<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus dated June 26, 1996)
$207,490,355
(APPROXIMATE)
CMC SECURITIES CORPORATION II
(DEPOSITOR)
REMIC PASS-THROUGH CERTIFICATES, SERIES 1996-B
PRINCIPAL AND INTEREST PAYABLE ON THE 25TH DAY OF EACH MONTH BEGINNING IN JULY
1996.
-----------------
The REMIC Pass-Through Certificates, Series 1996-B (the "Certificates")
consist of the Class A1, Class A2 and Class R Certificates, and evidence, in
the aggregate, the entire beneficial ownership interest in a trust fund (the
"Trust Fund") created by the Pooling Agreement described herein, the assets of
which will consist primarily of mortgage pass-through certificates (the
"Underlying Certificates"), of which CMC Securities Corporation II (the
"Company") is the sponsor, evidencing interests in pools of adjustable rate
mortgage loans secured by one- to four-family residential properties (the
"Underlying Mortgage Loans"). The Underlying Certificates are composed of two
groups (each, an "Underlying Certificate Group"), the first of which (the
"LIBOR Certificates") relates to Underlying Mortgage Loans (collectively an
"Underlying Mortgage Loan Group" and each a "LIBOR Loan") bearing interest at
a rate that is adjustable every six months at a specified margin over the
average of the interbank offered rates for six month U.S. dollar deposits in
the London market ("LIBOR") based on quotations of major banks, in the case of
certain of the LIBOR Loans, as published by The Wall Street Journal, and in
the case of the remaining LIBOR Loans, as published by FNMA. The second group
of Underlying Certificates (the "CMT Certificates") relates to Underlying
Mortgage Loans (collectively an "Underlying Mortgage Loan Group" and each a
"CMT Loan") bearing interest at a rate that is adjustable annually at a
specified margin over the weekly average yield on United States Treasury
Securities adjusted to a constant maturity of one year, as made available by
the Federal Reserve Board ("CMT"). The Underlying Certificates were created by
the Pooling and
(Cover continued on next page)
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING HEREIN UNDER
THE CAPTION "RISK FACTORS" ON PAGE S-11 AND BEGINNING ON PAGE 17 OF THE
PROSPECTUS BEFORE PURCHASING ANY CERTIFICATES.
-----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR
THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Certificate Certificate Scheduled Final
Principal Interest Distribution
Balance(1) Rate Date(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A1............................ $ 41,914,009 Variable February 26, 2024
- --------------------------------------------------------------------------------
Class A2............................ 165,576,246 Variable February 26, 2024
- --------------------------------------------------------------------------------
Class R............................. 100 Variable February 26, 2024
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Approximate, subject to adjustment in the aggregate as described herein.
(2) Determined as set forth under "Certain Investment, Prepayment, Yield and
Weighted Average Life Considerations--Scheduled Final Distribution Dates."
-----------------
Lehman Brothers Inc. (the "Underwriter") has agreed to purchase the Class A1
and Class A2 Certificates from the Company for a purchase price resulting in
aggregate proceeds to the Company of approximately $211,958,040 (based on the
Certificate Principal Balances set forth above), before the addition of
accrued interest and before the deduction of expenses payable by the Company
estimated to be approximately $250,000. The Underwriter proposes to offer the
Class A1 and Class A2 Certificates from time to time for sale in one or more
negotiated transactions or otherwise at prices to be determined at the time of
sale. It is anticipated that the Class R Certificates will be retained by the
Company or an affiliate thereof. For further information with respect to the
plan of distribution and any discounts, commissions or profit on resale that
may be deemed underwriting discounts or commissions, see "Underwriting"
herein.
The Certificates are offered subject to issuance by the Company and subject
to prior sale, withdrawal, cancellation or modification of the offer without
notice, to delivery to and acceptance by the Underwriter and certain further
conditions. It is expected that delivery of the Certificates, other than the
Class R Certificates, will be made in book entry form only through the Same
Day Funds Settlement System of The Depository Trust Company and that delivery
of the Class R Certificates will be made in registered definitive form to the
Company or an affiliate thereof, in each case on or about June 28, 1996.
-----------------
LEHMAN BROTHERS
The date of this Prospectus Supplement is June 26, 1996.
<PAGE>
(Cover continued from previous page)
Administration Agreement described herein. The Underlying Certificates will be
sold to the Trust Fund by the Company, a limited purpose finance subsidiary
wholly owned by Capstead Inc. ("CI"). See "Description of the Mortgage Loans
and the Mortgaged Properties" herein.
Distributions on each class of Certificates will be made on the 25th day of
each month or, if such day is not a business day, the immediately succeeding
business day (each, a "Distribution Date"), commencing in July 1996. Interest
will accrue on each class of Certificates at the variable rate per annum for
such class described herein during each one-month period ending on the last day
of the calendar month preceding the month in which the related Distribution
Date occurs (each, an "Interest Accrual Period"). On each Distribution Date, to
the extent funds are available therefor, the amount of interest distributable
on a Certificate ("Accrued Certificate Interest") of a class will equal one
month's interest at the Certificate Interest Rate for such class on the
Certificate Principal Balance of such Certificate immediately prior to such
Distribution Date, less such Certificate's share of any Interest Shortfalls (as
defined herein) for the related Underlying Mortgage Loan Group. See
"Description of the Certificates--Interest" herein.
Distributions of principal of and interest on the Class A1 Certificates will
be made from receipts of principal and interest on the LIBOR Certificates.
Distributions of principal of and interest on the Class A2 and Class R
Certificates will be made from receipts of principal and interest on the CMT
Certificates. Accordingly, for purposes of this Prospectus Supplement, the
Underlying Certificate Group comprising the LIBOR Certificates and the
Underlying Mortgage Loan Group comprising the LIBOR Loans are the related
Underlying Certificate Group and the related Underlying Mortgage Loan Group,
respectively, with respect to the Class A1 Certificates, and the Underlying
Certificate Group comprising the CMT Certificates and the Underlying Mortgage
Loan Group comprising the CMT Loans are the related Underlying Certificate
Group and the related Underlying Mortgage Loan Group, respectively, with
respect to the Class A2 and Class R Certificates.
The Certificate Interest Rate on the Class A1 Certificates for each Interest
Accrual Period will equal the weighted average (by principal balance) of the
Pass-Through Rates borne by the LIBOR Certificates as of the beginning of such
Interest Accrual Period. The Certificate Interest Rate on the Class A2 and
Class R Certificates for each Interest Accrual Period will equal the weighted
average (by principal balance) of the Pass-Through Rates borne by the CMT
Certificates as of the beginning of such Interest Accrual Period.
For each Interest Accrual Period, the Pass-Through Rate for each Underlying
Certificate is the weighted average of the Net Mortgage Rates (described
hereafter) borne by all of the Underlying Mortgage Loans evidenced by such
Underlying Certificate, weighted in proportion to the respective outstanding
principal balance of each such Underlying Mortgage Loan, as of the beginning of
such Interest Accrual Period. The Net Mortgage Rate for each Underlying
Mortgage Loan is calculated by deducting from the interest rate borne by such
Underlying Mortgage Loan, as of the beginning of such Interest Accrual Period,
the sum of (1) the applicable servicing fee, (2) the Underlying Administrator's
fees and the Underlying Trustee's fees under the Underlying Agreement described
herein and (3) the premiums for the Mortgage Pool Insurance Policy and Special
Hazard Insurance Policy described herein, in each case expressed as a
percentage.
Principal will be distributable monthly on each Distribution Date on the
Class A1 Certificates in an aggregate amount (the "LIBOR Principal Distribution
Amount") equal to the excess of the LIBOR Certificates Available Funds (as
defined herein) for such Distribution Date over the amount of interest
distributed with respect to the Class A1 Certificates on such Distribution
Date. Principal will be distributed monthly on each Distribution Date on the
Class A2 and Class R Certificates in an aggregate amount (the "CMT Principal
Distribution Amount") equal to the excess of the CMT Certificates Available
Funds (as defined herein) for such Distribution Date over the amount of
interest distributed with respect to the Class A2 and Class R Certificates on
such Distribution Date and will be allocated between the Class A2 and Class R
Certificates as described herein. See "Description of the Certificates--
Distributions" and "--Principal" herein.
The Underlying Certificates will have the limited benefit of the Mortgage
Pool Insurance Policy issued by PMI Mortgage Insurance Co. ("PMI"), to the
extent described herein. In addition, certain of the Underlying Certificates
(the "Guaranteed Underlying Certificates") are the subject of the coverage of a
financial guaranty insurance policy (the "Financial Guaranty Insurance Policy")
issued by Financial Security Assurance, Inc. ("FSA") which also covers
S-2
<PAGE>
certain other series of mortgage pass-through certificates issued by an
affiliate of the Company. Certain of the Underlying Mortgage Loans are also
covered by primary mortgage insurance. The Underlying Certificates will also
have limited rights to assets in the Special Hazard Account (including
proceeds under the Special Hazard Insurance Policy) and the Bankruptcy Account
described herein. ADDITIONAL RESIDENTIAL MORTGAGE LOANS, OTHER THAN THE
UNDERLYING MORTGAGE LOANS EVIDENCED BY THE UNDERLYING CERTIFICATES (THE "OTHER
MORTGAGE LOANS"), WILL ALSO HAVE THE BENEFIT OF THE MORTGAGE POOL INSURANCE
POLICY AND THE FINANCIAL GUARANTY INSURANCE POLICY AND ADDITIONAL MORTGAGE
PASS-THROUGH CERTIFICATES (THE "OTHER CERTIFICATES") WILL HAVE RIGHTS TO
ASSETS IN THE SPECIAL HAZARD ACCOUNT (INCLUDING PROCEEDS UNDER THE SPECIAL
HAZARD INSURANCE POLICY) AND IN THE BANKRUPTCY ACCOUNT. THE UNDERLYING
MORTGAGE LOANS AND THE OTHER MORTGAGE LOANS ARE REFERRED TO COLLECTIVELY
HEREIN AS THE "POOL INSURED LOANS". IN ADDITION, COVERAGE UNDER THE FOREGOING
FORMS OF CREDIT ENHANCEMENT MAY SUBSEQUENTLY BE EXPANDED TO COVER RESIDENTIAL
MORTGAGE LOANS AND MORTGAGE PASS-THROUGH CERTIFICATES NOT CURRENTLY COVERED BY
SUCH CREDIT ENHANCEMENT, PROVIDED, HOWEVER, THAT SUCH ACTION MAY BE TAKEN ONLY
IF IT WILL NOT RESULT IN A REDUCTION OF THE THEN-CURRENT RATING OF THE
CERTIFICATES. See "Description of Insurance, Special Hazard Account and
Bankruptcy Account" herein.
THE YIELD ON EACH CLASS OF CERTIFICATES WILL DEPEND UPON ITS PURCHASE PRICE,
ITS INTEREST RATE AND THE TIMING OF PRINCIPAL PAYMENTS ON THE UNDERLYING
MORTGAGE LOANS IN THE RELATED UNDERLYING MORTGAGE LOAN GROUP. THE YIELD ON
EACH CLASS OF CERTIFICATES WILL ALSO BE SENSITIVE TO THE RATE AND TIMING OF
PRINCIPAL PAYMENTS ON THE RELATED UNDERLYING MORTGAGE LOANS (INCLUDING, FOR
THIS PURPOSE, PREPAYMENTS AND AMOUNTS RECEIVED BY VIRTUE OF CONDEMNATION,
INSURANCE OR FORECLOSURE WITH RESPECT TO THE RELATED UNDERLYING MORTGAGE
LOANS), THE ACTUAL CHARACTERISTICS OF THE UNDERLYING MORTGAGE LOANS IN THE
RELATED UNDERLYING MORTGAGE LOAN GROUP AND FLUCTUATIONS IN THE LEVEL OF LIBOR,
IN THE CASE OF THE CLASS A1 CERTIFICATES, OR CMT, IN THE CASE OF THE CLASS A2
AND CLASS R CERTIFICATES. THE UNDERLYING MORTGAGE LOANS ARE GENERALLY SUBJECT
TO PREPAYMENT AT ANY TIME WITHOUT PENALTY. UNDERLYING MORTGAGE LOAN PREPAYMENT
RATES AND THE LEVELS OF LIBOR AND CMT ARE EACH LIKELY TO FLUCTUATE
SIGNIFICANTLY FROM TIME TO TIME. INVESTORS SHOULD CONSIDER THE ASSOCIATED
RISKS, INCLUDING:
. THE CERTIFICATES MAY NOT BE SUITABLE INVESTMENTS FOR ALL INVESTORS
BECAUSE OF THEIR COMPLEX NATURE. NO INVESTOR SHOULD PURCHASE THE
CERTIFICATES UNLESS SUCH INVESTOR UNDERSTANDS AND IS ABLE TO BEAR THE
PREPAYMENT, YIELD, LIQUIDITY AND OTHER RISKS ASSOCIATED WITH THE
CERTIFICATES.
. EACH FORM OF CREDIT ENHANCEMENT WITH RESPECT TO THE UNDERLYING MORTGAGE
LOANS AND RELATED MORTGAGED PROPERTIES PROVIDES LIMITED COVERAGE AS TO
CERTAIN TYPES OF LOSSES AND MAY PROVIDE NO COVERAGE AS TO CERTAIN OTHER
TYPES OF LOSSES. THE COVERAGE UNDER CERTAIN MEANS OF CREDIT ENHANCEMENT
WILL BE SUBJECT TO PERIODIC REDUCTION. SATISFACTION OF CERTAIN CONDITIONS
PRECEDENT IS REQUIRED WITH RESPECT TO EACH FORM OF CREDIT ENHANCEMENT
BEFORE COVERAGE IS AVAILABLE FOR A LOSS ON AN UNDERLYING MORTGAGE LOAN OR
ITS RELATED MORTGAGED PROPERTY. AS DESCRIBED ABOVE, CERTAIN FORMS OF
CREDIT ENHANCEMENT COVER LOSSES WITH RESPECT TO THE OTHER MORTGAGE LOANS
AND SUCH COVERAGE MAY BE EXPANDED TO COVER MORTGAGE LOANS NOT CURRENTLY
COVERED BY SUCH CREDIT ENHANCEMENT. NO PORTION OF ANY CREDIT ENHANCEMENT
IS RESERVED FOR THE EXCLUSIVE BENEFIT OF THE UNDERLYING MORTGAGE LOANS.
TO THE EXTENT CREDIT ENHANCEMENT IS USED TO COVER LOSSES WITH RESPECT TO
MORTGAGE LOANS OTHER THAN THE UNDERLYING MORTGAGE LOANS, THE AMOUNT OF
COVERAGE AVAILABLE FOR THE UNDERLYING MORTGAGE LOANS WILL BE REDUCED.
CONSEQUENTLY, A LOSS ON AN UNDERLYING MORTGAGE LOAN MAY NOT BE COVERED BY
CREDIT ENHANCEMENT AND, THEREFORE, MAY RESULT IN LOSSES ON THE RELATED
CERTIFICATES. SEE "DESCRIPTION OF INSURANCE, SPECIAL HAZARD ACCOUNT AND
BANKRUPTCY ACCOUNTS" HEREIN.
. FASTER THAN ANTICIPATED PREPAYMENT RATES ON THE UNDERLYING MORTGAGE LOANS
CAN REDUCE THE WEIGHTED AVERAGE LIVES AND, THUS, THE YIELDS OF
CERTIFICATES PURCHASED AT A PREMIUM.
. SLOWER THAN ANTICIPATED PREPAYMENT RATES ON THE UNDERLYING MORTGAGE LOANS
CAN INCREASE THE WEIGHTED AVERAGE LIVES AND, THUS, REDUCE THE YIELDS OF
CERTIFICATES PURCHASED AT A DISCOUNT.
. APPROXIMATELY 27% OF THE LIBOR LOANS AND 21% OF THE CMT LOANS (IN EACH
CASE BY AGGREGATE PRINCIPAL BALANCE AS OF THE CUT-OFF DATE) ARE
CONVERTIBLE AT THE OPTION OF THE RELATED MORTGAGORS INTO FIXED RATE
MORTGAGE LOANS. PURSUANT TO THE TERMS OF THE RELATED
S-3
<PAGE>
SERVICING AGREEMENT, THE RELATED SERVICER IS REQUIRED TO REPURCHASE ANY
SUCH UNDERLYING MORTGAGE LOAN WITH RESPECT TO WHICH A CONVERSION OPTION
IS EXERCISED. SUCH REPURCHASE WOULD HAVE THE SAME EFFECT AS A PREPAYMENT
IN FULL OF SUCH UNDERLYING MORTGAGE LOAN AND WOULD RESULT IN A
COMMENSURATE PREPAYMENT OF PRINCIPAL ON THE CLASS A1 CERTIFICATES OR ON
THE CLASS A2 OR CLASS R CERTIFICATES, AS THE CASE MAY BE. IN THE EVENT
THAT A SERVICER FAILS TO PURCHASE A LIBOR LOAN OR A CMT LOAN WITH RESPECT
TO WHICH A CONVERSION OPTION HAS BEEN EXERCISED, AND THE LIBOR INDEX OR
THE CMT INDEX, AS APPLICABLE, PLUS THE RELATED GROSS MARGIN FOR SUCH
MORTGAGE LOAN IS HIGHER THAN THE NEW FIXED RATE FOR SUCH MORTGAGE LOAN,
THE YIELD ON THE CLASS A1 CERTIFICATES OR THE CLASS A2 AND CLASS R
CERTIFICATES, AS APPLICABLE, WOULD BE LESS THAN WOULD HAVE BEEN THE CASE
IN THE ABSENCE OF SUCH INTEREST RATE CONVERSION.
. THE SERIES 1996-B REMIC WILL BE SUBJECT TO THE SPECIAL "SINGLE-CLASS
REMIC" RULES WHICH MAY CAUSE ADVERSE INCOME TAX CONSEQUENCES TO INVESTORS
WHO ARE INDIVIDUALS, TRUSTS OR ESTATES. SEE "CERTAIN FEDERAL INCOME TAX
CONSEQUENCES--FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES--
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES" IN THE PROSPECTUS.
SEE "CERTAIN INVESTMENT, PREPAYMENT, YIELD AND WEIGHTED AVERAGE LIFE
CONSIDERATIONS" IN THIS PROSPECTUS SUPPLEMENT FOR MORE SPECIFIC INFORMATION
WITH RESPECT TO THE YIELD AND REINVESTMENT RISKS ASSOCIATED WITH EACH SPECIFIC
TYPE OF CERTIFICATE. SEE ALSO "RISK FACTORS" HEREIN.
As described herein, proceeds of the assets in the Trust Fund are the sole
source of payments on the Certificates. The Certificates do not represent an
interest in or obligation of the Company or any of its affiliates. Neither the
Certificates, the Underlying Certificates nor the Underlying Mortgage Loans
are insured or guaranteed by any governmental agency or instrumentality or by
the Company or any of its affiliates.
There is currently no secondary market for the Certificates. The Underwriter
intends to make a secondary market in the Certificates, but has no obligation
to do so. There can be no assurance that any such secondary market for the
Certificates will develop, or if it does develop, that it will continue.
For federal income tax purposes, a real estate mortgage investment conduit
(a "REMIC") election will be made with respect to the Series 1996-B
Certificates. As described more fully herein, the Class A1 and Class A2
Certificates will constitute regular interests in the Series 1996-B REMIC and
"Regular Certificates" for purposes of the Prospectus. The Class R
Certificates will constitute the residual interests in the REMIC and "Residual
Certificates" for purposes of the Prospectus. See "Certain Federal Income Tax
Consequences" herein and in the Prospectus. The Residual Certificates may not
be purchased by or transferred to (i) a "Disqualified Organization" or a
"Book-Entry Nominee," (ii) except under certain limited circumstances, a
person who is a "Foreign Person," (iii) a Benefit Plan Investor (as defined
herein) or (iv) any person or entity who the transferor has reason to believe
intends to impede the assessment or collection of any federal, state or local
taxes legally required to be paid with respect thereto. See "Description of
the Certificates--Restrictions on Transfer of the Residual Certificates" and
"ERISA Considerations" herein and "Certain Federal Income Tax Consequences--
Federal Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Tax-Related Restrictions on Transfer of Residual Certificates"
in the Prospectus.
The Class A1 and Class A2 Certificates will be available to investors only
in book entry form through the facilities of The Depository Trust Company.
Definitive certificates for such Certificates will be available only under
certain limited circumstances as described herein. Beneficial interests in
such Certificates will be shown on, and transfers thereof will be effected
only through, records maintained by The Depository Trust Company and its
participants. See "Description of Book Entry Procedures" herein. The Class R
Certificates will be issued in the form of Definitive Certificates.
----------------
THIS PROSPECTUS SUPPLEMENT DOES NOT CONTAIN COMPLETE INFORMATION ABOUT THE
OFFERING OF THE CERTIFICATES. ADDITIONAL INFORMATION IS CONTAINED IN THE
PROSPECTUS AND PURCHASERS ARE URGED TO READ BOTH THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT. SALES OF THE CERTIFICATES MAY NOT BE CONSUMMATED UNLESS
THE PURCHASER HAS RECEIVED BOTH THE PROSPECTUS AND THIS PROSPECTUS SUPPLEMENT.
----------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE CERTIFICATES, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS SUPPLEMENT AND
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.
S-4
<PAGE>
SUMMARY OF TERMS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus Supplement and in
the accompanying Prospectus. Capitalized terms used herein and not otherwise
defined have the meanings assigned in the Prospectus. See "Glossary of
Principal Terms" for the location in the Prospectus of the definitions of
certain capitalized terms.
Securities Offered.... REMIC Pass-Through Certificates, Series 1996-B, Class
A1 and Class A2 in the approximate aggregate original
Certificate Principal Balances (each, a "Class
Certificate Principal Balance") set forth on the cover
hereof. It is anticipated that the Class R Certificate
will be retained by the Company or an affiliate
thereof.
The Certificates are sometimes referred to herein with
the following designations:
<TABLE>
<CAPTION>
DESIGNATION CLASSES
----------- -------
<S> <C>
Regular Certificates............................... A1, A2
Residual Certificates.............................. R
Book Entry Certificates............................ A1, A2
</TABLE>
The Underlying Certificates, Underlying Agreement,
Underlying Trustee and Servicers referred to in this
Prospectus Supplement constitute Private Mortgage-
Backed Securities, a PMBS Agreement, a PMBS Trustee
and PMBS Servicers, respectively, for purposes of the
accompanying Prospectus.
The Class A1 and Class A2 Certificates are "Book Entry
Certificates" as defined in the Prospectus and will be
issued initially in the form of one or more
certificates registered in the name of a nominee of
The Depository Trust Company (the "Clearing Agency").
Purchasers and other beneficial owners of Book Entry
Certificates ("Beneficial Owners") will not receive
definitive certificates ("Definitive Certificates")
representing their interests in the Certificates
except upon the termination of book entry registration
("Book Entry Termination") which will occur only under
certain limited circumstances. See "Description of
Book Entry Procedures" in this Prospectus Supplement
and "Risk Factors--Book Entry Registration" and
"Description of the Certificates--Book Entry
Registration" in the Prospectus.
Depositor............. CMC Securities Corporation II (the "Company"), a
limited purpose finance corporation wholly owned by
Capstead Inc. ("CI").
Trustee............... Texas Commerce Bank National Association, as trustee
(the "Trustee").
Cut-off Date.......... June 1, 1996.
Record Date........... The Record Date for the Certificates for each
Distribution Date (as defined herein) will be the last
day of the month preceding the month in which such
Distribution Date occurs.
Denominations......... Beneficial interests in the Book Entry Certificates
will be held in minimum denominations in Certificate
Principal Balances of $25,000 and integral multiples
of $1 in excess thereof. The Class R Certificates will
be issued as registered Definitive Certificates in
minimum denominations in
S-5
<PAGE>
Certificate Principal Balances of $50. See
"Description of the Certificates--General" in the
Prospectus. Notwithstanding the foregoing, one
Certificate of each class may be issued in a different
denomination.
Closing Date.......... On or about June 28, 1996 (the "Closing Date").
Underlying Mortgage
Loans................. All of the Underlying Mortgage Loans will be adjustable
rate, fully amortizing, conventional mortgage loans
secured by first liens on one- to four-family
residential properties. Approximately 20% and 80% of
the Underlying Mortgage Loans (by scheduled principal
balance as of the Cut-off Date) are LIBOR Loans and
CMT Loans, respectively. The Underlying Mortgage Loans
will have original terms to maturity of not more than
30 years. See "Description of the Mortgage Loans and
the Mortgaged Properties" herein.
Description of the
Certificates.......... The Certificates will be issued pursuant to a Pooling
Agreement, to be dated as of the Cut-off Date (the
"Agreement"), between the Company and the Trustee. To
the extent funds are available therefor from
distributions on the LIBOR Certificates and the CMT
Certificates, distributions on the Class A1
Certificates, and on the Class A2 and Class R
Certificates, respectively, 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
(each, a "Distribution Date"), commencing in July
1996, to holders of record on the related Record Date.
See "Description of the Certificates" herein.
Description of the
Underlying
Certificates......... The Underlying Certificates consist of the LIBOR
Certificates and the CMT Certificates. The Underlying
Certificates were issued pursuant to a Pooling and
Administration Agreement relating to Capstead Capital
Corporation's Portfolio Pass-Through Program 1993PA,
dated as of March 1, 1993, as supplemented and amended
through and as of the Cut-off Date (the "Underlying
Agreement"), among Capstead Capital Corporation
("CCC"), Capstead Mortgage Corporation, as
administrator (the "Underlying Administrator") and
Texas Commerce Bank National Association, as trustee
(the "Underlying Trustee"). Effective June 1, 1996,
the Company succeeded to all of CCC's rights and
obligations as sponsor under the Underlying Agreement
with respect to the Underlying Certificates. See
"Description of the Underlying Certificates" herein.
The Company is a PMBS Issuer for purposes of the
accompanying Prospectus. See "The Trust Fund--Private
Mortgage-Backed Securities" in the Prospectus.
Interest.............. Interest will accrue on the Certificates of each class
at the variable Certificate Interest Rate for such
class determined as more fully described herein under
"Description of the Certificates--Interest."
To the extent funds are available therefor from
distributions on the LIBOR Certificates (the "LIBOR
Certificates Available Funds") in the case of the
Class A1 Certificates, or from distributions on the
CMT Certificates (the "CMT Certificates Available
Funds") in the case of the Class A2 and Class R
Certificates, on each Distribution Date the amount of
interest distributable on a Certificate ("Accrued
Certificate Interest") of a class will equal one
month's interest at the Certificate Interest Rate for
such class on the Certificate Principal Balance of
such Certificate immediately prior to such
S-6
<PAGE>
Distribution Date, less such Certificate's share of
any Interest Shortfalls (as defined herein) for the
related Underlying Mortgage Loan Group. See
"Description of the Certificates--Distributions" and
"--Interest" herein.
Approximately 27.21% of the LIBOR Loans and 21.48% of
the CMT Loans (in each case by scheduled principal
balance as of the Cut-off Date) contain a conversion
option, pursuant to which the related Mortgagor may,
after the satisfaction of certain conditions, elect to
convert the rate of interest borne by such Underlying
Mortgage Loan to a fixed rate of interest. Pursuant to
the terms of the related Servicing Agreements, the
related Servicer is required to repurchase any such
Underlying Mortgage Loan with respect to which a
conversion option is exercised. In the event that a
Servicer fails to purchase a LIBOR Loan or a CMT Loan
with respect to which a conversion option has been
exercised, such Underlying Mortgage Loan will begin to
yield a fixed rate of interest for purposes of
calculating the Certificate Interest Rate on the Class
A1 Certificates or the Class A2 and Class R
Certificates, as applicable. See "Description of the
Certificates--Interest" and "Certain Investment,
Prepayment, Yield and Weighted Average Life
Considerations--Yield Considerations Relating to
Interest Rate Conversions" herein.
Principal............. Principal will be distributable monthly on each
Distribution Date on the Class A1 Certificates in an
aggregate amount (the "LIBOR Principal Distribution
Amount") equal to the excess of the LIBOR Certificates
Available Funds for such Distribution Date over the
amount of interest distributed with respect to the
Class A1 Certificates on such Distribution Date as
described herein. Principal will be distributed
monthly on each Distribution Date on the Class A2 and
Class R Certificates in an aggregate amount (the "CMT
Principal Distribution Amount") equal to the excess of
the CMT Certificates Available Funds for such
Distribution Date over the amount of interest
distributed with respect to the Class A2 and Class R
Certificates on such Distribution Date and will be
allocated between the Class A2 and Class R
Certificates as described herein. See "Description of
the Certificates--Distributions" and "--Principal"
herein.
Advances.............. Each Servicer will be obligated to make advances with
respect to delinquent monthly payments on the
Underlying Mortgage Loans serviced by it to the extent
such advances are, in its judgment, recoverable. See
"Description of the Underlying Certificates" herein.
Credit Enhancement.... The Underlying Certificates will have the limited
benefit of the Mortgage Pool Insurance Policy issued
by PMI as described herein. In addition, certain of
the Underlying Certificates are the subject of a
Financial Guaranty Insurance Policy issued by
Financial Security Assurance, Inc. ("FSA") as
described herein. The Underlying Certificates will
also have limited rights to assets in a Special Hazard
Account (including proceeds under the Special Hazard
Insurance Policy) and in a Bankruptcy Account. EACH
FORM OF CREDIT ENHANCEMENT WITH RESPECT TO THE
UNDERLYING MORTGAGE LOANS AND RELATED MORTGAGED
PROPERTIES PROVIDES LIMITED COVERAGE AS TO CERTAIN
TYPES OF LOSSES AND MAY PROVIDE NO COVERAGE AS TO
CERTAIN OTHER TYPES OF LOSSES. THE COVERAGE UNDER
CERTAIN FORMS OF CREDIT ENHANCEMENT WILL BE SUBJECT TO
PERIODIC REDUCTION. SATISFACTION OF CERTAIN CONDITIONS
PRECEDENT IS REQUIRED WITH RESPECT TO EACH FORM OF
CREDIT ENHANCEMENT BEFORE COVERAGE IS AVAILABLE FOR A
LOSS ON AN UNDERLYING MORTGAGE
S-7
<PAGE>
LOAN OR ITS RELATED MORTGAGED PROPERTY. CERTAIN
RESIDENTIAL MORTGAGE LOANS OTHER THAN THE UNDERLYING
MORTGAGE LOANS EVIDENCED BY THE UNDERLYING
CERTIFICATES (THE "OTHER MORTGAGE LOANS") HAVE THE
BENEFIT OF THE MORTGAGE POOL INSURANCE POLICY AND THE
FINANCIAL GUARANTY INSURANCE POLICY, AND CERTAIN
MORTGAGE PASS-THROUGH CERTIFICATES OTHER THAN THE
UNDERLYING CERTIFICATES (THE "OTHER CERTIFICATES")
ALSO HAVE THE BENEFIT OF THE ASSETS IN THE SPECIAL
HAZARD ACCOUNT (INCLUDING THE SPECIAL HAZARD INSURANCE
POLICY) AND THE BANKRUPTCY ACCOUNT. IN ADDITION,
COVERAGE UNDER THE FOREGOING FORMS OF CREDIT
ENHANCEMENT MAY SUBSEQUENTLY BE EXPANDED TO COVER
RESIDENTIAL MORTGAGE LOANS AND MORTGAGE PASS-THROUGH
CERTIFICATES NOT CURRENTLY COVERED BY SUCH CREDIT
ENHANCEMENT, PROVIDED, HOWEVER, THAT SUCH ACTION MAY
BE TAKEN ONLY IF IT WILL NOT RESULT IN A REDUCTION OF
THE THEN-CURRENT RATING OF THE CERTIFICATES.
