2.0000 One-Year CMT
76,786,797.30 6 21 1.0258 3.0049 Six-month LIBOR
8,249,001.37 6 31 1.1930 2.5801 Six-month LIBOR
3,640,149.64 6 4 1.2226 1.9030 Six-month LIBOR
20,112.10 -- -- -- -- --
2,707,352.41 -- -- -- -- --
181,456.11 -- -- -- -- --
100,061,252.72 -- -- -- -- --
155,639.78 -- -- -- -- --
1,854,595.83 -- -- -- -- --
34,448,662.35 -- -- -- -- --
</TABLE>
S-42
<PAGE> 43
The actual characteristics and the performance of the Mortgage Loans
will differ from the assumptions used in constructing the tables set forth
below, which are hypothetical in nature and are provided only to give a general
sense of how the principal cash flows might behave under varying prepayment
scenarios. For example, it is not expected that the Mortgage Loans will prepay
at a constant rate until maturity, that all of the Mortgage Loans will prepay at
the same rate or that there will be no defaults or delinquencies on the Mortgage
Loans. Moreover, the diverse remaining terms to maturity of the Mortgage Loans
could produce slower or faster principal payments than indicated in the tables
at the various percentages of the prepayment assumption specified, even if the
weighted average remaining term to maturity of the Mortgage Loans is as assumed.
Any difference between such assumptions and the actual characteristics and
performance of the Mortgage Loans, or actual prepayment or loss experience, will
cause the percentages of initial Class Principal Amounts outstanding over time
and the weighted average lives of the Offered Bonds to differ (which difference
could be material) from the corresponding information in the tables for each
indicated percentage of the prepayment assumption.
Subject to the foregoing discussion and assumptions, the following
tables indicate the weighted average lives of the Offered Bonds and set forth
the percentages of the initial Class Principal Amounts of the Offered Bonds that
would be outstanding after each of the Payment Dates shown at various
percentages of the prepayment assumption.
The weighted average life of an Offered Bond is determined by (i)
multiplying the net reduction, if any, of the applicable Class Principal Amount
by the number of years from the date of issuance of the Offered Bond to the
related Payment Date, (ii) adding the results and (iii) dividing the sum by the
aggregate of the net reductions of Class Principal Amount described in (i)
above.
[Remainder of Page Intentionally Left Blank]
S-43
<PAGE> 44
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OUTSTANDING
AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS A BONDS
<TABLE>
<CAPTION>
PAYMENT
DATE 0% 50% 100% 125% 150%
- -------------------------------- ----------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
March 2001 96 85 73 67 62
March 2002 95 71 50 40 31
March 2003 94 59 32 22 12
March 2004 93 49 26 19 12
March 2005 92 40 20 14 9
March 2006 91 34 15 10 0
March 2007 90 30 12 0 0
March 2008 89 26 9 0 0
March 2009 87 23 0 0 0
March 2010 85 20 0 0 0
March 2011 83 17 0 0 0
March 2012 81 15 0 0 0
March 2013 79 13 0 0 0
March 2014 76 11 0 0 0
March 2015 59 8 0 0 0
March 2016 57 0 0 0 0
March 2017 54 0 0 0 0
March 2018 51 0 0 0 0
March 2019 48 0 0 0 0
March 2020 44 0 0 0 0
March 2021 40 0 0 0 0
March 2022 36 0 0 0 0
March 2023 33 0 0 0 0
March 2024 29 0 0 0 0
March 2025 25 0 0 0 0
March 2026 21 0 0 0 0
March 2027 16 0 0 0 0
March 2028 10 0 0 0 0
March 2029 0 0 0 0 0
March 2030 0 0 0 0 0
Weighted Average 18.0 5.5 2.9 2.3 1.8
Life In Years*
</TABLE>
- -------------------
* The weighted average life of a Bond is determined by (i) multiplying the
amount of each payment in reduction of the Class Principal Amount by the number
of years from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial Class Principal
Amount of the Bond.
S-44
<PAGE> 45
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OUTSTANDING
AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M1 BONDS
<TABLE>
<CAPTION>
PAYMENT
DATE 0% 50% 100% 125% 150%
- ------------------ ----------------- ---------------- ----------------- ------------------ ----------------------
<S> <C> <C> <C> <C> <C>
Initial 100% 100% 100% 100% 100%
March 2001 100 100 100 100 100
March 2002 100 100 100 100 100
March 2003 100 100 100 100 100
March 2004 100 100 70 52 61
March 2005 100 100 53 37 25
March 2006 100 92 41 26 0
March 2007 100 80 31 0 0
March 2008 100 70 24 0 0
March 2009 100 61 0 0 0
March 2010 100 53 0 0 0
March 2011 100 46 0 0 0
March 2012 100 40 0 0 0
March 2013 100 34 0 0 0
March 2014 100 30 0 0 0
March 2015 100 21 0 0 0
March 2016 100 0 0 0 0
March 2017 100 0 0 0 0
March 2018 100 0 0 0 0
March 2019 100 0 0 0 0
March 2020 100 0 0 0 0
March 2021 100 0 0 0 0
March 2022 97 0 0 0 0
March 2023 88 0 0 0 0
March 2024 78 0 0 0 0
March 2025 68 0 0 0 0
March 2026 55 0 0 0 0
March 2027 42 0 0 0 0
March 2028 26 0 0 0 0
March 2029 0 0 0 0 0
March 2030 0 0 0 0 0
Weighted 26.0 10.7 5.7 4.7 4.4
Average
Life In Years*
</TABLE>
- -----------------
* The weighted average life of a Bond is determined by (i) multiplying the
amount of each payment in reduction of the Class Principal Amount by the number
of years from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial Class Principal
Amount of the Bond.
S-45
<PAGE> 46
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OUTSTANDING
AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS M2 BONDS
<TABLE>
<CAPTION>
PAYMENT
DATE 0% 50% 100% 125% 150%
- -------------------------------- ----------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
March 2001 100 100 100 100 100
March 2002 100 100 100 100 100
March 2003 100 100 100 100 100
March 2004 100 100 70 52 38
March 2005 100 100 53 37 25
March 2006 100 92 41 26 0
March 2007 100 80 31 0 0
March 2008 100 70 24 0 0
March 2009 100 61 0 0 0
March 2010 100 53 0 0 0
March 2011 100 46 0 0 0
March 2012 100 40 0 0 0
March 2013 100 34 0 0 0
March 2014 100 30 0 0 0
March 2015 100 21 0 0 0
March 2016 100 0 0 0 0
March 2017 100 0 0 0 0
March 2018 100 0 0 0 0
March 2019 100 0 0 0 0
March 2020 100 0 0 0 0
March 2021 100 0 0 0 0
March 2022 97 0 0 0 0
March 2023 88 0 0 0 0
March 2024 78 0 0 0 0
March 2025 68 0 0 0 0
March 2026 55 0 0 0 0
March 2027 42 0 0 0 0
March 2028 26 0 0 0 0
March 2029 0 0 0 0 0
March 2030 0 0 0 0 0
Weighted Average 26.0 10.7 5.7 4.7 4.2
Life In Years*
</TABLE>
- ---------------------
* The weighted average life of a Bond is determined by (i) multiplying the
amount of each payment in reduction of the Class Principal Amount by the number
of years from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial Class Principal
Amount of the Bond.
S-46
<PAGE> 47
PERCENTAGE OF INITIAL CLASS PRINCIPAL AMOUNT OUTSTANDING
AT VARIOUS PERCENTAGES OF THE PREPAYMENT ASSUMPTION
CLASS B BONDS
<TABLE>
<CAPTION>
PAYMENT
DATE 0% 50% 100% 125% 150%
- -------------------------------- ----------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Initial Percentage 100% 100% 100% 100% 100%
March 2001 100 100 100 100 100
March 2002 100 100 100 100 100
March 2003 100 100 100 100 100
March 2004 100 100 70 52 38
March 2005 100 100 53 37 25
March 2006 100 92 41 26 0
March 2007 100 80 31 0 0
March 2008 100 70 24 0 0
March 2009 100 61 0 0 0
March 2010 100 53 0 0 0
March 2011 100 46 0 0 0
March 2012 100 40 0 0 0
March 2013 100 34 0 0 0
March 2014 100 30 0 0 0
March 2015 100 21 0 0 0
March 2016 100 0 0 0 0
March 2017 100 0 0 0 0
March 2018 100 0 0 0 0
March 2019 100 0 0 0 0
March 2020 100 0 0 0 0
March 2021 100 0 0 0 0
March 2022 97 0 0 0 0
March 2023 88 0 0 0 0
March 2024 78 0 0 0 0
March 2025 68 0 0 0 0
March 2026 55 0 0 0 0
March 2027 42 0 0 0 0
March 2028 26 0 0 0 0
March 2029 0 0 0 0 0
March 2030 0 0 0 0 0
Weighted Average 26.0 10.7 5.7 4.6 4.0
Life In Years*
</TABLE>
- -------------------
* The weighted average life of a Bond is determined by (i) multiplying the
amount of each payment in reduction of the Class Principal Amount by the number
of years from the date of issuance of the Bond to the related Payment Date, (ii)
adding the results and (iii) dividing the sum by the initial Class Principal
Amount of the Bond.
THE 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
without charge, on written request, a copy (without exhibits) of the Indenture.
Requests should be addressed to the Corporate Trust Office of the Indenture
Trustee at 1 Bank One Plaza, Suite 0126, Chicago, Illinois 60670.
S-47
<PAGE> 48
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 Class Principal Amount 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 the Subordinate Bonds or the amount of
principal due to the Class M1, Class M2 or Class B Bonds as described herein 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
amount of principal due to the Senior Bonds as described herein 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 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 -- Acceleration of the Bonds Upon an Indenture Event
of Default" herein.
THE 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 without
charge, 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 1 Bank One Plaza, Suite 0126, Chicago, Illinois
60670.
ASSIGNMENT OF MORTGAGE LOANS
The Issuer will cause the Mortgage Loans to be assigned to the
Certificate Trustee, together with all principal and interest on the Mortgage
Loans other than principal and interest due on or before the Cut-off Date. The
Certificate Trustee will, concurrently with such assignment, authenticate and
deliver the Certificates or cause the Certificates to be authenticated and
delivered to the Indenture Trustee. 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 Servicing Fee, the
Master Servicing Fee, whether a Primary Insurance Policy has been obtained for
each Mortgage Loan, and the original value of each Mortgaged Property.
In addition, the Issuer will, as to each Mortgage Loan, deliver or cause
to be delivered to the Certificate Trustee the mortgage note, an assignment to
the Certificate Trustee of the Mortgage in a form for recording or filing as may
be appropriate in the state where the Mortgaged Property is located, the
original recorded Mortgage with evidence of recording or filing indicated
thereon, and a copy of the title insurance policy or other evidence of title. In
certain instances where original documents respecting a Mortgage Loan may not be
available prior to execution of the Pooling and Servicing Agreement, the Issuer
will deliver or will cause to be delivered such documents to the Certificate
Trustee within 270 days thereafter. In instances where, due to a delay on the
part of the recording office where any such original documents have been
delivered for recordation, the original recorded Mortgage or any intervening
assignment certified by the applicable recording office cannot be delivered to
the Certificate Trustee within 270 days after the Closing Date, the Issuer shall
cause the related Seller to deliver to the Certificate Trustee within such time
period an officer's certificate stating the date by which the related Seller
expects to receive such original documents from the applicable recording office.
In instances where, due to a delay on the part of the title insurer, a
copy of the title insurance policy for a particular Mortgage Loan cannot be
delivered to the Certificate Trustee prior to or concurrently with the execution
of the Pooling and Servicing Agreement, the Issuer will cause the applicable
Seller to provide a copy of such title insurance policy to the Certificate
Trustee within 90 days after the applicable Seller's receipt of the original
recorded Mortgage, intervening assignments with evidence of recording thereon or
other documents necessary to issue such title insurance policy.
The Certificate Trustee will review the mortgage documents within 45
days of receipt thereof to ascertain that all required documents have been
properly executed and received. If any document is found by the Certificate
Trustee not to have been properly executed or received or to be unrelated to the
Mortgage Loans identified in the Pooling and Servicing Agreement, and the Issuer
cannot cure such defect, the Issuer shall, not later than 60 days after the
Certificate Trustee's notice to it respecting such defect, within the
three-month period commencing on the Closing Date, be required to cause the
related Seller to (a) substitute a new mortgage loan meeting the conditions set
forth in the Pooling and Servicing Agreement or (b) repurchase the related
Mortgage Loan from the Certificate Trustee at the Repurchase Price. This
substitution or repurchase obligation constitutes the sole remedy available to
the Indenture Trustee, as the sole Certificateholder, for such a defect in a
mortgage document. An assignment of each Mortgage Loan to the Certificate
Trustee will be recorded or filed in each state in which the related Mortgaged
Property is located, unless the Certificate Trustee receives an opinion of
counsel admitted in such state to the effect
S-48
<PAGE> 49
that recordation in a particular state is not required in order to effect an
assignment of the related Mortgage Loans to the Certificate Trustee.
SUBSTITUTION OF MORTGAGE LOANS
The Certificate Trustee may cause the related Seller to substitute an
eligible mortgage loan for a defective Mortgage Loan in lieu of repurchasing
such defective Mortgage Loan or the related Mortgaged Property (a) within three
months after the Closing Date, or (b) within two years after such Closing Date,
if the related Mortgage Loan is a "defective obligation" within the meaning of
Section 860G(a)(4)(B)(ii) of the Code. 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. No substitutions may be made unless an opinion of counsel is
provided to the effect that the substitution will neither disqualify any REMIC,
nor result in a prohibited transaction under the Code.
REPRESENTATIONS AND WARRANTIES REGARDING THE MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, each Seller will make
certain representations and warranties with respect to the Mortgage Loans sold
by it. Such representations and warranties will generally have included, among
other things, that: (i) the information set forth in the related schedule of
Mortgage Loans is true and correct in all material respects; (ii) each Mortgage
Loan is covered by a lender's title policy (or other satisfactory evidence of
title); (iii) if a Primary Insurance Policy is required with respect to such
Mortgage Loan, such policy is valid and remains in full force and effect as of
the Closing Date; (iv) at the time of sale, such Seller was the sole owner of
each Mortgage Loan sold by it, free and clear of any lien or encumbrance, and
the mortgage notes are subject to no offsets, defenses or counterclaims; (v)
each Mortgage is a valid first lien on the related Mortgaged Property (subject
only to (a) liens for current real property taxes and special assessments, (b)
covenants, conditions and restrictions, rights of way, easements and other
matters of public record as of the date of recording of such Mortgage, such
exceptions appearing of record being acceptable to mortgage lending institutions
generally and set forth in the title insurance policy covering such Mortgaged
Property and (c) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by the Mortgage); (vi) each Mortgaged Property is free of material
damage and is in good repair, except for ordinary wear and tear; (vii) the
Mortgage Loan complies with all applicable state and federal laws, including
usury, equal credit opportunity, disclosure and recording laws; and (viii) each
Mortgage Loan was originated by a savings association, savings bank, a
commercial bank or similar institution which is supervised and examined by a
federal or state authority, or by a mortgagee approved by the FHA or the
Secretary of HUD. The benefit of such representations and warranties will be
assigned to the Certificate Trustee pursuant to the Pooling and Servicing
Agreement.
The representations and warranties made by each of PNC, DLJMCI and Old
Kent with respect to the Mortgage Loans sold by it will be made as of the
Closing Date. In the event of a breach of any representation or warranty
relating to a Mortgage Loan that materially and adversely affects the interest
of the Indenture Trustee, as sole Certificateholder, the related Seller will be
obligated to do one of the following:
o cure that breach,
o repurchase that Mortgage Loan for an amount equal to the
Repurchase Price, or
o substitute a replacement mortgage loan for that Mortgage Loan.
However, this substitution option is permitted only within two years of the
Closing Date and may not be made unless an opinion of counsel is provided to the
effect that the substitution will not disqualify any REMIC, or result in a
prohibited transaction under the Code. None of the Issuer, the Certificate
Trustee, the Indenture Trustee, the Bond Insurer or the Underwriter will make
any representations and warranties regarding the Mortgage Loans or will have any
obligation to cure, repurchase or substitute Mortgage Loans with deficient
documentation or that are otherwise defective. The obligations of each servicer
are limited to its contractual servicing obligations under the related Servicing
Agreement. YOU SHOULD BE AWARE THAT IF THE CIRCUMSTANCES GIVING RISE TO A BREACH
OF REPRESENTATION OR WARRANTY OCCUR AFTER THE DATE AS OF WHICH THE APPLICABLE
SELLER MAKES THE REPRESENTATION OR WARRANTY, SUCH SELLER WILL HAVE NO OBLIGATION
TO CURE, REPURCHASE OR SUBSTITUTE FOR THAT MORTGAGE LOAN.
BOND ADMINISTRATOR
PNC will act as the Bond Administrator under the Indenture and, in such
capacity, will calculate LIBOR and amounts payable to the Bondholders and
provide certain other administrative services as specified in the Indenture.