AS OF THE CUT-OFF DATE, THE AMOUNT OF INSURANCE
COVERAGE AVAILABLE UNDER THE MORTGAGE POOL INSURANCE
POLICY IS EXPECTED TO EQUAL APPROXIMATELY $80,001,704.
IN ADDITION, AS OF THE CUT-OFF DATE, THE REQUISITE
AMOUNT OF THE SPECIAL HAZARD ACCOUNT (INCLUDING
COVERAGE PROVIDED BY THE SPECIAL HAZARD POLICY) IS
EXPECTED TO EQUAL APPROXIMATELY $5,425,296 AND THE
REQUISITE AMOUNT OF THE BANKRUPTCY ACCOUNT IS EXPECTED
TO EQUAL APPROXIMATELY $121,042.
IN ADDITION TO THE COVERAGE PROVIDED BY THE MORTGAGE
POOL INSURANCE POLICY, THE SPECIAL HAZARD ACCOUNT AND
THE BANKRUPTCY ACCOUNT, THE UNDERLYING ADMINISTRATOR
HAS AGREED TO PROVIDE A LIMITED AMOUNT OF COVERAGE
WITH RESPECT TO NON-COVERED LOSSES BY SUBORDINATING
ITS RIGHT TO RECEIVE ITS FEES UNDER THE UNDERLYING
AGREEMENT, AS MORE FULLY DESCRIBED UNDER "DESCRIPTION
OF INSURANCE, SPECIAL HAZARD ACCOUNT AND BANKRUPTCY
ACCOUNT--OTHER CREDIT ENHANCEMENTS" HEREIN.
NO PORTION OF ANY CREDIT ENHANCEMENT IS RESERVED FOR
THE EXCLUSIVE BENEFIT OF THE UNDERLYING MORTGAGE
LOANS. TO THE EXTENT CREDIT ENHANCEMENT IS USED TO
COVER LOSSES WITH RESPECT TO THE OTHER MORTGAGE LOANS,
THE AMOUNT OF COVERAGE AVAILABLE FOR THE UNDERLYING
MORTGAGE LOANS WILL BE REDUCED. CONSEQUENTLY, A LOSS
ON AN UNDERLYING MORTGAGE LOAN MAY NOT BE COVERED BY
CREDIT ENHANCEMENT AND, THEREFORE, MAY RESULT IN
LOSSES ON THE RELATED CERTIFICATES. See "Description
of Insurance, Special Hazard Account and Bankruptcy
Account" herein.
Certain Investment,
Prepayment and Yield
Considerations....... The yield to investors of each class of the
Certificates will be sensitive in varying degrees to
the rate and timing of principal payments (including
prepayments) on the Underlying Mortgage Loans in the
related Underlying Mortgage Loan Group, which can
generally be prepaid at any time without penalty. All
investors should consider carefully the associated
risks including, in the case of any Certificates
purchased at a discount, the risk that a slower than
anticipated rate of principal prepayments on the
Underlying Mortgage Loans in the related Underlying
Mortgage Loan Group could result in an actual yield to
investors that is lower than the anticipated yield
and, in the case of any Certificates purchased at a
premium, the risk that a faster than anticipated rate
of principal prepayments on the Underlying Mortgage
Loans in the related Underlying
S-8
<PAGE>
Mortgage Loan Group could result in an actual yield to
investors that is lower than the anticipated yield.
The yield on the Class A1 Certificates will be
sensitive to fluctuations in the levels of the LIBOR
indices used to determine the interest rates on the
LIBOR Loans, and the yield on the Class A2 and Class R
Certificates will be sensitive to fluctuations in the
levels of the CMT index used to determine the interest
rates on the CMT Loans.
AS DESCRIBED HEREIN, APPROXIMATELY 7.18% (BY SCHEDULED
PRINCIPAL BALANCE) OF THE UNDERLYING MORTGAGE LOANS
AND APPROXIMATELY 8.09% (BY SCHEDULED PRINCIPAL
BALANCE) OF ALL OF THE MORTGAGE LOANS COVERED BY THE
MORTGAGE POOL INSURANCE POLICY (COLLECTIVELY, THE
"POOL INSURED LOANS") WERE DELINQUENT 60 DAYS OR MORE,
IN FORECLOSURE OR CONSTITUTED REAL ESTATE OWNED AS OF
MAY 31, 1996. SEE "RISK FACTORS" HEREIN.
With respect to each Underlying Mortgage Loan Group and
the related Certificates, principal prepayments in
full will reduce the amount of interest available for
distribution to the related Certificateholders in the
following month from the amount which would have been
available in the absence of such prepayments. No
compensating interest payments in respect of
shortfalls resulting from such prepayments in full on
the Underlying Mortgage Loans will be distributed on
the Underlying Certificates or the Certificates. With
respect to each Underlying Mortgage Loan Group and the
related Certificates, any Interest Shortfalls (as
defined herein) resulting from such early receipt of
principal may produce a lower yield than would
otherwise be the case.
Approximately 27.21% of the LIBOR Loans and 21.48% of
the CMT Loans (in each case by scheduled principal
balance as of the Cut-off Date) are convertible at the
option of the related Mortgagors into fixed rate
mortgage loans. Pursuant to the terms of the related
Servicing Agreements, the related Servicer is required
to repurchase any such LIBOR Loan or CMT Loan with
respect to which a conversion option is exercised.
Such repurchase would have the same effect as a
prepayment in full of such Underlying Mortgage Loan
and would result in a commensurate prepayment of
principal on the Class A1 Certificates or on the Class
A2 or Class R Certificates, as applicable. In the
event that a Servicer fails to purchase a LIBOR Loan
or a CMT Loan with respect to which a conversion
option has been exercised, and the LIBOR Index or the
CMT Index, as applicable, plus the related LIBOR Gross
Margin or CMT Gross Margin, respectively, for such
mortgage loan is higher than the new fixed rate for
such mortgage loan, the yield on the Class A1
Certificates or the Class A2 and Class R Certificates,
as applicable, would be less than would have been the
case in the absence of such interest rate conversion.
THE FOREGOING PARAGRAPHS ARE QUALIFIED IN THEIR
ENTIRETY BY REFERENCE TO THE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS SUPPLEMENT,
PARTICULARLY UNDER "CERTAIN INVESTMENT, PREPAYMENT,
YIELD AND WEIGHTED AVERAGE LIFE CONSIDERATIONS," WHICH
PROVIDES A MORE DETAILED DISCUSSION OF VARIOUS FACTORS
AFFECTING YIELDS ON THE CERTIFICATES. NO INVESTMENT
SHOULD BE MADE IN ANY CLASS OF THE CERTIFICATES UNLESS
AN INVESTOR HAS CONSIDERED CAREFULLY THE ASSOCIATED
RISKS OF INVESTING IN SUCH CLASS OF CERTIFICATES AS
DISCUSSED UNDER "CERTAIN INVESTMENT, PREPAYMENT, YIELD
AND WEIGHTED AVERAGE LIFE CONSIDERATIONS" HEREIN.
S-9
<PAGE>
Scheduled Final
Distribution
Dates................ The Scheduled Final Distribution Date for the Class A1
Certificates is the third Distribution Date occurring
after the stated maturity date of the latest maturing
LIBOR Loan. The Scheduled Final Distribution Date for
the Class A2 and Class R Certificates is the third
Distribution Date occurring after the stated maturity
date of the latest maturing CMT Loan. The rate of
payment of principal of each class of Certificates
will depend on the rate of payment of principal of the
Underlying Mortgage Loans in the related Underlying
Mortgage Loan Group which, in turn, will depend on the
characteristics of such Underlying Mortgage Loans, the
level of prevailing interest rates and other economic,
geographic and social factors. No assurance can be
given as to the actual payment experiences or
delinquencies of the Underlying Mortgage Loans or the
Certificates. As a result, the Class Certificate
Principal Balance of each class of Certificates may be
reduced to zero significantly earlier (e.g., if the
Underlying Mortgage Loans experience a high rate of
prepayment) or later (e.g., if any of the Underlying
Mortgage Loans become the subject of foreclosure
proceedings and such foreclosure proceedings continue
until after the Scheduled Final Distribution Date)
than its Scheduled Final Distribution Date. See
"Certain Investment, Prepayment, Yield and Weighted
Average Life Considerations--Scheduled Final
Distribution Dates" herein.
Optional
Termination.......... The Company may, at its option, repurchase all of the
Underlying Certificates and thereby effect the early
retirement of the Certificates on any Distribution
Date on which the aggregate principal balance of the
Underlying Certificates is equal to or less than 10%
of the aggregate principal balance thereof on the Cut-
off Date. The Underlying Agreement provides that the
Company may not repurchase the Underlying Mortgage
Loans and thereby effect the early retirement of the
Underlying Certificates until the Certificates have
been retired. See "Pooling Agreement--Termination"
herein.
Certain Federal
Income Tax
Consequences ........ For a discussion of certain tax matters, see "Certain
Federal Income Tax Consequences" in this Prospectus
Supplement and in the Prospectus.
Restrictions on
Purchase and
Transfer of the
Residual
Certificates......... For a discussion of restrictions on the purchase and
transfer of the Residual Certificates, see
"Description of the Certificates--Restrictions on
Transfer of the Residual Certificates" herein.
ERISA
Considerations....... For a discussion of certain ERISA considerations, see
"ERISA Considerations" in this Prospectus Supplement
and in the Prospectus.
Legal Investment ..... For a discussion of certain legal investment
considerations, see "Legal Investment Matters" herein
and in the accompanying Prospectus.
Certificate Rating ... It is a condition to the issuance of the Certificates
that they be rated "AAAr" by Standard & Poor's Rating
Services, a division of The McGraw-Hill Companies,
Inc. ("S&P"). In assigning this rating, S&P expresses
no opinion with respect to a Servicer's repurchase
obligation in the event a Mortgagor elects to convert
an Underlying Mortgage Loan from an adjustable rate
mortgage loan to a fixed rate mortgage loan. Investors
should be aware that there could be some variability
in expected returns in the event of a failure on the
part of a Servicer to repurchase converted mortgage
loans. The "r" component of the rating is attached to
highlight derivative, hybrid and certain other
obligations that S&P believes may experience high
volatility or high variability in expected returns due
to noncredit risks. See "Certificate Rating" herein.
S-10
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider the following factors in
connection with the purchase of a Certificate.
1. Delinquent Underlying Mortgage Loans and Pool Insured Loans. As described
herein, as of May 31, 1996, approximately 7.18% of the Underlying Mortgage
Loans, and approximately 8.09% of the Pool Insured Loans (in each case, by
scheduled principal balance) were delinquent 60 days or more, in foreclosure,
or constituted real estate owned. See "Description of Insurance, Special
Hazard Account and Bankruptcy Account--Certain Information with respect to the
Pool Insured Loans" herein. Investors should consider the risk that inclusion
of such Underlying Mortgage Loans in the Trust Fund may affect the rate of
prepayments and loan losses on the Underlying Mortgage Loans, and that losses
with respect to Other Pool Insurance Loans (as defined herein) will reduce the
amount of coverage available under the Mortgage Pool Insurance Policy in
respect of the Underlying Mortgage Loans.
2. Geographic Concentration. Approximately 83.35% of the Underlying Mortgage
Loans and approximately 85.26% of the Pool Insured Loans (in each case, by
scheduled principal balance as of the Cut-off Date) are secured by Mortgaged
Properties located in the State of California. Because of the relative lack of
geographic diversity of the Underlying Mortgage Loans in the Trust Fund,
losses on the Underlying Mortgage Loans may be higher than would be the case
if the Underlying Mortgage Loans were more diversified. Certain of the
Mortgaged Properties may be more susceptible to certain types of special
hazards, such as earthquakes, landslides, fires, mudflows and other hazards,
than residential properties located in other parts of the country. To the
extent that any of the Mortgaged Properties relating to the Underlying
Mortgage Loans may be the subject of damage caused by insured hazards, and
insurance proceeds (not required to be applied to repair of the related
Mortgaged Properties) are received by the Trust Fund in respect of such
damage, such proceeds will be distributed to the Certificateholders in advance
of the scheduled receipt thereof and the effective yield to Certificateholders
may be adversely affected. In addition, the economy of the State of California
may be adversely affected to a greater degree than the overall economy of the
country by certain regional developments.
3. Limited Credit Enhancement. Each form of credit enhancement with respect
to the Underlying Mortgage Loans and related Mortgaged Properties provides
limited coverage as to certain types of losses and may provide no coverage as
to certain other types of losses. The coverage under certain credit
enhancement will be subject to periodic reduction. Satisfaction of certain
conditions precedent is required with respect to each form of credit
enhancement before coverage is available for a loss on an Underlying Mortgage
Loan or its related Mortgaged Property. The Other Mortgage Loans also have the
benefit of the Mortgage Pool Insurance Policy and the Financial Guaranty
Insurance Policy and the Other Certificates have rights to the assets in the
Special Hazard Account (including proceeds under the Special Hazard Insurance
Policy) and in the Bankruptcy Account. In addition, coverage under the
foregoing forms of credit enhancement may subsequently be expanded to cover
residential mortgage loans not currently covered by such credit enhancement.
No portion of any credit enhancement is reserved for the exclusive benefit of
the Underlying Mortgage Loans. To the extent credit enhancement is used to
cover losses with respect to the Other Mortgage Loans, the amount of coverage
available for the Underlying Mortgage Loans will be reduced. Consequently, a
loss on an Underlying Mortgage Loan may not be covered by credit enhancement
and, therefore, may result in losses on the related Certificates. See
"Description of Insurance, Special Hazard Account and Bankruptcy Account."
CERTAIN LEGAL CONSIDERATIONS
In the event of the bankruptcy or insolvency of an affiliate of the Company,
it is possible that a creditor, receiver, trustee in bankruptcy or other party
in interest may claim that the transactions through which the Company acquired
the Underlying Certificates and conveyed them to the Trust Fund were pledges
of the Underlying Certificates rather than a true sale and that, accordingly,
the Underlying Certificates should be part of such affiliate's bankruptcy
estate. The transactions have been structured applying principles such that
S-11
<PAGE>
following the bankruptcy of such an affiliate, a court, in a proceeding
considering the transfers of the Underlying Certificates from such affiliate
to the Company and the Company's transfer of the Underlying Certificates to
the Trust Fund, should treat the transfers of such Underlying Certificates as
a true sale and, therefore, that the Underlying Certificates should not be
part of such affiliate's bankruptcy estate. The Company and any such affiliate
will treat transfers of the Underlying Certificates as sales for tax and
accounting purposes, but such treatment will not preclude a creditor,
receiver, trustee in bankruptcy or other party in interest of any such
affiliate from pursuing such claim. If such transactions are determined to be
sales to the Company, the Underlying Certificates would not be part of any
such affiliate's bankruptcy estate and would not be available for distribution
to any such affiliate's creditors or equity security holders.
Additionally, in the event of the bankruptcy or insolvency of one of the
Company's affiliates, a creditor, receiver, trustee in bankruptcy or other
party in interest may seek a court order consolidating the assets and
liabilities of the Company with the estate of such affiliate ("substantive
consolidation") with the result that their combined estate would be made
subject to their combined liabilities. Substantive consolidation may have an
adverse impact on Certificateholders if the court also determines that the
transfer of the Underlying Certificates by the Company to the Trust Fund was
not a true sale, contrary to the stated intent of the parties. The
transactions have been structured applying principles such that following the
bankruptcy of an affiliate of the Company, a court, upon motion of a creditor,
receiver, trustee in bankruptcy or other party in interest, should not
consolidate the assets and liabilities of the Company and such affiliate on
the basis of legal theories regarding substantive consolidation previously
recognized by courts of competent jurisdiction in bankruptcy proceedings. The
foregoing statement is based on and subject to a number of assumptions
concerning facts and circumstances that have been noted, cited or acknowledged
by courts adjudicating similar claims in prior cases and certain other
assumptions regarding the separate corporate identities of the Company and its
affiliates, many of which relate to the manner in which the Company and its
affiliates have conducted and will conduct their respective businesses.
If either of the foregoing positions is argued before a court, such argument
could, even if ultimately unsuccessful, prevent timely payments of amounts due
on the Certificates, and could result, if ultimately successful, in payment of
reduced amounts on the Certificates.
DESCRIPTION OF THE MORTGAGE LOANS AND THE MORTGAGED PROPERTIES
GENERAL
The assets of the Trust Fund will consist primarily of two groups of
mortgage pass-through certificates (the "LIBOR Certificates" and the "CMT
Certificates," respectively, and collectively, the "Underlying Certificates")
evidencing interests in pools of adjustable rate mortgage loans secured by
one- to four-family residential properties (the "LIBOR Loans" and the "CMT
Loans" and collectively, the "Underlying Mortgage Loans"). Distributions of
principal of and interest on the Class A1 Certificates will be made from
receipts of principal and interest on the LIBOR Certificates. Distributions of
principal of and interest on the Class A2 and Class R Certificates will be
made from receipts of principal and interest on the CMT Certificates.
Accordingly, for purposes of this Prospectus Supplement, the Underlying
Certificate Group comprising the LIBOR Certificates and the Underlying
Mortgage Loan Group comprising the LIBOR Loans are the related Underlying
Certificate Group and the related Underlying Mortgage Loan Group,
respectively, with respect to the Class A1 Certificates, and the Underlying
Certificate Group comprising the CMT Certificates and the Underlying Mortgage
Loan Group comprising the CMT Loans are the related Underlying Certificate
Group and the related Underlying Mortgage Loan Group, respectively, with
respect to the Class A2 and Class R Certificates. Approximately 20% of the
Underlying Mortgage Loans (by scheduled principal balance as of the Cut-off
Date) are LIBOR Loans and approximately 80% of the Underlying Mortgage Loans
(by scheduled principal balance as of the Cut-off Date) are CMT Loans.
Certain data with respect to the LIBOR Loans, the CMT Loans, the Other
Mortgage Loans and the Pool Insured Loans is set forth below. If the
characteristics of the actual mortgage loans constituting the LIBOR
S-12
<PAGE>
Loans, the CMT Loans, the Other Mortgage Loans and the Pool Insured Loans
differ in any material respect from the characteristics described below, a
detailed description of such Underlying Mortgage Loans will be available to
purchasers of the Certificates at or before, and will be filed by means of a
Current Report on Form 8-K with the Securities and Exchange Commission within
fifteen days after, the initial delivery of the Certificates.
Certain information regarding the underwriting standards and guidelines
applicable to the Underlying Mortgage Loans is set forth under "The Company--
Mortgage Loan Underwriting" in the Prospectus. The Underlying Mortgage Loans
were initially acquired by either (i) Capstead Mortgage Corporation, a
Maryland corporation ("CMC") or (ii) CMC Investment Partnership, a Texas
general partnership (the "Partnership"). In acquiring the Underlying Mortgage
Loans, each of CMC and the Partnership applied such underwriting guidelines
except that: (i) in the case of adjustable rate mortgage loans there is no
underwriting guideline for minimum original loan balance, and (ii) in the case
of "reduced documentation" mortgage loans, the special guidelines described in
the Prospectus under "The Company--Mortgage Loan Underwriting" do not apply
and the general guidelines thereunder do apply.
As described in the Prospectus, the Partnership will deviate from the
underwriting guidelines described therein and above when acquiring mortgage
loans on a case-by-case basis where compensating factors exist. The Underlying
Mortgage Loans are known to vary from the underwriting guidelines with respect
to the monthly housing payment as a percentage of the mortgagor's monthly
gross income and total required monthly debt payments as a percentage of the
mortgagor's monthly gross income. Generally, in the case of any Underlying
Mortgage Loan having an initial Loan-to-Value Ratio in excess of 80%, the
Mortgage Rate used in calculating the percentage referred to in the preceding
sentence will be the maximum possible Mortgage Rate, in view of the applicable
periodic interest rate cap, which could be in effect thirteen months after the
origination date of such Underlying Mortgage Loan. In the case of any
Underlying Mortgage Loan having an initial Loan-to-Value Ratio of 80% or less,
the initial Mortgage Rate will be used in the calculation of the above-
referenced percentage.
The Underlying Mortgage Loans evidenced by the Underlying Certificates
consist of fully-amortizing, conventional loans evidenced by promissory notes
("Mortgage Notes") secured by first mortgages or first deeds of trust or other
similar security instruments creating a first lien on single-family (one- to
four-family) residential properties (the "Mortgaged Properties"). The
Underlying Mortgage Loans consist of LIBOR Loans and CMT Loans, as described
herein.
For a description of certain delinquency and foreclosure statistics with
respect to the Underlying Mortgage Loans see "Description of Insurance,
Special Hazard Account and Bankruptcy Account--Certain Information with
respect to the Pool Insured Loans." The information set forth under "Certain
Legal Aspects of Mortgage Loans" in the accompanying Prospectus is applicable
to the Underlying Mortgage Loans.
MORTGAGE RATE ADJUSTMENTS WITH RESPECT TO THE LIBOR LOANS
The LIBOR Loans bear interest rates (each, a "LIBOR Mortgage Rate") which
adjust every six months at specified margins over the average of interbank
offered rates for six month U.S. dollar deposits in the London market based on
quotations of major banks, in the case of certain of the LIBOR Loans, as
published by The Wall Street Journal (each, a "WSJ LIBOR Loan"), and in the
case of the remaining LIBOR Loans, as published by FNMA (each, a "FNMA LIBOR
Loan"). The most recent such applicable published rate available as of the
date 45 days before the related adjustment date (each, a "LIBOR Adjustment
Date") on a LIBOR Loan is referred to as the "Current LIBOR Index." The LIBOR
Mortgage Rate for each LIBOR Loan will adjust every six months, on each
related LIBOR Adjustment Date, to a rate equal to the sum of (i) the Current
LIBOR Index plus (ii) a margin of 2.625 to 3.00 percentage points, as
specified for such LIBOR Loan in the related Mortgage Note (each, a "LIBOR
Gross Margin"), with such sum being rounded to the nearest one-eighth of one
percentage point (0.125%), except in the case of certain of the FNMA LIBOR
Loans which are not rounded. The LIBOR Gross Margin with respect to each LIBOR
Loan is fixed for the life of such LIBOR Loan. The LIBOR Loans were originated
at different times and, therefore, their LIBOR Adjustment Dates occur in
different months. With respect to certain of the LIBOR Loans, the initial
LIBOR Adjustment Date may have been a date less than six months after the
applicable origination date.
S-13
<PAGE>
With respect to each LIBOR Loan: (i) on any given LIBOR Adjustment Date, the
LIBOR Mortgage Rate borne by such LIBOR Loan may not be increased or decreased
by more than one percentage point (1.0%) (the "LIBOR Mortgage Interest Rate
Adjustment Cap"); (ii) the LIBOR Mortgage Rate cannot exceed a rate which is
four percentage points (4.0%) greater than the initial LIBOR Mortgage Rate
borne by such LIBOR Loan (the "LIBOR Lifetime Mortgage Interest Rate Cap"),
and (iii) the LIBOR Mortgage Rate cannot be decreased to a rate less than the
applicable minimum rate specified for such LIBOR Loan in the related Mortgage
Note, which minimum rate is not less than 0.0% (the "LIBOR Minimum Mortgage
Interest Rate").
Because of the LIBOR Mortgage Interest Rate Adjustment Cap, the LIBOR
Lifetime Mortgage Interest Rate Cap and the LIBOR Minimum Mortgage Interest
Rate, the LIBOR Mortgage Rate in effect from time to time on any LIBOR Loan
may not be equal to the applicable Current LIBOR Index plus the LIBOR Gross
Margin (subject to rounding).
On each LIBOR Adjustment Date for each LIBOR Loan, the LIBOR Mortgage Rate
will be reset in accordance with the applicable Current LIBOR Index and the
LIBOR Gross Margin (subject to rounding), subject to the LIBOR Lifetime
Mortgage Interest Rate Cap, the LIBOR Mortgage Interest Rate Adjustment Cap,
and the LIBOR Minimum Mortgage Interest Rate. To accommodate changes in the
Current LIBOR Index, the scheduled payment for each Underlying Mortgage Loan
will be adjusted on its respective LIBOR Adjustment Date to an amount that
would fully amortize such LIBOR Loan over its remaining term at the LIBOR
Mortgage Rate in effect as of the date of such adjustment.
THE LIBOR INDEX
As described previously, the LIBOR Index is the average of the interbank
offered rates for six month United States dollar deposits in the London
interbank market based on quotations of major banks, as published in The Wall
Street Journal or by FNMA. The table below sets forth historical average
values of the LIBOR Index for the months indicated (as made available from
FNMA), which values may differ from those published in The Wall Street
Journal. The table does not purport to be representative of subsequent levels
of the LIBOR Index as published either by The Wall Street Journal or by FNMA.
<TABLE>
<CAPTION>
YEAR(1)
----------------------------------------
MONTH 1996 1995 1994 1993 1992 1991 1990
- ----- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
January............................... 5.34% 6.69% 3.39% 3.44% 4.25% 7.13% 8.44%
February.............................. 5.29 6.44 4.00 3.33 4.38 6.89 8.44
March................................. 5.52 6.44 4.25 3.38 4.55 6.53 8.69
April................................. 5.42 6.31 4.63 3.31 4.27 6.31 9.00
May................................... 6.06 5.00 3.44 4.25 6.19 8.50
June.................................. 5.88 5.25 3.56 4.13 6.56 8.44
July.................................. 5.88 5.33 3.56 3.63 6.31 8.05
August................................ 5.94 5.33 3.44 3.63 5.88 8.19
September............................. 5.99 5.69 3.38 3.31 5.69 8.42
October............................... 5.95 6.00 3.50 3.64 5.36 8.06
November.............................. 5.74 6.44 3.52 3.89 4.94 8.38
December.............................. 5.56 7.00 3.50 3.64 4.25 7.56
</TABLE>
- --------
(1) Figures are averages of daily rates and do not necessarily correspond to
the LIBOR index values determined as provided in any related mortgage
note.
S-14
<PAGE>
MORTGAGE RATE ADJUSTMENTS WITH RESPECT TO THE CMT LOANS
Each CMT Loan bears interest at a rate (each, a "CMT Mortgage Rate") which
is adjustable annually at a specified margin over the weekly average yield on
United States Treasury securities adjusted to a constant maturity of one year,
as made available by the Federal Reserve Board ("CMT"). The most recent such
applicable published rate available as of the date 45 days before such related
adjustment date (each, a "CMT Adjustment Date") on a CMT Loan is referred to
as the "Current CMT Index." The CMT Mortgage Rate for each CMT Loan will
adjust on each related CMT Adjustment Date to a rate equal to the sum of (i)
the Current CMT Index plus (ii) a margin of 2.75 to 3.00 percentage points, as
specified for such CMT Loan in the related Mortgage Note (each, a "CMT Gross
Margin"), with such sum being rounded to the nearest one-eighth of one
percentage point (0.125%). The CMT Gross Margin with respect to each CMT Loan
is fixed for the life of such CMT Loan. The CMT Loans were originated at
different times and, therefore, their CMT Adjustment Dates will occur in
different months. With respect to certain of the CMT Loans, the initial CMT
Adjustment Date may have been a date more or less than one year after the
applicable origination date.
With respect to each CMT Loan: (i) on any given CMT Adjustment Date, the CMT
Mortgage Rate borne by such CMT Loan may not be increased or decreased by more
than two percentage points (2.0%) (the "CMT Mortgage Interest Rate Adjustment
Cap"); provided, however, that on the first CMT Adjustment Date with respect
to certain of the CMT Loans, the Mortgage Rate borne by such CMT Loan may
increase by up to three percentage points (3.0%) or decrease by up to two
percentage points (2.0%); and (ii) the CMT Mortgage Rate cannot exceed a rate
which is six percentage points (6.0%) greater than the initial CMT Mortgage
Rate borne by such CMT Loan (the "CMT Lifetime Mortgage Interest Rate Cap").
In addition, the CMT Mortgage Rates are subject to minimum rates (each, a "CMT
Minimum Mortgage Interest Rate").
Because of the CMT Mortgage Interest Rate Adjustment Cap, the CMT Lifetime
Mortgage Interest Rate Cap and the CMT Minimum Mortgage Interest Rate, the CMT
Mortgage Rate in effect from time to time on any CMT Loan after the first
anniversary of its origination may not be equal to the applicable Current CMT
Index plus the CMT Gross Margin (subject to rounding).
On each CMT Adjustment Date for each CMT Loan, the CMT Mortgage Rate will be
reset in accordance with the applicable Current CMT Index and the CMT Gross
Margin (subject to rounding), subject to the CMT Lifetime Mortgage Interest
Rate Cap, the CMT Mortgage Interest Rate Adjustment Cap, and the CMT Minimum
Mortgage Interest Rate. To accommodate changes in the Current CMT Index, the
scheduled payment for each CMT Loan will be adjusted on its respective CMT
Adjustment Date to an amount that would fully amortize such Mortgage Loan over
its remaining term at the CMT Mortgage Rate in effect as of the date of such
adjustment.
THE CMT INDEX
The CMT index will be based on the weekly average yield of United States
Treasury securities adjusted to a constant maturity of one year as published
in Federal Reserve Statistical Release No. H.15 (519). CMT index values are
also published in The Wall Street Journal.
Yields on United States Treasury securities are estimated from the United
States Treasury's daily yield curve. This curve, which relates the yield on a
security to its time to maturity, is based on the closing market bid yields on
actively-traded United States Treasury securities in the over-the-counter
market. These market yields are calculated from composites of quotations
reported by five leading United States Treasury securities dealers to the
Federal Reserve Bank of New York. The constant yield values are read from the
yield curve at fixed maturities. This method permits, for example, estimations
of the yield for a one-year maturity even if no outstanding security has
exactly one year remaining to maturity.
The index to be used in calculating the interest rates borne by the CMT
Loans is the weekly-average yield on United States Treasury securities
adjusted to a constant maturity of one year and is estimated from the United
States Treasury's daily yield curve as described above. The table below sets
forth historical values of the CMT index for the months indicated. The table
does not purport to be representative of subsequent levels of the CMT index.
S-15
<PAGE>
<TABLE>
<CAPTION>
YEAR (1)
-----------------------------------------------
MONTH 1996 1995 1994 1993 1992 1991 1990 1989
- ----- ---- ---- ---- ---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January........................ 5.09% 7.05% 3.54% 3.50% 4.15% 6.64% 7.92% 9.05%
February....................... 4.94 6.70 3.87 3.39 4.29 6.27 8.112 9.25
March.......................... 5.34 6.43 4.32 3.33 4.63 6.40 8.35 9.57
April.......................... 5.54 6.27 4.82 3.24 4.30 6.24 8.40 9.36
May............................ 5.64 6.00 5.31 3.36 4.19 6.13 8.32 8.98
June........................... 5.64 5.27 3.54 4.17 6.36 8.10 8.44
July........................... 5.59 5.48 3.47 3.60 6.31 7.94 7.80
August......................... 5.75 5.56 3.44 3.47 5.78 7.78 8.18
September...................... 5.62 5.76 3.36 3.18 5.57 7.76 8.22
October........................ 5.59 6.11 3.39 3.30 5.33 7.55 7.99
November....................... 5.43 6.54 3.58 3.68 4.89 7.31 7.77
December....................... 5.31 7.14 3.61 3.71 4.38 7.05 7.72
</TABLE>
- --------
(1) Figures are averages of daily rates and do not necessarily correspond to
the CMT index values determined as provided in any related mortgage note.
S-16
<PAGE>
DESCRIPTION OF MORTGAGE LOANS
The tables set forth below approximate information, as of the Cut-off Date,
with respect to the LIBOR Loans, the CMT Loans, the Other Mortgage Loans and
the Pool Insured Loans. The characteristics of the LIBOR Loans, the CMT Loans,
the Other Mortgage Loans and the Pool Insured Loans on the Closing Date may
differ from the descriptions set forth below due to unscheduled partial or
full prepayments or defaults with respect to the Underlying Mortgage Loans. To
the extent that the LIBOR Loans, the CMT Loans, the Other Mortgage Loans and
the Pool Insured Loans differ from the description contained herein, variances
may result.
MORTGAGE LOAN CHARACTERISTICS BY OUTSTANDING PRINCIPAL BALANCE GROUPS
The following table sets forth certain information as of the Cut-off Date
with respect to the outstanding principal balances of the LIBOR Loans, the CMT
Loans, the Other Mortgage Loans and the Pool Insured Loans:
<TABLE>
<CAPTION>
LIBOR LOANS CMT LOANS OTHER MORTGAGE LOANS
----------------------------------- ------------------------------------ ------------------------------------
PERCENT OF PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
OUTSTANDING NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
- ----------------- -------- -------------- ----------- -------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-
99,999 0 $ 0.00 0.00% 1 $ 33,011.93 0.02% 1 $ 85,577.59 0.05%
100,000-
199,999 18 3,008,693.65 7.18 17 3,133,263.68 1.89 77 12,993,583.94 7.93
200,000-
299,999 72 17,337,993.33 41.37 295 71,531,672.50 43.20 341 82,141,921.07 50.10
300,000-
399,999 39 13,390,006.13 31.95 123 42,199,493.10 25.49 96 32,793,038.32 20.00
400,000-
499,999 5 2,240,960.38 5.35 49 21,818,816.70 13.18 31 13,655,698.53 8.33
500,000-
599,999 11 5,936,355.68 14.16 36 19,594,334.34 11.83 27 14,908,862.05 9.09
600,000-
699,999 0 0.00 0.00 10 6,476,859.56 3.91 9 5,663,800.09 3.45
700,000-
799,999 0 0.00 0.00 1 788,894.92 0.48 1 750,698.92 0.46
800,000-
899,999 0 0.00 0.00 0 0.00 0.00 0 0.00 0.00
900,000-
999,999 0 0.00 0.00 0 0.00 0.00 1 952,963.91 0.58
--- -------------- ------ --- --------------- ------ --- --------------- ------
Total 145 $41,914,009.17 100.00% 532 $165,576,346.73 100.00% 584 $163,946,144.42 100.00%
=== ============== ====== === =============== ====== === =============== ======
<CAPTION>
POOL INSURED LOANS
------------------------------------
PERCENT OF
AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING
OUTSTANDING NUMBER PRINCIPAL PRINCIPAL
PRINCIPAL BALANCE OF LOANS BALANCE BALANCE
- ----------------- -------- --------------- -----------
<S> <C> <C> <C>
$ 0-
99,999 2 $ 118,589.52 0.03%
100,000-
199,999 112 19,135,541.27 5.15
200,000-
299,999 708 171,011,586.90 46.04
300,000-
399,999 258 88,382,537.55 23.79
400,000-
499,999 85 37,715,475.61 10.15
500,000-
599,999 74 40,439,552.07 10.89
600,000-
699,999 19 12,140,659.65 3.27
700,000-
799,999 2 1,539,593.84 0.41
800,000-
899,999 0 0.00 0.00
900,000-
999,999 1 952,963.91 0.26
-------- --------------- -----------
Total 1,261 $371,436,500.32 100.00%
======== =============== ===========
</TABLE>
S-17
<PAGE>
MORTGAGE LOAN CHARACTERISTICS BY MORTGAGE RATE GROUPS
The following table sets forth certain information as of the Cut-off Date
with respect to the Mortgage Rates borne by the LIBOR Loans, the CMT Loans,
the Other Mortgage Loans and the Pool Insured Loans:
<TABLE>
<CAPTION>
LIBOR LOANS CMT LOANS OTHER MORTGAGE LOANS
----------------------------------- ------------------------------------ ------------------------------------
PERCENT OF PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
MORTGAGE NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
RATE(%) OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
-------- -------- -------------- ----------- -------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
5.010- 5.509 0 $ 0.00 0.00% 1 $ 347,803.01 0.21% 0 $ 0.00 0.00%
5.510- 6.009 0 0.00 0.00 1 230,280.01 0.14 2 466,195.92 0.28
6.010- 6.509 0 0.00 0.00 8 2,158,095.23 1.30 17 5,025,995.60 3.07
6.510- 7.009 0 0.00 0.00 11 3,616,768.62 2.18 92 26,915,468.61 16.42
7.010- 7.509 0 0.00 0.00 0 0.00 0.00 94 27,071,487.33 16.51
7.510- 8.009 15 4,292,558.08 10.24 117 35,985,579.70 21.73 87 25,595,590.18 15.61
8.010- 8.509 105 30,063,949.38 71.73 341 106,064,622.71 64.06 205 57,180,386.46 34.88
8.510- 9.009 25 7,557,501.71 18.03 53 17,173,197.45 10.37 87 21,691,020.32 13.23
9.010- 9.509 0 0.00 0.00 0 0.00 0.00 0 0.00 0.00
10.010-10.509 0 0.00 0.00 0 0.00 0.00 0 0.00 0.00
--- -------------- ------ --- --------------- ------ --- --------------- ------
Total 145 $41,914,009.17 100.00% 532 $165,576,346.73 100.00% 584 $163,946,144.42 100.00%
=== ============== ====== === =============== ====== === =============== ======
<CAPTION>
POOL INSURED LOANS
------------------------------------
PERCENT OF
AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING
MORTGAGE NUMBER PRINCIPAL PRINCIPAL
RATE(%) OF LOANS BALANCE BALANCE
-------- -------- --------------- -----------
<S> <C> <C> <C>
5.010- 5.509 1 $ 347,803.01 0.09%
5.510- 6.009 3 696,475.93 0.19
6.010- 6.509 25 7,184,090.83 1.93
6.510- 7.009 103 30,532,237.23 8.22
7.010- 7.509 94 27,071,487.33 7.29
7.510- 8.009 219 65,873,727.96 17.73
8.010- 8.509 651 193,308,958.55 52.04
8.510- 9.009 165 46,421,719.48 12.50
9.010- 9.509 0 0.00 0.00
10.010-10.509 0 0.00 0.00
-------- --------------- -----------
Total 1,261 $371,436,500.32 100.00%
======== =============== ===========
</TABLE>
The weighted average Mortgage Rate at the Cut-off Date of the LIBOR Loans,
the CMT Loans, the Other Mortgage Loans and the Pool Insured Loans is
approximately 8.37%, 8.18%, 7.83% and 8.05%, respectively.
S-18
<PAGE>
MORTGAGE LOAN CHARACTERISTICS BY NET MORTGAGE RATE GROUPS
The following table sets forth certain information as of the Cut-off Date
with respect to the Net Mortgage Rates borne by the LIBOR Loans, the CMT
Loans, the Other Mortgage Loans and the Pool Insured Loans:
<TABLE>
<CAPTION>
LIBOR LOANS CMT LOANS OTHER MORTGAGE LOANS
----------------------------------- ------------------------------------ ------------------------------------
PERCENT OF PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NET MORTGAGE NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
RATE(%) OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
- ------------ -------- -------------- ----------- -------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4.510- 5.009 0 $ 0.00 0.00% 1 $ 347,803.01 0.21% 0 $ 0.00 0.00%
5.010- 5.509 0 0.00 0.00 1 230,280.01 0.14 4 957,837.18 0.58
5.510- 6.009 0 0.00 0.00 12 3,641,607.07 2.20 33 8,903,289.35 5.43
6.010- 6.509 0 0.00 0.00 7 2,133,256.78 1.29 123 36,515,633.01 22.27
6.510- 7.009 1 323,668.98 0.77 30 9,218,208.16 5.57 98 27,463,309.93 16.75
7.010- 7.509 43 12,177,744.32 29.05 295 90,742,063.77 54.80 162 46,891,581.39 28.60
7.510- 8.009 100 29,175,015.29 69.61 182 58,324,001.82 35.22 158 41,635,413.26 25.40
8.010- 8.509 1 237,580.58 0.57 4 939,126.11 0.57 6 1,579,080.30 0.96
8.510- 9.009 0 0.00 0.00 0 0.00 0.00 0 0.00 0.00
9.510-10.009 0 0.00 0.00 0 0.00 0.00 0 0.00 0.00
--- -------------- ------ --- --------------- ------ --- --------------- ------
Total 145 $41,914,009.17 100.00% 532 $165,576,346.73 100.00% 584 $163,946,144.42 100.00%
<CAPTION> === ============== ====== === =============== ====== === =============== ======
POOL INSURED LOANS
------------------------------------
PERCENT OF
AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING
NET MORTGAGE NUMBER PRINCIPAL PRINCIPAL
RATE(%) OF LOANS BALANCE BALANCE
- ------------ -------- --------------- -----------
<S> <C> <C> <C>
4.510- 5.009 1 $ 347,803.01 0.09%
5.010- 5.509 5 1,188,117.19 0.32
5.510- 6.009 45 12,544,896.42 3.38
6.010- 6.509 130 38,648,889.79 10.41
6.510- 7.009 129 37,005,187.07 9.96
7.010- 7.509 500 149,811,389.48 40.33
7.510- 8.009 440 129,134,430.37 34.77
8.010- 8.509 11 2,755,786.99 0.74
8.510- 9.009 0 0.00 0.00
9.510-10.009 0 0.00 0.00
-------- --------------- -----------
Total 1,261 $371,436,500.32 100.00%
======== =============== ===========
</TABLE>
The weighted average Net Mortgage Rate at the Cut-off Date of the LIBOR
Loans, the CMT Loans, the Other Mortgage Loans and the Pool Insured Loans is
approximately 7.57%, 7.38%, 7.01% and 7.24%, respectively.
S-19
<PAGE>
MORTGAGE LOAN CHARACTERISTICS BY GROSS MARGIN GROUPS
The following table sets forth certain information, as of the Cut-off Date,
with respect to the Gross Margins used in calculating the mortgage coupon
rates to be borne by the LIBOR Loans, the CMT Loans, the Other Mortgage Loans
and the Pool Insured Loans as of each Adjustment Date:
<TABLE>
<CAPTION>
LIBOR LOANS CMT LOANS OTHER MORTGAGE LOANS
----------------------------------- ------------------------------------ ------------------------------------
PERCENT OF PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
GROSS NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
MARGIN(%) OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
- --------- -------- -------------- ----------- -------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1.7500 0 $ 0.00 0.00% 0 $ 0.00 0.00% 316 $91,738,939.52 55.96%
1.8000 0 0.00 0.00 0 0.00 0.00 1 243,538.61 0.15
1.8750 0 0.00 0.00 0 0.00 0.00 7 2,272,101.88 1.39
2.6250 1 323,668.98 0.77 0 0.00 0.00 0 0.00 0.00
2.7500 93 27,086,399.47 64.62 437 136,428,554.49 82.40 149 41,676,297.37 25.42
2.8750 33 8,549,852.85 20.40 57 17,174,676.61 10.37 15 3,831,356.67 2.34
2.9990 4 1,317,750.64 3.14 2 703,841.09 0.43 35 8,409,641.61 5.13
3.0000 14 4,636,337.23 11.06 36 11,269,274.54 6.81 60 15,232,962.99 9.29
3.1250 0 0.00 0.00 0 0.00 0.00 1 541,305.77 0.33
--- -------------- ------ --- --------------- ------ --- --------------- ------
Total 145 $41,914,009.17 100.00% 532 $165,576,346.73 100.00% 584 $163,946,144.42 100.00%
=== ============== ====== === =============== ====== === =============== ======
<CAPTION>
POOL INSURED LOANS
------------------------------------
PERCENT OF
AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING
GROSS NUMBER PRINCIPAL PRINCIPAL
MARGIN(%) OF LOANS BALANCE BALANCE
- --------- -------- --------------- -----------
<S> <C> <C> <C>
1.7500 316 $91,738,939.52 24.70%
1.8000 1 243,538.61 0.07
1.8750 7 2,272,101.88 0.61
2.6250 1 323,668.98 0.09
2.7500 679 205,191,251.33 55.24
2.8750 105 29,555,886.13 7.96
2.9990 41 10,431,233.34 2.81
3.0000 110 31,138,574.76 8.38
3.1250 1 541,305.77 0.15
-------- --------------- -----------
Total 1,261 $371,436,500.32 100.00%
======== =============== ===========
</TABLE>
The weighted average Gross Margin at the Cut-Off Date of the LIBOR Loans,
the CMT Loans, the Other Mortgage Loans and the Pool Insured Loans is
approximately 2.81%, 2.78%, 2.22% and 2.54%, respectively.
S-20
<PAGE>
MORTGAGE LOAN CHARACTERISTICS BY NEXT ADJUSTMENT DATES
The following table sets forth certain information as of the Cut-off Date
with respect to the Next Adjustment Dates of the LIBOR Loans, the CMT Loans,
the Other Mortgage Loans and the Pool Insured Loans:
<TABLE>
<CAPTION>
LIBOR LOANS CMT LOANS OTHER MORTGAGE LOANS
----------------------------------- ------------------------------------ ------------------------------------
PERCENT OF PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NEXT NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
ADJUSTMENT DATE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
--------------- -------- -------------- ----------- -------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
July 1, 1996 33 8,959,946.16 21.38 48 16,049,659.97 9.69 59 15,527,776.08 9.47
August 1, 1996 35 11,192,852.27 26.70 43 12,707,371.55 7.67 56 14,269,230.62 8.70
September 1, 1996 23 6,698,924.90 15.98 26 8,327,415.31 5.03 22 5,532,806.95 3.37
October 1, 1996 18 5,408,965.89 12.90 12 3,436,523.20 2.08 26 7,782,491.93 4.75
November 1, 1996 11 2,967,870.15 7.08 11 3,321,627.95 2.01 31 9,610,405.70 5.86
December 1, 1996 25 6,685,449.80 15.95 78 24,400,949.31 14.74 59 15,059,744.29 9.19
January 1, 1997 0 0.00 0.00 73 21,599,123.56 13.04 0 0.00 0.00
February 1, 1997 0 0.00 0.00 61 18,740,825.09 11.32 0 0.00 0.00
March 1, 1997 0 0.00 0.00 50 15,519,385.84 9.37 0 0.00 0.00
April 1, 1997 0 0.00 0.00 35 10,665,317.82 6.44 0 0.00 0.00
May 1, 1997 0 0.00 0.00 43 13,667,954.20 8.25 0 0.00 0.00
June 1,1997 0 0.00 0.00 52 17,140,192.93 10.35 2 571,459.47 0.35
July 1, 1997 0 0.00 0.00 0 0.00 0.00 1 289,627.51 0.18
December 1, 1997 0 0.00 0.00 0 0.00 0.00 58 15,560,873.65 9.49
January 1, 1998 0 0.00 0.00 0 0.00 0.00 52 16,342,760.81 9.97
May 1, 1998 0 0.00 0.00 0 0.00 0.00 4 964,197.30 0.59
June 1, 1998 0 0.00 0.00 0 0.00 0.00 110 32,862,980.96 20.04
July 1, 1998 0 0.00 0.00 0 0.00 0.00 13 3,392,959.19 2.07
August 1, 1998 0 0.00 0.00 0 0.00 0.00 7 2,495,547.37 1.52
September 1, 1998 0 0.00 0.00 0 0.00 0.00 2 434,322.67 0.26
October 1, 1998 0 0.00 0.00 0 0.00 0.00 7 2,094,125.46 1.28
November 1, 1998 0 0.00 0.00 0 0.00 0.00 5 1,266,649.15 0.77
December 1, 1998 0 0.00 0.00 0 0.00 0.00 66 18,373,177.26 11.21
January 1, 1999 0 0.00 0.00 0 0.00 0.00 1 364,508.18 0.22
June 1, 1999 0 0.00 0.00 0 0.00 0.00 3 1,150,499.87 0.70
--- -------------- ------ --- --------------- ------ --- --------------- ------
Total 145 $41,914,009.17 100.00% 532 $165,576,346.73 100.00% 584 $163,946,144.42 100.00%
=== ============== ====== === =============== ====== === =============== ======
<CAPTION>
POOL INSURED LOANS
------------------------------------
PERCENT OF
AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING
NEXT NUMBER PRINCIPAL PRINCIPAL
ADJUSTMENT DATE OF LOANS BALANCE BALANCE
--------------- -------- --------------- -----------
<S> <C> <C> <C>
July 1, 1996 140 40,537,382.21 10.91
August 1, 1996 134 38,169,454.44 10.28
September 1, 1996 71 20,559,147.16 5.54
October 1, 1996 56 16,627,981.02 4.48
November 1, 1996 53 15,899,903.80 4.28
December 1, 1996 162 46,146,143.40 12.42
January 1, 1997 73 21,599,123.56 5.82
February 1, 1997 61 18,740,825.09 5.05
March 1, 1997 50 15,519,385.84 4.18
April 1, 1997 35 10,665,317.82 2.87
May 1, 1997 43 13,667,954.20 3.68
June 1,1997 54 17,711,652.40 4.77
July 1, 1997 1 289,627.51 0.08
December 1, 1997 58 15,560,873.65 4.19
January 1, 1998 52 16,342,760.81 4.40
May 1, 1998 4 964,197.30 0.26
June 1, 1998 110 32,862,980.96 8.85
July 1, 1998 13 3,392,959.19 0.91
August 1, 1998 7 2,495,547.37 0.67
September 1, 1998 2 434,322.67 0.12
October 1, 1998 7 2,094,125.46 0.56
November 1, 1998 5 1,266,649.15 0.34
December 1, 1998 66 18,373,177.26 4.95
January 1, 1999 1 364,508.18 0.10
June 1, 1999 3 1,150,499.87 0.31
-------- --------------- -----------
Total 1,261 $371,436,500.32 100.00%
======== =============== ===========
</TABLE>
S-21
<PAGE>
MORTGAGE LOAN CHARACTERISTICS BY ORIGINAL LOAN-TO-VALUE RATIO
The following table sets forth certain information as of the Cut-off Date
with respect to the original Loan-to-Value Ratios of the LIBOR Loans, the CMT
Loans, the Other Mortgage Loans and the Pool Insured Loans:
<TABLE>
<CAPTION>
LIBOR LOANS CMT LOANS OTHER MORTGAGE LOANS
----------------------------------- ------------------------------------ ------------------------------------
PERCENT OF PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
ORIGINAL LOAN- OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
TO- NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
VALUE RATIO(%) OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
-------------- -------- -------------- ----------- -------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
20.0001- 30.0000 0 $ 0.00 0.00% 2 $ 561,266.07 0.34% 2 $ 192,075.96 0.12%
30.0001- 40.0000 2 342,153.84 0.82 7 2,018,244.48 1.22 8 2,017,700.50 1.23
40.0001- 50.0000 5 1,594,389.44 3.80 14 4,888,632.50 2.95 16 4,444,186.04 2.71
50.0001- 60.0000 11 2,811,627.52 6.71 20 6,811,500.66 4.11 31 9,877,643.52 6.02
60.0001- 70.0000 14 4,579,473.62 10.93 79 27,536,202.40 16.63 79 23,890,438.35 14.57
70.0001- 80.0000 63 19,248,347.23 45.92 255 81,226,058.96 49.06 269 78,112,348.64 47.65
80.0001- 90.0000 45 12,278,799.04 29.30 144 39,836,183.57 24.06 172 43,825,413.45 26.73
90.0001-100.0000 5 1,059,218.48 2.53 11 2,698,258.09 1.63 7 1,586,337.96 0.97
--- -------------- ------ --- --------------- ------ --- --------------- ------
Total 145 $41,914,009.17 100.00% 532 $165,576,346.73 100.00% 584 $163,946,144.42 100.00%
=== ============== ====== === =============== ====== === =============== ======
<CAPTION>
POOL INSURED LOANS
------------------------------------
PERCENT OF
AGGREGATE AGGREGATE
ORIGINAL LOAN- OUTSTANDING OUTSTANDING
TO- NUMBER PRINCIPAL PRINCIPAL
VALUE RATIO(%) OF LOANS BALANCE BALANCE
-------------- -------- --------------- -----------
<S> <C> <C> <C>
20.0001- 30.0000 4 $ 753,342.03 0.20%
30.0001- 40.0000 17 4,378,098.82 1.18
40.0001- 50.0000 35 10,927,207.98 2.94
50.0001- 60.0000 62 19,500,771.70 5.25
60.0001- 70.0000 172 56,006,114.37 15.08
70.0001- 80.0000 587 178,586,754.83 48.08
80.0001- 90.0000 361 95,940,396.06 25.83
90.0001-100.0000 23 5,343,814.53 1.44
-------- --------------- -----------
Total 1,261 $371,436,500.32 100.00%
======== =============== ===========
</TABLE>
For purposes of the foregoing table, the "Original Loan-to-Value Ratio" of
each mortgage loan was calculated based upon the appraised value of the
related mortgaged property at the time of origination and the initial
principal balance of such mortgage loan. As used herein, the "appraised value"
of a mortgaged property is equal to the lesser of the sales price of such
mortgaged property to the related mortgagor or the value reflected in the
appraisal of the mortgaged property made at the time of origination of the
related mortgage loan. The weighted average original Loan-to-Value Ratio of
the LIBOR Loans, the CMT Loans, the Other Mortgage Loans and the Pool Insured
Loans is approximately 76.51%, 75.94%, 76.32% and 76.17%, respectively.
Because of the amount of time elapsed since origination of the Underlying
Mortgage Loans, the Loan-to-Value Ratio of an Underlying Mortgage Loan based
upon the appraised value of the related Mortgaged Property and outstanding
principal balance of the Underlying Mortgage Loan, each as of the Cut-off
Date, may be substantially more or less than the Loan-to-Value Ratio used to
determine the foregoing table.
S-22
<PAGE>
MORTGAGE LOAN CHARACTERISTICS BY MORTGAGED PROPERTY TYPE
The following table sets forth certain information, as of the Cut-off Date,
with respect to the Mortgaged Properties which secure the LIBOR Loans, the CMT
Loans, the Other Mortgage Loans and the Pool Insured Loans:
<TABLE>
<CAPTION>
LIBOR LOANS CMT LOANS OTHER MORTGAGE LOANS
----------------------------------- ------------------------------------ ------------------------------------
PERCENT OF PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
PROPERTY TYPE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
------------- -------- -------------- ----------- -------- --------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Low Rise
Condominium..... 5 1,086,460.26 2.59% 28 $ 7,396,980.25 4.47% 32 $ 7,444,557.42 4.54%
Duplex.......... 1 183,162.09 0.44 5 1,869,757.33 1.13 4 1,020,421.55 0.62
FourPlex........ 0 0.00 0.00 1 303,686.88 0.18 0 0.00 0.00
High Rise
Condominium..... 0 0.00 0.00 1 284,701.19 0.17 0 0.00 0.00
Planned Unit
Development..... 1 220,452.86 0.53 1 288,977.96 0.17 1 529,881.98 0.32
Single (one-
family) detached
(including de
minimus Planned
Unit
Development).... 135 39,687,847.81 94.69 484 152,146,312.30 91.89 537 152,826,706.02 93.22
Townhouse....... 3 736,086.15 1.76 12 3,285,930.82 1.98 10 2,124,577.45 1.30
--- -------------- ------ --- --------------- ------ --- --------------- ------
Total 145 $41,914,009.17 100.00% 532 $165,576,346.73 100.00% 584 $163,946,144.42 100.00%
=== ============== ====== === =============== ====== === =============== ======
<CAPTION>
POOL INSURED LOANS
------------------------------------
PERCENT OF
AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING
NUMBER PRINCIPAL PRINCIPAL
PROPERTY TYPE OF LOANS BALANCE BALANCE
------------- -------- --------------- -----------
<S> <C> <C> <C>
Low Rise
Condominium..... 65 $ 15,927,997.93 4.29%
Duplex.......... 10 3,073,340.97 0.83
FourPlex........ 1 303,686.88 0.08
High Rise
Condominium..... 1 284,701.19 0.08
Planned Unit
Development..... 3 1,039,312.80 0.28
Single (one-
family) detached
(including de
minimus Planned
Unit
Development).... 1,156 344,660,866.13 92.79
Townhouse....... 25 6,146,594.42 1.65
-------- --------------- -----------
Total 1,261 $371,436,500.32 100.00%
======== =============== ===========
</TABLE>
S-23
<PAGE>
MORTGAGE LOAN CHARACTERISTICS BY STATE
The following table sets forth certain information as of the Cut-off Date
with respect to the geographic distribution of the Mortgaged Properties
securing the LIBOR Loans, the CMT Loans, the Other Mortgage Loans and the Pool
Insured Loans:
<TABLE>
<CAPTION>
LIBOR LOANS CMT LOANS
----------------------------------- ------------------------------------
PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
STATE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
----- -------- -------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
California 135 38,549,368.83 91.97 434 134,384,129.18 81.16
Connecticut 0 0.00 0.00 5 1,539,331.33 0.93
District of Columbia 0 0.00 0.00 3 1,265,808.29 0.76
Florida 1 593,699.90 1.42 17 5,764,134.28 3.48
Georgia 2 548,253.96 1.31 10 2,320,158.84 1.40
Hawaii 0 0.00 0.00 4 1,725,297.18 1.04
Illinois 0 0.00 0.00 1 450,172.54 0.27
Maryland 1 470,592.21 1.12 5 1,700,608.05 1.03
Michigan 1 166,271.14 0.40 2 710,044.31 0.43
Missouri 0 0.00 0.00 0 0.00 0.00
New Jersey 1 293,003.44 0.70 8 2,333,054.72 1.41
Nevada 0 0.00 0.00 2 747,252.63 0.45
New York 0 0.00 0.00 11 3,400,519.24 2.05
North Carolina 0 0.00 0.00 1 358,233.06 0.22
Pennsylvania 0 0.00 0.00 6 2,128,593.75 1.29
Texas 1 344,561.33 0.82 2 581,614.96 0.35
Virginia 2 665,109.62 1.59 16 4,743,506.44 2.86
Vermont 0 0.00 0.00 2 755,766.43 0.46
Washington 1 283,148.74 0.68 3 668,121.50 0.40
--- -------------- ------ --- --------------- ------
Total 145 $41,914,009.17 100.00% 532 $165,576,346.73 100.00%
=== ============== ====== === =============== ======
<CAPTION>
OTHER MORTGAGE LOANS POOL INSURED LOANS
------------------------------------- ------------------------------------
PERCENT OF PERCENT OF
AGGREGATE AGGREGATE AGGREGATE AGGREGATE
OUTSTANDING OUTSTANDING OUTSTANDING OUTSTANDING
NUMBER PRINCIPAL PRINCIPAL NUMBER PRINCIPAL PRINCIPAL
STATE OF LOANS BALANCE BALANCE OF LOANS BALANCE BALANCE
----- -------- ---------------- ----------- -------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
California 518 143,739,493.13 87.67 1,087 316,672,991.14 85.26
Connecticut 2 606,984.43 0.37 7 2,146,315.76 0.58
District of Columbia 4 1,038,243.47 0.63 7 2,304,051.76 0.62
Florida 2 502,445.71 0.31 20 6,860,279.89 1.85
Georgia 8 1,963,250.66 1.20 20 4,831,663.46 1.30
Hawaii 1 182,614.39 0.11 5 1,907,911.57 0.51
Illinois 4 1,064,258.00 0.65 5 1,514,430.54 0.41
Maryland 13 3,924,565.12 2.39 19 6,095,765.38 1.64
Michigan 3 665,752.60 0.41 6 1,542,068.05 0.42
Missouri 1 567,017.90 0.35 1 567,017.90 0.15
New Jersey 5 1,615,296.44 0.99 14 4,241,354.60 1.14
Nevada 3 1,269,599.43 0.77 5 2,016,852.06 0.54
New York 4 1,315,573.77 0.80 15 4,716,093.01 1.27
North Carolina 0 0 0.00 1 358,233.06 0.10
Pennsylvania 0 0 0.00 6 2,128,593.75 0.57
Texas 0 0 0.00 3 926,176.29 0.25
Virginia 14 5,029,521.24 3.07 32 10,438,137.30 2.81
Vermont 0 0 0.00 2 755,766.43 0.20
Washington 2 461,528.13 0.28 6 1,412,798.37 0.38
-------- ---------------- ----------- -------- --------------- -----------
Total 584 $163,946,144.42 100.00% 1,261 $371,436,500.32 100.00%
======== ================ =========== ======== =============== ===========
</TABLE>
S-24
<PAGE>
In addition the LIBOR Loans and the CMT Loans are expected to have the
following characteristics, unless specified otherwise, as of the Cut-off Date
(percentages are by scheduled principal balance of all of the LIBOR Loans and
the CMT Loans, respectively, as of the Cut-off Date):
The weighted average number of months to the next LIBOR Adjustment Date
or CMT Adjustment Date for the LIBOR Loans and the CMT Loans, as
applicable, is approximately 3.05 months and 6.93 months, respectively.
The weighted average remaining term to maturity of the LIBOR Loans and
the CMT Loans is approximately 325 months and 321 months, respectively.
With respect to approximately 99.63% and 99.33% of the Mortgaged
Properties securing the LIBOR Loans and the CMT Loans, respectively, the
related Mortgagor represented at the origination of the related mortgage
loan that the dwelling will be an owner-occupied primary residence.
The average outstanding principal balance of the LIBOR Loans and the CMT
Loans is approximately $289,062 and $311,234, respectively.
The latest scheduled maturity date of any LIBOR Loan and any CMT Loan is
expected to be December 1, 2023.
No more than 9.61% and 22.38% of the LIBOR Loans and the CMT Loans,
respectively, will have been originated according to Reduced Documentation
Programs.
Approximately 22.89% and 30.14% of the LIBOR Loans and the CMT Loans,
respectively, will have been the subject of "cash-out" refinancings
pursuant to which the outstanding principal of each such mortgage loan has
been increased over the principal amount outstanding prior to such
refinancing.