PNC, in its capacity as Bond Administrator, will receive a fee (the "BOND
ADMINISTRATOR FEE") for its services under the Indenture. The Bond Administrator
Fee shall be included as part of the Master Servicing Fee. PNC will be
responsible for paying any expenses it incurs in connection with its activities
as Bond Administrator under the Indenture.
PAYMENTS ON MORTGAGE LOANS; CUSTODIAL ACCOUNTS FOR P&I, INVESTMENT ACCOUNT AND
CERTIFICATE ACCOUNT
Pursuant to the Pooling and Servicing Agreement, the Master Servicer
will cause each servicer to establish and maintain a custodial account for
principal and interest (each, a "CUSTODIAL ACCOUNT FOR P&I") and a special
custodial account for reserves (each, a "CUSTODIAL ACCOUNT FOR RESERVES") and
into which such servicer shall deposit daily the amounts related to the related
Mortgage Loans required by the Pooling and Servicing Agreement to be so
deposited. Proceeds received with respect to individual Mortgage Loans from any
title insurance policy,
S-49
<PAGE> 50
Special Hazard Policy or Primary Insurance Policy, or any other insurance policy
covering such Mortgage Loans shall be deposited first in the related Custodial
Account for Reserves, if required for the restoration or repair of the related
Mortgaged Property. Proceeds from such insurance policies not so deposited in
the related Custodial Account for Reserves shall be deposited in the related
Custodial Account for P&I, and shall be applied to the balances of the related
Mortgage Loans as payments of principal and interest.
The Master Servicer will require that deposits in each Custodial Account
for P&I be held (a) in a trust account in the corporate trust department of the
Certificate Trustee or another financial institution approved by the Master
Servicer so that the rights of the related Master Servicer, the Certificate
Trustee and the Indenture Trustee, as sole Certificateholder, will be fully
protected against the claims of any creditors of the related servicer and of any
creditors or depositors of the institution in which such account is maintained,
(b) within the Federal Deposit Insurance Corporation ("FDIC") FDIC insured
accounts (or other accounts with comparable insurance coverage acceptable to the
Rating Agencies) created, maintained and monitored by a servicer or (c) in a
separate non-trust account without FDIC or other insurance in an Eligible
Institution (as such term is defined in the Pooling and Servicing Agreement). If
a Custodial Account for P&I is insured by the FDIC and at any time the amount in
such account exceeds the limits of insurance on such account, the related
servicer shall be required to withdraw such excess from such account and remit
it to the Master Servicer for deposit in the Investment Account described below.
Not later than the 20th day of each month (or the preceding business day
if such 20th day is not a business day) (the "WITHDRAWAL DATE"), the Master
Servicer will withdraw or direct the withdrawal of funds in the related
Custodial Accounts for P&I for deposit in the Certificate Account or Investment
Account, at the Master Servicer's option, in an amount representing:
(i) Scheduled installments of principal and interest on the
related Mortgage Loans received or advanced by the applicable
servicer which were due on the first day of the current month,
net of Servicing Fees due the applicable servicer;
(ii) Payoffs on the Mortgage Loans received by the applicable
servicer during the related Prepayment Period and Liquidation
Proceeds and Insurance Proceeds of related Mortgage Loans
received by the applicable servicer during the Collection
Period for the related Payment Date, in each case, with
interest to the date of Payoff or liquidation; and
(iii) Curtailments received by the applicable servicer on such
Mortgage Loans during the Collection Period for the related
Payment Date.
All amounts withdrawn from the Custodial Accounts for P&I, together with
any Insurance Proceeds and Liquidation Proceeds previously received by the
Master Servicer (including amounts paid on behalf of a servicer in respect of
repurchase obligations on defective Mortgage Loans or otherwise) shall be
immediately deposited into the Investment Account or the Certificate Account, at
the Master Servicer's option. As used herein, "LIQUIDATION PROCEEDS" refers to
all proceeds received in connection with the liquidation of defaulted Mortgage
Loans, by foreclosure or otherwise, and "INSURANCE PROCEEDS" refers to all
amounts paid or payable by the applicable insurer under any Primary Insurance
Policy, Special Hazard Policy, Flood Policy or any applicable title, hazard or
other insurance policy covering any Mortgage Loan, other than proceeds to be
applied to the restoration or repair of the related Mortgaged Property.
The Master Servicer may invest funds withdrawn from the Custodial
Accounts for P&I, as well as any Insurance Proceeds and Liquidation Proceeds
previously received by the Master Servicer, for its own account and at its own
risk, for the period from the Withdrawal Date to the next Payment Date (the
"INVESTMENT PERIOD"). Investment of such funds shall be made through an account
(the "INVESTMENT ACCOUNT"), which shall be maintained at The Chase Manhattan
Bank or at another bank or trust company designated from time to time by the
Master Servicer and acceptable to the Rating Agencies (the "INVESTMENT
DEPOSITORY"); provided that such bank or trust company must at all times be an
Eligible Institution (as defined in the Pooling and Servicing Agreement). Each
Investment Account may be a commingled account with other similar accounts
maintained by the Master Servicer and invested for its own account; provided,
that the maintenance of such a commingled account has been approved by the
Rating Agencies. The investment of funds in the Investment Account shall be
limited to one or more Eligible Investments (as such term is defined in the
Pooling and Servicing Agreement).
On the business day prior to the applicable Payment Date, the Master
Servicer will withdraw from the Investment Account all funds due to be
distributed to the Indenture Trustee, as sole Certificateholder, and shall
deposit such funds, together with any Advances required to be made by it, into
the Certificate Account.
Under the Pooling and Servicing Agreement, the Master Servicer is
authorized to make the following withdrawals from the Certificate Account:
(i) To reimburse itself or the applicable servicer for Advances
made pursuant to the Pooling and Servicing Agreement, the
Master Servicer's right to reimburse itself or such servicer
pursuant to this paragraph (i) being limited to amounts
received on particular Mortgage Loans (including, for this
purpose, Insurance Proceeds and Liquidation Proceeds) which
represent late recoveries of principal and/or interest
respecting which any such Advance was made;
(ii) To reimburse itself or the applicable servicer for amounts
expended by or for the account of the Master Servicer pursuant
to the Pooling and Servicing Agreement or amounts expended by
such servicer pursuant to the Pooling and Servicing Agreement
in connection with the restoration of
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property damaged by an Uninsured Cause (as defined in the
Pooling and Servicing Agreement) or in connection with the
liquidation of a Mortgage Loan;
(iii) To pay to itself the Master Servicing Fee, net of Compensating
Interest, reduced by Payoff Earnings and Payoff Interest (each
as defined in the Pooling and Servicing Agreement), as to
which no prior withdrawals from funds deposited by the Master
Servicer have been made;
(iv) To reimburse itself or the applicable servicer for Advances
which the Master Servicer has determined to be nonrecoverable;
(v) To pay itself reinvestment earnings deposited or earned in the
Certificate Account (net of reinvestment losses) to which it
is entitled and to reimburse itself for any other expenses
incurred by and reimbursable to it pursuant to the Pooling and
Servicing Agreement;
(vi) To deposit amounts in the Investment Account representing
amounts in the Certificate Account not required to be on
deposit therein at the time of such withdrawal; and
(vii) To clear and terminate the Certificate Account upon
liquidation of all Mortgage Loans or upon an optional
redemption of the Bonds.
ADVANCES
The Master Servicer will be obligated under the Pooling and Servicing
Agreement to make Advances out of its own funds to the Certificate Account in
amounts sufficient to cover any shortfall between the funds scheduled to be
received in respect of the related Mortgage Loans, and the amounts actually
deposited in the Certificate Account on account of such payments; provided,
however, that the Master Servicer will be obligated to make such Advances only
to the extent any such Advance is, in the good faith judgment of the Master
Servicer made on or before the Business Day immediately following the Withdrawal
Date, reimbursable from Liquidation Proceeds or Insurance Proceeds of the
related Mortgage Loans or recoverable as late Monthly Payments with respect to
the related Mortgage Loans or otherwise. The Master Servicer will also be
obligated to make Advances with respect to the assumed monthly payments that
would have been due on Balloon Loans based upon the original amortization
schedule for those loans, unless the Master Servicer determines that the Advance
would not be recoverable.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
The Master Servicer will receive a Master Servicing Fee for its services
as Master Servicer under the Pooling and Servicing Agreement. Each servicer will
receive a Servicing Fee for acting as the primary servicer of the related
Mortgage Loans under the Pooling and Servicing Agreement. The fees payable to
each Master Servicer and the servicers will be paid out of the spread between
the Mortgage Rates on each Mortgage Loan and the Net Mortgage Rate with respect
to such Mortgage Loan. The Servicing Fee will be equal to the difference between
the Mortgage Rate and the Remittance Rate. In addition, the servicers will
retain late charges, assumption fees and similar charges , other than Prepayment
Premiums, to the extent collected from Mortgagors. The Master Servicer will
retain as its Master Servicing Fee an amount which will be calculated as a per
annum percentage for each related Mortgage Loan.
The Master Servicer will pay all expenses incurred in connection with
its responsibilities under the Pooling and Servicing Agreement. The Master
Servicer and the servicers, as applicable, are entitled to reimbursement for
certain expenses incurred by them in connection with the liquidation of
defaulted Mortgage Loans and expenditures incurred by them in connection with
the restoration of damaged Mortgaged Properties, such right of reimbursement
being prior to the rights of the Bondholders to receive any related Insurance
Proceeds or Liquidation Proceeds.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement provides that on or before April 30
of each year, beginning April 30, 2001, the Master Servicer, at its own expense,
shall cause a firm of independent public accountants to furnish a statement to
the Certificate Trustee and the Bond Insurer to the effect that, in connection
with the firm's examination of the consolidated financial statements of the
Master Servicer and its parent, as of the previous December 31, nothing came to
their attention that indicated that the Master Servicer was not in compliance
with specified sections of the Pooling and Servicing Agreement, except for (i)
such exceptions as such firm believes to be immaterial and (ii) such other
exceptions as are set forth in such statement.
The Pooling and Servicing Agreement also provides that on or before
April 30 of each year, beginning April 30, 2001, the Master Servicer shall
deliver to the Certificate Trustee and the Bond Insurer an annual statement
signed by an officer of the Master Servicer to the effect that, based on a
review of the Master Servicer's activities during the preceding calendar year,
to the best of such officer's knowledge the Master Servicer has fulfilled its
obligations under the Pooling and Servicing Agreement throughout the preceding
year or, if there has been a default in the fulfillment of any such obligations,
specifying each such default known to such officer and the nature and status
thereof.
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CERTAIN MATTERS REGARDING THE MASTER SERVICER, THE ISSUER AND THE BOND
ADMINISTRATOR
The Pooling and Servicing Agreement provides that neither the Issuer nor
the Master Servicer may resign from its respective obligations and duties
thereunder, except upon a determination that its duties thereunder are no longer
permissible under applicable law. No such resignation will become effective
until the Certificate Trustee or a successor to the Issuer or the Master
Servicer has assumed the Issuer's or the Master Servicer's responsibilities and
obligations and duties under the Pooling and Servicing Agreement, as applicable.
The Pooling and Servicing Agreement provides that neither the Issuer nor
the Master Servicer or any of the directors, officers, employees or agents of
the Issuer or the Master Servicer (the "INDEMNIFIED PARTIES") shall be under any
liability to the Trust or the Certificateholders for any action taken by such
Person or by a servicer or for such Person's or servicer's refraining from the
taking of any action in good faith pursuant to the Pooling and Servicing
Agreement, or for errors in judgment; provided, however, that the Indemnified
Parties shall not be protected against any liability which would otherwise be
imposed by reason of willful misfeasance, bad faith or gross negligence in the
performance of duties or by reason of reckless disregard of duties and
obligations under the Pooling and Servicing Agreement. The Pooling and Servicing
Agreement further provides that the Indemnified Parties may rely in good faith
on any document of any kind properly executed and submitted by any person
respecting any matters arising hereunder. The Pooling and Servicing Agreement
also provides that the Indemnified Parties shall be indemnified by the Trust and
held harmless against any loss, liability or expense incurred in connection with
any legal action relating to the Pooling and Servicing Agreement or the
Certificates, other than any loss, liability or expense relating to any Mortgage
Loan (other than as otherwise permitted in the Pooling and Servicing Agreement)
or incurred by reason of willful misfeasance, bad faith or gross negligence in
the performance of duties under the Pooling and Servicing Agreement or by reason
of reckless disregard of obligations and duties under the Pooling and Servicing
Agreement. In addition, the Pooling and Servicing Agreement provides that the
Issuer and the Master Servicer shall not be under any obligation to appear in,
prosecute or defend any legal action which is not incidental to its respective
duties under the Pooling and Servicing Agreement and which in its opinion may
involve it in any expense or liability; provided, however, that the Issuer and
the Master Servicer may, in its discretion, undertake any such action which it
may deem necessary or desirable with respect to the Mortgage Loans, the Pooling
and Servicing Agreement, the Certificates or the rights and duties of the
parties hereto and the interests of the Certificateholders under the Pooling and
Servicing Agreement. In such event, the Pooling and Servicing Agreement provides
that the legal expenses and costs of such action and any liability resulting
therefrom shall be expenses, costs and liabilities of the Trust and the Issuer
and the Master Servicer shall be entitled to be reimbursed therefor out of the
Certificate Account.
EVENTS OF DEFAULT
Events of Default under the Pooling and Servicing Agreement will
include, without limitation, (i) any failure by the Master Servicer to deposit
with the Certificate Trustee any payment required to be made under the terms of
the Pooling and Servicing Agreement which continues unremedied for ten days
after the earlier of (x) the giving of written notice of such failure to the
Master Servicer by the Certificate Trustee, or to the Master Servicer and the
Certificate Trustee by the holders of Certificates evidencing Fractional
Undivided Interests (as defined in the Pooling and Servicing Agreement)
aggregating not less than 66 2/3% of the Trust Fund, as determined in the manner
set forth in the Pooling and Servicing Agreement, or (y) the date the Master
Servicer should have known of such failure; (ii) any failure on the part of the
Master Servicer duly to observe or perform in any material respect any of the
other covenants or agreements on the part of the Master Servicer contained in
the Certificates or in the Pooling and Servicing Agreement which continues
unremedied for 60 days after the earlier of (x) the giving of written notice of
such failure to the Master Servicer by the Certificate Trustee, or to the Master
Servicer and the Certificate Trustee by the holders of Certificates evidencing
Fractional Undivided Interests aggregating not less than 66 2/3% of the Trust
Fund, as determined in the manner set forth in the Pooling and Servicing
Agreement, or (y) the date the Master Servicer should have known of such
failure; (iii) certain events of insolvency, readjustment of debt, marshaling of
assets and liabilities or similar proceedings and certain actions by the Master
Servicer indicating insolvency, reorganization or inability to pay its
obligations and (iv) any failure of the Master Servicer to make any Advance
(other than Advances which the Master Servicer deems would be nonrecoverable)
which continues unremedied at the opening of business on the Payment Date in
respect of which such Advance was to have been made. Notwithstanding the
foregoing, if an Event of Default described in clause (iv) above occurs, the
Certificate Trustee shall, by written notice to the Master Servicer, immediately
suspend all of the rights and obligations of the Master Servicer thereafter
arising under the Pooling and Servicing Agreement, but without prejudice to any
rights it may have as a Certificateholder or to reimbursement of Advances, and
the Certificate Trustee will act to carry out the duties of the Master Servicer,
including the obligation to make any Advance the nonpayment of which was an
Event of Default described in clause (iv) above. The Certificate Trustee will
permit the Master Servicer to resume its rights and obligations as Master
Servicer under the Pooling and Servicing Agreement if the Master Servicer,
within two Business Days following its suspension, remits to the Certificate
Trustee the amount of any Advance the nonpayment of which by the Master Servicer
was an Event of Default described in clause (iv) above. If an Event of Default
as described in clause (iv) above occurs more than two times in any twelve month
period, the Certificate Trustee will not be obligated to permit the Master
Servicer to resume its rights and obligations under the Pooling and Servicing
Agreement.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under the Pooling and Servicing Agreement
remains unremedied, either the Certificate Trustee or holders of Certificates
evidencing Fractional Undivided Interests aggregating not less than 66 2/3% of
the Trust Fund, as determined in the manner set forth in the Pooling and
Servicing Agreement, may terminate all of the rights and obligations of the
Master Servicer under the Pooling and Servicing Agreement,
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whereupon the Certificate Trustee will succeed to all the responsibilities,
duties and liabilities of the Master Servicer under the Pooling and Servicing
Agreement and will be entitled to similar compensation arrangements and
limitations on liability. In the event that the Certificate Trustee is unwilling
or unable to so act, it may appoint or petition a court of competent
jurisdiction for the appointment of an established housing and home finance
institution with a net worth of at least $10,000,000 to act as successor to the
Master Servicer under such Pooling and Servicing Agreement. Pending any such
appointment, the Certificate Trustee is obligated to act in such capacity. In
the event the Certificate Trustee acts as successor to the Master Servicer, the
Certificate Trustee will be obligated to make Advances unless it is prohibited
by law from doing so. The Certificate Trustee and such successor may agree upon
the compensation to be paid, which in no event may be greater than the
compensation to the Master Servicer under the Pooling and Servicing Agreement.