The majority of the LIBOR Loans and the CMT Loans are not expected to
contain due-on-sale clauses or similar provisions, and may be assumed by
subsequent borrowers if such subsequent borrowers have qualifications
meeting the Partnership's underwriting criteria described hereafter. See
"Servicing of the Mortgage Loans--Servicing Procedures" and "Certain Legal
Aspects of Mortgage Loans--Enforceability of Certain Provisions" in the
Prospectus.
Approximately 27.21% and 21.48% of the LIBOR Loans and the CMT Loans,
respectively, contain a conversion option whereby the related Mortgagor,
upon the satisfaction of certain conditions, may elect to convert such
mortgage loan to a mortgage loan having a fixed rate of interest.
Capstead Inc. will act as Servicer with respect to approximately 98.39%
and 92.37% of the LIBOR Loans and the CMT Loans, respectively. G.E. Capital
Mortgage Services, Inc. will act as Servicer with respect to approximately
5.09% of the CMT Loans.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued pursuant to a Pooling Agreement to be dated
as of the Cut-off Date (the "Agreement"), between the Company, as Depositor,
and Texas Commerce Bank National Association, as Trustee. The Residual
Certificates will be subject to certain restrictions described under "--
Restrictions on Transfer of the Residual Certificates" below.
DISTRIBUTIONS
General. Distributions on the Certificates will be made by the Trustee on
the 25th day (or if such 25th day is not a business day, the business day
immediately following the 25th day) of each month (the "Distribution Date") to
the persons in whose names such Certificates are registered at the close of
business on the last business day of the month immediately preceding the month
in which such Distribution Date occurs (the "Record Date").
S-25
<PAGE>
The first Distribution Date will be in July 1996. Distributions on the
Certificates will be made by the Trustee to each record holder by check or
money order or wire transfer, or by such other means as such record holder and
the Trustee may agree. See "Description of Book Entry Procedures" herein for
information with respect to distributions on and transfers of the Book Entry
Certificates.
Available Funds. On each Distribution Date, the Trustee will make
distributions on the Class A1 Certificates solely from Available Funds with
respect to the LIBOR Certificates, and distributions on the Class A2 and Class
R Certificates solely from Available Funds with respect to the CMT
Certificates. "Available Funds" with respect to an Underlying Certificate
Group (the "LIBOR Certificates Available Funds" and the "CMT Certificates
Available Funds," respectively) means, as to each Distribution Date, the
aggregate of all amounts distributed on the related Underlying Certificates on
the second business day preceding such Distribution Date (the "Underlying
Certificate Distribution Date") See "Pooling and Administration--
Administration of the Certificate Account" in the accompanying Prospectus for
a discussion of the amounts deposited into the Underlying Certificate Account.
INTEREST
On each Distribution Date, the amount of interest distributable on a
Certificate ("Accrued Certificate Interest") will equal one month's interest
at the Certificate Interest Rate for the related Class on the Certificate
Principal Balance of such Certificate immediately prior to such Distribution
Date, less such Certificate's share of any Interest Shortfalls (as defined
below) for the related Underlying Mortgage Loan Group. Interest will be
calculated on the basis of a 360-day year composed of twelve 30-day months.
The "Certificate Principal Balance" of each Certificate immediately before any
Distribution Date will equal the initial principal balance of such Certificate
on the Closing Date reduced by (a) all amounts distributed on previous
Distribution Dates to such Certificate on account of principal and (b) all
Loan Losses (as defined herein) for the Underlying Mortgage Loans in the
related Underlying Mortgage Loan Group previously allocated to such
Certificate.
The Certificate Interest Rate on the Class A1 Certificates for each Interest
Accrual Period will equal the weighted average (by principal balance) of the
respective Pass-Through Rates borne by the LIBOR Certificates as of the
beginning of such Interest Accrual Period. The Certificate Interest Rate on
the Class A2 and Class R Certificates for each Interest Accrual Period will
equal the weighted average (by principal balance) of the Pass-Through Rates
borne by the CMT Certificates as of the beginning of such Interest Accrual
Period.
For each Interest Accrual Period, the Pass-Through Rate for each Underlying
Certificate is the weighted average of the Net Mortgage Rates (as defined
below) borne by the Underlying Mortgage Loans evidenced by such Underlying
Certificate, weighted in proportion to the respective outstanding principal
balance of each such Underlying Mortgage Loan, as of the beginning of such
Interest Accrual Period. The "Net Mortgage Rate" for each Underlying Mortgage
Loan is calculated by deducting from the Mortgage Rate borne by such
Underlying Mortgage Loan, as of the beginning of such Interest Accrual Period,
the sum of (1) the applicable servicing fee, (2) the applicable Underlying
Administrator's fees and the applicable Underlying Trustee's fees under the
Underlying Agreement described herein and (3) the premiums charged in respect
of the Mortgage Pool Insurance Policy, the Financial Guaranty Insurance Policy
(if applicable) and the Special Hazard Insurance Policy described herein, in
each case expressed as a percentage. The difference between the weighted
average Net Mortgage Rates and the weighted average Mortgage Rates as of the
Cut-off Date is expected to be approximately 0.80% with respect to the
Underlying Mortgage Loans. The calculations made on the first day of each
Interest Accrual Period, as described in the second preceding sentence, shall
be made after giving effect to all interest rate adjustments made to the
Underlying Mortgage Loans as of such date.
Interest Shortfalls will be determined separately with respect to each
Underlying Mortgage Loan Group. As used herein, "Interest Shortfall" means,
with respect to any Distribution Date and with respect to each Underlying
Mortgage Loan for which a Principal Prepayment is distributed on such
Distribution Date, the excess of one month's interest for the preceding
calendar month on such Underlying Mortgage Loan at the applicable Net Mortgage
Rate thereon over the interest paid by the Mortgagor (and by the Servicer in
the case of a compensating interest payment with respect to a partial
prepayment of principal) on such an Underlying Mortgage Loan computed at the
applicable Net Mortgage Rate. No Interest Shortfalls are expected with respect
to partial prepayments of principal since partial
S-26
<PAGE>
prepayments are applied either (a) as of the beginning of the calendar month
following their receipt or (b) as of the beginning of the calendar month of
their receipt and remitted by the Servicer with one month's worth of
compensating interest. A "Principal Prepayment" means any Mortgagor payment or
other recovery of principal on an Underlying Mortgage Loan which is not
applied by the related Servicer during the month of receipt to a scheduled
payment under the Underlying Mortgage Loan and the portion of any insurance
proceeds, liquidation proceeds or other collections representing similar
payments.
Interest Shortfalls in respect of the LIBOR Loans will be allocated to the
Class A1 Certificates. Interest Shortfalls in respect of the CMT Loans will be
allocated between the Class A2 and Class R Certificates in proportion to the
amount of interest that would have been allocated to each such class in the
absence of such Interest Shortfalls.
Approximately 27.21% of the LIBOR Loans and 21.48% of the CMT Loans (in each
case by scheduled principal balance as of the Cut-off Date) contain a
conversion option, pursuant to which the related Mortgagor may, after the
satisfaction of certain conditions, elect to convert the rate of interest
borne by such Underlying Mortgage Loan to a fixed rate of interest. Pursuant
to the terms of the related Servicing Agreements, the related Servicer is
required to repurchase any such Underlying Mortgage Loan with respect to which
a conversion option is exercised. In the event that a Servicer fails to
purchase a LIBOR Loan or a CMT Loan with respect to which a conversion option
has been exercised such Underlying Mortgage Loan will begin to bear a new,
fixed rate of interest for purposes of calculating the Certificate Interest
Rate on the Class A1 Certificates or the Class A2 and Class R Certificates, as
applicable. See "Certain Investment, Prepayment, Yield and Weighted Average
Life Considerations--Yield Considerations Relating to Interest Rate
Conversions" herein.
PRINCIPAL
Principal will be distributable monthly on each Distribution Date with
respect to the Class A1 Certificates in an aggregate amount (the "LIBOR
Principal Distribution Amount") equal to the excess of the LIBOR Certificates
Available Funds on such Distribution Date over the amount of interest
distributed with respect to the Class A1 Certificates on such Distribution
Date. Principal will be distributable monthly on each Distribution Date with
respect to the Class A2 and Class R Certificates in an aggregate amount (the
"CMT Principal Distribution Amount") equal to the excess of the CMT
Certificates Available Funds on such Distribution Date over the amount of
interest distributed with respect to the Class A2 and Class R Certificates on
such Distribution Date. The LIBOR Principal Distribution Amount and the CMT
Principal Distribution Amount for any Distribution Date will generally equal
the sum of (i) scheduled payments of principal in respect of the related
Underlying Mortgage Loan Group due on the first day of the month of such
Distribution Date (less any amounts deemed to represent Nonrecoverable
Advances (as defined herein)) and (ii) all previously undistributed Principal
Prepayments (as defined above) with respect to such Underlying Mortgage Loan
Group received by the related Servicers in the preceding calendar month.
On each Distribution Date, (i) the LIBOR Principal Distribution Amount will
be distributed to the Class A1 Certificates until the Certificate Principal
Balance thereof has been reduced to zero, and (ii) the CMT Principal
Distribution Amount will be allocated first to the Class R Certificates until
the Certificate Principal Balance thereof has been reduced to zero, and
thereafter, to the Class A2 Certificates until the Class Certificate Principal
Balance thereof has been reduced to zero. Distributions of principal of a
class of Certificates will be made on a pro rata basis among all outstanding
Certificates of such class.
ALLOCATION OF LOAN LOSSES
Loan Losses on the Underlying Mortgage Loans will be determined separately
with respect to each Underlying Mortgage Loan Group. Loan Losses on the LIBOR
Loans will be allocated solely to the Class A1 Certificates and Loan Losses on
the CMT Loans will be allocated between the Class A2 and Class R Certificates
in proportion to their Class Certificate Principal Balances. Any such
allocation of a Loan Loss will be accomplished on a Distribution Date by
reducing the applicable Class Certificate Principal Balance of a class by the
allocable share of any such Loan Losses occurring during the month preceding
the month of such Distribution Date, before distribution of the related
Principal Distribution Amount for such Distribution Date. A "Loan Loss" with
respect to any Underlying Mortgage Loan as of the Liquidation Date thereof is
generally the Imputed Principal Balance for such Underlying Mortgage Loan on
such Liquidation Date. The "Imputed Principal
S-27
<PAGE>
Balance" of (a) an Underlying Mortgage Loan as to which a delinquency, default
or foreclosure has occurred (a "Defaulted Loan") as of any date on or before
the Liquidation Date therefor, means the amount which would be the outstanding
principal balance of such Underlying Mortgage Loan on such date on the
assumption that no delinquency or default in payment has occurred, after
giving effect to any partial principal prepayments, insurance proceeds and
liquidation proceeds previously applied to the principal of such Underlying
Mortgage Loan; provided, however, that if any monthly advance or other advance
of a delinquent monthly payment (with interest) is not made by the related
Servicer, the Underlying Administrator, the Pool Insurer or any other person
required to make such advance or if such advance would be a Nonrecoverable
Advance, the principal balance of such Mortgage Loan shall not be reduced by
the principal portion of such monthly payment; (b) with respect to an
Underlying Mortgage Loan which has been foreclosed, as of any date after the
related Liquidation Date, zero, and (c) with respect to all other Underlying
Mortgage Loans, the outstanding principal balance thereof. The "Liquidation
Date" of an Underlying Mortgage Loan is the date, in the judgment of the
Underlying Administrator, of final transfer to the Underlying Certificate
Account (as defined herein) of all payments and recoveries on such Underlying
Mortgage Loan.
ADDITIONAL RIGHTS OF THE RESIDUAL CERTIFICATEHOLDERS
The Residual Certificates will remain outstanding for so long as the Trust
Fund will exist, whether or not they are receiving current distributions of
principal or interest. In addition to distributions of principal and interest
distributable as described herein, the holders of the Residual Certificates
will be entitled to receive (i) the amounts, if any, of LIBOR Certificates
Available Funds and CMT Certificates Available Funds remaining in the
Certificate Account on any Distribution Date after distributions of principal
and interest on the Certificates on such date and (ii) the proceeds of the
assets of the Trust Fund, if any, remaining in the Series 1996-B REMIC on the
final Distribution Date for the Certificates, after payment of expenses,
distributions in respect of any accrued and unpaid interest on such
Certificates, and after distributions in respect to principal have reduced the
Class Certificate Principal Balances of the Certificates to zero. It is not
anticipated that there will be any material assets remaining in the Trust Fund
at any such time. Notwithstanding the foregoing, on each Distribution Date
reinvestment income on amounts on deposit in the Certificate Account and in
the Underlying Certificate Account established under the Underlying Agreement
will be paid to the REMIC administrator as sole compensation for
administration of the Series 1996-B REMIC.
RESTRICTIONS ON TRANSFER OF THE RESIDUAL CERTIFICATES
The Residual Certificates will be subject to the following restrictions on
transfer and will contain a legend to such effect.
The Code imposes a tax on transfers of residual interests to Disqualified
Organizations (as defined in the Prospectus under "Certain Federal Income Tax
Consequences--Taxation of Residual Certificates--Tax-Related Restrictions on
Transfer of Residual Certificates"). This tax applies to transferors of a
Residual Certificate as well as holders of a Residual Certificate that are
pass-through entities (as described in the Prospectus under "Certain Federal
Income Tax Consequences--Taxation of Residual Certificates--Tax-Related
Restrictions on Transfer of Residual Certificates"). The Agreement will
provide that no legal or beneficial interest in a Residual Certificate may be
transferred to or registered in the name of any person unless (i) the proposed
purchaser provides to the Trustee an affidavit to the effect that, among other
things, such transferee is not a Disqualified Organization, is not purchasing
such Residual Certificate as an agent for a Disqualified Organization (i.e.,
as a broker, nominee, or other middleman thereof) and is not an entity (a
"Book-Entry Nominee") 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 states in writing to the Trustee that it has no actual knowledge
that such affidavit is false. Further, such affidavit requires the transferee
to affirm (i) that it understands that it must take into account the taxable
income relating to the Residual Certificate, (ii) that it has no intention to
impede the assessment or collection of any federal, state or local income
taxes legally required to be paid with respect to the Residual Certificate,
(iii) that it will not transfer the Residual Certificate to any person or
entity that it has reason to believe has the intention to impede the
assessment or
S-28
<PAGE>
collection of such taxes, (iv) it has historically paid its debts as they come
due, (v) it intends to continue to pay its debts as they come due in the
future, (vi) it understands that it may incur tax liabilities in excess of any
cash flows generated by the Residual Certificate, and (vii) it intends to pay
any and all taxes associated with holding the Residual Certificate as they
become due.
In addition, the Residual Certificates may not be purchased by or
transferred to any person that is a "Foreign Person," unless (i) such person
holds the Residual Certificates in connection with the conduct of a trade or
business within the United States and furnishes the transferor and the Trustee
with an effective Internal Revenue Service Form 4224 or (ii) the transferee
delivers to both the transferor and the Trustee an opinion of a nationally
recognized tax counsel to the effect that such transfer is in accordance with
the requirements of the Code and the regulations promulgated thereunder and
that such transfer of the Residual Certificate will not be disregarded for
federal income tax purposes. The term "Foreign Person" means a person who is
not one of the following: a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate
or trust that is subject to U.S. federal income tax regardless of the source
of its income.
The Agreement 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. Any transferor or agent to whom the
Trustee provides information as to any applicable tax imposed on such
transferor or agent may be required to bear the cost of computing or providing
such information.
The Residual Certificates may not be purchased by or transferred to a
Benefit Plan Investor (as defined herein). Accordingly, the Trustee will
require delivery of a certificate to such effect as a condition to registering
the transfer of a Residual Certificate. See "ERISA Considerations" herein and
in the Prospectus.
CERTAIN INVESTMENT, PREPAYMENT, YIELD AND WEIGHTED AVERAGE LIFE CONSIDERATIONS
GENERAL
The effective yield on the Certificates of each class will be affected by
the rate and timing of payments of principal on the Underlying Mortgage Loans
in the related Underlying Mortgage Loan Group (including, for this purpose,
prepayments and amounts received by virtue of condemnation, insurance or
foreclosure with respect to such Underlying Mortgage Loans) and the amount and
timing of Mortgagor delinquencies and defaults resulting in Loan Losses. Such
yield may be adversely affected by a higher or lower than anticipated rate of
principal payments on the related Underlying Mortgage Loans. The rate of
principal payments on such Underlying Mortgage Loans will in turn be affected
by the amortization schedules of such Underlying Mortgage Loans, the rate and
timing of principal prepayments thereon by the Mortgagors, liquidations of the
related defaulted Underlying Mortgage Loans and purchases thereof due to
certain breaches of representations. The timing of changes in the rate of
prepayments, liquidations and repurchases of the Underlying Mortgage Loans,
and the timing of Loan Losses, could significantly affect the yield to an
investor, even if the average rate of principal payments experienced over time
is consistent with an investor's expectation. Because the rate and timing of
principal payments on the Underlying Mortgage Loans will depend on future
events and on a variety of factors (as described more fully herein), no
assurance can be given as to such rate or the timing of principal prepayments
on the related Certificates.
Principal prepayments may be influenced by a variety of economic,
geographic, social and other factors. The rate of defaults on the Underlying
Mortgage Loans will also affect the rate and timing of principal payments on
the Underlying Mortgage Loans. In general, defaults on mortgage loans are
expected to occur with greater frequency in their early years. The rate of
default on Underlying Mortgage Loans which are equity refinance or limited
documentation mortgage loans, and on Underlying Mortgage Loans with high loan-
to-value ratios, may be higher than for other types of Underlying Mortgage
Loans. Prepayments, liquidations and purchases of the Underlying Mortgage
Loans will result in payments to holders of the related Certificates of
principal amounts which would otherwise be distributed over the remaining
terms of such Underlying Mortgage Loans. Furthermore, the
S-29
<PAGE>
rate and timing of prepayments, defaults and liquidations on the Underlying
Mortgage Loans will be affected by the general economic conditions in the
region of the country in which the related Mortgaged Properties are located.
The risk of delinquencies, loss and involuntary prepayments resulting from
foreclosure is greater, and voluntary prepayments may be less likely, in
regions where a weak or deteriorating economy exists, as may be evidenced by,
among other factors, increasing unemployment or falling property values.
Approximately 83.35% of the Underlying Mortgage Loans and approximately 85.26%
of the Pool Insured Mortgage Loans (in each case, by scheduled principal
balance as of the Cut-off Date) are secured by Mortgaged Properties located in
the State of California. To the extent that the locations of the Mortgaged
Properties are concentrated in a given region, the risk of delinquencies,
losses and involuntary prepayments resulting from adverse economic conditions
in such region or from other factors, such as fires, storms, landslides,
mudflows, and earthquakes, is increased. Certain information regarding the
location of the Mortgaged Properties with respect to the Underlying Mortgage
Loans is set forth under "Description of the Mortgage Loans and the Mortgaged
Properties" and "Risk Factors" herein.
Other factors affecting prepayment of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment and mortgagors' net
equity in the mortgaged properties. Since the rate of payment of principal of
each class of Certificates will depend on the rate of payment (including
prepayments) of the principal of the Underlying Mortgage Loans, the actual
maturity of each class of Certificates could occur significantly earlier than
its Scheduled Final Distribution Date.
In addition, the yield to maturity of the Certificates of each class will
depend on the price paid by the holders of such Certificates and the related
interest rate. The extent to which the yield to maturity of a class of
Certificates is sensitive to prepayments will depend upon the degree to which
it is purchased at a discount or premium. Any Loan Losses on the Underlying
Mortgage Loans in an Underlying Mortgage Loan Group allocated to a related
class of Certificates, as described under "Description of the Certificates--
Allocation of Loan Losses," will adversely affect the yield on such class of
Certificates.
The effective yield to holders of Certificates will be lower than the yield
otherwise produced by the applicable Certificate Interest Rates and purchase
prices because, although interest will accrue from the first day of each
month, the distribution of such interest will not be made until the 25th day
(or if such day is not a business day, the immediately following business day)
of the month following the month of accrual. See "Description of the
Certificates--Interest" herein.
Prepayments of principal on the Underlying Mortgage Loans generally will be
passed through to the related Certificateholders in the month following the
month of receipt. Any prepayment of an Underlying Mortgage Loan or liquidation
of an Underlying Mortgage Loan (by foreclosure proceedings or by virtue of the
purchase of an Underlying Mortgage Loan in advance of its stated maturity as
required or permitted by the Underlying Agreement) will have the effect of
passing through to the related Certificateholders amounts which would
otherwise be passed through in amortized increments over the remaining term of
such Underlying Mortgage Loan.
When a claim is paid under certain insurance policies, including the
Mortgage Pool Insurance Policy, accrued interest is paid only to the date of
payment of the claim, without regard to timing of distribution thereof to
Certificateholders. When a full prepayment is made on an Underlying Mortgage
Loan during a month, the Mortgagor is charged interest on the days in the
month actually elapsed up to the date of such prepayment, at a daily interest
rate which is applied to the principal amount of the loan so prepaid. No
compensating interest payments in respect of Interest Shortfalls resulting
from Principal Prepayments in full on the Underlying Mortgage Loans will be
made with respect to the Underlying Certificates or the Certificates.
Consequently, Interest Shortfalls with respect to an Underlying Mortgage Loan
Group will result in a reduction in the amount of interest distributed and,
therefore, lower the yield on the related Certificates.
AS DESCRIBED HEREIN, APPROXIMATELY 7.18% (BY SCHEDULED PRINCIPAL BALANCE) OF
THE UNDERLYING MORTGAGE LOANS, AND APPROXIMATELY 8.09% (BY SCHEDULED PRINCIPAL
BALANCE) OF THE POOL INSURED LOANS WERE DELINQUENT 60 DAYS OR MORE, IN
FORECLOSURE OR CONSTITUTED REAL ESTATE OWNED AS OF MAY 31, 1996. SEE "RISK
FACTORS" HEREIN.
The yield on the Certificates may be affected by any delays in receipt of
payments thereon as described under "Description of Book Entry Procedures."
S-30
<PAGE>
The yield on the Certificates also may be affected by any repurchase of all
Underlying Certificates by the Company when the aggregate principal balance
thereof is equal to or less than 10% of the aggregate principal balance of the
Underlying Certificates as of the Cut-off Date. See "Pooling Agreement--
Termination" herein.
NO REPRESENTATION IS MADE AS TO THE RATE OF PRINCIPAL PAYMENTS OR DEFAULTS
ON THE UNDERLYING MORTGAGE LOANS OR AS TO THE YIELD TO MATURITY OF ANY CLASS
OF THE CERTIFICATES. AN INVESTOR IS URGED TO MAKE AN INVESTMENT DECISION WITH
RESPECT TO THE CERTIFICATES BASED ON THE ANTICIPATED YIELD TO MATURITY OF SUCH
CERTIFICATES RESULTING FROM THEIR RESPECTIVE PURCHASE PRICES AND SUCH
INVESTOR'S OWN DETERMINATION AS TO ANTICIPATED PREPAYMENT RATES AND DEFAULTS
ON THE UNDERLYING MORTGAGE LOANS.
YIELD CONSIDERATIONS RELATING TO ADJUSTABLE RATE MORTGAGES
All of the Underlying Mortgage Loans are adjustable rate mortgage loans.
During the initial period following origination, substantially all of the
Underlying Mortgage Loans bore interest at Mortgage Rates which were set by
the originators of such Underlying Mortgage Loans independently of the current
LIBOR Index or the current CMT Index otherwise applicable at the time of
origination. See "Description of the Mortgage Loans--Mortgage Rate
Adjustments" herein.
At the initial LIBOR Adjustment Date for each LIBOR Loan, the LIBOR Mortgage
Rate thereon was adjusted to a rate based on the applicable Current LIBOR
Index plus the related LIBOR Gross Margin, subject to the applicable LIBOR
Mortgage Interest Rate Adjustment Cap and applicable LIBOR Lifetime Mortgage
Interest Rate Cap and LIBOR Minimum Mortgage Interest Rate. The yield on the
Class A1 Certificates will be sensitive to fluctuations in the level of the
Current LIBOR Indices. On a LIBOR Adjustment Date, increases in a LIBOR Index
will increase the LIBOR Mortgage Rates of the related LIBOR Loans, subject to
the applicable LIBOR Mortgage Interest Rate Adjustment Cap and the applicable
LIBOR Lifetime Mortgage Interest Rate Cap. Resulting increases in the amount
of the required monthly payments on the LIBOR Loans in excess of those assumed
in underwriting such LIBOR Loans may result in a default rate higher than that
on mortgage loans with fixed mortgage rates. To the extent that coverage under
the Mortgage Pool Insurance Policy is insufficient to cover any such defaults,
a loss to the related Certificateholders may result.
At the initial CMT Adjustment Date for each CMT Loan, the CMT Mortgage Rate
thereon was adjusted to a rate based on the applicable Current CMT Index plus
the related CMT Gross Margin, subject to the applicable CMT Mortgage Interest
Rate Adjustment Cap and applicable CMT Lifetime Mortgage Interest Rate Cap and
CMT Minimum Mortgage Interest Rate. The yield on the Class A2 and Class R
Certificates will be sensitive to fluctuations in the level of the Current CMT
Indices. On a CMT Adjustment Date, increases in a CMT Index will increase the
CMT Mortgage Rates of the related CMT Loans, subject to the applicable CMT
Mortgage Interest Rate Adjustment Cap and the applicable CMT Lifetime Mortgage
Interest Rate Cap. Resulting increases in the amount of the required monthly
payments on the CMT Loans in excess of those assumed in underwriting such CMT
Loans may result in a default rate higher than that on mortgage loans with
fixed mortgage rates. To the extent that coverage under the Mortgage Pool
Insurance Policy is insufficient to cover any such defaults and resulting Loan
Losses, a loss to the related Certificateholders may result.
Notwithstanding prevailing market interest rates, in the event the Mortgage
Rate on any Underlying Mortgage Loan cannot increase due to the LIBOR Mortgage
Interest Rate Adjustment Cap or the LIBOR Lifetime Mortgage Interest Rate Cap,
with respect to a LIBOR Loan, or the CMT Mortgage Interest Rate Adjustment Cap
or the CMT Lifetime Mortgage Interest Rate Cap, with respect to a CMT Loan,
the yield on the related Certificates will be adversely affected. Conversely,
should the Mortgage Rate on any Underlying Mortgage Loan not be able to
decrease below a certain level due to the LIBOR Minimum Mortgage Interest Rate
or LIBOR Mortgage Interest Rate Adjustment Cap, with respect to a LIBOR Loan,
or the CMT Minimum Mortgage Interest Rate or the CMT Mortgage Interest Rate
Adjustment Cap, with respect to a CMT Loan, in either case at a time when
market interest rates are below such level, the yield on the related
Certificates could be higher than that which would otherwise be the case. In
such event, however, the related Mortgagor would have an incentive to prepay
such Underlying Mortgage Loan in full and to refinance at a lower rate.
S-31
<PAGE>
The Company is not aware of any publicly available statistics that set forth
principal prepayment experience or prepayment forecasts of adjustable rate
mortgage loans over an extended period of time, and its experience with
respect to such loans is insufficient to draw any conclusions with respect to
the expected prepayment rates on the Underlying Mortgage Loans. The rate of
principal prepayments with respect to adjustable rate mortgage loans has
fluctuated in recent years. In addition, the features of adjustable rate
mortgage loan programs in the past have varied significantly in response to
market conditions such as interest rates, consumer demand, regulatory
restrictions and other factors. The lack of uniformity of the terms and
provisions of such adjustable rate mortgage loan programs has made it
impracticable to compile meaningful comparative data on prepayment rates and,
accordingly, there can be no assurance as to the rate of prepayments on the
Underlying Mortgage Loans in stable or changing interest rate environments. As
is the case with conventional fixed rate mortgage loans, adjustable rate
mortgage loans may be subject to a greater rate of principal prepayments in a
declining interest rate environment. For example, if prevailing interest rates
fall significantly, adjustable rate mortgage loans could be subject to higher
prepayment rates than if prevailing interest rates remain constant because the
availability of fixed rate mortgage loans at competitive interest rates may
cause Mortgagors to refinance their adjustable rate mortgage loans in order to
obtain lower fixed interest rates.
YIELD CONSIDERATIONS RELATING TO INTEREST RATE CONVERSIONS
The Company is not aware of any publicly available statistics that set forth
conversion experience or forecasts of conversion of convertible adjustable
rate mortgage loans over an extended period of time, and its experience with
respect to such loans is insufficient to draw any conclusions with respect to
the expected conversion rates. Because Mortgagors may attempt to limit the
risk of higher rates during periods of rising interest rates by exercising the
option to convert Underlying Mortgage Loans and thereby secure a fixed rate,
the yield on the Certificates may be adversely affected by such conversions at
times when prepayments generally would not be expected. Also, Mortgagors may
attempt to secure a fixed rate in a declining interest rate environment and
may elect to do so through the conversion feature.
The rate at which Mortgagors exercise their conversion rights and the
resulting purchase of the related Underlying Mortgage Loans by the respective
Servicers of such Underlying Mortgage Loans will affect the rate of payment of
principal of, and hence the effective yield on, the Certificates. The
effective yield on the Certificates may also be affected by the failure of the
Servicer of a Mortgage Loan to repurchase such Mortgage Loan as described
below.
As described herein under "Description of the Certificates--Interest",
approximately 27.21% and 21.48% respectively, by scheduled principal balance
as of the Cut-off Date, of all LIBOR Loans and of all CMT Loans contain a
conversion option, pursuant to which the related Mortgagor may elect to
convert the rate of interest borne by such LIBOR Loan or CMT Loan to a fixed
rate of interest. Pursuant to the terms of each Servicing Agreement the
related Servicer is required to repurchase any Underlying Mortgage Loan with
respect to which such conversion option is exercised. Such repurchase would
have the same effect as a prepayment in full of the related Underlying
Mortgage Loan, and would result in a commensurate prepayment of principal on
the Class A1 Certificates or the Class A2 or Class R Certificates, as the case
may be.
If the Servicer of an Underlying Mortgage Loan fails to repurchase an
Underlying Mortgage Loan following such an interest rate conversion, such
Underlying Mortgage Loan will begin to bear interest at the new, fixed rate.
Accordingly, if the LIBOR Index or CMT Index plus the related LIBOR Gross
Margin or CMT Gross Margin, respectively, for such Mortgage Loan is higher
than the new fixed rate following such conversion, the yield on the Class A1
Certificates or the Class A2 and Class R Certificates, as applicable, will be
less than would have been the case in the absence of such interest rate
conversion. Conversely, if the LIBOR Index or CMT Index plus the related LIBOR
Gross Margin or CMT Gross Margin, respectively, for such Underlying Mortgage
Loan is lower than the new fixed rate following such a conversion, the yield
on the Class A1 Certificates or the Class A2 and Class R Certificates, as
applicable, will be greater than would have been the case in the absence of
such interest rate conversion. With respect to the majority of the Underlying
Mortgage Loans having an interest rate conversion right, the fixed interest
rate (which would, upon conversion, become the Mortgage Rate) will be
S-32
<PAGE>
equal to the Federal National Mortgage Association's required net yield as of
a date and time of day specified by the note holder for (i) if the original
term of the Mortgage Note is greater than 15 years, 30-year fixed rate
mortgages covered by applicable 60-day mandatory delivery commitments, plus
one percentage point (1.00%), rounded to the nearest one-eighth of one
percentage point (0.125%), or (ii) if the original term of the Mortgage Note
is 15 years or less, 15-year fixed rate mortgages covered by applicable 60-day
mandatory delivery commitments, plus one percentage point (1.00%), rounded to
the nearest one-eighth of one percentage point (0.125%).