Subject to certain limitations, holders of Certificates evidencing Fractional
Undivided Interests aggregating not less than 66 2/3% of the Trust Fund, as
determined in the manner set forth in the Pooling and Servicing Agreement, may
direct the action of the Certificate Trustee in pursuing remedies and exercising
powers under the Pooling and Servicing Agreement.
The Certificate Trustee is under no obligation to exercise any of the
extraordinary trusts or powers vested in it by the Pooling and Servicing
Agreement or to make any investigation of matters arising thereunder or to
institute, conduct or defend any litigation thereunder or in relation thereto at
the request, order or direction of any of the Certificateholders, unless such
Certificateholders have offered to the Certificate Trustee reasonable security
or indemnity against the costs, expenses and liabilities which may be incurred
therein or thereby.
AMENDMENT
The Pooling and Servicing Agreement may be amended by the Master
Servicer, the Issuer and the Certificate Trustee without the consent of any of
the Certificateholders but with the consent of the Bond Insurer: (i) to cure any
ambiguity; (ii) to correct or supplement any provision therein which may be
inconsistent with any other provision therein; (iii) to comply with any
requirements imposed by the Internal Revenue Code of 1986, as amended (the
"CODE"); and (iv) to correct the description of any property at any time
included in the Trust Fund, or to assure conveyance to the Certificate Trustee
of any property included in the Trust Fund. The Pooling and Servicing Agreement
may also be amended by the Master Servicer, the Issuer and the Certificate
Trustee with the consent of the Bond Insurer and the holders of Certificates
evidencing Fractional Undivided Interests aggregating not less than 66 2/3% of
the Trust Fund, as determined in the manner set forth in the Pooling and
Servicing Agreement, for the purpose of adding any provisions to or changing in
any manner or eliminating any of the provisions of the Pooling and Servicing
Agreement or of modifying in any manner the rights of the holders of the
Certificates; provided, however, that no such amendment may, without the consent
of the holders of each Certificate affected thereby: (i) reduce in any manner
the amount of, or delay the timing of, payments of principal or interest
required to be made under the Pooling and Servicing Agreement or reduce such
Certificateholder's Fractional Undivided Interest in the Trust Fund, the
Remittance Rate, the Purchase Price or the Repurchase Price with respect to the
Certificates; (ii) reduce the percentage of Fractional Undivided Interests which
are required to amend the Pooling and Servicing Agreement with respect to the
Certificates; (iii) create or permit the creation of any lien against any part
of the Trust Fund; or (iv) modify any provision in any way which would permit an
earlier retirement of the Certificates.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate upon payment to the Bondholders of all amounts required to be paid to
the Bondholders pursuant to the Indenture following the earlier of: (i) the
final payment or other liquidation (or any Advance with respect thereto) of the
last Mortgage Loan remaining in the Trust Fund or the disposition of all
property acquired upon foreclosure of any such Mortgage Loan and (ii) the
repurchase of all of the Mortgage Loans by the Class X Bondholder or the Master
Servicer when the Aggregate Loan Balance equals 10% or less of the Cut-off Date
Balance, as described herein under "Description of the Bonds -- Optional
Purchase of Mortgage Loans; Redemption of the Bonds."
Any such repurchase of Mortgage Loans and property acquired in respect
of the Mortgage Loans shall be made at a price at least equal to the Purchase
Price. The exercise of the right to repurchase the Mortgage Loans by the Class X
Bondholder or the Master Servicer as set forth in clause (ii) of the preceding
paragraph will effect early retirement of the Certificates and an early
redemption of the Bonds.
THE CERTIFICATE TRUSTEE
Bank One, National Association will be the Certificate Trustee under the
Pooling and Servicing Agreement. The Issuer and the Master Servicer may maintain
other banking relationships in the ordinary course of business with the
Certificate Trustee. Offered Bonds may be surrendered at the Corporate Trust
Office of the Certificate Trustee located at 1 Bank One Plaza, Chicago,
Illinois, 60607 or at such other addresses as the Certificate Trustee may
designate from time to time by notice to the Bondholders, the Issuer, the Master
Servicer and the Bond Insurer.
The Certificate Trustee is eligible to serve as such under the Pooling
and Servicing Agreement only if it is (i) an institution insured by the FDIC,
(ii) a corporation or association organized and doing business under the laws of
the United States or of any state thereof, authorized under such laws to
exercise corporate trust powers, having a combined capital and surplus of not
less than $50,000,000, and subject to supervision or examination by federal or
state authority, and (iii) acceptable to the Rating Agencies.
Under the Pooling and Servicing Agreement, the Certificate Trustee may
resign at any time upon giving written notice to the Master Servicer and the
Bond Insurer. In such event the Master Servicer shall appoint a successor
Certificate Trustee. The Master Servicer may also remove the Certificate Trustee
if the Certificate
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Trustee ceases to be eligible to continue as such under the Pooling and
Servicing Agreement or if the capital and surplus of the Certificate Trustee is
reduced below $50 million. Upon becoming aware of such circumstances, the Master
Servicer will be obligated to appoint a successor Certificate Trustee. The
Certificate Trustee may also be removed at any time by holders of Certificates
evidencing more than 66 2/3% of the aggregate Fractional Undivided Interests in
the Trust Fund. 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.
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
GENERAL
The Indenture provides that the Trust Estate, exclusive of the assets
held in the Basis Risk Reserve Fund, will comprise a "Lower Tier REMIC" and an
"Upper Tier REMIC" organized in a tiered REMIC structure. The Lower Tier REMIC
will issue uncertificated regular interests and those interests will be held
entirely by the Upper Tier REMIC. The Lower Tier REMIC and the Upper Tier REMIC
will designate a single class of interests as the residual interest in that
REMIC. The Class R Bond will represent ownership of the residual interests in
each of the REMICs. Elections will be made to treat each Lower Tier REMIC and
the Upper Tier REMIC as a REMIC for federal income tax purposes.
Each Class of Offered Bonds, other than the Class R Bonds (the "OFFERED
REGULAR BONDS"), the Class P and the Class X Bonds will represent beneficial
ownership of a corresponding class of regular interests issued by the Upper Tier
REMIC. In addition, each of the Offered Regular Bonds will represent a
beneficial interest in the right to receive payments from the Basis Risk Reserve
Fund.
Upon the issuance of the Offered Bonds, Andrews & Kurth L.L.P. ("TAX
COUNSEL") will deliver its opinion to the effect that, assuming compliance with
the Indenture, for federal income tax purposes, the Lower Tier REMIC and the
Upper Tier REMIC will qualify as a REMIC within the meaning of Section 860D of
the Internal Revenue Code of 1986, as amended (the "CODE"). In addition, Tax
Counsel will deliver an opinion to the effect that the Basis Risk Reserve Fund
is an "outside reserve fund" that is beneficially owned by the holder of the
Class X Bond. Moreover, Tax Counsel will deliver an opinion to the effect that
the rights of the holders of the Offered Regular Bonds to receive payments from
the Basis Risk Reserve Fund represents, for federal income tax purposes,
interests in an interest rate cap contract.
TAXATION OF REGULAR INTERESTS
A holder of a Class of Offered Regular Bonds will be treated for federal
income tax purposes as owning an interest in the corresponding Class of regular
interests in the Upper Tier REMIC and an interest in a limited recourse interest
rate cap contract (the "CAP CONTRACT"). A holder of a Class A, Class M2, Class
M1 or Class B Bond must allocate its purchase price for the Offered Regular Bond
between its components -- the REMIC regular interest component and the Cap
Contract components. For information reporting purposes, the Indenture Trustee
will assume that, with respect to any Offered Regular Bond, the Cap Contract
components will have only nominal value relative to the value of the regular
interest component. The IRS could, however, argue that the Cap Contract
components have significant value, and if that argument were to be sustained,
the regular interest component could be viewed as having been issued with an
additional amount of original issue discount ("OID") (which could cause the
total amount of OID to exceed a statutorily defined de minimis amount). See
"Certain Federal Income Tax Consequences -- Taxation of Regular Bonds --
Original Issue Discount" in the Prospectus.
Upon the sale, exchange, or other disposition of an Offered Regular
Bond, the holder must allocate the amount realized between the components of the
Offered Regular Bond based on the relative fair market values of those
components at the time of sale. Assuming that an Offered Regular Bond is held as
a "capital asset" within the meaning of section 1221 of the Code, gain or loss
on the disposition of an interest in the Cap Contract component should be
capital gain or loss, and gain or loss on the disposition of the regular
interest component should, subject to the limitation described below, be capital
gain or loss. Gain attributable to the regular interest components of an Offered
Regular Bond will be treated as ordinary income, however, to the extent such
gain does not exceed the excess, if any, of (1) the amount that would have been
includible in the holder's gross income with respect to the regular interest
component had income thereon accrued at a rate equal to 110% of the applicable
federal rate as defined in section 1274(d) of the Code determined as of the date
of purchase of the Offered Regular Bond over (2) the amount actually included in
such holder's income.
Interest on the regular interest component of an Offered Regular Bond
must be included in income by a holder under the accrual method of accounting,
regardless of the holder's regular method of accounting. In addition, the
regular interest components of the Offered Regular Bonds could be considered to
have been issued with OID. See "Certain Federal Income Tax Consequences --
Taxation of Regular Bonds -- Original Issue Discount" in the Prospectus. The
prepayment assumption that will be used in determining the accrual of any OID,
market discount, or bond premium, if any, will be a rate equal to 100% of the
prepayment assumption. No representation is made that the Mortgage Loans will
prepay at such a rate or at any other rate. OID must be included in income as it
accrues on a constant yield method, regardless of whether the holder receives
currently the cash attributable to such OID.
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STATUS OF THE OFFERED BONDS
The regular interest components of the Offered Regular Bonds will be
treated as assets described in Section 7701(a)(19)(C) of the Code, and as "real
estate assets" under Section 856(c)(5)(B) of the Code, generally, in the same
proportion that the assets of the Trust Estate, exclusive of the Basis Risk
Reserve Fund, would be so treated. In addition, to the extent the regular
interest component of an Offered Regular Bond represents real estate assets
under section 856(c)(5)(B) of the Code, the interest derived from that component
would be interest on obligations secured by interests in real property for
purposes of section 856(c)(3) of the Code. The Cap Contract components of a
Class A, Class M2, Class M1 and Class B Bond will not, however, qualify as an
asset described in Section 7701(a)(19)(C) of the Code or as a real estate asset
under Section 856(c)(5)(B) of the Code.
THE BASIS RISK RESERVE FUND
As indicated above, a portion of the purchase price paid by a holder to
acquire a Class A, Class M1, Class M2 or Class B Bond will be attributable to
the Cap Contract components of such Bond. The portion of the overall purchase
price attributable to the Cap Contract components must be amortized over the
life of such Bond, taking into account the declining balance of the related
regular interest component. Treasury regulations concerning notional principal
contracts provide alternative methods for amortizing the purchase price of an
interest rate cap contract. Under one method -- the level yield constant
interest method -- the price paid for an interest rate cap is amortized over the
life of the cap as though it were the principal amount of a loan bearing
interest at a reasonable rate. Holders are urged to consult their tax advisors
concerning the methods that can be employed to amortize the portion of the
purchase price paid for the Cap Contract components of an Offered Regular Bond.
Any payments made to a holder from the Basis Risk Reserve Fund will be
treated as periodic payments on an interest rate cap contract. To the extent the
sum of such periodic payments for any year exceeds that year's amortized cost of
the Cap Contract component, such excess is ordinary income. If for any year the
amount of that year's amortized cost exceeds the sum of the periodic payments,
such excess is allowable as an ordinary deduction.
For further information regarding the federal income tax consequences of
investing in the Offered Bonds, see "Certain Federal Income Tax Consequences" in
the Prospectus.
LEGAL INVESTMENT CONSIDERATIONS
The Senior Bonds and the Class M1 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 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 Class M2 and Class B Bonds will not constitute
"mortgage related securities" under SMMEA.
Institutions whose investment activities are subject to review by
certain regulatory authorities may be or may become subject to restrictions,
which may be retroactively imposed by such regulatory authorities, on the
investment by such institutions in certain mortgage related securities. In
addition, several states have adopted or may adopt regulations that prohibit
certain state-chartered institutions from purchasing or holding similar types of
securities.
Accordingly, investors should consult their own legal advisors to
determine whether and to what extent the Offered Bonds may be purchased by such
investors.
See "Legal Investment" in the Prospectus.
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 REGULATION").
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.
S-55
<PAGE> 56
Plan Asset Regulation and The Bonds. The United States Department of
Labor (the "DOL") has issued the Plan Asset Regulation concerning the definition
of what constitutes the assets of the Plan for purposes of ERISA and the
prohibited transaction provisions of the Code. The Plan Asset Regulation
describes 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 Regulation, 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
Regulation provides 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 Regulation, 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 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 has 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 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 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.
The Class X and Class R Bonds are expected to have "substantial equity
characteristics." Accordingly, no Class X or Class R Bond may be acquired by a
Plan, a person acting on behalf of a Plan, or any person using the assets of a
Plan (each, a "PLAN INVESTOR"). Although the matter is not entirely clear, the
Class B Bonds may have "substantial equity characteristics." Consequently, no
transfer of the Class B Bonds will be permitted to be made to any person unless
the proposed transferee delivers to the Indenture Trustee either (i) a
certificate from such transferee to the effect that such transferee is not a
Plan Investor or, in the case of an insurance company, is not a Plan Investor,
or is eligible for an exemption from the applicable prohibited transaction
provisions of ERISA and the Code, or (ii) an opinion of counsel satisfactory to
the Indenture Trustee and the Issuer to the effect that the purchase and holding
of such Bonds will not constitute or result in a prohibited transaction under
ERISA or the Code and will not subject the Master Servicer, the servicers, the
Certificate Trustee, the Indenture Trustee, the Issuer or their respective
affiliates to any obligation or liability (including obligations or liabilities
under ERISA or Section 4975 of the Code) in addition to those undertaken in the
Indenture (a "BENEFIT PLAN OPINION").
In addition, without regard to whether the Bonds are considered to be
equity interests in the Issuer, certain affiliates of the Issuer or the Master
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 Class A, Class M1 or Class M2 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.
S-56
<PAGE> 57
USE OF PROCEEDS
The net proceeds from the sale of the Offered Bonds will be applied by
the Issuer, or an affiliate thereof, toward the purchase of the Mortgage Loans.
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting
agreement and in a terms agreement (collectively, 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, all of
the Offered Bonds.
The distribution of the Offered Bonds by the Underwriter will be
effected in each case 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 Bonds to or
through dealers, and such dealers may receive from the Underwriter, for whom
they act as agent, compensation in the form of underwriting discounts,
concessions or commissions. The Underwriter and any dealers that participate
with the Underwriter in the distribution of the Bonds may be deemed to be an
underwriter, and any discounts, commissions or concessions received by them, and
any profit on the resale of the Bonds purchased by them, may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933, as
amended (the "ACT"). The Underwriting Agreement provides that the Issuer will
indemnify the Underwriter against certain civil liabilities, including
liabilities under the Act.
DLJ has entered into an agreement with the Issuer to purchase the Class
P and Class X Bonds simultaneously with the purchase of the Offered Bonds,
subject to certain conditions.
EXPERTS
The consolidated balance sheets of MBIA Insurance Corporation and
Subsidiaries as of December 31, 1999 and December 31, 1998 and the related
consolidated statements of income, changes in shareholder's equity, and cash
flows for each of the three years in the period ended December 31, 1999,
incorporated by reference herein, have been incorporated herein in reliance on
the report of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of that firm as experts in accounting and auditing.
LEGAL MATTERS
Certain legal matters with respect to the Bonds will be passed upon for
the Issuer by Andrews & Kurth L.L.P. and for the Underwriter by Brown & Wood
LLP, New York, New York. The enforceability of the Class A Bond Insurance Policy
will be passed upon by Kutak Rock LLP, Omaha, Nebraska, special counsel to the
Bond Insurer.
RATINGS
It is a condition to the issuance of the Class A Bonds that they be
rated "AAA" by Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("S&P"), "AAA" by Duff & Phelps Credit Rating Co. ("DCR") and
"Aaa" by Moody's Investors Service, Inc. ("MOODY'S and, together with S&P and
DCR, the "RATING AGENCIES" or a "RATING AGENCY"). It is a condition to the
issuance of the Class R Bonds that they be rated "AAA" by S&P and DCR. It is a
condition to the issuance of the Class M1 Bonds that they be rated "AA" by S&P
and DCR and "Aa2" by Moody's. It is a condition to the issuance of the Class M2
Bonds that they be rated "A" by S&P and DCR and "A2" by Moody's. It is a
condition to the issuance of the Class B Bonds that they be rated "BBB-" by S&P
and DCR and "Baa3" by Moody's. The ratings on the Class A Bonds are without
regard to the Class A Bond Insurance Policy.