ADDITIONAL YIELD CONSIDERATIONS FOR THE RESIDUAL CERTIFICATES
The respective after-tax yields on the Residual Certificates may be
significantly lower than would be the case if the Residual Certificates were
not taxable as residual interests in a REMIC. See "Certain Federal Income Tax
Consequences--Residual Certificates" herein and "Certain Federal Income Tax
Consequences--Taxation of Residual Certificates" in the Prospectus.
SCHEDULED FINAL DISTRIBUTION DATES
The Scheduled Final Distribution Date for the Class A1 Certificates is the
third Distribution Date occurring after the stated maturity of the latest
maturing LIBOR Loan. The Scheduled Final Distribution Date of the Class A2 and
Class R Certificates is the third Distribution Date occurring after the stated
maturity of the latest maturing CMT Loan. The rate of payment of principal of
the Certificates of a class will depend on the rate of payment of principal of
the Underlying Mortgage Loans in the related Underlying Mortgage Loan Group
which, in turn, will depend on the characteristics of such Underlying Mortgage
Loans, the level of prevailing interest rates and other economic, geographic,
social and other factors, and no assurance can be given as to the actual
payment experience. The Underlying Mortgage Loans may be prepaid without
penalty at any time. In the event that losses with respect to the Underlying
Mortgage Loans exceed the coverage provided by the forms of credit enhancement
described herein, delinquencies could result in distributions to the
Certificateholders after the respective Scheduled Final Distribution Dates of
each class of Certificates. As a result, the Class Certificate Principal
Balance of each class of Certificates may be reduced to zero significantly
earlier (e.g., if the Underlying Mortgage Loans experience a high rate of
prepayment) or later (e.g., if any of the Underlying Mortgage Loans become the
subject of foreclosure proceedings and such foreclosure proceedings continue
until after the Scheduled Final Distribution Date) than its respective
Scheduled Final Distribution Date.
DESCRIPTION OF BOOK ENTRY PROCEDURES
The Book Entry Certificates will be represented by one or more certificates
registered in the name of the nominee of The Depository Trust Company (the
"Clearing Agency"). The Clearing Agency will maintain book entry records of
ownership, transfers and pledges of the Book Entry Certificates only in the
names of its participants and indirect participants (the "Clearing Agency
Participants"), which include securities brokers and dealers, banks and trust
companies and clearing corporations and may include certain other
organizations. Prior to Book Entry Termination (as defined below), Beneficial
Owners who are not Clearing Agency Participants may transfer and pledge their
interests in the Book Entry Certificates, and exercise any other rights and
remedies of Certificateholders, only through Clearing Agency Participants or
other entities that maintain relationships with Clearing Agency Participants.
The Clearing Agency may charge its customary fee to Clearing Agency
Participants in connection with any such transfers and pledges.
Distributions of principal and interest on the Book Entry Certificates will
be made on each Distribution Date by the Trustee to the Clearing Agency. The
Clearing Agency will be responsible for crediting the amount of such payments
to the accounts of the applicable Clearing Agency Participants in accordance
with the Clearing Agency's normal procedures. Each Clearing Agency Participant
will be responsible for disbursing such payments to the beneficial owners of
the Book Entry Certificates that it represents and to each financial
intermediary for which it acts as agent. Each such financial intermediary will
be responsible for disbursing funds to the beneficial owners of the Book Entry
Certificates that it represents.
S-33
<PAGE>
The Book Entry Certificates will be issued in definitive, registered form to
Beneficial Owners or their nominees, and thereupon such Beneficial Owners will
become Certificateholders if, and only if, one of the following events occurs
(any such event being referred to as "Book Entry Termination"): (i) the
Clearing Agency or the Company advises the Trustee in writing that the
Clearing Agency is no longer willing or able properly to discharge its
responsibilities as a clearing corporation with respect to the Book Entry
Certificates and the Company and the Trustee are unable to engage a qualified
successor to serve as the Clearing Agency, (ii) the Clearing Agency
Participants, at the direction of Beneficial Owners representing a majority of
the outstanding principal amount of the Book Entry Certificates, advise the
Trustee in writing that the continuation of a book entry system is no longer
in the best interests of Beneficial Owners, or (iii) the Company, at its
option, advises the Trustee that it elects to terminate the book entry system.
Upon Book Entry Termination, Beneficial Owners will become registered
Certificateholders and will deal directly with the Trustee with respect to
transfers, notices and payments.
The Clearing Agency has advised the Company and the Trustee that, prior to
Book Entry Termination, the Clearing Agency will take any action permitted to
be taken by a Certificateholder under the Agreement only at the direction of
one or more Clearing Agency Participants to whom the Book Entry Certificates
are credited in an account maintained by the Clearing Agency. The Clearing
Agency has advised that it will take such action with respect to any principal
amount of the Book Entry Certificates only at the direction of and on behalf
of Clearing Agency Participants with respect to those principal amounts of
such Book Entry Certificates.
Issuance of the Book Entry Certificates offered hereby in book entry form
rather than as physical certificates may adversely affect the liquidity of the
Book Entry Certificates in the secondary market and the ability of Beneficial
Owners to pledge them. In addition, prior to Book Entry Termination,
distributions on the Book Entry Certificates will be made by the Trustee to
the Clearing Agency and the Clearing Agency will credit such distributions 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 distributions.
See "Risk Factors--Book Entry Registration" and "Description of the
Certificates--Book Entry Registration" in the Prospectus.
THE COMPANY
GENERAL
The Company is a Delaware corporation and a wholly-owned limited purpose
finance subsidiary of Capstead Inc., a Delaware corporation ("CI"). The
Company was originally incorporated on January 4, 1993. The principal
executive office of the Company is located at 2711 N. Haskell, Suite 1000,
Dallas, Texas 75204, telephone (214) 874-2500. See "The Company" in the
Prospectus.
Capstead Mortgage Corporation ("CMC") owns all of the outstanding non-voting
preferred stock of CI. CMC and CI are the sole general partners of CMC
Investment Partnership, a Texas general partnership (the "Partnership"). On or
prior to the Closing Date, CI will acquire the Underlying Certificates from
CMC and the Partnership, and the Company will in turn acquire the Underlying
Certificates from CI.
DELINQUENCY AND FORECLOSURE STATISTICS OF CMC'S TOTAL INVESTMENT PORTFOLIO AND
CMC'S ADJUSTABLE RATE MORTGAGE INVESTMENT PORTFOLIO
The following tables set forth certain information concerning CMC's
delinquency and Loan Loss experience with respect to the first lien,
residential mortgage loans in CMC's total investment portfolio and adjustable
rate mortgage loan investment portfolio (which portfolio includes mortgage
loans owned by the Partnership, and mortgage loans which back collateralized
mortgage obligations and pass-through certificates issued or sold by
subsidiaries of CMC and CI). CMC's adjustable rate mortgage loan investment
portfolio includes other types of adjustable rate mortgage loans in addition
to adjustable rate mortgage loans such as the LIBOR Loans and the CMT Loans.
S-34
<PAGE>
DELINQUENCY AND FORECLOSURE STATISTICS AS PERCENTAGES OF CMC'S TOTAL PORTFOLIO
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF DECEMBER 31,
-------------------- --------------------------------------------------------------
1996 1995 1994 1993
-------------------- -------------------- -------------------- --------------------
DOLLAR DOLLAR DOLLAR DOLLAR
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
MORTGAGE MORTGAGE MORTGAGE MORTGAGE MORTGAGE MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS LOANS LOANS LOANS LOANS LOANS
--------- ---------- --------- ---------- --------- ---------- --------- ----------
PERIOD OF DELINQUENCY
--------------------- (% OF PORTFOLIO)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days delinquent .. 1.90% 1.92% 2.27% 2.22% 2.09% 2.12% 2.05% 2.11%
60-89 days delinquent .. 0.55 0.56 0.49 0.50 0.55 0.55 0.52 0.53
90 + days delinquent ... 0.80 0.83 1.22 1.29 0.69 0.77 0.44 0.45
Foreclosures pending ... 1.48 1.67 2.27 2.42 2.38 2.34 1.74 1.87
---- ---- ---- ---- ---- ---- ---- ----
Total ................ 4.73% 4.98% 6.25% 6.43% 5.71% 5.78% 4.75% 4.96%
==== ==== ==== ==== ==== ==== ==== ====
Foreclosed Loans(1)..... 0.92% 0.94% 0.84% 0.84% 1.38% 1.52% 0.74% 0.57%
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio.... 24,674 $6,957,993 26,391 $7,507,373 29,849 $8,665,477 28,391 $8,507,049
Liquidated Foreclosed
Loans(2)................ 164 $ 44,931 651 $ 208,808 618 $ 195,872 189 $ 56,445
Loan Losses(3).......... -- $ 15,017 -- $ 63,033 -- $ 66,738 -- $ 15,479
</TABLE>
- ----
(1) For purposes of these tables, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to
which had been acquired and which had not been liquidated by the end of
the period indicated.
(2) Liquidated Foreclosed Loans are for the five month period ended on May 31,
1996 and for the one year periods ended on the other dates set forth
above. For purposes of these tables, Liquidated Foreclosed Loans includes
the principal balance of mortgage loans secured by mortgaged properties
the title to which has been acquired and which had been liquidated during
the period indicated.
(3) Loan losses are for all mortgage loans liquidated during the five month
period ended on May 31, 1996 and during the one year periods ended on the
other dates set forth above. For this purpose a loan loss for any mortgage
loan is generally equal to the difference between (a) the principal
balance plus accrued interest plus all liquidation expenses related to
such mortgage loan and (b) all amounts received in connection with
liquidation of the related mortgage property (including primary mortgage
insurance, hazard insurance or other insurance available for specific
mortgage properties), but excluding amounts received from mortgage pool or
special hazard insurance, bankruptcy bonds or other forms of credit
enhancement.
S-35
<PAGE>
DELINQUENCY AND FORECLOSURE STATISTICS AS PERCENTAGES OF CMC'S ADJUSTABLE RATE
MORTGAGE LOAN PORTFOLIO
<TABLE>
<CAPTION>
AS OF MAY 31, AS OF DECEMBER 31,
-------------------- --------------------------------------------------------------
1996 1995 1994 1993
-------------------- -------------------- -------------------- --------------------
DOLLAR DOLLAR DOLLAR DOLLAR
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
MORTGAGE MORTGAGE MORTGAGE MORTGAGE MORTGAGE MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS LOANS LOANS LOANS LOANS LOANS
--------- ---------- --------- ---------- --------- ---------- --------- ----------
PERIOD OF DELINQUENCY
--------------------- (% OF PORTFOLIO)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
30-59 days delinquent .. 2.93% 2.99% 3.18% 3.21% 2.85% 2.98% 2.98% 3.12%
60-89 days delinquent .. 0.89 0.89 0.72 0.75 0.70 0.75 0.70 0.71
90 + days delinquent ... 1.35 1.37 2.12 2.26 1.02 1.17 1.01 1.11
Foreclosures pending ... 2.40 2.80 3.87 4.25 3.45 3.55 3.42 3.47
---- ---- ---- ---- ---- ---- ---- ----
Total ................ 7.57% 8.05% 9.89% 10.47% 8.02% 8.45% 8.11% 8.41%
==== ==== ==== ==== ==== ==== ==== ====
Foreclosed Loans(1)..... 1.89% 2.01% 1.61% 1.70% 2.06% 2.37% 1.07% 0.89%
<CAPTION>
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Loan Portfolio.... 8,202 $2,307,321 9,158 $2,597,213 11,180 $3,246,122 8,800 $2,747,058
Liquidated Foreclosed
Loans(2)................ 96 $ 28,179 341 $ 114,856 167 $ 57,536 21 $ 8,267
Loan Losses(3).......... -- $ 8,571 -- $ 34,791 -- $ 19,095 -- $ 1,930
</TABLE>
- ----
(1) For purposes of these tables, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to
which had been acquired and which had not been liquidated by the end of
the period indicated.
(2) Liquidated Foreclosed Loans are for the five month period ended on May 31,
1996 and for the one year periods ended on the other dates set forth
above. For purposes of these tables, Liquidated Foreclosed Loans includes
the principal balance of mortgage loans secured by mortgaged properties
the title to which has been acquired and which had been liquidated during
the period indicated.
(3) Loan losses are for all mortgage loans liquidated during the five month
period ended on May 31, 1996 and during the one year periods ended on the
other dates set forth above. For this purpose a loan loss for any mortgage
loan is generally equal to the difference between (a) the principal
balance plus accrued interest plus all liquidation expenses related to
such mortgage loan and (b) all amounts received in connection with
liquidation of the related mortgage property (including primary mortgage
insurance, hazard insurance or other insurance available for specific
mortgage properties), but excluding amounts received from mortgage pool or
special hazard insurance, bankruptcy bonds or other forms of credit
enhancement.
S-36
<PAGE>
For CMC's investment portfolio as a whole, total mortgage loan delinquencies
generally have increased since January 1, 1993. Although these increases may
be due to a variety of factors, the Company believes a general downturn in the
California economy, resulting in increased unemployment and reduced property
values, is a contributing factor to the increases in these categories. Two
other factors may be contributing to the increases in the percentages of
delinquencies. A number of mortgage loans have been refinanced with other
lenders and it is less likely that delinquent mortgage loans can be refinanced
as compared to current mortgage loans, thus increasing the percentage of the
remaining portfolio consisting of delinquent mortgage loans. Additionally, CMC
has not been adding a substantial number of loans to its portfolio, and as a
result the aging of the existing portfolio may result in a higher percentage
of delinquent mortgage loans.
No assurance can be given that the values of the Mortgaged Properties have
remained or will remain at their levels on the dates of origination of the
related Underlying Mortgage Loans. Adverse economic conditions (which may or
may not affect real property values) may affect the timely payments by
Mortgagors of scheduled payments of principal and interest on the Underlying
Mortgage Loans and accordingly, the actual rates of delinquencies,
foreclosures and losses with respect to the Underlying Mortgage Loans. If the
residential real estate market should experience an overall decline in
property values such that the outstanding balances of the Underlying Mortgage
Loans, and any secondary financing on the Mortgaged Properties by a lender,
become equal to or greater than the value of the Mortgaged Properties, the
actual rates of delinquencies, foreclosures and losses could be significantly
higher than the rates indicated in the tables above. TO THE EXTENT THAT SUCH
LOSSES OCCUR IN CONNECTION WITH THE UNDERLYING MORTGAGE LOANS AND ARE NOT
OTHERWISE COVERED BY THE MORTGAGE POOL INSURANCE POLICY, THE FINANCIAL
GUARANTY INSURANCE POLICY OR AMOUNTS AVAILABLE IN THE SPECIAL HAZARD ACCOUNT
(INCLUDING PROCEEDS FROM THE SPECIAL HAZARD INSURANCE POLICY) AND THE
BANKRUPTCY ACCOUNT DESCRIBED HEREIN, THEY WILL BE PASSED THROUGH AS LOSSES ON
THE RELATED CERTIFICATES AND SUCH LOSSES WILL BE BORNE BY THE RELATED
CERTIFICATEHOLDERS. See "Description of the Certificates--Allocation of Loan
Losses" and "Description of Insurance, Special Hazard Account and Bankruptcy
Account" herein.
POOLING AGREEMENT
The following summaries describe certain provisions of the Agreement. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreement. Where
particular provisions or terms used in the Agreement are referred to, such
provisions or terms are as specified in the Agreement. Except as described
below or referred to below, the summaries under "Pooling and Administration"
in the Prospectus are not applicable to the Agreement.
ASSIGNMENT OF THE UNDERLYING CERTIFICATES
The Company will cause the Underlying Certificates to be assigned to the
Trustee together with all principal and interest distributable thereunder on
and after the Closing Date. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Company in exchange for the
Underlying Certificates. Each Underlying Certificate will be identified in a
schedule appearing as an exhibit to the Agreement. See "Pooling and
Administration--Assignment of Mortgage Assets--Assignment of Agency
Securities, Private Mortgage-Backed Securities and Other Mortgage Securities"
in the Prospectus.
THE TRUSTEE
For a summary of the provisions of the Agreement applicable to the Trustee
see "Pooling and Administration--The Trustee" in the Prospectus, except that
reference to the "Administrator" and "Events of Default" therein are
inapplicable. The Trustee will not be entitled to any compensation under the
Agreement in addition to the compensation it receives as Underlying Trustee
under the Underlying Agreement. The Agreement provides that any Trustee must
also be the Underlying Trustee.
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ADMINISTRATION OF THE CERTIFICATE ACCOUNT
For a summary of the provisions of the Agreement applicable to the
Certificate Account see "Pooling and Administration--Administration of the
Certificate Account" in the Prospectus. Notwithstanding anything to the
contrary in the Prospectus, only amounts distributed on the Underlying
Certificates and reinvestment income thereon will be deposited in the
Certificate Account. Distributions on each Underlying Certificate Group will
be accounted for separately but will not be segregated in the Certificate
Account. Reinvestment income will be paid as a fee to the Company as partial
compensation for administration of the Series 1996-B REMIC.
REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution on the Certificates, the Trustee will
mail to Certificateholders a statement generally setting forth, among other
things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each class of the
Certificates after giving effect to distributions on such Distribution
Date;
(iv) as of the most recent date for which information was available, the
aggregate principal balance and number of Underlying Mortgage Loans and
Pool Insured Loans which (a) were delinquent 30-59 days, 60-89 days, and 90
days or more, (b) were in foreclosure, or (c) constituted real estate
owned;
(v) the amount of coverage at the Cut-off Date and the amount of coverage
then remaining under any Credit Enhancement Instrument (as defined herein);
(vi) the amount of any Interest Shortfalls for each Underlying Mortgage
Loan Group;
(vii) the principal balance at the Cut-off Date of each Underlying
Mortgage Loan Group; and
(viii) the weighted average Mortgage Rate and weighted average remaining
term to maturity of the Underlying Mortgage Loans.
The Trustee or the Company will also furnish annually customary information
deemed necessary for Certificateholders to prepare their tax returns.
AMENDMENT
For a summary of the provisions of the Agreement applicable to amendments of
the Agreement, see "Pooling and Administration--Amendment" in the Prospectus.
References therein to the Administrator do not apply to the Agreement.
TERMINATION
The Company may repurchase all of the Underlying Certificates on any
Distribution Date on which the aggregate principal balance of the Underlying
Certificates is less than or equal to ten percent (10%) of the aggregate
principal balance of such Underlying Certificates at the Cut-off Date. In such
event, the purchase price shall be equal to 100% of the outstanding aggregate
principal amount of all Underlying Certificates then remaining in the Trust
Fund. The Underlying Agreement provides that the Company may not repurchase
the Underlying Mortgage Loans and thereby effect the early retirement of the
Underlying Certificates until the Certificates have been retired.
DESCRIPTION OF THE UNDERLYING CERTIFICATES
The Underlying Certificates were issued pursuant to a Pooling and
Administration Agreement relating to Capstead Capital Corporation's Portfolio
Pass-Through Program 1993PA, dated as of March 1, 1993, as supplemented and
amended through and as of the Cut-off Date (the "Underlying Agreement") among
Capstead
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Capital Corporation ("CCC"), Capstead Mortgage Corporation ("CMC"), as
administrator (the "Underlying Administrator"), and Texas Commerce Bank
National Association, as trustee (the "Underlying Trustee"). Effective June 1,
1996, the Company succeeded to all of CCC's rights and obligations as sponsor
under the Underlying Agreement with respect to the Underlying Certificates.
References in this Prospectus Supplement to the Company in connection with the
transactions contemplated by the Underlying Agreement and transactions
involving the Underlying Mortgage Loans refer to CCC if occurring prior to
June 1, 1996 and refer to the Company if occurring on or after June 1, 1996.
Each Underlying Certificate represents a 100% beneficial ownership interest in
each pool of Underlying Mortgage Loans. The Underlying Mortgage Loans have
been assigned to the Underlying Trustee for the benefit of the holder of the
Underlying Certificates. The Underlying Certificates were initially acquired
by the Partnership or CMC and will be sold by the Partnership or CMC to CI and
by CI to the Company on or before the Closing Date. The Company will sell such
Underlying Certificates to the Trustee on the Closing Date. Thereafter, the
Underlying Certificates will at all times be registered in the name of the
Trustee. Servicing of the Underlying Mortgage Loans will be performed pursuant
to the Servicing Agreements (as defined below) and administered by the
Underlying Administrator pursuant to the Underlying Agreement. The Servicers
will each receive a fee for their services. See "Pooling, Administration and
Servicing" herein.
All of the Underlying Mortgage Loans will be serviced by servicers (each
such servicer being referred to as a "Servicer") pursuant to servicing
agreements between each such Servicer and the Partnership (the "Servicing
Agreements"). All of the Partnership's right, title and interest in the
Servicing Agreements with respect to the Underlying Mortgage Loans were
assigned to the Company which in turn assigned them to the Underlying Trustee
pursuant to the Underlying Agreement.
Pursuant to the Servicing Agreements, on the eighteenth day of each month,
or if such day is not a business day, the preceding business day (the
"Remittance Date"), the Servicers will remit to the Underlying Trustee
payments (including prepayments) of principal, together with interest at a
rate (the "Remittance Rate") equal to the LIBOR Mortgage Rate or CMT Mortgage
Rate, as applicable, borne by the Underlying Mortgage Loan less the related
Servicer's servicing fee. The Servicers are not required to advance any
monthly installment of principal and interest deemed to be a Nonrecoverable
Advance (as defined below). All remittances from a Servicer will be deposited
to a trust account (the "Underlying Certificate Account") established by and
maintained with the Underlying Trustee. Funds in the Underlying Certificate
Account will be invested from time to time in Permitted Instruments maturing
on or before the next Underlying Certificate Distribution Date. The only funds
available to make distributions on an Underlying Certificate and to pay
related expenses will be payments (including Principal Prepayments and Monthly
Advances) on the related Underlying Mortgage Loans. As described herein, a
Principal Prepayment includes certain payments by the Mortgagor, insurance
proceeds and liquidation proceeds. Funds or Permitted Instruments in the
Underlying Certificate Account will be applied on the Underlying Certificate
Distribution Date to distribute principal and interest (at the Pass-Through
Rate) on the Underlying Mortgage Loans to the Underlying Trustee and to pay
fees and certain expenses of, and reimbursements to, the Underlying Trustee,
the Underlying Administrator, the Pool Insurer and the Special Hazard Insurer.
The assignment of the Underlying Mortgage Loans to the Underlying Trustee
was without recourse. The Company's obligations with respect to the Underlying
Mortgage Loans will consist of its limited obligation, as described herein, to
repurchase Underlying Mortgage Loans as to which there has been a material
breach of certain representations and warranties or as to which the
documentation is found to contain a material defect. See "Pooling,
Administration and Servicing--Representations and Warranties" below. The
Underlying Administrator's obligations with respect to the Underlying Mortgage
Loans will consist of the obligation to notify the Company if the
documentation for any Underlying Mortgage Loan is found to be defective, its
monitoring and supervisory obligations under the Underlying Agreement
(including its obligations to enforce certain repurchase and other obligations
of the Servicers) and its obligation to make certain cash advances in the
event of delinquencies in payments on or with respect to the Underlying
Mortgage Loans. The obligations of each Servicer with respect to the
Underlying Mortgage Loans serviced by it will be limited to its servicing
duties
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and its obligation to make advances pursuant to its Servicing Agreement. Such
advances will be limited to amounts which the Servicer, with the concurrence
of the Underlying Administrator, believes ultimately would be reimbursable
under any applicable insurance policy, from the proceeds of a liquidation of
any of the Mortgaged Properties or from any other source (any amount deemed
not to be so reimbursable being a "Nonrecoverable Advance").
POOLING, ADMINISTRATION AND SERVICING
GENERAL
The following discussion applies to the Underlying Agreement and each
related Servicing Agreement. For information regarding pooling, administration
and servicing of the Underlying Mortgage Loans see "Servicing of the Mortgage
Loans" in the Prospectus.
The Underlying Administrator. CMC will serve as the Underlying
Administrator. CMC began administering Mortgage Loans in February 1993. The
Underlying Agreement provides that if either of two conditions occur as of the
18th calendar day of any month (each a "Determination Date") based upon
monthly reports furnished to the Underlying Trustee, on the thirty-first day
after such Determination Date the Underlying Trustee will terminate CMC as
Underlying Administrator under the Underlying Agreement and either retain
another Underlying Administrator or serve as Underlying Administrator itself
unless before such thirty-first day CMC delivers a letter to the Underlying
Trustee from S&P approving the retention of CMC as the applicable Underlying
Administrator. The two conditions (separately determined as to the Underlying
Mortgage Loans) are: (i) (a) the average of the Delinquency Rates, as defined
below, as of the end of each of the twelve most recent calendar months
preceding the applicable Determination Date and for which delinquency
information is available exceeds 3.5%, and (b) aggregate cumulative reductions
in the Mortgage Pool Insurance Policy due to loan losses incurred as of the
end of the calendar month preceding such Determination Date exceed 20% of the
initial coverage for losses under the Mortgage Pool Insurance Policy; or (ii)
(a) the average of the Delinquency Rates as of the end of each of the twelve
most recent calendar months preceding the applicable Determination Date and
for which delinquency information is available exceeds 4.5%, and (b) aggregate
cumulative reductions in the Mortgage Pool Insurance Policy due to loan losses
incurred as of the end of the calendar month preceding such Determination Date
exceed 10% of the initial coverage for losses under the Mortgage Pool
Insurance Policy. The Delinquency Rate as of the end of any calendar month is
equal to the ratio, expressed as a percentage, of (i) the aggregate Imputed
Principal Balance of all mortgage loans subject to the Underlying Agreement
delinquent as of such date in excess of 60 days, including real estate owned
and subject to the Underlying Agreement and mortgage loans in foreclosure, to
(ii) the aggregate Imputed Principal Balance of all mortgage loans subject to
the Underlying Agreement as of such date. Either or both of the two conditions
referred to above may be replaced at any time by different conditions
specified by S&P. Notwithstanding the foregoing this termination provision
will not apply any time after S&P has delivered to the Underlying Trustee a
letter stating that such provision no longer applies and confirming the then
current rating of the Certificates as determined by S&P.
REPRESENTATIONS AND WARRANTIES
The Underlying Mortgage Loans were acquired by the Partnership from certain
entities (the "Sellers") and were subsequently sold to CCC in order to form
the Underlying Certificates. In connection with the Partnership's acquisition
of the Underlying Mortgage Loans, the related Sellers made certain
representations and warranties to the Partnership. Such representations and
warranties are substantially similar to those described in the Prospectus
under "Pooling and Administration--Assignment of Mortgage Assets" as being
made by a Seller to the Partnership. Remedies in respect of breaches of any
such representations and warranties are available to the Underlying Trustee as
described below. In addition to the Seller's representations and warranties,
the Underlying Mortgage Loans are the subject of certain other representations
and warranties made by the Servicers. Such representations and warranties are
substantially similar to those described in the Prospectus under "Pooling and
Administration--Assignment of Mortgage Assets" as being made by a Servicer.
CCC represented and warranted
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in the Underlying Agreement that, as of the applicable cut-off dates relating
to the formation of the Underlying Certificates representing a 100% beneficial
ownership interest in the applicable Underlying Mortgage Loans, the
representations and warranties of the Sellers and Servicers with respect to
such Underlying Mortgage Loans were true and correct. The remedies in respect
of breaches of such representations and warranties are available to the
Underlying Trustee as described below.
Upon the discovery by the Underlying Trustee or the Underlying Administrator
of a material breach of any representation or warranty made in respect of an
Underlying Mortgage Loan as described above or of a material defect in the
mortgage documents relating to such Underlying Mortgage Loan, the related
party will be obligated to cure such breach or repurchase such Underlying
Mortgage Loan at a price equal to 100% of the then outstanding principal
amount thereof plus accrued interest thereon to the end of the month in which
the date of purchase occurs; provided, however, that the obligation of the
Company to repurchase Fraudulent Mortgage Loans (as defined in the Prospectus)
shall be limited to an amount equal to the Pool Insurer's liability under the
Waiver Letter (as defined herein). For purposes of the foregoing, the Company
shall be deemed to have satisfied its repurchase obligation with respect to a
Fraudulent Mortgage Loan to the extent that the Company or CMC repurchases any
such Fraudulent Mortgage Loan or PMI purchases such Fraudulent Mortgage Loan
or pays a loss with respect to such Fraudulent Mortgage Loan pursuant to a
Waiver Letter as described under "Description of Insurance, Special Hazard
Account and Bankruptcy Account--The Mortgage Pool Insurance Policy." In
addition, the Sellers and the Servicers have agreed to indemnify against any
loss or liability incurred by the Underlying Trustee on account of any
material breach of any representation or warranty made pursuant to the
applicable loan sale agreements and the Servicing Agreements, respectively.
The repurchase obligations of the Company, the Sellers, and the Servicers
constitute the sole remedy available to the Certificateholders or the Trustee
for a material breach of their respective representations and warranties or
for a material defect in the mortgage loan documents.
MAINTENANCE OF INSURANCE POLICIES; CLAIMS THEREUNDER AND OTHER REALIZATION
UPON DEFAULTED LOANS
The Underlying Trustee is required to pay the premiums for the Mortgage Pool
Insurance Policy from amounts available in the Underlying Certificate Account.
The Underlying Trustee will pay premiums for the Special Hazard Insurance
Policy from amounts available in the Underlying Certificate Account unless
coverage under the policy has been exhausted through payment of claims or
alternative coverage for special hazards has been provided. IN THE EVENT,
HOWEVER, THAT DEFAULTED LOANS ARE NOT COVERED BY THE MORTGAGE POOL INSURANCE
POLICY, THE FINANCIAL GUARANTY INSURANCE POLICY, ANY PRIMARY MORTGAGE
INSURANCE POLICIES, OR AMOUNTS AVAILABLE IN THE SPECIAL HAZARD ACCOUNT
(INCLUDING PROCEEDS UNDER THE SPECIAL HAZARD INSURANCE POLICY) OR THE
BANKRUPTCY ACCOUNT, OR CLAIMS ARE EITHER NOT MADE OR PAID UNDER SUCH POLICIES,
OR IF COVERAGE THEREUNDER HAS CEASED, A LOAN LOSS WILL OCCUR TO THE EXTENT
THAT THE PROCEEDS FROM THE LIQUIDATION OF A DEFAULTED LOAN, AFTER
REIMBURSEMENT OF THE APPLICABLE SERVICER'S EXPENSES (INCLUDING REIMBURSEMENT
OF ADVANCES), ARE LESS THAN THE PRINCIPAL BALANCE OF SUCH DEFAULTED LOAN.
Each Servicer will maintain a Primary Mortgage Insurance Policy with respect
to each Underlying Mortgage Loan serviced by it for which such coverage is
required. Further, each Servicing Agreement requires the related Servicer to
cause to be maintained for each Underlying Mortgage Loan serviced by it a
Standard Hazard Insurance Policy providing fire and extended coverage. Each
Servicing Agreement also requires that a Title Insurance Policy be in effect
on each of the Mortgaged Properties with respect to the Underlying Mortgage
Loans subject to such Servicing Agreement.
The Underlying Administrator will prepare and file claims to the respective
issuers of the Mortgage Pool Insurance Policy, the Financial Guaranty
Insurance Policy and the Special Hazard Insurance Policy. Each Servicer, with
respect to each Underlying Mortgage Loan serviced by it, will present claims
to any primary insurer under any related Primary Mortgage Insurance Policy and
to the hazard insurer under any related Standard Hazard Insurance Policy. All
collections under the Mortgage Pool Insurance Policy, any related Primary
Mortgage Insurance Policy, any related Standard Hazard Insurance Policy (less
any proceeds to be applied to the restoration or repair of the related
Mortgaged Property) and the Financial Guaranty Insurance Policy will be
deposited with the Underlying Trustee.
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SERVICING COMPENSATION AND PAYMENT OF EXPENSES
As compensation for its services, the Underlying Administrator will be
entitled to a monthly administration fee on each Underlying Mortgage Loan for
which the related monthly interest payment is received equal to not more than
.050% per annum of the outstanding principal balance of such Underlying
Mortgage Loan. The weighted average administration fee with respect to the
Underlying Mortgage Loans is 0.05%. As compensation for its servicing duties,
each Servicer will be entitled to a monthly servicing fee on each Underlying
Mortgage Loan serviced by it equal to no more than 0.375% per annum of the
outstanding principal balance of such Underlying Mortgage Loan. In addition to
the primary compensation, the Servicer will retain all assumption underwriting
fees and late payment charges, to the extent collected from Mortgagors.
RESIGNATION OF THE UNDERLYING ADMINISTRATOR
The Underlying Administrator may not resign from its obligations as
Underlying Administrator or as the Servicer, unless a successor has accepted
an appointment and unless satisfactory evidence has been furnished to S&P that
such resignation and succession will not adversely affect the rating of the
Underlying Certificates.
DESCRIPTION OF INSURANCE, SPECIAL HAZARD ACCOUNT AND BANKRUPTCY ACCOUNT
GENERAL
As more fully described below, the Mortgage Pool Insurance Policy will cover
certain losses by reason of default on the Underlying Mortgage Loans; certain
amounts on deposit in the Special Hazard Account (including proceeds under the
Special Hazard Insurance Policy) will be available to cover certain losses
resulting from damage or destruction of the Mortgaged Properties; and certain
amounts on deposit in the Bankruptcy Account will be available to cover
certain losses resulting from bankruptcy proceedings involving Mortgagors. The
Mortgage Pool Insurance Policy, the Special Hazard Account (including proceeds
under the Special Hazard Insurance Policy) and the Bankruptcy Account are
collectively referred to herein as the "Credit Enhancement Instruments." As
more fully described in the Prospectus under "Servicing of the Mortgage
Loans," the Primary Mortgage Insurance Policies will cover certain losses by
reason of default on the Underlying Mortgage Loans; the Standard Hazard
Insurance Policies will cover certain losses resulting from damage to or
destruction of the Mortgaged Properties; and the Title Insurance Policies will
cover certain losses resulting from defects in title to the Mortgaged
Properties. The filing of claims under the Mortgage Pool Insurance Policy, the
Special Hazard Insurance Policy, any Primary Mortgage Insurance Policies and
any Standard Hazard Insurance Policies, and the application of collections
under such insurance policies, are described above under "Pooling,
Administration and Servicing--Maintenance of Insurance Policies; Claims
Thereunder and Other Realization Upon Defaulted Loans" herein and under
"Servicing of the Mortgage Loans" in the Prospectus. References under this
subdivision to "Mortgagor," "Mortgage Rate" or "Mortgaged Property" refer to a
mortgagor, mortgage rate or mortgaged property of a mortgage loan covered by
the applicable credit enhancement.
In addition to providing coverage for the Underlying Mortgage Loans, the
Mortgage Pool Insurance Policy also provides coverage in respect of other
residential mortgage loans not evidenced by the Underlying Certificates (such
loans, the "Other Mortgage Loans"). See "--Certain Information with Respect to
Other Mortgage Loans Insured under the Mortgage Pool Insurance Policy" herein.
Also, in addition to providing coverage for the Underlying Mortgage Loans, the
Special Hazard Account (including the Special Hazard Insurance Policy) and the
Bankruptcy Account each provides coverage in respect of the Other Mortgage
Loans. Furthermore, as described below, coverage under any Credit Enhancement
Instrument may be expanded in the future to provide coverage in respect of
additional residential mortgage loans which are not currently covered by such
Credit Enhancement Instrument (such loans, "Additional Mortgage Loans").
Claims paid under any Credit Enhancement Instrument in respect of Other
Mortgage Loans and Additional Mortgage Loans will reduce the amount of
corresponding coverage available with respect to the Underlying Mortgage
Loans, notwithstanding that the Underlying Mortgage Loans may not have
suffered any losses at such time. If the rate
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of losses respecting the Other Mortgage Loans and Additional Mortgage Loans is
disproportionately greater than the rate of losses respecting the Underlying
Mortgage Loans, coverage available under the related Credit Enhancement
Instrument in respect of the Underlying Mortgage Loans will be reduced below
that which would otherwise have been provided if the Underlying Mortgage Loans
were covered by Credit Enhancement Instruments that provided coverage
exclusively for the Underlying Mortgage Loans. No assurance can be given that
disproportionately high claims in respect of Other Mortgage Loans or
Additional Mortgage Loans will not adversely affect the amount of coverage
available under the related Credit Enhancement Instruments. No portion of any
of the Credit Enhancement Instruments is reserved for the exclusive benefit of
the Underlying Mortgage Loans.
As referred to above, coverage under each Credit Enhancement Instrument may
subsequently be expanded to provide coverage for Additional Mortgage Loans.
Furthermore, mortgage loans currently covered by a Credit Enhancement
Instrument may be removed from such coverage. In such event, the amount of
coverage provided by the applicable Credit Enhancement Instruments may be
reduced. On or before the Closing Date the Company will covenant that it will
not arrange for Additional Mortgage Loans to have the benefit of coverage
under any Credit Enhancement Instrument, nor will coverage under any Credit
Enhancement Instrument be reduced as a result of removal of mortgage loans
covered thereby, unless the Company has delivered a letter to the Trustee from
S&P to the effect that such action will not result in the reduction or
withdrawal of the then-current rating of the Certificates. Because the Company
has not identified any Additional Mortgage Loans, no information regarding the
characteristics of such mortgage loans is included in this Prospectus
Supplement. No assurance can be given that such Additional Mortgage Loans will
have characteristics comparable to those of the Underlying Mortgage Loans.
THE MORTGAGE POOL INSURANCE POLICY
The Mortgage Pool Insurance Policy was issued on March 19, 1993 and covers
certain losses by reason of default on the Underlying Mortgage Loans and Other
Mortgage Loans (collectively, the "Pool Insured Loans") in an aggregate amount
expected to equal approximately $80,001,704 as of the Cut-off Date. Claims
aggregating approximately $4,651,184 have been paid under the Mortgage Pool
Insurance Policy prior to the Cut-off Date. The amount of coverage provided by
the Mortgage Pool Insurance Policy will not be less than that required at the
time of issuance of the Certificates in order to receive the ratings described
herein under "Certificate Rating." Such amount may be increased or decreased
in the future, as required or permitted by S&P to maintain the then-current
ratings of the Certificates. If such increase or decrease in the percentage of
pool insurance required by S&P is due to the inclusion of Additional Mortgage
Loans, then the updated percentage will be disclosed in a Current Report on
Form 8-K to be filed with the Securities and Exchange Commission.
THERE IS NO DESIGNATED PORTION OF THE TOTAL COVERAGE PROVIDED BY THE
MORTGAGE POOL INSURANCE POLICY ALLOCATED TO OR SEGREGATED FOR ANY PARTICULAR
POOL INSURED LOANS. RATHER, COVERAGE UNDER THE MORTGAGE POOL INSURANCE POLICY
WILL BE APPLIED TO LOSSES IN THE ORDER THAT SUCH LOSSES ARE REALIZED ON ALL
POOL INSURED LOANS. CONSEQUENTLY, IF LOSSES ARE DISPROPORTIONATELY GREATER ON
THE OTHER MORTGAGE LOANS (AND ADDITIONAL MORTGAGE LOANS, IF ANY), COVERAGE MAY
BE REDUCED FOR THE UNDERLYING MORTGAGE LOANS.
The Mortgage Pool Insurance Policy and each related Schedule Endorsement has
been issued by PMI Mortgage Insurance Co. ("PMI"). PMI, an Arizona corporation
with its administrative offices in San Francisco, California, is a monoline
mortgage guaranty insurer. PMI was organized in 1972 and currently provides
primary mortgage guaranty insurance on residential mortgage loans. PMI
discontinued its mortgage pool insurance operations in December 1993. PMI is a
wholly owned subsidiary of The PMI Group, Inc., a publicly traded company
(NYSE: PMA). PMI is licensed in 50 states and the District of Columbia to
offer both primary and pool insurance and is approved as a private mortgage
insurer by FHLMC and FNMA. As of December 31, 1995, PMI reported, on a
statutory accounting basis, assets of $1,130,424,653, policyholder's surplus
of $293,282,068,
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and a statutory contingency reserve of $530,873,792. As of December 31, 1995,
PMI reported net insurance in force of approximately $62,196,245,000. An
Annual Statement for PMI for the year ended December 31, 1995, prepared on the
Convention Form prescribed by the National Association of Insurance
Commissioners, is available upon request to the Trustee. As of March 31, 1996,
PMI reported, on a statutory accounting basis, assets of $1,141,548,299,
policyholder's surplus of $263,829,999, and a statutory contingency reserve of
$572,279,353. As of March 31, 1996, PMI reported net insurance in force of
$62,304,527,000. A quarterly statement for PMI for the quarter ended March 31,
1996, prepared on the Convention Form prescribed by the National Association
of Insurance Commissioners, is available upon request to the Trustee.
As of the date hereof, the claims-paying ability of PMI is rated "AA+" by
S&P and Fitch Investors Service, Inc. ("Fitch") and "Aa2" by Moody's Investor
Services, Inc. ("Moody's"). PMI has reinsured all of its risk in connection
with mortgage pool insurance, including the Mortgage Pool Insurance Policy,
with Forestview Mortgage Insurance Co. ("Forestview"). Forestview, a
California corporation with its administrative offices in San Francisco,
California, is a monoline private mortgage guaranty insurance company, and is
a wholly owned subsidiary of Allstate Insurance Company. Forestview will, upon
receipt of necessary regulatory approvals, directly assume PMI's liability
under the Mortgage Pool Insurance Policy. As of December 31, 1995, Forestview
reported, on a statutory accounting basis, assets of $189,241,314,
policyholder's surplus of $43,674,930, and a statutory contingency reserve of
$13,629,524. An Annual Statement for Forestview for the year ended December
31, 1995, prepared on the Convention Form prescribed by the National
Association of Insurance Commissioners, is available upon request to the
Trustee. As of March 31, 1996, Forestview reported, on a statutory accounting
basis, assets of $195,962,333, policyholder's surplus of $37,502,715, and a
statutory contingency reserve of $11,933,727. A quarterly statement for
Forestview for the quarter ended March 31, 1996, prepared on the Convention
Form prescribed by the National Association of Insurance Commissioners, is
available upon request to the Trustee. As of the date hereof, the claims
paying ability of Forestview is rated "AAA" by S&P and Fitch.
The information set forth above concerning PMI and Forestview has been
provided by PMI. Accordingly, none of the Company, the Administrator, the
Trustee, the Underwriter or any affiliate thereof makes any representation as
to the accuracy or completeness of such information.
THE MORTGAGE POOL INSURANCE POLICY IS NOT A BLANKET POLICY AGAINST LOSS;
CLAIMS THEREUNDER MAY ONLY BE MADE RESPECTING PARTICULAR DEFAULTED LOANS AND
ONLY UPON SATISFACTION OF CERTAIN CONDITIONS PRECEDENT DESCRIBED BELOW. Except
with respect to the limited coverage to be provided with respect to certain
Fraud Losses, as described hereafter, the Mortgage Pool Insurance Policy will
not cover losses in connection with a related mortgage loan arising out of a
failure to pay or denial of a claim under a Primary Mortgage Insurance Policy,
regardless of the reason therefor.
The Mortgage Pool Insurance Policy provides that as a condition precedent to
the payment of any claim with respect to a defaulted Pool Insured Loan the
insured will be required (a) to advance hazard insurance premiums on the
related Mortgaged Property; (b) to advance, as necessary and approved in
advance by PMI, (1) real estate property taxes, (2) all expenses required to
preserve and repair the related Mortgaged Property, to protect such Mortgaged
Property from waste, so that such Mortgaged Property is at least in as good a
condition as existed on the date upon which coverage under the Mortgage Pool
Insurance Policy with respect to such Mortgaged Property first became
effective, ordinary wear and tear excepted, (3) property sales expenses, and
(4) foreclosure costs including court costs and reasonable attorneys' fees not
to exceed three percent of the unpaid balance of the defaulted Pool Insured
Loan; and (c) if there has been physical loss or damage to the related
Mortgaged Property, to restore such Mortgaged Property to its condition
(reasonable wear and tear excepted) as of the issue date of the Mortgage Pool
Insurance Policy. It is also a condition precedent to the payment of any claim
under the Mortgage Pool Insurance Policy that the insured maintains a Primary
Mortgage Insurance Policy that is acceptable to PMI on all Pool Insured Loans
that have Loan-to-Value Ratios at the time of origination in excess of 80%.
FHA insurance and VA guarantees will be deemed to be an acceptable Primary
Mortgage Insurance Policy under the Mortgage Pool Insurance Policy. Assuming
satisfaction of these conditions,
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PMI has the option either (i) to purchase the related Mortgaged Property
securing the defaulted Pool Insured Loan at a price equal to the unpaid
principal balance thereof plus accrued and unpaid interest at the related
Mortgage Rate to the date of payment of the claim and certain expenses
incurred by the related Servicer on behalf of the Underlying Trustee, or (ii)
to pay the amount by which the sum of (a) the unpaid principal balance of the
defaulted Pool Insured Loan, (b) accrued and unpaid interest at the related
Mortgage Rate to the date of payment of the claim and (c) the aforementioned
expenses exceed the proceeds received from an approved sale of the Mortgaged
Property, in either case set forth in clauses (i) or (ii) above net of certain
amounts paid or assumed to have been paid under the related Primary Mortgage
Insurance Policy and, if applicable, certain other amounts set forth in the
Mortgage Pool Insurance Policy. If PMI elects its option to purchase the
related Mortgaged Property and pay the loss as specified in clause (i) above,
it is a condition precedent to payment of the claim that the insured provide
PMI with good and merchantable title to such Mortgaged Property, unless it has
been conveyed to PMI pursuant to a Primary Mortgage Insurance Policy.
Subject to the limitations described below, PMI has delivered letters (each
a "Waiver Letter"), waiving its right to deny a claim or rescind coverage
under the Mortgage Pool Insurance Policy resulting from losses sustained by
reason of a default arising from fraud, dishonesty or misrepresentation in
connection with the Pool Insured Loans specified therein. Pursuant to the
terms of certain indemnity agreements between CMC and PMI with respect to the
Pool Insurance Policy and each Waiver Letter (each an "Indemnity Agreement"),
CMC has agreed to reimburse PMI for the amount of any loss paid by PMI as a
result of a Pool Insured Loan being subject to a default arising from fraud,
dishonesty or misrepresentation (each such amount, a "Fraud Loss"). Each
Waiver Letter states the maximum aggregate amount of Fraud Losses with respect
to the mortgage loans specified therein during specified periods of time with
respect to which PMI agrees to give this waiver (each a "Waiver Amount"). The
Waiver Amount with respect to each Waiver Letter is described in the following
paragraphs. Each Waiver Amount will be reduced by any related Fraud Loss
regardless of whether PMI is reimbursed pursuant to the related Indemnity
Agreement for such amount. As described below, PMI's liability under each
Waiver Letter will be further reduced by an amount equal to any payments by
CMC to repurchase a mortgage loan to which the Waiver Letter would otherwise
apply, less net proceeds received by CMC upon liquidation of such mortgage
loan. However, Fraud Losses will not reduce overall coverage under the
Mortgage Pool Insurance Policy for losses by reason of default on the Pool
Insured Loans arising from causes other than fraud, dishonesty or
misrepresentation, except to the extent that CMC does not reimburse PMI for
such Fraud Losses under the related Indemnity Agreement.
With respect to approximately 53% of the Underlying Mortgage Loans (by
scheduled principal balance as of the Cut-off Date), during the first year
after the date such Underlying Mortgage Loans became subject to coverage under
the Mortgage Pool Insurance Policy (each, an "Effective Date"), the Waiver
Amount specified in the related Waiver Letter is an amount equal to two
percent (2.0%) of the initial total principal balance of the mortgage loans
specified therein as of the first day of the month in which such mortgage
loans became subject to coverage under the Mortgage Pool Insurance Policy
(with respect to each Waiver Letter, the "Initial Total Principal Balance"),
less an amount equal to any payments by CMC to repurchase mortgage loans to
which such Waiver Letter would otherwise apply (net of liquidation proceeds
received by CMC) (the "First Year Repurchase Amount"). During the period from
the first anniversary of the related Effective Date to the fifth anniversary
of such Effective Date, the Waiver Amount specified in the related Waiver
Letter will be the lesser of (i) one percent (1.0%) of the related Initial
Total Principal Balance less an amount equal to any payments paid by CMC,
during such period, to repurchase mortgage loans to which such Waiver Letter
would otherwise apply (net of liquidation proceeds received by CMC) (the
"Years 2-5 Repurchase Amount") or (ii) two percent (2.0%) of the related
Initial Total Principal Balance less the sum of (a) actual Fraud Losses paid
by PMI during the one year period ending on the first anniversary of the
related Effective Date, (b) the First Year Repurchase Amount, and (c) the
Years 2-5 Repurchase Amount. There are two Effective Dates with respect to the
Mortgage Pool Insurance Policy for purposes of this paragraph and such dates
are March 19, 1993 and June 15, 1993.
S-45
<PAGE>
With respect to approximately 47% of the Underlying Mortgage Loans (by
scheduled principal balance as of the Cut-off Date), during the first year
after the related Effective Date, the Waiver Amount specified in the related
Waiver Letter is an amount equal to three percent (3.0%) of the related
Initial Total Principal Balance, less the First Year Repurchase Amount. During
the period from the first anniversary of the related Effective Date to the
second anniversary of such Effective Date, the Waiver Amount specified in the
related Waiver Letter will be the lesser of (i) two percent (2.0%) of the
related Initial Total Principal Balance less an amount equal to any payments
paid by CMC, during such period, to repurchase mortgage loans to which such
Waiver Letter would otherwise apply (net of liquidation proceeds received by
CMC) (the "Second Year Repurchase Amount") or (ii) three percent (3.0%) of the
related Initial Total Principal Balance less the sum of (a) actual Fraud
Losses paid by PMI during the one year period ending on the first anniversary
of the related Effective Date, (b) the First Year Repurchase Amount, and (c)
the Second Year Repurchase Amount. During the period from the second
anniversary of the related Effective Date to the fifth anniversary of such
Effective Date, the Waiver Amount specified in the related Waiver Letter will
be the lesser of (i) one percent (1.0%) of the related Initial Total Principal
Balance less an amount equal to any payments paid by CMC, during such period,
to repurchase mortgage loans to which such Waiver Letter would otherwise apply
(net of liquidation proceeds received by CMC) (the "Years 3-5 Repurchase
Amount"); or (ii) three percent (3.0%) of the related Initial Total Principal
Balance, less the sum of (a) actual Fraud Losses paid by PMI during the two
year period ending on the second anniversary of the related Effective Date,
(b) the First Year Repurchase Amount, (c) the Second Year Repurchase Amount,
and (d) the Years 3-5 Repurchase Amount. There are two Effective Dates with
respect to the Mortgage Pool Insurance Policy for purposes of this paragraph
and such dates are September 21, 1993 and January 14, 1994.
Subject to the Waiver Letters, the Mortgage Pool Insurance Policy does not
insure (and many Primary Mortgage Insurance Policies do not insure) against
loss sustained by reason of a default arising from, among other things, (i)
fraud or negligence in the origination or servicing of a Pool Insured Loan,
including misrepresentation by the Mortgagor, the originator or other persons
involved in the origination thereof, except for the limited coverage for Fraud
Losses described in the three preceding paragraphs, or (ii) failure to
construct a Mortgaged Property in accordance with plans and specifications.
Depending upon the nature of the event, a breach of representation made by an
originator may also have occurred. Such a breach, if it cannot be cured, could
give rise to a repurchase obligation on the part of the related Seller or the
related Servicer, and, to a limited extent, the Company and the Partnership.
The original amount of coverage under the Mortgage Pool Insurance Policy
will be reduced over the life of the Pool Insured Loans by the aggregate
dollar amount of claims paid thereunder less the aggregate of the net amounts
realized by PMI upon disposition of all related foreclosed properties. The
amount of claims paid includes certain expenses incurred by the Servicers as
well as accrued interest on defaulted Pool Insured Loans to the date of
payment of the claim. See "Certain Legal Aspects of the Mortgage Loans--
Foreclosure" in the Prospectus. Accordingly, if aggregate net claims paid
under the Mortgage Pool Insurance Policy reach the original policy limit,
coverage under the Mortgage Pool Insurance Policy will be exhausted (and the
Financial Guaranty Insurance Wrap Policy described hereafter will terminate)
and any further losses on the Underlying Mortgage Loans in an Underlying
Mortgage Loan Group, if not covered by amounts on deposit in the Special
Hazard Account (including proceeds under the Special Hazard Insurance Policy)
or the Bankruptcy Account, as described hereafter, or the Underlying
Certificate Account, will result in a loss being borne by the related
Certificateholders. In addition, unless the applicable Servicer determines
that an advance in respect of a delinquent Pool Insured Loan would be
recoverable from the proceeds of the liquidation of such Pool Insured Loan or
otherwise, such Servicer would not be obligated to make an advance respecting
any such delinquency since the advance would not be ultimately recoverable by
such Servicer.
The Mortgage Pool Insurance Policy will contain a servicer back-up claim
payment advance endorsement (the "Advance Claim Payment Endorsement"),
pursuant to which PMI is required to advance to the insured, subject to the
coverage limitations of such policy, an amount equal to all delinquent
payments of principal and
S-46
<PAGE>
interest, upon receipt of written notice from the insured that a payment on
any defaulted Pool Insured Loan covered thereby has not been paid within 17
days after the due date of such payment and if neither the applicable Servicer
nor the Administrator has advanced such payment pursuant to the terms of its
Servicing Agreement or the Underlying Agreement, as applicable. Prior to
commencement of foreclosure proceedings, PMI is obligated to make such
payments for no longer than four months after and including the month during
which such default occurred. As long as foreclosure proceedings have been
commenced prior to the expiration of such four month period, PMI is obligated
to continue to make such advances, but only so long as foreclosure proceedings
are being diligently pursued and only until such foreclosure proceedings have
been completed or title has been otherwise obtained by the insured and a claim
for loss has been (or should have been) filed with PMI. The insured will be
required to reimburse PMI for amounts paid pursuant to the Advance Claim
Payment Endorsement from, among other sources, delinquent payments received
with respect to the related defaulted loan by the insured from the Mortgagor
or from other sources specified in the Advance Claim Payment Endorsement. Any
unreimbursed payments received by the insured pursuant to the Advance Claim
Payment Endorsement will be offset against any claim payment with respect to
the Pool Insured Loan or, if no benefits are due, will be required to be
reimbursed in full. Advance payments under the Advance Claim Payment
Endorsement will not be applied to, or be considered by a Mortgagor or by the
insured to be applied to, the payment of a defaulted Pool Insured Loan.
Since the Mortgage Pool Insurance Policy will require that the Mortgaged
Property subject to a defaulted Pool Insured Loan be restored to its original
condition (normal wear and tear excepted) prior to claiming against the Pool
Insurer, such policy will not provide coverage against hazard losses or a
deduction will be made for restoration costs in connection with a hazard loss
before payment of a claim under the Mortgage Pool Insurance Policy. The
Standard Hazard Insurance Policies covering the Pool Insured Loans typically
exclude from coverage (or contain a deductible for) a number of causes and,
even when the damage is covered, may afford recoveries which are significantly
less than full replacement cost of such losses. In addition, as summarized
above, satisfaction of certain other conditions precedent is required before
claims will be paid under the Mortgage Pool Insurance Policy. AS A RESULT,
CERTAIN RISKS WITH RESPECT TO THE UNDERLYING MORTGAGE LOANS WILL NOT BE
INSURED AGAINST AND WILL THEREFORE BE BORNE BY THE RELATED CERTIFICATEHOLDERS
TO THE EXTENT SUCH HAZARD LOSSES ARE NOT COVERED BY AMOUNTS ON DEPOSIT IN THE
SPECIAL HAZARD ACCOUNT (INCLUDING PROCEEDS UNDER THE SPECIAL HAZARD INSURANCE
POLICY) OR THE BANKRUPTCY ACCOUNT, AS DESCRIBED HEREAFTER, OR AMOUNTS
AVAILABLE IN THE CERTIFICATE ACCOUNT.
CERTAIN INFORMATION WITH RESPECT TO THE POOL INSURED LOANS
As described above, the Mortgage Pool Insurance Policy provides coverage for
the Other Mortgage Loans in addition to the Underlying Mortgage Loans
evidenced by the Underlying Certificates. Such Other Mortgage Loans (which
constitute first lien residential mortgage loans) are expected to have an
aggregate principal balance, as of the Cut-off Date, of approximately
$163,946,144.42.
S-47
<PAGE>
The following tables set forth certain information concerning delinquency
experience with respect to the Underlying Mortgage Loans and the Pool Insured
Loans.
<TABLE>
<CAPTION>
AS OF MAY 31, 1996
---------------------------------------
UNDERLYING ALL POOL
MORTGAGE LOANS INSURED LOANS
------------------- -------------------
DOLLAR DOLLAR
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
MORTGAGE MORTGAGE MORTGAGE MORTGAGE
LOANS LOANS LOANS LOANS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
30-59 days delinquent................ 4.28% 4.60% 4.04% 4.02%
60-89 days delinquent................ 1.18 1.21 1.19 1.18
90+ days delinquent.................. 1.48 1.56 1.35 1.36
Foreclosures pending................. 1.62 1.69 1.90 1.92
---- ---- ---- ----
Total.............................. 8.56% 9.06% 8.48% 8.48%
==== ==== ==== ====
Foreclosed Loans (1)................. 2.66% 2.72% 3.41% 3.63%
</TABLE>
- --------
(1) For purposes of this table, Foreclosed Loans includes the principal
balance of mortgage loans secured by mortgaged properties, the title to
which had been acquired and which had not been liquidated by the end of
the period indicated.
THE FINANCIAL GUARANTY INSURANCE POLICY
Description of Financial Guaranty Insurance Policy. The following summary of
the provisions of the Financial Guaranty Insurance Policy does not purport to
be complete and is qualified in its entirety by reference to the Financial
Guaranty Insurance Policy, a copy of which may be obtained from the Underlying
Trustee.
Simultaneously with the issuance of the Mortgage Pool Insurance Policy, FSA
delivered a Financial Guaranty Insurance Policy to the Underlying Trustee for
the benefit of the holders of certificates (the "Guaranteed Underlying
Certificates") which evidence interests in certain, but not all, of the Pool
Insured Loans. Underlying Certificates having an aggregate scheduled principal
balance as of the Cut-off Date of approximately $66,168,895.32 are the subject
of coverage provided by the Financial Guaranty Insurance Policy. THE FINANCIAL
GUARANTY INSURANCE POLICY PROVIDES CERTAIN INSURANCE COVERAGE WITH RESPECT TO
THE GUARANTEED UNDERLYING CERTIFICATES AS SPECIFIED HEREAFTER; HOWEVER, THE
FINANCIAL GUARANTY INSURANCE POLICY DOES NOT DIRECTLY INSURE THE CERTIFICATES.
Pursuant to the terms of the Financial Guaranty Insurance Policy, FSA has
irrevocably guaranteed to the Underlying Trustee for the benefit of the
holders of the Guaranteed Underlying Certificates, Guaranteed Distributions
(as defined below) relating to the Guaranteed Underlying Certificates. The
maximum amount of Guaranteed Distributions payable under the Financial
Guaranty Insurance Policy will not exceed the maximum aggregate amount set
forth therein, which amount is equal to approximately 7.2% of the aggregate
principal balance of the Pool Insured Loans which are subject to coverage
under the Financial Guaranty Insurance Policy as of the date such mortgage
loans became subject to the coverage provided by such policy.
"Guaranteed Distributions" means, (a) with respect to each Underlying
Distribution Date for the Guaranteed Underlying Certificates, the aggregate
amount of principal and interest due and payable to the holder of the
Guaranteed Underlying Certificates on such Underlying Distribution Date and
(b) certain expenses payable pursuant to the Underlying Agreement, in each
case to the extent that the amount required to pay such distributions and
expenses equals moneys which PMI is obligated to pay pursuant to one of more
appropriately completed valid claims made under the Mortgage Pool Insurance
Policy but which claims have not been paid by PMI in accordance with the terms
of the Mortgage Pool Insurance Policy. FSA will be obligated to pay a claim
made under the Financial Guaranty Insurance Policy only if certain conditions
are satisfied, including: (i) PMI has defaulted in its obligation to pay a
valid claim rightfully and appropriately made under the Mortgage Pool
Insurance Policy (including any claim rightfully and appropriately made under
the applicable Fraud Waiver Letter) and (ii) the sum of (A) all claims made
under the Financial Guaranty Insurance Policy previously paid by
S-48
<PAGE>
FSA and (B) all appropriately made claims then due and payable under the
Financial Guaranty Policy in accordance with its terms do not equal or exceed
the maximum aggregate amount of claims payable under the Financial Guaranty
Insurance Policy.
Pursuant to the Financial Guaranty Insurance Policy, FSA will be subrogated
to the rights of each holder of Guaranteed Underlying Certificates (as insured
under the Mortgage Pool Insurance Policy) to receive distributions with
respect to each Guaranteed Underlying Certificate held by such holder to the
extent of any payments made by FSA under the Financial Guaranty Insurance
Policy with respect to the Guaranteed Underlying Certificates.
FSA's obligations under the Financial Guaranty Insurance Policy in respect
of the related Guaranteed Distributions shall be discharged to the extent
funds are transferred to the Underlying Trustee as provided in the Financial
Guaranty Insurance Policy, whether or not such funds are properly applied by
the Underlying Trustee.