The rating of "AAA" is the highest rating that each of S&P and DCR
assigns to securities. The rating of "Aaa" is the highest rating that Moody's
assigns to securities.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. A securities rating addresses the likelihood of
the timely receipt of interest and ultimate payment of principal by holders of
Offered Bonds. The rating takes into consideration the characteristics of the
Mortgage Loans and the structural and legal aspects associated with the Offered
Bonds. The ratings on the Offered Bonds do not represent any assessment of the
likelihood or rate of principal prepayments. The ratings do not address the
possibility that holders of Offered Bonds might suffer a lower than anticipated
yield due to prepayments. In addition, the ratings do not address the likelihood
that any Basis Risk Shortfall or Unpaid Basis Risk Shortfall will be repaid to
Bondholders from Monthly Excess Cashflow.
The security ratings assigned to the Offered Bonds should be evaluated
independently from similar ratings on other types of securities.
The Issuer has not requested a rating of the Offered Bonds by any rating
agency other than the Rating Agencies; there can be no assurance, however, 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.
S-57
<PAGE> 58
INDEX OF DEFINED TERMS
<TABLE>
<S> <C>
"A Spread".....................................................................................................S-28
"Accrual Period"...............................................................................................S-29
"Act"..........................................................................................................S-58
"Adjustable Rate Mortgage Loans"...............................................................................S-16
"Adjustment Date"..............................................................................................S-17
"Advance"......................................................................................................S-24
"Aggregate Expense Rate".......................................................................................S-29
"Aggregate Loan Balance".......................................................................................S-34
"Applied Loss Amount"..........................................................................................S-35
"B Principal Payment Amount"...................................................................................S-33
"B Spread".....................................................................................................S-28
"Balloon Loans"................................................................................................S-17
"Balloon Payments".............................................................................................S-17
"Basis Risk Reserve Fund"......................................................................................S-29
"Basis Risk Shortfall".........................................................................................S-29
"Beneficial Owner".............................................................................................S-27
"Benefit Plan Opinion".........................................................................................S-56
"Bloomberg Screen LIUS01M Index Page"..........................................................................S-30
"Bond Administrator Fee".......................................................................................S-49
"Bond Administrator"...........................................................................................S-16
"Bond Insurer".................................................................................................S-36
"Bond Insurer's Premium Rate"..................................................................................S-28
"Bonds"........................................................................................................S-26
"Book-Entry Bonds".............................................................................................S-27
"Book-Entry Termination".......................................................................................S-27
"Business Day".................................................................................................S-27
"Carryforward Interest"........................................................................................S-29
"CCC"..........................................................................................................S-15
"Certificate Account"..........................................................................................S-26
"Certificate Trustee"..........................................................................................S-15
"Certificateholders"...........................................................................................S-16
"Certificates".................................................................................................S-26
"Class Principal Amount".......................................................................................S-26
"Code".........................................................................................................S-53
"Collection Account"...........................................................................................S-26
"Collection Period"............................................................................................S-31
"Compensating Interest"........................................................................................S-24
"Current Interest".............................................................................................S-29
"Curtailments".................................................................................................S-31
"Custodial Account for P&I"....................................................................................S-49
"Custodial Account for Reserves"...............................................................................S-49
"Cut-off Date Balance".........................................................................................S-34
"DCR"..........................................................................................................S-57
"Deferred Amount"..............................................................................................S-36
"Deficiency Amount"............................................................................................S-37
"Definitive Bond"..............................................................................................S-27
"Delinquency Rate".............................................................................................S-32
"DLJMCI".......................................................................................................S-15
"DLJ"..........................................................................................................S-23
"DOL"..........................................................................................................S-56
"DTC"..........................................................................................................S-27
"Due Date".....................................................................................................S-16
"FDIC".........................................................................................................S-50
"Fixed Rate Mortgage Loans"....................................................................................S-16
"Flood Policy".................................................................................................S-26
"Gross Margin".................................................................................................S-17
"Highest Priority Junior Class"................................................................................S-34
"Indemnified Parties"..........................................................................................S-52
"Indenture Event of Default"...................................................................................S-27
"Indenture Trustee"............................................................................................S-16
"Indenture"....................................................................................................S-16
"Initial Cap"..................................................................................................S-17
"Initial Purchase Date"........................................................................................S-39
"Insurance Proceeds"...........................................................................................S-50
"Insured Bonds"................................................................................................S-36
"Insured Payment"..............................................................................................S-37
"Interest Rate"................................................................................................S-28
"Interest Remittance Amount"...................................................................................S-29
"Interest Shortfall"...........................................................................................S-30
"Investment Account"...........................................................................................S-50
"Investment Depository"........................................................................................S-50
</TABLE>
S-58
<PAGE> 59
<TABLE>
<S> <C>
"Investment Period"............................................................................................S-50
"Issuer".......................................................................................................S-15
"Lender PMI Mortgage Loans"....................................................................................S-25
"Lender PMI Premium Rate"......................................................................................S-28
"Lender PMI Premium"...........................................................................................S-25
"LIBOR Determination Date".....................................................................................S-30
"LIBOR"........................................................................................................S-30
"Liquidated Mortgage Loan".....................................................................................S-35
"Liquidation Proceeds".........................................................................................S-50
"LIUS01M"......................................................................................................S-30
"Loan Sale Agreement"..........................................................................................S-15
"Loan-to-Value Ratio"..........................................................................................S-17
"London Banking Day"...........................................................................................S-30
"M1 Principal Payment Amount"..................................................................................S-33
"M1 Spread"....................................................................................................S-28
"M2 Principal Payment Amount"..................................................................................S-33
"M2 Spread"....................................................................................................S-28
"Master Servicer"..............................................................................................S-15
"Master Servicing Fee Rate"....................................................................................S-24
"Master Servicing Fee".........................................................................................S-24
"Maximum Interest Rate"........................................................................................S-29
"Maximum Rate".................................................................................................S-17
"Minimum Rate".................................................................................................S-17
"Modeling Assumptions".........................................................................................S-41
"Monthly Excess Cashflow"......................................................................................S-35
"Monthly Excess Interest"......................................................................................S-30
"Mortgage Loan"................................................................................................S-15
"Mortgage Pool"................................................................................................S-15
"Mortgage Rate"................................................................................................S-15
"Mortgage Related Securities"..................................................................................S-55
"Mortgaged Property"...........................................................................................S-17
"Net Funds Cap"................................................................................................S-28
"Net Liquidation Proceeds".....................................................................................S-34
"Net Mortgage Rate"............................................................................................S-28
"Offered Bonds"................................................................................................S-26
"Offered Regular Bonds"........................................................................................S-54
"OID"..........................................................................................................S-54
"Old Kent".....................................................................................................S-15
"One-Year CMT Index"...........................................................................................S-18
"Optimal Interest Remittance Amount"...........................................................................S-28
"Optional Redemption"..........................................................................................S-39
"Originators"..................................................................................................S-15
"Overcollateralization Amount".................................................................................S-33
"Overcollateralization Deficiency".............................................................................S-33
"Overcollateralization Release Amount".........................................................................S-33
"Participant"..................................................................................................S-27
"Parties in Interest"..........................................................................................S-55
"Payahead".....................................................................................................S-30
"Payment Date".................................................................................................S-26
"Periodic Cap".................................................................................................S-17
"Plan Asset Regulation"........................................................................................S-55
"Plan Investors"...............................................................................................S-55
"Plan".........................................................................................................S-55
"PNC"..........................................................................................................S-15
"Pooling and Servicing Agreement"..............................................................................S-15
"Preference Amount"............................................................................................S-37
"Prepayment Period"............................................................................................S-31
"Prepayment Premium"...........................................................................................S-17
"Primary Insurance Policy".....................................................................................S-25
"Principal Payment Amount".....................................................................................S-31
"Principal Prepayments"........................................................................................S-31
"Principal Remittance Amount"..................................................................................S-31
"pro rata".....................................................................................................S-34
"PTCE".........................................................................................................S-56
"Purchase Price"...............................................................................................S-39
"R Spread".....................................................................................................S-28
"Rating Agencies"..............................................................................................S-57
"Rating Agency"................................................................................................S-57
"Real Estate Assets"...........................................................................................S-55
"Record Date"..................................................................................................S-26
"Reference Banks"..............................................................................................S-30
"Relief Act"...................................................................................................S-24
"Remittance Rate"..............................................................................................S-15
</TABLE>
S-59
<PAGE> 60
<TABLE>
<S> <C>
"Repurchase Price".............................................................................................S-24
"Reserve Interest Rate"........................................................................................S-31
"Rolling Three Month Delinquency Rate".........................................................................S-32
"Rules"........................................................................................................S-27
"S&P"..........................................................................................................S-57
"Scheduled Payment"............................................................................................S-34
"Scheduled Principal Balance"..................................................................................S-34
"Seller".......................................................................................................S-15
"Senior Enhancement Percentage"................................................................................S-33
"Senior Principal Payment Amount"..............................................................................S-33
"Servicing Agreement"..........................................................................................S-15
"Servicing Fee Rate"...........................................................................................S-23
"Servicing Fee"................................................................................................S-23
"Six-Month LIBOR Index"........................................................................................S-18
"SMMEA"........................................................................................................S-55
"Spread".......................................................................................................S-28
"Standard Hazard Policy".......................................................................................S-25
"Stated Income Documentation"..................................................................................S-21
"Stepdown Date"................................................................................................S-32
"Substitution Amount"..........................................................................................S-30
"Targeted Overcollateralization Amount"........................................................................S-33
"Tax Counsel"..................................................................................................S-54
"Trigger Event"................................................................................................S-32
"Trust Estate".................................................................................................S-26
"Trust Fund"...................................................................................................S-26
"Trustee Fee Rate".............................................................................................S-29
"Trustee Fee"..................................................................................................S-29
"Trust"........................................................................................................S-15
"Underwriter"..................................................................................................S-23
"Underwriting Agreement".......................................................................................S-57
"Underwriting Guidelines"......................................................................................S-21
"Unpaid Basis Risk Shortfall"..................................................................................S-29
"Upper Tier REMIC".............................................................................................S-54
"Withdrawal Date"..............................................................................................S-50
</TABLE>
S-60
<PAGE> 61
EXHIBIT A
FORM OF FINANCIAL GUARANTY INSURANCE POLICY
<TABLE>
<S> <C> <C>
OBLIGATIONS: CMC Securities Corporation III POLICY NUMBER: 31862
Collateralized Mortgage Obligations, Series 2000-1
$195,874,506 Class A Bonds
</TABLE>
MBIA Insurance Corporation (the "Insurer"), in consideration of the payment
of the premium and subject to the terms of this Financial Guaranty Insurance
Policy (this "Policy"), hereby unconditionally and irrevocably guarantees to any
Owner that an amount equal to each full and complete Insured Payment will be
received from the Insurer by Bank One, National Association, or its successors,
as trustee for the Owners (the "Indenture Trustee"), on behalf of the Owners,
for payment by the Indenture Trustee to each Owner of each Owner's proportionate
share of the Insured Payment. The Insurer's obligations hereunder with respect
to a particular Insured Payment shall be discharged to the extent funds equal to
the applicable Insured Payment are received by the Indenture Trustee, whether or
not such funds are properly applied by the Indenture Trustee. Insured Payments
shall be made only at the time set forth in this Policy, and no accelerated
Insured Payments shall be made regardless of any acceleration of the
Obligations, unless such acceleration is at the sole option of the Insurer. This
Policy does not provide credit enhancement for any Class of Bonds other than the
Class A Bonds.
Notwithstanding the foregoing paragraph, this Policy does not cover
shortfalls, if any, attributable to the liability of the Trust, the REMICs, the
Certificate Trustee or the Indenture Trustee for withholding taxes, if any
(including interest and penalties in respect of any such liability).
The Insurer will pay any Insured Payment that is a Preference Amount on the
Business Day following receipt on a Business Day by the Fiscal Agent (as
described below) of (a) a certified copy of the order requiring the return of a
preference payment, (b) an opinion of counsel satisfactory to the Insurer that
such order is final and not subject to appeal, (c) an assignment in such form as
is reasonably required by the Insurer, irrevocably assigning to the Insurer all
rights and claims of the Owner relating to or arising under the Obligations
against the debtor which made such preference payment or otherwise with respect
to such preference payment and (d) appropriate instruments to effect the
appointment of the Insurer as agent for such Owner in any legal proceeding
related to such preference payment, such instruments being in a form
satisfactory to the Insurer, provided that if such documents are received after
12:00 noon, New York City time, on such Business Day, they will be deemed to be
received on the following Business Day. Such payments shall be disbursed to the
receiver or trustee in bankruptcy named in the final order of the court
exercising jurisdiction on behalf of the Owner and not to any Owner directly
unless such Owner has returned principal or interest paid on the Obligations to
such receiver or trustee in bankruptcy, in which case such payment shall be
disbursed to such Owner.
The Insurer will pay any other amount payable hereunder no later than 12:00
noon, New York City time, on the later of the Payment Date on which the related
Deficiency Amount is due or the second Business Day following receipt in New
York, New York on a Business Day by State Street Bank and Trust Company, N.A.,
as Fiscal Agent for the Insurer, or any successor fiscal agent appointed by the
Insurer (the "Fiscal Agent"), of a Notice (as described below), provided that if
such Notice is received after 12:00 noon, New York City time, on such Business
Day, it will be deemed to be received on the following Business Day. If any such
Notice received by the Fiscal Agent is not in proper form or is otherwise
insufficient for the purpose of making claim hereunder, it shall be deemed not
to have been received by the Fiscal Agent for purposes of this paragraph, and
the Insurer or the Fiscal Agent, as the case may be, shall promptly so advise
the Indenture Trustee and the Indenture Trustee may submit an amended Notice.
Insured Payments due hereunder, unless otherwise stated herein, will be
disbursed by the Fiscal Agent to the Indenture Trustee on behalf of the Owners
by wire transfer of immediately available funds in the amount of the Insured
Payment less, in respect of Insured Payments related to Preference Amounts, any
amount held by the Indenture Trustee for the payment of such Insured Payment and
legally available therefor.
The Fiscal Agent is the agent of the Insurer only, and the Fiscal Agent
shall in no event be liable to Owners for any acts of the Fiscal Agent or any
failure of the Insurer to deposit, or cause to be deposited, sufficient funds to
make payments due under this Policy.
Subject to the terms of the Agreement, the Insurer shall be subrogated to
the rights of each Owner to receive payments under the Obligations to the extent
of any payment by the Insurer under this Policy.
As used herein, the following terms shall have the following meanings:
"Agreement" means the Indenture dated as of March 1, 2000 by and between
CMC Securities Corporation III and Bank One, National Association, as
supplemented by the Series 2000-1 Supplement dated as of March 31, 2000 by and
among CMC Securities Corporation III, PNC Mortgage Securities Corp. and Bank
One, National Association, without regard to any amendment or further supplement
thereto unless approved in writing by the Insurer.
"Business Day" means any day other than (a) a Saturday or a Sunday (b) a
day on which the Insurer is closed or (c) a day on which banking institutions in
New York City or in the city in which the corporate trust office of the
A-1
<PAGE> 62
Indenture Trustee under the Agreement is located are authorized or obligated by
law or executive order to close.
"Deficiency Amount" means, with respect to any Payment Date, the sum of (i)
the amount, if any, by which the amount available to be paid as interest to the
Class A Bonds, pursuant to the priority of payment set forth in the Agreement,
is less than (A) the Current Interest plus any Carryforward Interest allocable
to the Class A Bonds minus (B) any Interest Shortfalls and (ii) to the extent
unpaid on the Final Scheduled Payment Date, after payment of all other amounts
due to the Class A Bonds, any remaining Class Principal Amount of the Class A
Bonds.
"Insured Payment" means (a) as of any Payment Date, any Deficiency Amount
and (b) any Preference Amount.
"Notice" means the telephonic or telegraphic notice, promptly confirmed in
writing by facsimile substantially in the form of Exhibit A attached hereto, the
original of which is subsequently delivered by registered or certified mail,
from the Indenture Trustee specifying the Insured Payment which shall be due and
owing on the applicable Payment Date.
"Owner" means each Class A Bondholder (as defined in the Agreement) who, on
the applicable Payment Date, is entitled under the terms of the applicable Class
A Bonds to payment thereunder.
"Preference Amount" means any amount previously paid to an Owner on the
Obligations that is recoverable and sought to be recovered as a voidable
preference by a trustee in bankruptcy pursuant to the United States Bankruptcy
Code (11 U.S.C.), as amended from time to time in accordance with a final
nonappealable order of a court having competent jurisdiction.