Claims under the Financial Guaranty Insurance Policy will rank equally with
other unsecured and unsubordinated obligations of FSA ranking not less than
pari passu with other unsecured and unsubordinated indebtedness of FSA for
borrowed money. Claims against FSA under the Financial Guaranty Insurance
Policy and claims against FSA under each other financial guaranty insurance
policy issued by FSA constitute pari passu claims against the general assets
of FSA. The terms of the Financial Guaranty Insurance Policy cannot be
modified or altered by any other agreement or instrument. The Financial
Guaranty Insurance Policy may not be cancelled or revoked prior to the
expiration of its term, which term will expire at the earlier of (i) payment
in full of the related Guaranteed Underlying Certificates, (ii) the date on
which claims have been paid under the Financial Guaranty Insurance Policy in
an amount equal to the maximum aggregate amount of claims payable thereunder,
(iii) the date on which coverage under the related Mortgage Pool Insurance
Policy has been reduced to zero, and (iv) the date on which the Mortgage Pool
Insurance Policy is terminated in accordance with its terms.
The Financial Guaranty Insurance Policy is not covered by the
Property/Casualty Insurance Security Fund specified in Article 76 of the New
York Insurance Law. The Financial Guaranty Insurance Policy is governed by the
laws of the State of New York.
Financial Security Assurance Inc. The information set forth below concerning
FSA has been provided by FSA. Neither the Company nor the Underwriter makes
any representation as to the accuracy or completeness of such information.
FSA is a monoline insurance company incorporated in 1984 under the laws of
the State of New York. FSA is licensed to engage in financial guaranty
insurance business in all 50 states, the District of Columbia and Puerto Rico.
FSA and its subsidiaries are engaged in the business of writing financial
guaranty insurance, principally in respect of securities offered in domestic
and foreign markets. In general, financial guaranty insurance consists of the
issuance of a guaranty of scheduled payments of an issuer's securities--
thereby enhancing the credit rating of those securities--in consideration for
the payment of a premium to the insurer. FSA and its subsidiaries principally
insure asset-backed, collateralized and municipal securities. Asset-backed
securities are generally supported by residential mortgage loans, consumer or
trade receivables, securities or other assets having an ascertainable cash
flow or market value. Collateralized securities include public utility first
mortgage bonds and sale/leaseback obligation bonds. Municipal securities
consist largely of general obligation bonds, special revenue bonds and other
special obligations of state and local governments. FSA insures both newly
issued securities sold in the primary market and outstanding securities sold
in the secondary market that satisfy FSA's underwriting criteria.
FSA is a wholly owned subsidiary of Financial Security Assurance Holdings
Ltd. ("Holdings"), a New York Stock Exchange listed company. Major
shareholders of Holding's include Fund American Enterprises Holdings, Inc., U
S West Capital Corporation and The Tokio Marine and Fire Insurance Co., Ltd.
No shareholder of Holdings is obligated to pay any debt of FSA or any claim
under any insurance policy issued by FSA or to make any additional
contribution to the capital of FSA.
The principal executive offices of FSA are located at 350 Park Avenue, New
York, New York 10022, and its telephone number at that location is (212) 826-
0100.
S-49
<PAGE>
Pursuant to an intercompany agreement, liabilities on financial guaranty
insurance written or reinsured from third parties by FSA or any of its
domestic operating insurance company subsidiaries are reinsured among such
companies on an agreed-upon percentage substantially proportional to their
respective capital, surplus and reserves, subject to applicable statutory risk
limitations. In addition, FSA reinsures a portion of its liabilities under
certain of its financial guaranty insurance policies with other reinsurers
under various quota share treaties and on a transaction-by-transaction basis.
Such reinsurance is utilized by FSA as a risk management device and to comply
with certain statutory and rating agency requirements; it does not alter or
limit FSA's obligations under any financial guaranty insurance policy.
FSA's claims-paying ability is rated "Aaa" by Moody's and "AAA" by S&P,
Nippon Investors Service Inc. and Standard & Poor's (Australia) Pty. Ltd. Such
ratings reflect only the views of the respective rating agencies, are not
recommendations to buy, sell or hold securities and are subject to revision or
withdrawal at any time by such rating agencies.
The following table sets forth the capitalization of FSA and its wholly-
owned subsidiaries on the basis of generally accepted accounting principles as
of March 31, 1996 (in thousands):
<TABLE>
<CAPTION>
MARCH 31,
1996
-----------
(UNAUDITED)
<S> <C>
Unearned Premium Reserve (net of prepaid reinsurance premiums)..... $ 340,226
Shareholder's Equity:
Common Stock..................................................... 15,000
Additional Paid-In Capital....................................... 681,470
Unrealized Loss on Investments (net of deferred income taxes).... (737)
Accumulated Earnings............................................. 83,444
----------
Total Shareholder's Equity..................................... 779,177
----------
Total Unearned Premium Reserve and Shareholder's Equity........ $1,119,403
==========
</TABLE>
Copies of the statutory quarterly and annual statements filed with the State
of New York Insurance Department by FSA are available upon request to the
State of New York Insurance Department.
FSA is licensed and subject to regulation as a financial guaranty insurance
corporation under the laws of the State of New York, its state of domicile. In
addition, FSA and its insurance subsidiaries are subject to regulation by
insurance laws of the various other jurisdictions in which they are licensed
to do business. As a financial guaranty insurance corporation licensed to do
business in the State of New York, FSA is subject to Article 69 of the New
York Insurance Law which, among other things, limits the business of each such
insurer to financial guaranty insurance and related lines, requires that each
such insurer maintain a minimum surplus to policyholders, establishes
contingency, loss and unearned premium reserve requirements for each such
insurer, and limits the size of individual transactions ("single risks") and
the volume of transactions ("aggregate risks") that may be underwritten by
each such insurer. Other provisions of the New York Insurance Law, applicable
to non-life insurance companies such as FSA, regulate, among other things,
permitted investments, payment of dividends, transactions with affiliates,
mergers, consolidations, acquisitions or sales of assets and incurrence of
liability for borrowings.
PRIMARY MORTGAGE INSURANCE POLICIES
For information regarding the Primary Mortgage Insurance Policies, see
"Servicing of the Mortgage Loans--Primary Mortgage Insurance Policies" in the
Prospectus.
STANDARD HAZARD INSURANCE POLICIES
For information regarding the Standard Hazard Insurance Policies, see
"Servicing of the Mortgage Loans --Standard Hazard Insurance Policies" in the
Prospectus.
S-50
<PAGE>
THE SPECIAL HAZARD ACCOUNT
The Underlying Certificates will have an undivided interest in a reserve
account providing coverage with respect to a defined level of special hazard-
related losses (the "Special Hazard Account"). The Special Hazard Account has
been established by the Underlying Trustee at the direction of the Company and
is funded by Permitted Instruments and the Special Hazard Insurance Policy.
The Special Hazard Account is a joint account available, on an undivided
basis, up to a specified claim ceiling for each participating program of pass-
through certificates (each, a "Program") for which CCC or the Company is the
sponsor, as described hereafter (each, a "Special Hazard Claim Ceiling"). The
only Program currently participating in the Special Hazard Account (including
the Special Hazard Insurance Policy) is the Program for the Series 1993PA
Mortgage Pass-Through Certificates (the "Series 1993PA Certificates", which
evidence the Pool Insured Loans, and which include the Underlying
Certificates). Currently, the Company serves as sponsor with respect to the
Underlying Certificates. In the future, other Programs of CCC's or the
Company's pass-through certificates may be permitted to participate in the
Special Hazard Account. The Underlying Mortgage Loans, the Other Mortgage
Loans and the Additional Mortgage Loans which participate in the Special
Hazard Account are referred to collectively as "Account Loans. "
The amount of assets or special hazard insurance coverage required to be
available in the Special Hazard Account (the "Requisite Amount of the Special
Hazard Account") is expected to be approximately $5,425,296.27 as of the Cut-
off Date. Claims aggregating approximately $536,966.33 have been paid from
amounts on deposit in the Special Hazard Account prior to the Cut-off Date.
The "Requisite Amount of the Special Hazard Account" as of the first day of
the month preceding the month in which a Distribution Date occurs (each a "Due
Date") will be an amount equal to the greatest of: (i) one percent (1.0%) of
the aggregate outstanding principal amount of the Account Loans as of such Due
Date, (ii) an amount equal to the greatest aggregate outstanding principal
amount of Account Loans secured by mortgaged properties located in any one
California postal zip code area as of such Due Date, and (iii) two times (2X)
the outstanding principal amount of the largest Account Loan outstanding as of
such Due Date, in each case reduced by the aggregate claims paid in respect of
all special hazard-related losses experienced to such Due Date with respect to
all Account Loans. The formula for the Requisite Amount of the Special Hazard
Account may be changed and, as a result, the Requisite Amount of the Special
Hazard Account on such date may be reduced; provided, however, no such change
shall be made if it will result in the downgrading of the then current ratings
of the Certificates.
The Series 1993PA Certificates (which include the Underlying Certificates)
have an undivided interest in the assets, if any, at any time on deposit in
the Special Hazard Account (including the Special Hazard Insurance Policy) up
to an aggregate amount equal to the "Program 1993PA Special Hazard Claim
Ceiling," which, as of the Cut-off Date, because there are no Other Program
Mortgage Loans (as defined below), is equal to the Requisite Amount of the
Special Hazard Account. Subsequently, the Program 1993PA Special Hazard Claim
Ceiling shall be determined by taking the amount determined through
application, as of the most recent Due Date, of the formula described in the
preceding paragraph for the calculation of the Requisite Amount of the Special
Hazard Account (determined with respect to the Pool Insured Loans only) and
then reducing such amount by the aggregate claims paid in respect of special
hazard-related losses experienced through the date of such determination with
respect to all Pool Insured Loans. Assets in the Special Hazard Account
(including the Special Hazard Insurance Policy), up to the Program 1993PA
Special Hazard Claim Ceiling, are available to cover special hazard-related
losses, on an undivided basis, as they are realized chronologically on all
Pool Insured Loans. Additionally, assets on deposit in the Special Hazard
Account are available to cover special hazard-related losses, on an undivided
basis, as they are realized chronologically on all mortgage loans evidenced by
pass-through certificates issued under each other Program of CCC's or the
Company's pass-through certificates which may participate in the Special
Hazard Account from time to time (collectively, the "Other Program Mortgage
Loans") up to the Special Hazard Claim Ceiling for the applicable Program. No
Underlying Certificate has any specified fractional or proportionate interest
in the funds in the Special Hazard Account. Consequently, if special hazard
losses are disproportionately greater on the Other Program Mortgage Loans,
coverage may not be available for the Pool Insured Loans, including the
Underlying Mortgage Loans.
S-51
<PAGE>
If additional series of certificates issued under the 1993PA Mortgage Pass-
Through Program are permitted to participate in the Special Hazard Account,
the Requisite Amount of the Special Hazard Account and/or the Program 1993PA
Special Hazard Claim Ceiling will be adjusted to the extent required by S&P.
Similarly, the Requisite Amount of the Special Hazard Account will be adjusted
to the extent required by S&P in the event of the participation in the Special
Hazard Account by other Programs of CCC's or the Company's pass-through
certificates, although in such case there would not be a commensurate
adjustment in the Program 1993PA Special Hazard Claim Ceiling. Additionally,
if the mortgage loans pooled to form all or a portion of the certificates
issued under any Program participating in the Special Hazard Account are
repurchased, as permitted under the applicable pooling and administration
agreement, the Requisite Amount of the Special Hazard Account may be reduced
to the extent permitted by S&P.
As described below, the Company has obtained a Special Hazard Insurance
Policy from Aetna (as defined herein) covering certain special hazard-related
losses in excess of the Reserved Amount (described hereafter). See "--Special
Hazard Insurance Policy". The "Reserved Amount" is calculated by taking 20% of
the Requisite Amount of the Special Hazard Account prior to deduction of
losses (but not less than $1,000,000), and then decreasing such amount by all
claims paid in respect of Special Hazard Losses following the date the Special
Hazard Policy was obtained, until the Reserved Amount is reduced to zero. CCC
has deposited cash in the Special Hazard Account equal to the applicable
Reserved Amount as of the last date any mortgage loans were made subject to
coverage thereunder. Neither the funds on deposit in the Special Hazard
Account nor the coverage under the Special Hazard Policy will be available to
cover any losses or shortfalls other than special hazard-related losses.
The trustee for the applicable Program shall withdraw from funds on deposit
in the Special Hazard Account and deposit into the applicable certificate
account, in accordance with the order of priority described below, any amount
necessary to make up a shortfall in the required monthly payments on any pass-
through certificate evidencing an Account Loan to the extent that any such
shortfall is attributable to special hazard losses. Additionally, the
applicable trustee shall withdraw from funds on deposit in the Special Hazard
Account any amount necessary to reimburse the applicable servicer or the
applicable administrator for advances of principal, interest and expenses made
by such servicer or the applicable administrator, which are not subsequently
recoverable due to special hazard losses. Following the exhaustion of
available funds on deposit in the Special Hazard Account (other than insurance
coverage), the applicable trustee shall notify the applicable administrator to
make claims under the Special Hazard Insurance Policy to cover any additional
special hazard losses up to the aggregate loss limit defined in the Special
Hazard Insurance Policy and subject to the applicable claim ceiling for the
related Program. Any proceeds received as a result of claims filed under the
Special Hazard Insurance Policy will also be available for the reimbursement
of the applicable servicer or the applicable administrator, as applicable,
prior to the deposit of any remaining proceeds into the applicable certificate
account, all in accordance with the applicable pooling and administration
agreement.
Gains from investment of monies deposited in the Special Hazard Account and
any excess funds over the Reserved Amount of the Special Hazard Account shall
be paid to the Company or CCC.
ANY HAZARD-RELATED LOSSES AFFECTING THE UNDERLYING MORTGAGE LOANS IN AN
UNDERLYING MORTGAGE LOAN GROUP NOT COVERED BY EITHER THE STANDARD HAZARD
INSURANCE POLICIES OR ASSETS ON DEPOSIT IN THE SPECIAL HAZARD ACCOUNT,
INCLUDING THE SPECIAL HAZARD INSURANCE POLICY, WILL NOT BE INSURED AGAINST AND
MAY THEREFORE BE BORNE BY THE RELATED CERTIFICATEHOLDERS. In addition, once
the aggregate draws made by the Underlying Trustee against the Special Hazard
Account (including the Special Hazard Insurance Policy) for the benefit of
holders of the 1993PA Certificates equals the then applicable Program 1993PA
Special Hazard Claim Ceiling, the Underlying Certificates may have to bear
future special hazard-related losses, even though assets remain in the Special
Hazard Account for the benefit of certificateholders under other Programs.
Conversely, there may be no assets available in the Special Hazard Account
even though the Program 1993PA Special Hazard Claim Ceiling has not been
reached, as a result of payments up to or approaching the respective Special
Hazard Claim Ceilings of any other Programs which may in the future
participate in the Special Hazard Account. This is
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due to the fact that the Requisite Amount of the Special Hazard Account may in
the future be less than the sum of the respective Special Hazard Claim
Ceilings for all Programs participating in the Special Hazard Account.
SPECIAL HAZARD INSURANCE POLICY
The Company has obtained a Special Hazard Insurance Policy (the "Special
Hazard Insurance Policy") covering the Underlying Mortgage Loans evidenced by
the Underlying Certificates and the Other Mortgage Loans. The Underlying
Trustee will pay the premiums for such policy from monies deducted on a
monthly basis from principal and interest received on the mortgage loans
participating in the Special Hazard Account, unless coverage under the Special
Hazard Insurance Policy has been exhausted through the payment of claims or
alternative coverage has been provided. The Underlying Administrator will
prepare, file, and supervise the processing of claims under the Special Hazard
Insurance Policy and all related endorsements thereto. The Underlying Trustee
will supervise the filing of such claims by the Underlying Administrator.
The Special Hazard Insurance Policy will be issued by Aetna Casualty and
Surety Company, a property and casualty insurance company organized under the
laws of the State of Connecticut ("Aetna"). As of December 31, 1995, Aetna
reported, on a statutory accounting basis, total assets of $10,488,753,934,
policyholders' surplus of $2,165,583,124, loss reserves and loss adjustment
expense reserves aggregating $6,846,241,356 and unearned premium reserves
(inclusive of accrued retrospective premiums of 205,260,437) of $754,605,401.
The claims paying ability of Aetna is rated "A+" by S&P.
In April of 1996, The Travelers Group acquired the property/casualty
operations of Aetna Life and Casualty Company, the parent company of Aetna,
for a total consideration of approximately $4 billion. Aetna was included in
this acquisition.
The information set forth above concerning Aetna has been supplied by Aetna.
The Company makes no representation as to the accuracy or completeness of such
information.
The following summary describes certain provisions of the Special Hazard
Insurance Policy. However, this summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the actual
provisions of the Special Hazard Insurance Policy.
The Special Hazard Insurance Policy will insure against all risks of direct
physical loss or damage which occur to the Mortgaged Properties from any
cause, except as excluded in the policy (and summarized below), and which
either (i) occur prior to the Underlying Trustee's acquiring title because of
a default by a Mortgagor; or (ii) occur while the Underlying Trustee has title
that was acquired because of the default of a Mortgagor.
The Special Hazard Insurance Policy will not insure against loss or damage
caused by or resulting from:
(i) wear and tear, deterioration, rust or corrosion, mold, wet or dry
rot, inherent vice or latent defect, animals, birds, vermin, insects;
(ii) settling, subsidence, cracking, shrinkage, bulging or expansion of
pavements, foundations, walls, floors, roofs or ceilings;
(iii) errors in design, faulty workmanship or faulty materials, unless
the collapse of the property or part thereof ensues and then only for the
ensuing loss;
(iv) nuclear or chemical reaction or nuclear radiation or radioactive or
chemical contamination, all whether controlled or uncontrolled, and whether
such loss be direct or indirect, proximate or remote or be in whole or part
cause by, contributed to or aggravated by a peril insured against in the
Special Hazard Insurance Policy;
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(v) hostile or warlike action in time of peace or war, including action
in hindering, combating or defending against an actual impending or
expected attack;
(a) by any government or sovereign power, de jure or de facto, or by
any authority maintaining or using military, naval or air forces;
(b) by military, naval or air forces; or
(c) by an agent or any such government, power, authority or forces;
(vi) any weapon of war employing atomic fission or radioactive force
whether in time of peace or war; and
(vii) insurrection, rebellion, revolution, civil war, usurped power or
action taken by governmental authority in hindering, combating or defending
against such an occurrence, seizure or destruction under quarantine or
customs regulations, confiscation by order or any government or public
authority, or risks of contraband or illegal transportation or trade.
The Special Hazard Insurance Policy will provide that no claim may be paid
unless hazard and, if applicable, flood insurance on the property securing the
mortgage loan has been kept in force and other protection and preservation
expenses have been paid by the related Servicer. Aggregate claims under the
Special Hazard Insurance Policy will be limited to 80% of the Requisite Amount
of the Special Hazard Account. No amounts will be paid under the Special
Hazard Insurance Policy until the Reserved Amount has been reduced to zero.
Subject to the foregoing limitations and the exhaustion of the Reserved
Amount, the Special Hazard Insurance Policy provides that, if there has been
damage to property securing a defaulted mortgage loan (title to which has been
acquired by the insured) and to the extent such damage is not covered by the
Standard Hazard Insurance Policy or flood insurance policy, if any, maintained
by the mortgagor or the related Servicer, Aetna will pay the lesser of (i) the
cost of repair or replacement of such property or (ii) upon transfer of the
property to Aetna, the unpaid principal balance of such mortgage loan at the
time of acquisition of such property by foreclosure or deed in lieu of
foreclosure, plus accrued interest at the mortgage interest rate to the date
of claim settlement and certain expenses incurred by the related Servicer with
respect to such property. In either case, the amount paid by Aetna in respect
of any claim will be reduced by any amounts which the related Servicer has
collected or recovered from any other source in respect of such claim. As
claims are paid thereunder, the amount of further coverage under the Special
Hazard Insurance Policy will be reduced by the sum of the amounts paid under
clauses (i) and (ii) of this paragraph, less any net proceeds Aetna receives
upon the disposal of any mortgaged property acquired under clause (ii) of this
paragraph.
REINSURANCE AGREEMENT
The claims-paying ability of Aetna is rated "A+" by S&P. In order to obtain
the desired ratings on the Certificates, Aetna has entered into a Reinsurance
Agreement (the "Reinsurance Agreement") with Capital Mortgage Reinsurance
Company (Bermuda) Ltd. ("Capital Mortgage"), an insurance company organized
under the laws of Bermuda. As of December 31, 1995, Capital Mortgage reported,
on a statutory accounting basis, total net admitted assets of $87,650,271,
policyholder's surplus (inclusive of contingency reserves of $1,160,663) of
$58,488,947, loss reserves and loss adjustment expense reserves aggregating
$766,575 and unearned premium reserves of $28,445,301. As of March 31, 1996,
Capital Mortgage reported, on a statutory accounting basis, total net admitted
assets of $116,120,432, policyholder's surplus (inclusive of contingency
reserves of $1,521,137) of $80,900,970, loss reserves and loss adjustment
expense reserves aggregating $0 and unearned premium reserves of $30,947,022.
The claims-paying ability of Capital Mortgage is rated "AA" by S&P.
The information set forth above concerning Capital Mortgage has been
supplied by Capital Mortgage. The Company makes no representations as to the
accuracy or completeness of such information.
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The following summary generally describes the provisions of the Reinsurance
Agreement. However, this summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to, the actual
provisions of the Reinsurance Agreement.
Pursuant to the Reinsurance Agreement, Capital Mortgage will provide
reinsurance coverage with respect to 100% of all losses insured by Aetna under
the Special Hazard Policy up to an aggregate amount, on any given date, equal
to the lesser of (i) the limit of liability under the Special Hazard Policy as
of such date, and (ii) an amount equal to the greater of: (1) one percent (1%)
of the sum of outstanding principal balances of all of the mortgage loans
covered under the Special Hazard Policy, (2) twice the outstanding principal
balance of the largest such mortgage loan, and (3) the sum of all of such
Mortgage Loans secured by mortgaged properties located in the California zip
code having the highest concentration of properties securing mortgage loans
covered under the Special Hazard Policy; provided that Capital Mortgage will
be obligated to pay claims under the Reinsurance Agreement only if and to the
extent that (i) Aetna fails to make timely payment of a loss due under the
Special Hazard Policy and (ii) at the time of such failure, Aetna is
insolvent, is in liquidation or rehabilitation or has had a receiver appointed
under the laws of its domicile.
THE BANKRUPTCY ACCOUNT
The holders of the Underlying Certificates have an undivided interest in a
reserve account providing coverage with respect to a defined level of
bankruptcy-related losses (the "Bankruptcy Account"). The Bankruptcy Account
has been established by the Underlying Trustee at the direction of the
Company. The Bankruptcy Account is a joint account available, on an undivided
basis up to a specified claim ceiling for each participating Program, as
described hereafter (each, a "Bankruptcy Claim Ceiling"). The only Program
currently participating in the Bankruptcy Account is the 1993PA Mortgage Pass-
Through Program (evidencing the Pool Insured Loans). In the future, other
programs of CCC's or the Company's pass-through certificates may be permitted
to participate in the Bankruptcy Account.
The amount of assets required to be available in the Bankruptcy Account (the
"Requisite Amount of the Bankruptcy Account") is expected to be $121,041.93 as
of the Cut-off Date. No claims have been paid from amounts on deposit in the
Bankruptcy Account prior to the Cut-off Date. The "Requisite Amount of the
Bankruptcy Account" as of any Due Date will be an amount equal to the greater
of: (A) if and only if the aggregate outstanding principal balance, as of such
Due Date, of all Account Loans and Other Program Mortgage Loans secured by
Mortgaged Properties which are not the principal residence of the respective
Mortgagor ("second homes and investor properties") having a loan-to-value
ratio equal to or greater than 80% equals or exceeds 10% of the aggregate
outstanding principal balance of the Account Loans and Other Program Mortgage
Loans as of such Due Date, the sum of (i) 0.25% of the outstanding principal
balance, as of such Due Date, of all Account Loans and Other Program Mortgage
Loans secured by second homes and investor properties having a loan-to-value
ratio greater than 80% and less than or equal to 90%; (ii) 0.50% of the
outstanding principal balance, as of such Due Date, of all Account Loans and
Other Program Mortgage Loans secured by second homes and investor properties
having a loan-to-value ratio greater than 90% and less than or equal to 95%;
and (iii) 0.75% of the outstanding principal balance, as of such Due Date, of
all Account Loans and Other Program Mortgage Loans secured by second homes and
investor properties having a loan-to-value ratio in excess of 95%, reduced by
the aggregate claims paid in respect of Bankruptcy Losses experienced to such
Due Date with respect to all Account Loans and Other Program Mortgage Loans;
or (B) the greater of: (i) $100,000 or (ii) .06% (6 basis points) multiplied
by the outstanding principal balance, as of such Due Date, of all Account
Loans having a Loan-to-Value Ratio greater than 75%, in each case reduced by
the aggregate claims paid in respect of all bankruptcy-related losses
experienced to such Due Date with respect to all Account Loans. The formula
for Requisite Amount of the Bankruptcy Account may be changed and as a result
the Requisite Amount of the Bankruptcy Account on such date may be reduced;
provided, however, no such change shall be made if it will result in the
downgrading of the Certificates.
The 1993PA Certificates (which include the Underlying Certificates) shall
have an undivided interest in the funds, if any, at any time on deposit in the
Bankruptcy Account up to an aggregate amount equal to the "Program 1993PA
Bankruptcy Claim Ceiling," which, as of the Cut-off Date, because there are no
Other
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Program Mortgage Loans, is equal to the Requisite Amount of the Bankruptcy
Account. Subsequently, the Program 1993PA Bankruptcy Claim Ceiling shall be
determined by reducing the amount determined through application, as of the
most recent Due Date, of the formula described in the preceding paragraph for
the calculation of the Requisite Amount of the Bankruptcy Account (determined
with respect to the Pool Insured Loans only) by the aggregate claims paid in
respect of bankruptcy-related losses experienced through such Due Date with
respect to all Pool Insured Loans. Funds in the Bankruptcy Account up to the
Program 1993PA Bankruptcy Claim Ceiling are available to cover bankruptcy-
related losses, on an undivided basis, as they are realized chronologically on
all Pool Insured Loans. Additionally, funds on deposit in the Bankruptcy
Account are available to cover bankruptcy-related losses with respect to Other
Program Mortgage Loans up to the Bankruptcy Claim Ceiling for the applicable
Program. No Underlying Certificate has any specified fractional or
proportionate interest in the funds in the Bankruptcy Account. Consequently,
if bankruptcy losses are disproportionately greater on the Other Program
Mortgage Loans, the coverage may not be available for the Pool Insured Loans,
including the Underlying Mortgage Loans.
If additional series of certificates issued under the 1993PA Mortgage Pass-
Through Program are permitted to participate in the Bankruptcy Account, the
Requisite Amount of the Bankruptcy Account and/or the program 1993PA
Bankruptcy Claim Ceiling will be adjusted to the extent required by S&P.
Similarly, the Requisite Amount of the Bankruptcy Account will be increased to
the extent required by S&P in the event of the participation in the account by
other Programs of CCC's or the Company's pass-through certificates, although
in such case there would not be a commensurate increase in the Program 1993PA
Bankruptcy Claim Ceiling. Additionally, if the mortgage loans pooled to form
all or a portion of the certificates issued under any Program participating in
the Bankruptcy Account are repurchased, as permitted under the applicable
pooling and administration agreement, the Requisite Amount of the Bankruptcy
Account may be reduced to the extent permitted by S&P.
The trustee for the applicable Program shall withdraw funds on deposit in
the Bankruptcy Account and deposit into the applicable certificate account any
amount necessary to make up a shortfall in the required monthly payments on
any certificate evidencing an Account Loan to the extent that any such
shortfall is attributable to bankruptcy-related losses. Additionally, the
applicable trustee shall withdraw from available funds on deposit in the
Bankruptcy Account, any amount necessary to reimburse the applicable servicer
or the applicable administrator for advances of principal, interest and
expenses made by such servicer or the applicable administrator which are not
subsequently recoverable due to bankruptcy-related losses.
In the event that any amounts withdrawn from the Bankruptcy Account are
subsequently recovered by advances from the applicable servicer or from
insurance proceeds, such amounts shall be deposited to replenish the
Bankruptcy Account. Gains from investments of monies deposited into the
Bankruptcy Account and any excess funds over the Requisite Amount of the
Bankruptcy Account shall be paid to the Company or CCC.
Any bankruptcy-related losses affecting the Underlying Mortgage Loans not
covered by funds on deposit in the Bankruptcy Account will not be insured
against and may, therefore, be borne by Certificateholders. In addition, once
the aggregate draws made by the Underlying Trustee against the Bankruptcy
Account for the benefit of holders of 1993PA Certificates equal the then
applicable Program 1993PA Bankruptcy Claim Ceiling, the Certificates may have
to bear future bankruptcy-related losses, even though funds remain in the
Bankruptcy Account for the benefit of certificateholders under other Programs
then participating in the Bankruptcy Account. Conversely, there may be no
funds available in the Bankruptcy Account even though the Program 1993PA
Bankruptcy Claim Ceiling has not been reached, as a result of payments up to
or approaching the respective Bankruptcy Claim Ceilings of any other Programs
which may in the future participate in the Bankruptcy Account. This is due to
the fact that the Requisite Amount of the Bankruptcy Account may in the future
be less than the sum of the respective Bankruptcy Claim Ceilings for all
Programs participating in the Bankruptcy Account.
TITLE INSURANCE POLICIES
For information regarding the Title Insurance Policies, see "Servicing of
the Mortgage Loans--Title Insurance Policies" in the Prospectus.
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OTHER CREDIT ENHANCEMENTS
Notwithstanding the foregoing, with respect to any loss that is not covered
by the Mortgage Pool Insurance Policy, any Primary Mortgage Insurance Policy,
or amounts available in the Special Hazard Account (including proceeds from
the Special Hazard Policy) or the Bankruptcy Account (each, a "Non-Covered
Loss"), each of the Company, CMC, as Underlying Administrator, and the
Underlying Trustee have agreed that the Underlying Administrator will
subordinate its fees under the Underlying Agreement to the extent necessary to
make up a shortfall in the aggregate amount distributable to each Underlying
Certificateholder on each Distribution Date to the extent that such shortfall
results from a Non-Covered Loss. In the event that the Underlying
Administrator's fee is insufficient to make such Non-Covered Loss whole on a
Distribution Date, the Underlying Administrator's future fees under the
Underlying Agreement will be subordinate to payments on the Underlying
Certificates until such Non-Covered Loss is made whole. Notwithstanding the
foregoing, the aggregate amount required to be applied to Non-Covered Losses
from the subordination of the Underlying Administrator's fee shall be limited
to an amount that is equal to $834,547, less an amount equal to the amount of
any Non-Covered Losses which have been made whole from (i) assets on deposit
in any bankruptcy account with respect to a series of CCC's or the Company's
portfolio pass-through certificates or (ii) the subordination of the
Underlying Administrator's fee with respect to any series of CCC's or the
Company's portfolio pass-through certificates, including Series 1993PA.