Capitalized terms used herein and not otherwise defined herein shall have
the respective meanings set forth in the Agreement as of the date of execution
of this Policy, without giving effect to any subsequent amendment to or
modification of the Agreement unless such amendment or modification has been
approved in writing by the Insurer.
Any notice hereunder or service of process on the Fiscal Agent may be made
at the address listed below for the Fiscal Agent or such other address as the
Insurer shall specify in writing to the Indenture Trustee.
The notice address of the Fiscal Agent is 15th Floor, 61 Broadway, New
York, New York 10006, Attention: Municipal Registrar and Paying Agency, or such
other address as the Fiscal Agent shall specify to the Indenture Trustee in
writing.
THIS POLICY IS BEING ISSUED UNDER AND PURSUANT TO, AND SHALL BE CONSTRUED
UNDER, THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICT
OF LAWS PRINCIPLES THEREOF.
The insurance provided by this Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law.
This Policy is not cancelable for any reason. The premium on this Policy is
not refundable for any reason, including payment, or provision being made for
payment, prior to maturity of the Obligations.
A-2
<PAGE> 63
IN WITNESS WHEREOF, the Insurer has caused this Policy to be executed and
attested this 31st day of March, 2000.
MBIA INSURANCE CORPORATION
By:
---------------------------------
Title:
------------------------------
Attest:
By:
---------------------------------
Assistant Secretary
A-3
<PAGE> 64
EXHIBIT A
TO FINANCIAL GUARANTY INSURANCE
POLICY NUMBER: 31862
NOTICE UNDER FINANCIAL GUARANTY
INSURANCE POLICY NUMBER: 31862
State Street Bank and Trust Company, N.A., as Fiscal Agent
for MBIA Insurance Corporation
15th Floor
61 Broadway
New York, NY 10006
Attention: Municipal Registrar and
Paying Agency
MBIA Insurance Corporation
113 King Street
Armonk, NY 10504
The undersigned, a duly authorized officer of [ ], as trustee (the "Indenture
Trustee"), hereby certifies to State Street Bank and Trust Company, N.A. (the
"Fiscal Agent") and MBIA Insurance Corporation (the "Insurer"), with reference
to Financial Guaranty Insurance Policy Number: 31862 (the "Policy") issued by
the Insurer in respect of the CMC Securities Corporation III Collateralized
Mortgage Obligations, Series 2000-1 $195,874,506 Class A Bonds (the
"Obligations"), that:
(a) the Indenture Trustee is the trustee under Indenture dated as
of March 1, 2000 by and between CMC Securities Corporation III
and Bank One, National Association, as supplemented by the
Series 2000-1 Supplement dated as of March 31, 2000 by and
among CMC Securities Corporation III, PNC Mortgage Securities
Corp. and Bank One, National Association;
(b) the amount due under clause (i) of the definition of
Deficiency Amount for the Payment Date occurring on [ ]
(the "Applicable Payment Date") is $[ ];
(c) the amount due under clause (ii) of the definition of
Deficiency Amount for the Applicable Payment Date is $[ ];
(d) the sum of the amounts listed in paragraphs (b) and (c) above
is $[ ] (the "Deficiency Amount");
(e) the amount of previously distributed payments on the
Obligations that is recoverable and sought to be recovered as
a voidable preference by a trustee in bankruptcy pursuant to
the Bankruptcy Code in accordance with a final nonappealable
order of a court having competent jurisdiction is $[ ] (the
"Preference Amount");
(f) the total Insured Payment due is $[ ], which amount equals
the sum of the Deficiency Amount and the Preference Amount;
(g) the Indenture Trustee is making a claim under and pursuant to
the terms of the Policy for the dollar amount of the Insured
Payment set forth in (d) above to be applied to the payment of
the Deficiency Amount for the Applicable Payment Date in
accordance with the Agreement and for the dollar amount of the
Insured Payment set forth in (e) above to be applied to the
payment of any Preference Amount; and
(h) the Indenture Trustee directs that payment of the Insured
Payment be made to the following account by bank wire transfer
of federal or other immediately available funds in accordance
with the terms of the Policy: [INDENTURE TRUSTEE'S ACCOUNT
NUMBER].
Any capitalized term used in this Notice and not otherwise defined herein shall
have the meaning assigned thereto in the Policy.
Any Person Who Knowingly And With Intent To Defraud Any Insurance Company Or
Other Person Files An Application For Insurance Or Statement Of Claim Containing
Any Materially False Information, Or Conceals For The Purpose Of Misleading,
Information Concerning Any Fact Material Thereto, Commits A Fraudulent Insurance
Act, Which Is A Crime, And Shall Also Be Subject To A Civil Penalty Not To
Exceed Five Thousand Dollars And The Stated Value Of The Claim For Each Such
Violation.
<PAGE> 65
IN WITNESS WHEREOF, the Indenture Trustee has executed and delivered
this Notice under the Policy as of the [ ] day of [ ], [ ].
[NAME OF INDENTURE TRUSTEE], as Indenture
Trustee
By:
-------------------------------------------
Title:
----------------------------------------
<PAGE> 66
PROSPECTUS
$754,114,907
CMC SECURITIES CORPORATION III
COLLATERALIZED MORTGAGE OBLIGATIONS (ISSUABLE IN SERIES)
-------------------
This Prospectus relates to $754,114,907 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 III. 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 MARCH 30, 2000.
<PAGE> 67
PROSPECTUS SUPPLEMENT
The Prospectus Supplement or Supplements relating to a Series of Bonds
to be offered hereunder will, among other things, set forth with respect to such
Series of Bonds:
i. information regarding the issuance of such Series;
ii. the aggregate principal amount, the interest rate or the method by
which such interest rate may be determined, and the authorized denominations of
each Class of such Bonds;
iii. the identification and characteristics of the collateral securing
such Bonds, including, if applicable, the amount of the Reserve Fund or Funds
for such Series;
iv. the order of the application of principal payments to the Classes
of such Bonds and the allocation of principal to be so applied;
v. the circumstances, if any, under which the Bonds of such Series are
subject to special redemption or optional redemption;
vi. any minimum principal payment requirements and the terms of any
related minimum principal payment agreement with respect to such Series;
vii. the Stated Maturity of each Class of such Bonds and the method
used to determine such Stated Maturities;
viii. the method used to calculate the aggregate amount of principal
required to be paid on the Bonds of such Series on each Payment Date;
ix. the principal amount of each Class of such Bonds that would be
outstanding on specified Payment Dates if the mortgages underlying the
Certificates pledged as security for such Bonds were prepaid at various assumed
rates;
x. the Payment Dates, record dates, redemption dates, if any, and the
Assumed Reinvestment Rate for such Series of Bonds;
xi. whether such Series is participating in the Issuer's Special Hazard
and Bankruptcy Account and, if so, the Claim Ceiling for such Series (as defined
herein);
xii. if applicable, the Issuer's ratio of earnings to fixed charges;
xiii. whether such Series constitutes a Series of Special Allocation
Bonds;
xiv. if all or part of the collateral for the Bonds of such Series
consists of Non-Agency Certificates, information concerning the Agency
Certificates or mortgages evidenced by such Certificates and related servicing
and, if applicable, insurance or guaranty arrangements;
xv. whether ownership of Bonds of any Class of such Series will
initially be available only in book entry form through a clearing agency and, if
so, the duties to be performed by the clearing agency with respect to principal
payments and redemptions and the conditions, if any, under which definitive
Bonds will be available to beneficial owners;
xvi. the investment rating agencies and ratings required with respect
to such Series;
xvii. the extent, if any, to which deposits, withdrawals or
substitutions of Certificates securing the Bonds may be permitted;
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<PAGE> 68
xviii. whether an election will be made to treat one or more segregated
pools of assets securing such Series as a REMIC;
xix. the identity of the Indenture Trustee for such Series; and
xx. additional information with respect to the plan of distribution of
such Bonds.
AVAILABLE INFORMATION
The Issuer was incorporated in Delaware on May 6, 1992. The Issuer is
subject to the informational requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), and in accordance therewith is required
to file reports and other information with the Securities and Exchange
Commission (the "Commission"). Such reports and other information filed by the
Issuer with the Commission can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington D.C. 20549; and at the following regional offices of
the Commission: Chicago Regional Office, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and New York Regional Office, 7 World Trade Center,
Suite 1300, New York, New York 10048. Copies of such material can also be
obtained from the Commission at prescribed rates through its Public Reference
Section at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
maintains a Web site that contains reports, proxy and information statements 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 8401 N. Central
Expressway, Suite 800, Dallas, Texas 75225. Its telephone number is (214)
874-2323.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following document heretofore filed by the Issuer with the
Commission is incorporated herein by reference:
o The Issuer's Annual Report on Form 10-K for the year ended
December 31, 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, Executive Vice President -- Finance, CMC Securities Corporation III,
8401 N. Central Expressway, Suite 800, Dallas, Texas 75225 (214/874-2323).
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<PAGE> 69
SUMMARY OF PROSPECTUS
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and by reference to the
information with respect to each Series of Bonds contained in the Prospectus
Supplement or Supplements to be prepared and delivered in connection with the
offering of Bonds of such Series.
Securities Offered...... Collateralized Mortgage Obligations (the "Bonds")
collateralized by certificates ("Certificates")
evidencing undivided interests in pools of
residential mortgage loans. The Certificates will
consist of one or more of the following:
(i) "fully modified pass-through" mortgage-backed
certificates ("GNMA Certificates") guaranteed as to
timely payment of principal and interest by the
Government National Mortgage Association ("GNMA"),
(ii)Guaranteed Mortgage Pass-Through Certificates
("FNMA Certificates") issued and guaranteed as to
timely payment of principal and interest by the
Federal National Mortgage Association ("FNMA"),
(iii) Mortgage Participation Certificates ("FHLMC
Certificates") issued and guaranteed as to timely
payment of interest and ultimate collection (and to
the extent specified in the related Prospectus
Supplement, timely payment) of principal by the
Federal Home Loan Mortgage Corporation ("FHLMC"),
(iv)pass-through certificates or participation
certificates ("Non-Agency Certificates") which are
neither issued nor guaranteed by an agency or
instrumentality of the United States and which
evidence undivided interests in Agency Certificates
(defined hereafter) or pools of mortgage loans
secured by single family (one- to four-units) or
multi-family residences, or
(v) a combination of such Certificates.
The Non-Agency Certificates pledged to secure any
Series of Bonds may be guaranteed as to payment of
principal and interest by a third-party insurer or
guarantor, to the extent provided in the related
Prospectus Supplement. GNMA Certificates, FNMA
Certificates and FHLMC Certificates are referred to
collectively in this Prospectus as "Agency
Certificates".
The Bonds will be issued from time to time in Series
pursuant to an Indenture (an "Indenture") between the
Issuer (as defined below) and the trustee for such
Series (the "Indenture Trustee"), as supplemented by
one or more supplemental indentures between the
Issuer and the Indenture Trustee authorizing such
Series (each a "Series Supplement"). Each Series will
consist of one or more Classes of Bonds, which may
include one or more Classes of Compound Interest
Bonds ("Compound Interest Bonds").
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<PAGE> 70
The Bonds of a Class may differ from Bonds of other
Classes of the same Series in the amounts allocated
to and the priority of principal payments, maturity
date and interest rate or in such other manner as
specified in the related Prospectus Supplement. The
Bonds of each Class of each Series will be issued
either in definitive, fully registered form or book
entry form in the authorized denominations specified
in the related Prospectus Supplement. The Bonds may
be insured or guaranteed as to payment of principal
and interest by a third-party insurer or guarantor,
to the extent provided in the related Prospectus
Supplement. The Bonds will represent nonrecourse
obligations solely of the Issuer of that Series of
Bonds and will not be insured or guaranteed by any
affiliate of the Issuer or by any other person or
entity.
Issuer................. CMC Securities Corporation III (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 8401 N. Central Expressway,
Suite 800, Dallas, Texas 75225. Its telephone number
is (214) 874-2323. 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
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<PAGE> 71
(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 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
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<PAGE> 72
Prospectus Supplement for each Series of Bonds will
specify the manner in which the amount of such
aggregate principal payment will be determined. See
"Description of the Bonds -- Payments of Principal."
The "Bond Value" for a Certificate represents the
principal amount of Bonds of a Series that, based on
certain assumptions, can be supported by the
distributions on such Certificate, regardless of any
prepayments on such Certificate, together with
(depending on the type of Certificate and the method
used to determine its Bond Value) the reinvestment
income thereon at the Assumed Reinvestment Rate
and/or, if applicable, the cash available to be
withdrawn from any related Reserve Fund (as defined
below). The Prospectus Supplement for a Series of
Bonds will specify the method or methods (and related
assumptions) used to determine the Bond Values of the
Certificates pledged to secure such Series of Bonds.
Unless otherwise specified in the related Prospectus
Supplement, the "Spread" for a Series of Bonds as of
any Payment Date is the excess, if any, of the sum of
all amounts available on such Payment Date from
certain items of collateral, as described in the
following sentence, over the sum of all amounts due
on such Payment Date for payments of principal and
interest on such Bonds. Amounts available on any
Payment Date from certain items of collateral may
include, to the extent described in the related
Prospectus Supplement, (i) all distributions received
on the Certificates securing such Series of Bonds in
the Due Period prior to such Payment Date for such
Series of Bonds, (ii) the reinvestment income
thereon, and (iii) if applicable, the amount of cash,
if any, initially deposited to the Collection Account
(as defined below) or withdrawn from any related
Reserve Fund in the Due Period prior to such Payment
Date and reinvestment income thereon. Amounts due for
payment on such Series of Bonds on any Payment Date
may include, to the extent described in the related
Prospectus Supplement, (i) all interest payable on
the Bonds of such Series on such Payment Date, (ii)
the Basic Principal Payment for such Series of Bonds
for such Principal Payment Date, including, if
applicable, the amount (the "Scheduled Amortization
Amount") to be paid on any Class of Scheduled
Amortization Bonds (the "Scheduled Amortization
Bonds"), (iii) interest, if any, accrued but not then
payable on any Compound Interest Bonds of such 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
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<PAGE> 73
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 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
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<PAGE> 74
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 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
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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 deposit cash on the
closing date for such Series,
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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 otherwise specified 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 to the persons entitled thereto free from
the lien of the Indenture under the conditions and to
the extent specified in the related Prospectus
Supplement. Additional information concerning any
Reserve Fund securing a Series of Bonds will be set
forth in the related Prospectus Supplement. See
"Security for the Bonds-- Reserve Funds."
D. Minimum Principal
Payment
Agreement....... If provided in the Prospectus Supplement with respect
to a Series of Bonds, the Issuer will enter into an
agreement with an institution pursuant to which such
institution will provide such funds as may be
necessary to enable the Issuer to make principal
payments on the Bonds of such Series at a minimum
rate set forth in the Prospectus Supplement
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relating to such Series. See "Security for the
Bonds-- Minimum Principal Payment Agreement."
E. Deposits,
Substitution and
Withdrawal...... If and to the extent provided in the related
Prospectus Supplement for a Series of Bonds, the
Issuer may deposit or withdraw Certificates or
substitute new Certificates for Certificates
previously pledged as Collateral for a Series, in
each case under the conditions described in the
Indenture. See "Security for the Bonds-- Deposits,
Substitution and Withdrawal of Certificates."
Book Entry
Registration ........... If the Prospectus Supplement for a Series so
provides, Bonds of one or more Classes of such Series
may be issued in book entry form in which case a
single certificate will be issued in the name of a
clearing agency (a "Clearing Agency") registered with
the Securities and Exchange Commission, or its
nominee. Transfers and pledges of Book Entry Bonds
may be made only through entries on the books of the
Clearing Agency in the name of brokers, dealers,
banks and other organizations eligible to maintain
accounts with the Clearing Agency ("Clearing Agency
Participants") or their nominees. Transfers and
pledges by purchasers and beneficial owners of Book
Entry Bonds ("Beneficial Owners") other than Clearing
Agency Participants may be effected only through
Clearing Agency Participants. Beneficial Owners will
receive payments of principal and interest, and, if
applicable, may tender Bonds for redemption to the
Indenture Trustee, only through the Clearing Agency
and Clearing Agency Participants. Except as otherwise
specified in this Prospectus or a related Prospectus
Supplement, the terms "Bondholders" and "holders"
shall be deemed to include Beneficial Owners. See
"Special Considerations-- Book Entry Registration"
and "Description of the Bonds-- Book Entry
Registration."
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."
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Legal Investment........ Unless otherwise specified in the Prospectus
Supplement, Bonds of each Series offered by this
Prospectus and the related Prospectus Supplement will
constitute "mortgage related securities" under the
Secondary Mortgage Market Enhancement Act of 1984
("SMMEA") and, as such, will be legal investments for
certain types of investors to the extent provided in
SMMEA, subject, in any case, to any other regulations
which may govern investments by such investors. See
"Legal Investment".
ERISA Matters........... An acquisition or holding of Bonds by an employee
benefit plan or an individual retirement account with
respect to which certain affiliates of the Issuer,
certain affiliates of an underwriter or an
underwriter of the Bonds is a "party in interest" or
"disqualified person" may constitute a "prohibited
transaction" within the meaning of the Employee
Retirement Income Security Act of 1974, as amended,
and the 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 CMC.
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 by the Trustee from the
Administrator. Should the aggregate draws made by the Trustee
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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
contingencies described in the applicable Prospectus Supplement and will be
limited to the credit and assets of the
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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.
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.
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
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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 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
To the extent specified in the related Prospectus Supplement, the Bonds
of each Class will bear interest 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
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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 specified 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"); 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
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aggregate of the Bond Values of all the Bond Value Groups securing a Series of
Bonds will always be at least equal to the outstanding principal amount of the
Bonds of such Series.
The Assumed Reinvestment Rate for a Series of Bonds will be specified
in the related Prospectus Supplement, but in no event will it be more than the
highest rate permitted by the nationally recognized statistical rating agency or
agencies rating such Series of Bonds or a rate insured by means of a surety bond
or similar arrangement satisfactory to such rating agency or agencies. If the
Assumed Reinvestment Rate is so insured, the related Prospectus Supplement will
set forth the terms of such arrangement.
Unless otherwise specified in the related Prospectus Supplement, the
Spread for each Series of Bonds as of any Principal Payment Date is the excess,
if any, of the sum of (i) the distributions received on the Certificates
securing such Series of Bonds in the Due Period prior to such Principal Payment
Date, (ii) the reinvestment income thereon, and (iii) if applicable, the amount
of cash initially deposited to the Collection Account or withdrawn from any
related Reserve Fund prior to such Principal Payment Date and reinvestment
income thereon, over the sum of (i) all interest payable on the Bonds of such
Series on such Principal Payment Date, (ii) the Basic Principal Payment required
to be made on such Series of Bonds for such Principal Payment Date, (iii)
interest, if any, accrued but not then payable on any Compound Interest Bonds of
such Series in the prior Interest Accrual Period, (iv) the amounts, if any, paid
with respect to special redemptions of the Bonds of such Series, as described
below, during such Due Period and (v) if applicable, an amount allocable to the
payment of fees and expenses of the Indenture Trustee, independent accountants
and/or other administrative expenses related to the Bonds of such Series.
MATURITY OF THE BONDS
All of the Mortgage Loans underlying any GNMA Certificates securing a
Series of Bonds will consist of mortgage loans insured by the Federal Housing
Administration ("FHA Loans") or guaranteed by the Farmers Home Administration
("FmHA Loans") or partially insured or guaranteed by the Veterans'
Administration ("VA Loans"). The Mortgage Loans underlying any FNMA, FHLMC or
Non-Agency Certificates securing a Series of Bonds will consist of conventional
(that is, neither insured nor guaranteed by any government agency) mortgage
loans ("Conventional Loans") and may consist of FHA, FmHA or VA Loans. Each
Certificate will provide by its terms for monthly payments of principal and
interest in the amounts described in "Security for the Bonds" and in the related
Prospectus Supplement.
Since the aggregate amount of the principal payment required to be made
on a Series of Bonds on a Principal Payment Date will depend on the amount of
the principal receipts received on the related Certificates in the preceding Due
Period, the prepayment experience on the Mortgage Loans will affect the average
life of each Class of Bonds and the extent to which such Class is paid prior to
its Stated Maturity. The Stated Maturity for each Class of Bonds is the date on
which the principal thereof will be fully paid, assuming (i) timely receipt of
scheduled payments (with no prepayments) on the Certificates securing such
Bonds, (ii) 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.
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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 Prospectus Supplement and that
any such Class or Classes may be redeemed in whole, but not in part, on any
Payment Date after the aggregate principal amount of any such Class has declined
below a specified percentage of the original aggregate principal amount of such
Class. Notice of such redemption will be given by the Issuer or the Indenture
Trustee prior to the redemption date. The redemption price, including accrued
interest, for any Bond so redeemed will be specified in the related Prospectus
Supplement. (Indenture, Sections 10.1 and 10.2)
OPTIONAL VARIABLE INTEREST RATE BOND REDEMPTION
Unless specified otherwise in the related Prospectus Supplement, the
Issuer, at its option, may use all or a portion of the Spread to redeem any
Class of Variable Interest Rate Bonds, in whole or in part (an "Optional
Variable Interest Rate Bond Redemption"), on any Variable Interest Rate Payment
Date, at 100% of the principal amount thereof, together with accrued interest
and unpaid thereon to the date specified in the related Prospectus Supplement,
if the Variable Interest Rate at which interest on such Class of Variable
Interest Rate Bonds accrues during the Variable Interest Rate Period applicable
to such Variable Interest Rate Payment Date is equal or, pursuant to the related
Prospectus Supplement, deemed to be equal to the Maximum Variable Interest Rate
set forth in the related Prospectus Supplement. If any such Optional Variable
Interest Rate Bond Redemption occurs, the rate of principal payments on the
Bonds of Classes with later Stated Maturities will not be thereby affected,
unless otherwise provided in the related Prospectus Supplement. If so provided
in the related Prospectus Supplement, after a redemption in full of a Class of
Variable Interest Rate Bonds in which any Optional Variable Interest Rate Bond
Redemption has occurred, there may be a period of time, such period to include
one or more Principal Payment Dates, after the Class of Variable Interest Rate
Bonds has been fully redeemed and before principal payments on the Bonds of
another Class are to commence (a "Time-Out Period"). A Time-Out Period shall
extend for the length of time required such that principal payments on the Bonds
of other Classes shall commence on that Principal Payment Date on which they
would otherwise have commenced if there had been no Optional Variable Interest
Rate Bond Redemptions in that Series.
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PROCEDURES AND REDEMPTION NOTICES
With respect to any special or optional redemption of the Bonds, unless
a Prospectus Supplement provides otherwise, the Indenture Trustee will mail to
the holders of the Bonds to be redeemed a notice setting forth: (a) the Special
Redemption Date on which a special redemption is to take place or the Payment
Date on which an optional redemption is to take place, (b) the redemption price,
(c) if the Bonds of a Class are not to be redeemed in full, the amount of
principal to be paid, that no interest will accrue on such principal amount
thereafter and, except as otherwise provided herein and in the Prospectus
Supplement with respect to Book Entry Bonds, that payment of the redemption
price will be made by check mailed to the registered holders of the Bonds on the
relevant record date and (d) in the case of Bonds other than Book Entry Bonds,
if the Bonds are to be redeemed in full then the place where such Bonds should
be surrendered for payment.
BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a Series so provides, Bonds of any
Class of such Series may be issued in book entry form ("Book Entry Bonds") and
held in the form of a single certificate issued in the name of a Clearing Agency
("Clearing Agency") registered with the Securities and Exchange Commission or
its nominee. Transfers and pledges of Book Entry Bonds may be made only through
entries on the books of the Clearing Agency in the name of brokers, dealers,
banks and other organizations eligible to maintain accounts with the Clearing
Agency ("Clearing Agency Participants") or their nominees. Clearing Agency
Participants may also be Beneficial Owners (as defined below) of Book Entry
Bonds.
Purchasers and other beneficial owners of Book Entry Bonds ("Beneficial
Owners") may not hold Book Entry Bonds directly, but may hold, transfer or
pledge their ownership interest in the Bonds only through Clearing Agency
Participants. Additionally, Beneficial Owners will receive all payments of
principal and interest with respect to the Bonds, and, if applicable, may
request redemption of Bonds, only through the Clearing Agency and the Clearing
Agency Participants. Beneficial Owners will not be registered holders of Bonds
or be entitled to receive definitive certificates representing their ownership
interest in the Bonds except under the limited circumstances, if any, described
in the related Prospectus Supplement. See "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.
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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 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
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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 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.
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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.
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.
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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 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
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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 in a FHLMC Certificate
Pool will be greater than or equal to the annual pass-through rate on the
related FHLMC Certificate, and the maximum interest rate will not be more than
two percentage points above such pass- through rate.
Under FHLMC's Guarantor Program, the mortgage loans underlying a FHLMC
Certificate are purchased from a single seller in exchange for such FHLMC
Certificate. The interest rate on a FHLMC Certificate under such program is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC. Under the Guarantor
Program, the range between the lowest and highest annual interest rates on the
mortgage loans in a FHLMC Certificate Pool may not exceed two percentage points.
For some FHLMC Certificates issued pursuant to purchase contracts under the
Guarantor Program on or after September 1, 1987, the range of the interest rates
on the mortgage loans in a FHLMC Certificate Pool will not exceed one percentage
point.
NON-AGENCY CERTIFICATES
Each Non-Agency Certificate will evidence an undivided interest in
Agency Certificates or a pool of Mortgage Loans secured by first liens on
single-family (one- to four-unit) or multi-family (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
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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 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.
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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 to the persons
entitled thereto free from the lien of the Indenture under the conditions and to
the extent specified in the related Prospectus Supplement. Additional
information concerning any Reserve Fund securing a Series of Bonds will be set
forth in the related Series Supplement.
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,
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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
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 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
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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.
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-
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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.
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
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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.
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.
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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.
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
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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.
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.
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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.
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 8401 N. Central Expressway,
Suite 800, Dallas, Texas 75225. The Issuer's telephone number is (214) 874-2323.
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 newly
originated debt instruments issued by the REMIC on the day of their creation and
not as ownership interests in the REMIC or the REMIC's assets. Residual Bonds
are not treated as debt instruments for federal income tax purposes. See
"Special Tax Considerations Applicable to Residual Bonds" below. The Prospectus
Supplement for each such Series of Bonds will indicate whether the Issuer
intends to make a REMIC election for that Series.
In general (i) REMIC Bonds held by a thrift institution taxed as a
"domestic building and loan association" will be treated as assets described in
Code Section 7701(a)(19)(C); (ii) REMIC Bonds held by a real estate investment
trust will be treated as "real estate assets" within the meaning of Code Section
856(c)(4)(A) and (iii) any amount includible in gross income with respect to
REMIC Bonds will be interest described in Code Section 856(c)(3)(B) to the
extent that the REMIC Bonds are treated as "real estate assets" within the
meaning of the Code Section 856(c)(4)(A), in each case, in the same proportion
that the assets of the REMIC Pool would be so treated. However, if at all times
95% or more of the assets held by the REMIC Pool are assets qualifying under any
of the foregoing Code sections, the REMIC Bonds will be treated entirely as
qualifying assets (and the income will be treated entirely as qualifying
income). The Agency Certificates will be considered qualifying assets under the
foregoing Code sections. The Final REMIC Regulations provide that, for purposes
of Code Section 856(c)(4)(A), payments of principal and interest on the Mortgage
Loans that are reinvested pending distribution to holders of REMIC Bonds
constitute qualifying assets for such entities. Where two REMIC Pools are part
of a tiered structure they will be treated as one REMIC for purposes of the
tests described above respecting asset ownership of more or less than 95%.
Reserve assets will not be considered to be qualifying assets. REMIC Bondholders
should be aware that (i) REMIC Bonds held by a real estate investment trust will
not constitute "Government securities" within the meaning of Code Section
856(c)(4)(A), and (ii) REMIC Bonds held by a regulated investment company will
not constitute "Government securities" within the meaning of Code Section
851(b)(3)(A)(i). However, REMIC Bonds acquired by another REMIC on its Startup
Day (as defined below) in exchange for regular or residual interests in the
REMIC will constitute "qualified mortgages" within the meaning of Code Section
860G(a)(3). Notwithstanding the foregoing, however, REMIC income received by a
REIT owning a residual interest in a REMIC Pool could be treated in part as
non-qualifying REIT income if the REMIC Pool holds Mortgage Loans with respect
to which income is contingent on mortgagor profits or property appreciation. In
addition, if the assets of the REMIC include buy-down Mortgage Loans, it is
possible that the percentage of such assets constituting "loans . . . secured by
an interest in real property" for purposes of Code Section 7701(a)(19)(C)(v) may
be required to be reduced by the amount of the related buy-down funds. REMIC
Bonds held by certain financial institutions will constitute an "evidence of
indebtedness" within the meaning of Code Section 582(c)(1).
Qualification as a REMIC
In order for the REMIC Pool to qualify as a REMIC, there must be
ongoing compliance on the part of the REMIC Pool with the requirements set forth
in the Code. The REMIC Pool must fulfill an asset test, which requires that no
more than a de minimis amount of the assets of the REMIC Pool, as of the close
of the third calendar month beginning after the "Startup Day" (which for
purposes of this discussion is the date of issuance of the REMIC Bonds) and at
all times thereafter, may consist of assets other than "qualified mortgages" and
"permitted investments." The Final
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REMIC Regulations provide a "safe harbor" pursuant to which the de minimis
requirement will be met if at all times the aggregate adjusted basis of any
nonqualified assets (i.e., assets other than qualified mortgages and permitted
investments) is less than 1% of the aggregate adjusted basis of all the REMIC
Pool's assets.
If a REMIC Pool fails to comply with one or more of the ongoing
requirements of the Code for REMIC status during any taxable year, the REMIC
Pool will not be treated as a REMIC for such year and thereafter. In this event,
the classification of the REMIC Pool for federal income tax purposes is
uncertain. The REMIC Regular Bonds may continue to be treated as debt
instruments for federal income tax purposes, but the REMIC Pool could be treated
as a taxable mortgage pool (a "TMP"). If the REMIC Pool is treated as a TMP, any
residual income of the REMIC Pool (i.e., income from the mortgage loans less
interest and original issue discount expense allocable to the REMIC Regular
Bonds and any administrative expenses of the REMIC Pool) would be subject to
corporate income tax at the REMIC Pool level. On the other hand, the arrangement
may be treated as a separate association taxable as a corporation under Treasury
regulations and the REMIC Regular Bonds may be treated as stock interests
therein, rather than debt instruments. The Code, however, authorizes the
Treasury Department to issue regulations that address situations where failure
to meet one or more of the requirements for REMIC status occurs inadvertently
and in good faith, and disqualification of the REMIC would occur absent
regulatory relief. However, the Conference Committee Report to the 1986 Act (the
"Committee Report") indicates that the relief may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the REMIC
Pool's income for the period of time in which the requirements for REMIC status
are not satisfied.
NON-REMIC BONDS
With respect to each Series of Bonds for which the Issuer does not make
a REMIC election, no regulations, published rulings, or judicial decisions exist
that discuss the characterization for federal income tax purposes of securities
with terms substantially the same as the Non-REMIC Bonds. Andrews & Kurth
L.L.P., as counsel to the Issuer, however, will deliver their opinion that the
Non-REMIC Bonds will be treated for federal income tax purposes as indebtedness,
and not as an ownership interest in the Collateral, or as an equity interest in
the Issuer or in a separate association taxable as a corporation.
For federal income tax purposes, (i) Non-REMIC Bonds held by a thrift
institution taxed as a domestic building and loan association will not
constitute "loans secured by an interest in real property" within the meaning of
Code Section 7701(a)(19)(C)(v); (ii) interest on Non-REMIC Bonds held by a real
estate investment trust will not be treated as "interest on obligations secured
by mortgages on real property or on interests in real property" within the
meaning of Code Section 856(c)(3)(B); (iii) Non-REMIC Bonds held by a real
estate investment trust will not constitute "real estate assets" or "Government
securities" within the meaning of Code Section 856(c)(4)(A); and (iv) Non-REMIC
Bonds held by a regulated investment company will not constitute "Government
securities" within the meaning of Code Section 851(b)(3)(A)(i).
TAXATION OF REGULAR BONDS
General
The discussion under this caption, "Taxation of Regular Bonds," applies
only to Regular Bonds and not to Residual Bonds. In general, interest paid or
accrued, original issue discount, and market discount on a Bond will be treated
as ordinary income to the Bondholder, and principal payments on a Bond will be
treated as a return of capital to the extent of the Bondholder's basis in the
Bond allocable thereto. A Bondholder must use the accrual method of accounting
with regard to REMIC Bonds, regardless of the method of accounting otherwise
used by such Bondholder.
Original Issue Discount
All Compound Interest Bonds will, and certain of the other Bonds may,
be issued with "original issue discount" within the meaning of Code Section
1273(a). Holders of any Class of Bonds issued with original issue discount
generally must include original issue discount in gross income for federal
income tax purposes as it accrues, in accordance with a constant interest method
based on a compounding of interest, in advance of receipt of the cash or a
portion of the cash attributable to such income. Based in part on Treasury
regulations issued on January 27, 1994, as amended on June 14, 1996, under Code
Sections 1271 through 1273 and 1275 (the "OID Regulations"), and in part on
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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 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
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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 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
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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, than
the expected yield without the cap or floor, or (iii) the governor is not
reasonably expected to cause the yield to be significantly more or less than the
expected yield without the governor. For instruments issued on or after August
13, 1996, an objective rate is a rate (other than a qualified floating rate)
that is determined using a single fixed formula and that is based on objective
financial or economic information. An objective rate is a qualified inverse
floating rate if the rate is equal to a fixed rate minus a qualified floating
rate in which the variations of such rate can reasonably be expected to
inversely reflect contemporaneous variations in the qualified floating rate.
However, a variable rate is not an objective rate if it is reasonably expected
that the average value of the rate during the first half of the Bond's term will
be significantly less or greater than the average value of the rate during the
final half of the Bond's term.
If a variable rate Bond provides for stated interest at a single
qualified floating rate or objective rate that is unconditionally payable in
cash or property at least annually (i) all stated interest is qualified stated
interest, (ii) the amount of qualified stated interest and original issue
discount, if any, that accrues is determined as if the Bond had a
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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 in effect beginning with the period in which the first
weighted average adjustment date occurring after the issue date occurs. If the
Bond interest rate for one or more periods is less than it would be based upon
the fully indexed rate, the excess of the interest payments projected at the
assumed index over interest projected at such initial rate will be tested under
the de minimis rules as described above. Adjustments will be made in each
accrual period increasing or decreasing the amount of ordinary income reportable
to reflect the actual Bond interest rate on the Bonds. It is possible, however,
that the IRS may treat some or all of the interest on Bonds with a weighted
average rate as taxable under the rules relating to obligations providing for
contingent payments. Such treatment may affect the timing of income accruals on
such Bonds.
It is not clear how income should be accrued with respect to REMIC
Regular Bonds issued at a significant premium and with respect to REMIC Regular
Bonds the payments on which consist primarily of a specified portion of the
interest payments on qualified mortgages held by the REMIC ("Premium REMIC
Regular Bonds"). One method
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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. The Treasury Department has issued final regulations concerning the
amortization of premium but by their terms the regulations do not apply to REMIC
Regular Bonds and bonds like the Regular Bonds.
Sale or Redemption
If a Bondholder sells or exchanges a Bond, the Bondholder will
recognize gain or loss equal to the difference, if any, between the amount
received and his adjusted basis in the Bond. The adjusted basis of a Bond
generally will equal the cost of the Bond to the seller, increased by any
original issue discount and market discount included in the seller's gross
income with respect to the Bond and reduced by the portion of the basis in the
Bond allocable to payments on the Bond previously received by the seller and by
any amortized premium.
Except as provided in this paragraph, under "Original Issue Discount"
above and under "Market Discount" below, any such gain or loss will be capital
gain or loss provided the Bond is held as a "capital asset" within the meaning
of Code Section 1221. If the holder of a REMIC Bond or Regular Bond is a bank,
thrift, or similar institution described in Section 582 of the Code, any gain or
loss on the sale or exchange of such REMIC Bond or Regular Bond will be treated
as ordinary income or loss. In the case of other types of holders, gain from the
disposition of a Regular Bond that otherwise would be capital gain will be
treated as ordinary income (i) if a Regular Bond is held as part of a
"conversion transaction" as defined in Code Section 1258(c), up to the amount of
interest that would have accrued on the Regular Bondholder's net investment in
the conversion transaction at 120% of the appropriate applicable Federal rate
under Code Section 1274(d) in effect at the time the taxpayer entered into the
transaction minus any amount previously treated as ordinary income with respect
to any prior disposition of property that was held as part of such transaction,
(ii) in the case of a noncorporate taxpayer, to the extent such taxpayer has
made an election under Code Section 163(d)(4) to have net capital gains taxed as
investment income at ordinary income rates, or (iii) in the case of a REMIC
Regular Bond, to the extent that the amount actually includible in income with
respect to the REMIC Regular Bond by the Bondholder during his holding period is
less than the amount that would have been includible in income if the yield on
that Bond during the holding period had been 110% of a specified U.S. Treasury
borrowing rate as of the date that the Bondholder acquired the REMIC Regular
Bond. Although the legislative history to the 1986 Act indicates that the
portion of the gain from disposition of a REMIC Regular Bond that will be
recharacterized as ordinary income is limited to the amount of original issue
discount (if any) on the REMIC Regular Bond that was not previously includible
in income, the applicable Code provision contains no such limitation. In the
case of a Regular Bond subject to the Contingent Debt Regulations as described
above under "Original Issue Discount," any gain on the sale or exchange of such
Bond is treated as interest income.
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Market Discount
A purchaser of a Bond also may be subject to the market discount
provisions of Code Sections 1276 through 1278. Under these provisions and the
rules set forth in the OID Regulations with respect to original issue discount,
"market discount" equals the amount by which the purchaser's basis in the Bond
(i) is exceeded by the stated redemption price at maturity of the Bond, or (ii)
in the case of a Bond having original issue discount, is exceeded by the sum of
the issue price of such Bond plus any original issue discount that would have
previously accrued thereon if held by an original Bondholder who purchased the
Bond at its issue price, in either case less any prior payment that was included
in the stated redemption price at maturity of the Bond. Such purchaser generally
will be required to recognize accrued market discount as ordinary income as
payments includible in the stated redemption price at maturity of such Bond are
received, in an amount not exceeding any such payment. The computation of the
accrual of market discount on debt instruments the principal of which is payable
in more than one installment is to be provided by Treasury regulations and
should take into account the Prepayment Assumption. Until such time that the
regulations are issued, the Committee Report provides holders may elect to
accrue market discount for a Bond either (i) on the basis of a constant interest
rate or, (ii) for those Bonds that have original issue discount, in the
proportion that the original issue discount accrued for the relevant period
bears to the sum of the original issue discount for such period plus the
remaining original issue discount as of the end of such period, and, for those
Bonds that have no original issue discount, in the proportion that the amount of
the stated interest paid in the accrual period bears to the total amount of
stated interest remaining to be paid on the Bond as of the beginning of the
accrual period. Such purchaser also generally will be required to treat a
portion of any gain on a sale or exchange of the Bond as ordinary income to the
extent of the market discount accrued to the date of disposition under one of
the foregoing methods, less any accrued market discount previously reported as
ordinary income as partial payments in reduction of the stated redemption price
at maturity of such Bond were received. Such purchaser also will be required to
defer the interest deductions (to the extent they exceed the sum of the interest
income (including original issue discount) on the Bond for such year)
attributable to any indebtedness incurred or continued to purchase or carry the
Bond. However, the amount of the net interest expense that must be deferred in a
taxable year may not exceed the amount of market discount accrued on the Bond
for the days in such year that such purchaser held such Bond. Any such deferred
interest expense is, in general, allowed as a deduction not later than the year
in which the related market discount income is recognized or the Regular Bond is
disposed of. As an alternative to the inclusion of market discount in income on
the foregoing basis, the holder may elect to include such market discount in
income currently as it accrues on all market discount instruments acquired by
such holder in that taxable year or thereafter, in which case the interest
deferral rule will not apply. In Revenue Procedure 92-67, the IRS set forth
procedures for taxpayers (1) electing under Section 1278(b) of the Code to
include market discount in income currently, (2) electing under rules of Section
1276(b) of the Code to use a constant interest rate to determine accrued market
discount on a bond where the holder of the bond is required to determine the
amount of accrued market discount at a time prior to the holder's disposition of
the bond, and (3) requesting consent to revoke an election under Section 1278(b)
of the Code. Market discount with respect to a Bond will be considered to be
zero if the amount allocable to the Bond is less than 0.25% of the remaining
stated redemption price at maturity of such Bond times the weighted average
maturity of the Bond (determined as described above under "Original Issue
Discount") remaining after the date of purchase. Treasury regulations
implementing the market discount rules have not yet been issued; therefore,
investors should consult their own tax advisors regarding the application of
these rules, as well as the advisability of making any of the elections
discussed above.
Taxation of Certain Foreign Investors
Generally, payments of interest (including any payment with respect to
accrued original issue discount) on the Bonds to a Bondholder who is a
nonresident alien individual, foreign corporation or other non-United States
person ("foreign person") not engaged in a trade or business within the 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,
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Residual Bonds which are residual interests in the same REMIC, notwithstanding
compliance with the certification requirements discussed above.
If a tax is withheld by the withholding agent, the Bondholder would be
entitled to a refund of such tax if such Bondholder can prove it is a foreign
person and it is not a 10 percent shareholder of the Issuer or a controlled
foreign corporation related to the Issuer. A Bondholder may be required to file
a U.S. federal income tax return to obtain a refund. Foreign investors should
consult their tax advisors regarding the potential imposition of the 30 percent
withholding tax.
Final regulations dealing with withholding tax on income paid to
foreign persons and related matters (the "New Withholding Regulations") were
issued by the Treasury Department on October 6, 1997. The New Withholding
Regulations will generally be effective for payments made after December 31,
2000, subject to certain transition rules. Prospective Bondholders who are
foreign persons are strongly urged to consult their own tax advisors with
respect to the New Withholding Regulations.
BACK-UP WITHHOLDING AND INFORMATION REPORTING
Payments of interest, original issue discount, or other reportable
payments (including, under certain circumstances, principal payments) made on
the Bonds, and proceeds from the sale, including redemption, of the Bonds to or
through certain brokers, including the Indenture Trustee, may be subject to a
"back-up" withholding tax of 31% of reportable payments unless a Bondholder
complies with certain reporting and/or certification procedures. Any amount so
withheld from payments on the Bonds would be refunded or allowed as a credit
against a Bondholder's federal income tax.
To the extent required by law, reports of accrued interest, in the case
of each Series of Bonds for which a REMIC election is made, and interest paid
for each other Series of Bonds and original issue discount will be made annually
to the Internal Revenue Service and to individuals, estates, non-exempt and
non-charitable trusts, and partnerships who are either holders of record of
Bonds or beneficial owners who own Bonds through a broker or middleman as
nominee. All brokers, nominees and all other non-exempt holders of record of
Bonds (including corporations, non-calendar year taxpayers, securities or
commodities dealers, real estate investment trusts, investment companies, common
trust funds, thrift institutions and charitable trusts) may request such
information for any calendar quarter by telephone or in writing by contacting
the person designated in Internal Revenue Service Publication 938 with respect
to a particular Series of Bonds. Holders through nominees must request such
information from the nominee. Treasury regulations provide that information
necessary to compute the accrual of any market discount on the Bonds must also
be furnished.
SPECIAL TAX CONSIDERATIONS APPLICABLE TO RESIDUAL BONDS
Allocation of the Income of the REMIC
Generally, the REMIC will not be subject to federal income tax except
with respect to income from prohibited transactions and with respect to certain
contributions to the REMIC after the Startup Day (see "Taxes on Prohibited
Transactions, Foreclosure Income and Certain Contributions" below). Instead,
each original Residual Bondholder will report on its federal income tax return,
as ordinary income, its share of the REMIC's taxable income for each day during
the taxable year on which such 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
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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 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
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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.
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.
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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 defined below). Such tax is generally imposed on the transferor
of the residual interest, except that where such transfer is through an agent
for a Disqualified Organization, the tax is instead imposed on such agent.
However, a transferor of a residual interest is in no event liable for such tax
with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a Disqualified Organization, and as of the
time of the transfer, the transferor does not have actual knowledge that such
affidavit is false. Furthermore, the Treasury Department may waive the tax on
transfers if the Disqualified Organization promptly disposes of the residual
interest and the transferor (or agent) pays the tax on the excess inclusion
income for the period during which the Disqualified Organization held the
residual interest. A Disqualified Organization means (i) the United States, any
State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of any of the
foregoing, (ii) any organization (other than a farmer's cooperative described in
Section 521 of the Code) that is exempt from the tax imposed by Chapter 1 of the
Code and not subject to the tax imposed by Section 511 of the Code; (iii) any
rural electric or telephone cooperative described in Section 1381(a)(2)(C) of
the Code; or (iv) any other person whose holding of the residual interests of
the REMIC may cause the REMIC to incur a liability for any tax imposed under the
Code that would not otherwise be imposed but for the purchase or transfer of the
residual interests to such person. For purposes of clause (i) of the previous
sentence, a corporation shall not be treated as an instrumentality of the United
States or of any State or political subdivision thereof, if (i) all of the
activities of such corporation are subject to the tax imposed by Chapter 1 of
the Code, and (ii) a majority of the board of directors of such corporation is
not selected by the United States or any State or political subdivision thereof
(except that this clause (ii) shall not apply to the Federal Home Loan Mortgage
Corporation).
In addition to the tax on transfers, a partnership, trust, estate,
regulated investment company, real estate investment trust, common trust fund,
or cooperative (a "Pass-Through Entity") that holds a residual interest is
subject to tax at the highest corporate rate on the allocable portion of excess
inclusion income of a Disqualified Organization that owns an equity interest in
such an entity. The Pass-Through Entity would not be liable for such tax if it
has received an affidavit from such record holder that (i) states under penalty
of perjury that it is not a Disqualified Organization or (ii) furnishes a social
security number and states under penalties of perjury that the social security
number is that of the transferee, provided that during the period such person is
the record holder of the Residual Bond, the Pass-Through Entity does not have
actual knowledge that such affidavit is false. The Indenture and/or the
agreements governing the Trusts with respect to a Series will provide for
reasonable arrangements designed to ensure that Residual Bonds are not held by
Disqualified Organizations and for the furnishing of information to residual
holders to compute the foregoing taxes.
The Taxpayer Relief Act of 1997 provides, for taxable years beginning
after December 31, 1997, that if an "electing large partnership" holds a
Residual Bond, all interests in the electing large partnership are treated as
held by disqualified organizations for purposes of the tax imposed upon a
pass-through entity by Section 860(E)(e) of the Code. An exception to this tax,
otherwise available to a pass-through entity that is furnished certain
affidavits by record holders of interests in the entity that does not know such
affidavits are false, is not available to an electing large partnership.
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An "electing large partnership" is a partnership that had 100 or more partners
during the preceding taxable year and that has filed an election with the IRS to
be so treated.
Mark to Market Rules
A REMIC residual interest acquired after January 3, 1995 cannot be
marked-to-market.
Payments
Any payment made on a Residual Bond to a Residual Bondholder will be
treated as a non-taxable return of capital to the extent it does not exceed the
Residual Bondholder's adjusted basis in such Residual Bond. To the extent a
distribution exceeds such adjusted basis, it will be treated as gain from the
sale of the Residual Bond.
Sales of Residual Bonds
If a Residual Bond is sold, the seller will recognize gain or loss
equal to the difference between the amount realized in the sale and its adjusted
basis in the Residual Bond (except that the recognition of loss may be limited
under the "wash sale" rules described below). A holder's adjusted basis in a
Residual Bond generally equals the cost of such Residual Bond to such Residual
Bondholder, increased by the taxable income of the REMIC that was included in
the income of such Residual Bondholder with respect to such Residual Bond, and
decreased (but not below zero) first by the distributions received thereon by
such Residual Bondholder, and second by the net losses that have been allowed as
deductions to such Residual Bondholder with respect to such Residual Bond. In
general, any such gain or loss will be capital gain or loss provided the
Residual Bond is held as a capital asset. However, Residual Bonds will be
"evidences of indebtedness" within the meaning of Code Section 582(c)(1), so
that gain or loss recognized from sale of a Residual Bond by a bank or thrift
institution to which such section applies would be ordinary income or loss.
Except as provided in Treasury regulations yet to be issued, if the
seller of a Residual Bond reacquires such Residual Bond, or acquires any other
Residual Bond, any residual interest in another REMIC or comparable interest in
a "taxable mortgage pool" (as defined in Code Section 7701(i)) during the period
beginning six months before, and ending six months after, the date of such sale,
such sale will be subject to the "wash sale" rules of Code Section 1091. In that
event, any loss realized by the Residual Bondholder on the sale will not be
deductible, but, instead, will increase such Residual Bondholder's adjusted
basis in the newly acquired asset.
Taxes on Prohibited Transactions, Foreclosure Income and Certain
Contributions
The REMIC is subject to a tax at a rate equal to 100 percent of the net
income derived from "prohibited transactions." Prohibited transactions generally
include (i) the disposition of a qualified mortgage other than for (a)
substitution within two years of the Startup Day for a defective (including a
defaulted) obligation (or repurchase in lieu of substitution of a defective
(including a defaulted) obligation at any time) or for any qualified mortgage
within three months of the Startup Day, (b) foreclosure, default or imminent
default of a qualified mortgage, (c) bankruptcy or insolvency of the REMIC or
(d) a qualified (complete) liquidation, (ii) the receipt of income from assets
that are not the type of mortgages or investments that the REMIC is permitted to
hold, (iii) the receipt of compensation for services or (iv) the receipt of gain
from disposition of cash flow investments other than pursuant to a qualified
liquidation. Notwithstanding (i) and (iv), it is not a prohibited transaction to
sell REMIC property to prevent a default on Regular Bonds as a result of a
default on qualified mortgages or to facilitate a clean-up call (generally, an
optional termination to save administrative costs when no more than a small
percentage of the Bonds is outstanding). The Final REMIC Regulations indicate
that the modification of a Mortgage Loan generally will not be treated as a
disposition if it is occasioned by a default or reasonably foreseeable default,
an assumption of the Mortgage Loan, the waiver of a due-on- sale or encumbrance
clause or the conversion of an interest rate by a mortgagor pursuant to the
terms of a convertible adjustable rate Mortgage Loan. Final REMIC Regulations
also provide that the modification of mortgage loans underlying Certificates
will not be treated as a modification of the Certificates, provided that the
trust including the Certificates was not created to avoid prohibited transaction
rules.
The REMIC must pay a tax at the highest corporate rate on its net
income from foreclosure property. In general, net income from foreclosure
property means gain from the disposition of foreclosure property that is
considered held for sale to customers in the ordinary course of a trade or
business (i.e., "dealer property") and other income from
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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.
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
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be taken into account for withholding tax purposes only when paid or distributed
(or when the REMIC Residual Bond is disposed of). The Treasury has statutory
authority, however, to promulgate regulations which would require such amounts
to be taken into account at an earlier time in order to prevent the avoidance of
tax. Such regulations could, for example, require withholding prior to the
distribution of cash in the case of Residual Interest Bonds that do not have
significant value. See "Excess Inclusions" above and "Restrictions on Transfer
of a Residual Bond" below.
Restrictions on Transfer of a Residual Bond
The Residual Bonds will be subject to certain restrictions on transfer
for federal income tax purposes. First, Residual Bonds may not be transferred to
a Disqualified Organization, as described in "Excess Inclusions." The Indenture
with respect to a series of REMIC Bonds will provide that neither legal title
nor beneficial interest in a Residual Bond may be transferred or registered
unless (i) the proposed transferee provides to the Issuer and the Indenture
Trustee an affidavit to the effect that such transferee is not a Disqualified
Organization, is not purchasing such Residual Bonds on behalf of a Disqualified
Organization (i.e., as a broker, nominee or middleman thereof) and is not an
entity that holds REMIC residual securities as nominee to facilitate the
clearance and settlement of such securities through electronic book-entry
changes in accounts of participating organizations and (ii) the transferor
provides a statement in writing to the Issuer and the Indenture Trustee that it
has no actual knowledge that such affidavit is false. Moreover, the Indenture
will provide that any attempted or purported transfer in violation of these
transfer restrictions will be null and void and will vest no rights in any
purported transferee. Each Residual Bond with respect to a series will bear a
legend referring to such restrictions on transfer, and each Residual Bondholder
will be deemed to have agreed, as a condition of ownership thereof, to any
amendments to the Indenture required under the Code or applicable Treasury
regulations to effectuate the foregoing restrictions.
Second, the Final REMIC Regulations provide that the transfer of a
residual interest that has tax avoidance potential is disregarded for all
federal income tax purposes if the transferee is a foreign person. This rule
does not apply to income from a residual interest that is effectively connected
to the residual holder's United States trade or business (in which case the
residual holder is treated like a U.S. person). A proposed transfer has tax
avoidance potential unless at the time the residual interest is transferred the
transferor reasonably expects that, for each excess inclusion, (i) the REMIC
will distribute to the transferee residual interest holder an amount that will
equal at least 30% of the excess inclusions and (ii) that each such amount will
be distributed at or after the time at which the excess inclusion accrues and
not later than the close of the calendar year following the calendar year of
accrual. In order to prevent a foreign person from transferring a residual
interest of the type described in this paragraph to a U.S. person shortly before
any tax is due, the Final REMIC Regulations provide that if the transfer has the
effect of allowing the foreign person to avoid tax on accrued excess inclusions,
the transfer is disregarded. The foreign person continues to be treated as owner
of the residual interest for withholding tax purposes. To the extent provided in
the Prospectus Supplement, the Issuer may restrict the transfer of a Residual
Bond to a foreign person.
The Final REMIC Regulations would also disregard certain transfers of
residual interests, such that the transferor would continue to be treated as the
owner of the residual interest and thus would continue to be subject to tax on
its allocable portion of the net income of the REMIC. Under the Final REMIC
Regulations, a transfer of a "noneconomic residual interest" (as defined below)
is disregarded for all federal income tax purposes unless no significant purpose
of the transfer is to impede the assessment or collection of tax. A residual
interest in a REMIC (including a residual interest with positive value at
issuance) is a "noneconomic residual interest" unless, at the time of the
transfer, (i) the present value of the expected future distributions on the
residual interest at least equals the 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
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to indicate that the transferee will not continue to pay its debts as they come
due in the future; and (ii) the transferee represents to the transferor that it
understands that, as the holder of the noneconomic residual interest, the
transferee may incur tax liabilities in excess of any cash flows generated by
the residual interest and that the transferee intends to pay taxes associated
with holding of the residual interest as they become due. The Indenture will
require the transferee of a Residual Bond to state as part of the affidavit
described above with respect to Disqualified Organizations that such transferee
(i) has historically paid its debts as they come due, (ii) intends to continue
to pay its debts as they come due in the future, (iii) understands that, as the
holder of a noneconomic Residual Bond, it may incur tax liabilities in excess of
any cash flows generated by the Residual Bond, and (iv) intends to pay any and
all taxes associated with holding the Residual Bond as they become due. The
transferor must have no reason to believe that such statement is untrue.
If a Residual Bond has a negative value, it is not clear whether its
issue price would be considered to be zero or such negative amount for purposes
of determining the REMIC's basis in its assets. The Final REMIC Regulations do
not address whether residual interests could have a negative basis and a
negative issue price. The Issuer does not intend to treat a class of Residual
Bonds as having a value of less than zero for purposes of determining the bases
of the assets in the related REMIC Pool. The federal income tax consequences of
any consideration paid to a transferee on a transfer of a Residual Bond are
unclear; any transferee receiving such consideration should consult its tax
advisors.
Tax-Exempt Investors
A qualified pension fund or other entity that is exempt from federal
income taxation (a "Tax-Exempt Investor") under Code Section 501 nonetheless
will be subject to tax on its income that is "unrelated business taxable income"
("UBTI") within the meaning of Code Section 512. Net income attributable to a
Residual Bond beneficially owned by a Tax-Exempt Investor will be considered
UBTI and thus will be subject to federal income tax, to the extent that any such
income is considered an excess inclusion. See "Excess Inclusions" above.
REMIC Expenses; Single Class REMICs
As a general rule, all of the expenses of a REMIC will be taken into
account by holders of the Residual Bonds. In the case of a "single class REMIC,"
however, the expenses will be allocated, under Treasury regulations, among the
holders of the REMIC Regular Bonds and the holders of the Residual Bonds on a
daily basis in proportion to the relative amounts of income accruing to each
holder of a Residual Bond or REMIC Regular Bond on that day. In the case of a
holder of a REMIC Regular Bond who is an individual or a "pass-through interest
holder" (including certain pass- through entities but not including real estate
investment trusts), such expenses will be deductible only to the extent that
such expenses, plus other "miscellaneous itemized deductions" of the holder of a
REMIC Regular Bond, exceed 2% of such holder's adjusted gross income. In
addition, for taxable years beginning after December 31, 1990, the amount of
itemized deductions otherwise allowable for the taxable year for an individual
whose adjusted gross income exceeds the applicable amount (which amount will be
adjusted for inflation for taxable years beginning after 1990) will be reduced
by the lesser of (i) 3% of the excess of adjusted gross income over the
applicable amount, or (ii) 80% of the amount of itemized deductions otherwise
allowable for such taxable year. The reduction or disallowance of this deduction
may have a significant impact on the yield of the REMIC Regular Bond to such a
holder. In general terms, a single class REMIC is one that either (i) would
qualify, under existing Treasury regulations, as a grantor trust if it were not
a REMIC (treating all interests as ownership interests, even if they would be
classified as debt for federal income tax purposes) or (ii) is similar to such a
trust and which is structured with the principal purpose of avoiding the single
class REMIC rules. Unless otherwise specified in the related Prospectus
Supplement, the expenses of the REMIC will be allocated to holders of the
related Residual Bonds.
LEGAL INVESTMENT
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
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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, 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
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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.
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
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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)
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) except as otherwise provided in the related Prospectus
Supplement in the case of a Series of Bonds which includes one or more Classes
of Junior Bonds, 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
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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 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.
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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.
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
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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)
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.
LEGAL MATTERS
The legality of the Bonds will be passed upon for the Issuer by Andrews
& Kurth L.L.P., Dallas, Texas. Andrews & Kurth L.L.P. has also delivered its
opinion to the Issuer as to certain federal income tax consequences with respect
to the Bonds.
EXPERTS
The balance sheet of CMC Securities Corporation III, (formerly known as
Capstead Securities Corporation VI), appearing in CMC Securities Corporation
III's Annual Report on Form 10-K for the years ended December 31, 1994, 1995 and
1996 have been audited by Ernst & Young LLP, independent auditors, as set forth
in their report thereon
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included therein and incorporated herein by reference. Such balance sheet is
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Copies of the Registration Statement of which this Prospectus forms a
part and the exhibits thereto are on file at the offices of the Securities and
Exchange Commission in Washington, D.C., and may be obtained at rates prescribed
by the Commission upon request to the Commission and inspected, without charge,
at the offices of the Commission.
Copies of FHLMC's most recent Offering Circular for FHLMC Certificates,
FHLMC's Information Statement and most recent Supplement thereto and any
quarterly report made available by FHLMC can be obtained by writing or calling
FHLMC's Investor Inquiry Department at 8200 Jones Branch Drive, McLean, Virginia
22102 (800-336-FMPC). The Issuer did not participate in the preparation of
FHLMC's Offering Circular, Information Statement or any Supplement thereto or
any such quarterly report.
Copies of FNMA's most recent Prospectus for FNMA Certificates and
FNMA's annual report and quarterly financial statements as well as other
financial information are available from the Vice President for Investor
Relations of FNMA, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016
(202-752-7585). The Issuer did not participate in the preparation of FNMA's
Prospectus or any such report, financial statement or other financial
information.
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GLOSSARY OF PRINCIPAL TERMS
<TABLE>
<S> <C>
"Administrator"..................................................................................................29
"Agency Certificates"..........................................................................................1, 4
"Assumed Reinvestment Rate".......................................................................................1
"Basic Principal Payment".....................................................................................6, 21
"Beneficial Owners"..........................................................................................12, 24
"Bond Value Group"...............................................................................................21
"Bond Value"..................................................................................................7, 21
"Bondholders"....................................................................................................12
"Bonds"........................................................................................................1, 4
"Book Entry Bonds"............................................................................................6, 24
"Certificate Trustee"............................................................................................29
"Certificates"....................................................................................................4
"Claim Ceiling"..................................................................................................15
"Clearing Agency Participants"...............................................................................12, 24
"Clearing Agency"............................................................................................12, 24
"Code".......................................................................................................12, 39
"Collateral".....................................................................................................10
"Collection Account".............................................................................................11
"Commission"......................................................................................................3
"Committee Report"...............................................................................................40
"Compound Interest Bonds".........................................................................................4
"Conventional Loans".............................................................................................22
"Due Period"..................................................................................................6, 21
"ERISA"..........................................................................................................56
"Exchange Act"....................................................................................................3
"FDIC"...........................................................................................................55
"FHA Loans"......................................................................................................22
"FHLMC Act"......................................................................................................27
"FHLMC Certificate Group"........................................................................................28
"FHLMC Certificate Pool".........................................................................................28
"FHLMC Certificates"...........................................................................................1, 4
"FHLMC"...........................................................................................................4
"Final REMIC Regulations"........................................................................................38
"Floating Interest Rate Bonds"...................................................................................21
"FmHA Loans".....................................................................................................22
"FNMA"............................................................................................................4
"Garn-St Germain Act"............................................................................................34
"GNMA Certificates"............................................................................................1, 4
"GNMA Servicer"..................................................................................................25
"GNMA"............................................................................................................4
"GPM Certificates"...............................................................................................30
"Guaranty Agreement".............................................................................................26
"Housing Act"....................................................................................................25
"Indenture Trustee"...............................................................................................4
"Indenture".......................................................................................................4
"Interest Accrual Period".........................................................................................6
"Inverse Floating Interest Rate Bonds"...........................................................................21
"IRS"............................................................................................................43
"Issuer".......................................................................................................1, 5
"Maximum Variable Interest Rate"..............................................................................9, 20
"Minimum Variable Interest Rate".................................................................................20
"Mortgage Loans".............................................................................................10, 44
"Non-Agency Certificates"......................................................................................1, 4
"Non-Priority Bonds".............................................................................................16
</TABLE>
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<TABLE>
<S> <C>
"OID Regulations"................................................................................................40
"Optional Variable Interest Rate Bond Redemption".............................................................9, 23
"OTS"............................................................................................................55
"Owner"..........................................................................................................29
"Participating Series"...........................................................................................15
"Pass-Through Entity"............................................................................................50
"Payment Date"....................................................................................................6
"Plan"...........................................................................................................56
"Pooling and Administration Agreement"...........................................................................29
"Premium REMIC Regular Bonds"....................................................................................44
"Prepayment Assumption"..........................................................................................41
"Principal Payment Date"..........................................................................................6
"Priority Bonds".................................................................................................16
"PTCE"...........................................................................................................56
"PTC"............................................................................................................26
"Registration Statement"..........................................................................................3
"Regular Bonds"..............................................................................................12, 38
"Regulations"....................................................................................................56
"REIT"...........................................................................................................50
"REMIC Bonds".................................................................................................1, 38
"REMIC Pool".....................................................................................................39
"REMIC Regular Bonds".............................................................................................1
"REMIC"...........................................................................................................1
"Requisite Amount of the Special Hazard and Bankruptcy Account"..................................................15
"Reserve Funds"..................................................................................................11
"Residual Bondholders"...........................................................................................17
"Residual Bonds"..................................................................................................1
"Retail Class Bond"..............................................................................................41
"Scheduled Amortization Amount"...................................................................................7
"Scheduled Amortization Bonds"................................................................................7, 19
"Scheduled Principal"............................................................................................28
"Series Supplement"...............................................................................................4
"Servicers"......................................................................................................29
"Servicing Agreement"............................................................................................29
"SMMEA"......................................................................................................13, 54
"Special Allocation Bonds".......................................................................................16
"Special Redemption Date".....................................................................................9, 23
"Spread"..........................................................................................................7
"Startup Day"....................................................................................................39
"TIA"............................................................................................................59
"Time-Out Period" ...........................................................................................10, 23
"TMP"............................................................................................................40
"Underlying Mortgage Loans"......................................................................................14
"Variable Interest Rate Bonds"...................................................................................20
"Variable Interest Rate Payment Date".............................................................................9
"Variable Interest Rate Period"...............................................................................9, 21
"Variable Interest Rate"......................................................................................5, 21
</TABLE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND PROSPECTUS
SUPPLEMENT, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS AND PROSPECTUS
SUPPLEMENT DO NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO
BUY IN ANY SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS OR
PROSPECTUS SUPPLEMENT OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS OR PROSPECTUS SUPPLEMENT, NOR
ANY SALE MADE 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 THE DATE OF SUCH INFORMATION.
---------------------
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Important Notice................................ S-2
Summary......................................... S-5
Risk Factors.................................... S-10
Description of The Certificates................. S-15
Description of The Mortgage Pool................ S-16
Underwriting Guidelines of The Originators...... S-21
Underwriting Guidelines of PNC.................. S-23
The Master Servicer............................. S-23
Servicing of The Mortgage Loans................. S-23
Description of Insurance........................ S-25
Description of The Bonds........................ S-26
Yield, Prepayment And Weighted Average Life..... S-39
The Indenture................................... S-47
The Pooling And Servicing Agreement............. S-48
Material Federal Income Tax Considerations...... S-54
Legal Investment Considerations................. S-55
ERISA Considerations............................ S-55
Use of Proceeds................................. S-57
Underwriting.................................... S-57
Experts......................................... S-57
Legal Matters................................... S-57
Ratings......................................... S-57
Index of Defined Terms.......................... S-58
Exhibit A....................................... A-1
</TABLE>
PROSPECTUS
<TABLE>
<CAPTION>
<S> <C>
Available Information............................ 3
Incorporation of Certain Documents by
Reference...................................... 3
Summary of Prospectus............................ 4
Risk Factors..................................... 14
Use of Proceeds.................................. 19
Description of the Bonds......................... 19
Security for the Bonds........................... 24
Certain Legal Aspects of the Mortgage Loans...... 32
The Issuer....................................... 38
Certain Federal Income Tax Consequences.......... 38
Legal Investment................................. 54
ERISA Matters.................................... 55
The Indenture.................................... 56
Plan of Distribution............................. 60
Legal Matters.................................... 60
Experts.......................................... 60
Additional Information........................... 61
</TABLE>
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED BONDS, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS
TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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$230,440,604
(APPROXIMATE)
CMC SECURITIES
CORPORATION III
COLLATERALIZED MORTGAGE
OBLIGATIONS,
SERIES 2000-1
CMC SECURITIES CORPORATION III
ISSUER
------------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------------
DONALDSON, LUFKIN & JENRETTE
MARCH 30, 2000
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