In addition, in the event that funds on deposit in the Bankruptcy Account
are depleted as a result of the coverage of Non-Covered Losses as described
above, the Administrator will provide coverage for any further Bankruptcy
Losses by subordinating its right to receive its fee, but only up to an amount
equal to the Requisite Amount of the Bankruptcy Account as of September 1,
1994, less an amount equal to all withdrawals from the Bankruptcy Account in
respect of bankruptcy-related losses from September 1, 1994 to the date of
determination.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes, a REMIC election will be made with respect
to the Trust Fund (the "Series 1996-B REMIC"). The Class A1 Certificates and
the Class A2 Certificates will be designated as regular interests, and the
Class R Certificates will be designated as the residual interest, in the
Series 1996-B REMIC.
The Certificates will be treated as "qualifying real property loans" for
mutual savings banks and domestic building and loan associations, "regular or
residual interests in a REMIC" for domestic building and loan associations and
"real estate assets" for real estate investment trusts, to the extent
described in the Prospectus.
For federal income tax purposes the Company will treat the Series 1996-B
REMIC as a "single-class" REMIC. As a result, holders of Regular Certificates
who are individuals, trusts, estates or pass-through entities in which such
investors hold interests may be required to recognize certain amounts of
income in addition to interest and discount income. See "Certain Federal
Income Tax Consequences--Federal Income Tax Consequences for REMIC
Certificates--Limitation on Deduction of Certain Expenses" in the Prospectus.
REGULAR CERTIFICATES
The Regular Certificates will be treated as debt instruments for federal
income tax purposes. Holders of the Regular Certificates will be required to
report income on such Certificates in accordance with the accrual method of
accounting. The expected price to the public of each of the Class A1
Certificates and the Class A2 Certificates as of the date hereof (including
interest accrued before the issue date, if any), is expected to exceed their
respective initial principal amounts. The Internal Revenue Service might
contend that the interest payments on each of the Class A1 Certificates and
the Class A2 Certificates should be reported under the contingent payment
rules relating to original issue discount. The Internal Revenue Service has
issued final Treasury regulations with respect to contingent payment
obligations but such regulations do not apply to REMIC interests. Unless
required by final Treasury regulations or other applicable authority, the
Company intends to report the interest on the Class A1 Certificates and the
Class A2 Certificates as not subject to the contingent payment rules.
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Each investor in a Class of Certificates should consult with its tax advisor
as to the proper method of reporting income from such Certificates.
RESIDUAL CERTIFICATES
The holder of a Residual Certificate must include the taxable income or loss
of the Series 1996-B REMIC in determining its federal taxable income or such
holder's proportionate share of such taxable income or loss if it holds less
than all of the Residual Certificates of such REMIC. The Residual Certificates
will remain outstanding for federal income tax purposes until there are no
Certificates of any other class of Certificates outstanding.
The transferee affidavit used for transfers of a Residual Certificate will
require the transferee to state, among other things, that (i) it understands
that it must take into account the taxable income relating to such Residual
Certificate, (ii) it has no intention to impede the assessment or collection
of any federal, state or local income taxes legally required to be paid with
respect to the Residual Certificate, (iii) it will not transfer such Residual
Certificate to any person or entity that it has reason to believe has the
intention to impede this assessment or collection of such taxes, (iv) it has
historically paid its debts as they come due, (v) it intends to continue to
pay its debts as they come due in the future, (vi) it understands that it may
incur tax liabilities in excess of any cash flows generated by such Residual
Certificate, and (vii) it intends to pay any and all taxes associated with
holding such Residual Certificate as they become due. Finally, the Residual
Certificates generally may not be transferred to persons who are Foreign
Persons (as defined herein).
ERISA CONSIDERATIONS
Any fiduciary of an employee benefit plan within the meaning of Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
which is subject to Title I of ERISA or Section 4975 of the Internal Revenue
Code of 1986, as amended (the "Code"), hereinafter an "ERISA Plan," should
carefully review with their legal advisors whether the purchase or holding of
any Certificates could give rise to a transaction that is prohibited or not
otherwise permissible either under ERISA or the Code. See "ERISA
Considerations" in the Prospectus.
In accordance with ERISA's general fiduciary standards, before investing in
a Certificate, an ERISA Plan fiduciary should determine whether to do so is
permitted under the governing ERISA Plan instruments and is appropriate for
the ERISA Plan in view of its overall investment policy and the composition
and diversification of its portfolio. An ERISA Plan fiduciary should
especially consider the ERISA requirement of investment prudence and the
sensitivity of the return on the Certificates to the rate of principal
repayments (including prepayments) on the Underlying Mortgage Loans.
Other provisions of ERISA (and corresponding provisions of the Code)
prohibit certain transactions involving the assets of an ERISA Plan and
persons who have certain specified relationships to the Plan (so-called
"parties in interest" within the meaning of ERISA or "disqualified persons"
within the meaning of the Code). The Underlying Administrator, the Company,
the Underwriter, the Servicers or the Trustee or certain affiliates thereof,
might be considered or might become "parties in interest" or "disqualified
persons" with respect to an ERISA Plan. If so, the acquisition or holding of
Certificates by or on behalf of such ERISA Plan could be considered to give
rise to a "prohibited transaction" within the meaning of ERISA and the Code
unless an administrative exemption described below or some other exemption is
available. Special caution should be exercised before the assets of an ERISA
Plan are used to purchase a Certificate if, with respect to such assets, the
Underlying Administrator, the Company, the Underwriter, the Servicers or the
Trustee or an affiliate thereof, either: (a) has investment discretion with
respect to the investment of such assets of such ERISA Plan; or (b) has
authority or responsibility to give, or regularly gives investment advice with
respect to such assets for a fee and pursuant to an agreement or understanding
that such advice will serve as a primary basis for investment decisions with
respect to such assets and that such advice will be based on the particular
investment needs of the ERISA Plan. See "ERISA Considerations" in the
Prospectus.
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The United States Department of Labor (the "DOL") has granted the
Underwriter an administrative exemption (Prohibited Transaction Exemption 91-
14, Exemption Application Number D-7958, 56 Fed. Reg. 7414, February 22, 1991)
(the "Exemption") from certain of the prohibited transaction rules of ERISA
and the related excise tax provisions of Section 4975 of the Code with respect
to the initial purchase, the holding and the subsequent resale by ERISA Plans
of certificates representing interests in asset-backed pass-through trusts
that consist of certain receivables, loans and other obligations that meet the
conditions and requirements of the PTE 90-29. The receivables covered by the
exemption include mortgage loans such as the Underlying Mortgage Loans. The
Exemption is expected to apply to the acquisition, holding and resale of the
Class A1 and Class A2 Certificates (the "ERISA Eligible Certificates") by an
ERISA Plan, provided that certain conditions (certain of which are described
below) are met.
The Exemption covers only certificates evidencing an interest in a trust
consisting of obligations that bear interest or are purchased at a discount
and which are secured, such as mortgages secured by single family, commercial
or multifamily real property. Among the other conditions which must be
satisfied for the Exemption to apply to the ERISA Eligible Certificates are
the following:
(i) the acquisition of the ERISA Eligible Certificates by an ERISA Plan
is on terms (including the price for the ERISA Eligible Certificates) that
are at least as favorable to the ERISA Plan as they would be in an arm's-
length transaction with an unrelated party;
(ii) the rights and interests evidenced by the ERISA Eligible
Certificates acquired by the ERISA Plan are not subordinated to the rights
and interests evidenced by other certificates of the trust;
(iii) the ERISA Eligible Certificates acquired by the ERISA Plan have
received a rating at the time of such acquisition that is in one of the
three highest generic rating categories from any of S&P, Moody's Investors
Service Inc., Duff & Phelps Credit Rating Co. or Fitch Investors Service,
Inc.;
(iv) the Trustee is not an affiliate of any member of the Restricted
Group (as defined below);
(v) the sum of all payments made to and retained by the Underwriter in
connection with the distribution of the ERISA Eligible Certificates
represents not more than reasonable compensation for underwriting the ERISA
Eligible Certificates; the sum of all payments made to and retained by the
Company pursuant to the sale of the Underlying Certificates to the Trust
Fund represents not more than the fair market value of such Underlying
Certificates; the sum of all payments made to and retained by the
Underlying Administrator and the Servicer represents not more than
reasonable compensation for the Underlying Administrator or the Servicers'
services and reimbursement of the Underlying Administrator or the
Servicers' reasonable expenses in connection therewith; and
(vi) the ERISA Plan investing in the ERISA Eligible Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Act.
The Trust Fund must also meet the following requirements:
(i) the corpus of the Trust Fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's Investors
Service Inc., Fitch Investors Service, Inc., or Duff & Phelps Credit Rating
Co. for at least one year prior to the ERISA Plan's acquisition of
certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than ERISA Plans for at least
one year prior to any ERISA Plan's acquisition of certificates.
Moreover, the Exemption would provide relief from certain self-
dealing/conflict of interest prohibited transactions that may occur when the
ERISA Plan fiduciary causes an ERISA Plan to acquire certificates in a trust
in which the fiduciary (or its affiliate) is an obligor on the receivables
held in the trust only if, among other requirements, (i) in the case of the
acquisition of ERISA Eligible Certificates in connection with the initial
issuance, at least 50% of the ERISA Eligible Certificates are acquired by
persons independent of the Restricted Group (as defined below); (ii) such
fiduciary (or its affiliate) is an obligor with respect to five percent or
less of the fair market value of the obligations contained in the trust; (iii)
the ERISA Plan's investment in ERISA
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Eligible Certificates does not exceed 25% of all of the ERISA Eligible
Certificates outstanding at the time of the acquisition and (iv) immediately
after acquisition, no more than 25% of the assets of the ERISA Plan are
invested in certificates representing an interest in one or more trusts
containing assets sold or serviced by the same entity. The Exemption does not
apply to ERISA Plans sponsored by the Underlying Administrator, the Servicers,
the Company, the Underwriter, the Trustee, any issuer of the Underlying
Mortgage Loans, any obligor with respect to Underlying Mortgage Loans included
in the Trust Fund constituting more than 5% of the aggregate unamortized
principal balance of the assets in the Trust Fund, or any affiliate of such
parties (the "Restricted Group"). As of the date hereof, there is no single
Mortgage Loan included in the Trust Fund that constitutes more than 5% of the
aggregate unamortized principal balance of the assets of the Trust Fund.
The Underwriter believes that the Exemption applies to the acquisition and
holding of the ERISA Eligible Certificates by ERISA Plans and that all
conditions of the Exemption other than those within the control of the
investors will be met. However, there can be no assurance that the DOL or the
Internal Revenue Service will not take a contrary position, nor that such
position will be sustained. One or more alternative exemptions may be
available with respect to certain prohibited transactions to which the
Exemption is not applicable, depending in part upon the type of ERISA Plan
fiduciary making the decision to acquire the ERISA Eligible Certificates and
the circumstances under which such decision is made, including, but not
limited to, (a) Prohibited Transaction Class Exemption ("PTCE") 91-38,
regarding investments by bank collective investment funds, (b) PTCE 90-1,
regarding investments by insurance company pooled separate account, or (c)
PTCE 83-1, regarding acquisitions by ERISA Plans of interests in mortgage
pools. Before purchasing the ERISA Eligible Certificates, an ERISA Plan
fiduciary should consult with its counsel to determine whether the conditions
of the Exemption or any other exemptions would be met. A purchaser of the
ERISA Eligible Certificates should be aware, however, that even if the
conditions specified in one or more exemptions are met, the scope of the
relief provided by the applicable exemption or exemptions might not cover all
acts that might be construed as prohibited transactions.
As described above, the acquisition of an ERISA Eligible Certificate by a
benefit plan could result in various unfavorable consequences for the benefit
plan or its fiduciaries under the regulations unless one of the exceptions in
the regulations or an exemption is applicable. Prospective investors should be
aware that there can be no assurance that any such exception or exemption will
apply with respect to the acquisition of an ERISA Eligible Certificate. See
"ERISA Considerations" in the Prospectus.
Prospective ERISA Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, the applicability of the
Exemption or any other exemptions, and the potential consequences in their
specific circumstances, prior to making an investment in an ERISA Eligible
Certificate. Any ERISA Plan which acquires a beneficial ownership interest in
ERISA Eligible Certificates will be deemed, by virtue of the acceptance and
acquisition of such ownership interest, to have represented to the Company and
the Trustee that such ERISA Plan is an "accredited investor" for purposes of
Rule 501(a)(1) of Regulation D under the Securities Act.
A governmental plan as defined in section 3(32) of ERISA is not subject to
ERISA, or Code Section 4975. However, such a governmental plan may be subject
to a federal, state, or local law, which is, to a material extent, similar to
the provisions of ERISA or Code Section 4975 ("Similar Law"). A fiduciary of a
governmental plan should make its own determination as to the need for and the
availability of any exemptive relief under Similar Law. A governmental plan
subject to Similar Law and an ERISA Plan are each referred to as a "Benefit
Plan."
UNDERWRITING
Lehman Brothers Inc. (the "Underwriter") has agreed, subject to the terms
and conditions of the Underwriting Agreement to purchase from the Company the
entire principal amount of the Class A1 and Class A2 Certificates offered
hereby.
The Company has been advised by the Underwriter that it proposes to offer
the Certificates from time to time for sale in one or more negotiated
transactions or otherwise, at prices to be determined at the time of sale. The
Underwriter may effect such transactions by selling the Certificates to or
through certain dealers and such dealers may receive compensation in the form
of underwriting discounts, concessions or commissions from the
S-60
<PAGE>
Underwriter and any purchasers of such Certificates for whom they may act as
agent. The Underwriter and any dealers that participate with the Underwriter
in the distribution of the Certificates may be deemed to be underwriters, and
any amounts or commissions received by them and any profit on the resale of
such Certificates positioned by them may be deemed to be underwriting
discounts or commissions, under the Securities Act of 1933, as amended (the
"Act").
The Company and CI will indemnify the Underwriter against certain
liabilities, including liabilities under the Act, and may also contribute to
payments the Underwriter may be required to make in respect thereof.
CERTIFICATE RATING
It is a condition to the issuance of the Certificates that they be rated
"AAAr" by Standard & Poor's Rating Services, a division of The McGraw-Hill
Companies, Inc. ("S&P"). In assigning this rating, S&P expresses no opinion
with respect to a Servicer's repurchase obligation in the event a Mortgagor
elects to convert an Underlying Mortgage Loan from an adjustable rate mortgage
loan to a fixed rate mortgage loan. Investors should be aware that there could
be some variability in expected returns in the event of a failure on the part
of a Servicer to repurchase converted mortgage loans. The "r" component of the
rating is attached to highlight derivative, hybrid and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to noncredit risks.
Ratings on mortgage pass-through certificates address the likelihood of the
receipt by Certificateholders of payments required under the operative
agreements. Such ratings take into consideration the credit quality of the
mortgage loans including any credit support providers, structural and legal
aspects associated with the Certificates, and the extent to which the payment
stream of the mortgage loans is adequate to make payments required under the
Certificates. Such ratings on the Certificates do not, however, constitute a
statement regarding frequency of prepayments on the mortgage loans. Such
ratings do not address the possibility that investors may suffer a lower than
anticipated yield.
The rating of the Certificates should be evaluated independently from
similar ratings on other types of securities. A security rating is not a
recommendation to buy, sell or hold securities and may be subject to revision
or withdrawal at any time by the assigning rating agency.
The Company has not requested a rating on the Certificates by any rating
agency other than S&P. However, there can be no assurance as to whether any
other rating agency will rate the Certificates, or, if it does, what rating
would be assigned by any such other rating agency. A rating on the
Certificates by another rating agency, if assigned at all, may be lower than
the rating assigned to the Certificates by S&P.
LEGAL INVESTMENT MATTERS
The Certificates offered hereby constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA"),
and, as such, are legal investments for certain entities to the extent
provided in SMMEA. However, institutions subject to the jurisdiction of the
Office of the Comptroller of the Currency, the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation, the Office
of Thrift Supervision, the National Credit Union Administration or state
banking or insurance authorities should review applicable rules, supervisory
policies and guidelines of these agencies before purchasing any of the
Certificates, as such Certificates may be deemed to be unsuitable investments
under one or more of these rules, policies and guidelines and certain
restrictions may apply to investments therein. It should also be noted that
certain states have enacted legislation limiting to varying extents the
ability of certain entities (in particular insurance companies) to invest in
mortgage related securities. Investors should consult with their own legal
advisors in determining whether and to what extent the Certificates constitute
legal investments for such investors. See "Legal Investment Matters" in the
accompanying Prospectus.
LEGAL MATTERS
Certain legal matters in respect of the Certificates will be passed upon for
the Company by Andrews & Kurth L.L.P., Dallas, Texas and for the Underwriter
by Brown & Wood, Washington, D.C.
S-61
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Account Loans.................................................. S-51
accredited investor............................................ S-60
Accrued Certificate Interest................................... S-2, S-6, S-26
Act............................................................ S-61
Advance Claim Payment Endorsement.............................. S-46
Aetna.......................................................... S-53
Additional Mortgage Loans...................................... S-42
Agreement...................................................... S-6, S-25
Available Funds................................................ S-26
Bankruptcy Account............................................. S-55
Bankruptcy Claim Ceiling....................................... S-55
Beneficial Owners.............................................. S-5
Benefit Plan................................................... S-60
Book Entry Certificates........................................ S-5
Book-Entry Nominee............................................. S-28
Book Entry Termination......................................... S-5, S-34
Capital Mortgage............................................... S-54
Cash-out....................................................... S-25
CCC............................................................ S-6, S-39
Certificate Principal Balance.................................. S-26
Certificate Rating............................................. S-43
Certificates................................................... S-1
CI............................................................. S-2, S-5, S-34
Class Certificate Principal Balance............................ S-5
Clearing Agency................................................ S-5, S-33
Clearing Agency Participants................................... S-33
Closing Date................................................... S-6
CMC............................................................ S-13, S-34, S-39
CMT............................................................ S-1, S-15
CMT Adjustment Date............................................ S-15
CMT Certificates............................................... S-1, S-12
CMT Certificates Available Funds............................... S-6, S-26
CMT Gross Margin............................................... S-15
CMT Lifetime Mortgage Interest Rate Cap........................ S-15
CMT Loans...................................................... S-1, S-12
CMT Minimum Mortgage Interest Rate............................. S-15
CMT Mortgage Interest Rate Adjustment Cap...................... S-15
CMT Mortgage Rate.............................................. S-15
CMT Principal Distribution Amount.............................. S-2, S-7, S-27
Code........................................................... S-58
Company........................................................ S-1, S-5
Credit Enhancement Instruments................................. S-42
Current CMT Index.............................................. S-15
Current LIBOR Index............................................ S-13
Defaulted Loan................................................. S-27
Definitive Certificates........................................ S-5
Determination Date............................................. S-40
disqualified persons........................................... S-58
Distribution Date.............................................. S-2, S-6, S-25
DOL............................................................ S-59
Due Date....................................................... S-51
</TABLE>
S-62
<PAGE>
<TABLE>
<CAPTION>
PAGE
--------------
<S> <C>
Effective Date................................................... S-45
ERISA............................................................ S-58
ERISA Eligible Certificates...................................... S-59
ERISA Plan....................................................... S-58
Events of Default................................................ S-37
Exemption........................................................ S-59
Financial Guaranty Insurance Policy.............................. S-2
First Year Repurchase Amount..................................... S-45
Fitch............................................................ S-44
FNMA LIBOR Loan.................................................. S-13
Foreign Person................................................... S-29
Forestview....................................................... S-44
Fraud Loss....................................................... S-45
FSA.............................................................. S-2, S-7
Guaranteed Underlying Certificates............................... S-2, S-48
Guaranteed Distributions......................................... S-48
Holdings......................................................... S-49
Imputed Principal Balance........................................ S-27
Indemnity Agreement.............................................. S-45
Initial Total Principal Balance.................................. S-45
Interest Accrual Period.......................................... S-2
Interest Shortfall............................................... S-26
LIBOR............................................................ S-1
LIBOR Adjustment Date............................................ S-13
LIBOR Certificates............................................... S-1, S-12
LIBOR Certificates Available Funds............................... S-6, S-26
LIBOR Gross Margin............................................... S-13
LIBOR Lifetime Mortgage Interest Rate Cap........................ S-14
LIBOR Loans...................................................... S-1, S-12
LIBOR Minimum Mortgage Interest Rate............................. S-14
LIBOR Mortgage Interest Rate Adjustment Cap...................... S-14
LIBOR Mortgage Rate.............................................. S-13
LIBOR Principal Distribution Amount.............................. S-2, S-7, S-27
Liquidation Date................................................. S-28
Loan Loss........................................................ S-27
Moody's.......................................................... S-44
Mortgage Notes................................................... S-13
Mortgaged Properties............................................. S-13
Mortgage Rate.................................................... S-42
mortgage related securities...................................... S-61
Mortgaged Property............................................... S-42
Mortgagor........................................................ S-42
Net Mortgage Rate................................................ S-26
Non-Covered Loss................................................. S-57
Nonrecoverable Advance........................................... S-40
Other Certificates............................................... S-3, S-8
Other Mortgage Loans............................................. S-3, S-8, S-42
Other Program Mortgage Loans..................................... S-51
parties in interest.............................................. S-58
Partnership...................................................... S-13, S-34
PMI.............................................................. S-2, S-43
Pool Insured Loans............................................... S-3, S-9, S-43
Principal Prepayment............................................. S-27
Program.......................................................... S-51
</TABLE>
S-63
<PAGE>
<TABLE>
<CAPTION>
PAGE
----------
<S> <C>
Program 1993PA Bankruptcy Claim Ceiling.............................. S-55
Program 1993PA Special Hazard Claim Ceiling.......................... S-51
prohibited transaction............................................... S-58
PTCE................................................................. S-60
"r".................................................................. S-10, S-61
Record Date.......................................................... S-25
Regular Certificates................................................. S-4
Reinsurance Agreement................................................ S-54
REMIC................................................................ S-4
Remittance Date...................................................... S-39
Remittance Rate...................................................... S-39
Requisite Amount of the Bankruptcy Account........................... S-55
Requisite Amount of the Special Hazard Account....................... S-51
Reserved Amount...................................................... S-52
Residual Certificates................................................ S-4
Restricted Group..................................................... S-60
S&P.................................................................. S-10, S-61
Second Year Repurchase Amount........................................ S-46
Sellers.............................................................. S-40
Series 1993PA Certificates........................................... S-51
Series 1996-B REMIC.................................................. S-57
Servicer............................................................. S-39
Servicing Agreements................................................. S-39
Similar Law.......................................................... S-60
Single-class REMIC................................................... S-57
SMMEA................................................................ S-61
Special Hazard Account............................................... S-51
Special Hazard Claim Ceiling......................................... S-51
Special Hazard Insurance Policy...................................... S-53
substantive consolidation............................................ S-12
Trust Fund........................................................... S-1
Trustee.............................................................. S-5
Underlying Agreement................................................. S-6, S-38
Underlying Administrator............................................. S-6, S-39
Underlying Certificate Account....................................... S-39
Underlying Certificate Distribution Date............................. S-26
Underlying Certificate Group......................................... S-1
Underlying Certificates.............................................. S-1, S-12
Underlying Mortgage Loan Group....................................... S-1
Underlying Mortgage Loans............................................ S-1, S-12
Underlying Trustee................................................... S-6, S-39
Underwriter.......................................................... S-1, S-60
Waiver Amount........................................................ S-45
Waiver Letter........................................................ S-45
WSJ LIBOR Loan....................................................... S-13
Years 2-5 Repurchase Amount.......................................... S-45
Years 3-5 Repurchase Amount.......................................... S-46
</TABLE>
S-64
<PAGE>
PROSPECTUS
CMC SECURITIES CORPORATION II
DEPOSITOR
PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to Pass-Through Certificates (the "Certificates"),
which may be sold from time to time in one or more series by CMC Securities
Corporation II (the "Company") on terms determined at the time of sale and
described in this Prospectus and the related Prospectus Supplement. Each
Certificate will evidence a beneficial ownership interest in a trust fund
("Trust Fund"). As specified in the related Prospectus Supplement, the assets
of a Trust Fund will include certain mortgage related assets (the "Mortgage
Assets") consisting of one or more of the following types of assets: (i) first
lien, one- to four-family residential mortgage loans, multifamily residential
mortgage loans or participation interests therein ("Mortgage Loans"), (ii)
mortgage-backed certificates, mortgage pass-through certificates or mortgage
participation certificates ("Agency Securities") issued or guaranteed by the
Government National Mortgage Association ("GNMA"), the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"), (iii) mortgage pass-through certificates representing beneficial
interests in certain mortgage loans or certain mortgage-backed securities and
collateralized mortgage obligations secured by certain mortgage loans or
certain mortgage-backed securities (collectively, "Private Mortgage-Backed
Securities") and (iv) residual interests in Agency Securities and Private
Mortgage-Backed Securities, and other mortgage-related assets and securities
(collectively, "Other Mortgage Securities"). A Trust Fund may also include
reinvestment income, reserve funds, cash accounts, insurance policies,
guarantees, letters of credit or other assets as described in the related
Prospectus Supplement.
The Certificates may be sold from time to time in one or more series on
terms determined at the time of sale and specified in the Prospectus
Supplement relating to such series. Each series of Certificates will be issued
in one or more classes. The Certificates of each class will evidence the
beneficial ownership of (i) any distributions in respect of the assets of the
Trust Fund that are allocable to principal of such class of Certificates in
the amount of the aggregate original principal balance, if any, of such class
of Certificates as specified in the related Prospectus Supplement and (ii) any
distributions in respect of the assets of the Trust Fund that are allocable to
interest on the principal balance or notional principal balance of such class
of Certificates at the interest rate, if any, applicable to such class of
Certificates as specified in the related Prospectus Supplement. One or more
classes of Certificates of a series (i) may be entitled to receive
distributions allocable to principal, principal prepayments, interest or any
combination thereof prior to one or more other classes of Certificates of such
series or after the occurrence of certain events and (ii) may be subordinated
in the right to receive such distributions to one or more senior classes of
Certificates of such series, in each case as specified in the related
Prospectus Supplement. Interest on each class of Certificates entitled to
distributions allocable to interest will accrue at a fixed rate or at a rate
that is subject to change from time to time as specified in the related
Prospectus Supplement or in an amount equal to a specified portion of interest
received on some or all of the assets of the Trust Fund or as may otherwise be
determined as specified in the related Prospectus Supplement. The Company may
retain or hold for sale from time to time one or more classes of a series of
Certificates.
Distributions to Certificateholders will be made monthly, quarterly, semi-
annually or at such other intervals and on the dates specified in the related
Prospectus Supplement. Distributions on the Certificates of a series will be
made only from the assets of the related Trust Fund and any other assets
pledged for the benefit of the Certificateholders as specified in the related
Prospectus Supplement. The Certificates of any series will not be insured or
guaranteed by any governmental entity or, unless otherwise specified in the
related Prospectus Supplement, by any other person. Unless otherwise specified
in the related Prospectus Supplement, the Company's only obligations with
respect to a series of Certificates will be to obtain certain representations
and warranties from each Seller and to assign to the Trustee for the related
series of Certificates the Company's rights with respect thereto, and its
obligations pursuant to certain representations and warranties made by it.
Unless otherwise specified in the Prospectus Supplement relating to a series,
no affiliate of the Company will have any obligations with respect to the
Certificates of the related Trust Fund.
The yield on each class of Certificates of a series will be affected by the
rate of payment of principal (including prepayments) on the Mortgage Assets in
the related Trust Fund and the timing of receipt of such payments as described
herein and in the related Prospectus Supplement. Each series of Certificates
may be subject to early termination only under the circumstances described
herein and in the related Prospectus Supplement.
PROSPECTIVE INVESTORS SHOULD REVIEW THE INFORMATION APPEARING HEREIN UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 17 BEFORE PURCHASING ANY
CERTIFICATES.
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 OR ANY RELATED PROSPECTUS SUPPLEMENT.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
Offers of the Certificates may be made through one or more different
methods, including offerings through underwriters, as more fully described
under "Plan of Distribution" herein and in the related Prospectus Supplement.
There will have been no public market for any series of Certificates prior
to the offering thereof. There can be no assurance that a secondary market
will develop for the Certificates of any series or, if it does develop, that
such market will continue.
Retain this Prospectus for future reference. This Prospectus may not be used
to consummate sales of Certificates unless accompanied by a Prospectus
Supplement.
THE DATE OF THIS PROSPECTUS IS JUNE 26, 1996.
<PAGE>
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K
The Prospectus Supplement or Supplements or Current Report on Form 8-K
relating to a series of Certificates to be offered hereunder will, among other
things, set forth with respect to such series of Certificates:
(i) information as to the assets comprising the Trust Fund, including the
characteristics of the Mortgage Assets included therein and, if applicable,
the insurance, guarantees or other instruments or agreements included in the
Trust Fund or otherwise available for the benefit of Certificateholders and
information regarding the amount and source of any reserve funds;
(ii) the aggregate original principal balance of each class of Certificates
entitled to distributions allocable to principal and, if a fixed rate of
interest, the interest rate for each class of such Certificates entitled to
distributions allocable to interest;
(iii) information as to any class of Certificates that has a rate of
interest that is subject to change from time to time and the basis on which
such interest rate will be determined;
(iv) information as to any class of Certificates on which interest will
accrue and be added to the principal or, if applicable, notional principal
balance thereof;
(v) information as to the method used to calculate the amount of interest to
be paid on any class entitled to distributions of interest only;
(vi) information as to the nature and extent of subordination with respect
to any class of Certificates that is subordinate in right of payment to any
other class;
(vii) the circumstances, if any, under which the Trust Fund is subject to
early termination;
(viii) if applicable, the final distribution date and the first mandatory
principal distribution date of each class of such Certificates;
(ix) the method used to calculate the aggregate amounts of principal and
interest required to be distributed on each distribution date in respect of
each class of such Certificates and, with respect to any series consisting of
more than one class, the basis on which such amounts will be allocated among
the classes of such series;
(x) the distribution date for each class of the Certificates, the date on
which payments received in respect of the assets included in the Trust Fund
during the related period will be deposited in the certificate account and, if
applicable, the assumed reinvestment rate applicable to payments received in
respect of such assets and the date on which such payments are assumed to be
received for such series of Certificates;
(xi) the name of the trustee of the Trust Fund;
(xii) information with respect to the administrator, if any, of the Trust
Fund;
(xiii) whether one or more elections will be made to treat all or a portion
of the Trust Fund as a real estate mortgage investment conduit (a "REMIC")
and, if applicable, the designation of the regular interests and residual
interests therein; and
(xiv) information with respect to the plan of distribution of such
Certificates.
2
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports and other information. The Company has filed with the
Securities and Exchange Commission (the "Commission") a Registration Statement
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Certificates. This Prospectus, which forms a part of the
Registration Statement, and the Prospectus Supplement or Supplements relating
to each series of Certificates contain summaries of the material documents
referred to herein and therein, but do not contain all of the information
contained in such Registration Statement pursuant to the rules and regulations
of the Commission. The Registration Statement can be inspected and copied at
prescribed rates 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: Midwest
Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661;
and Northeast Regional Office, 7 World Trade Center, 13th Floor, New York, New
York 10048.
The Company does not plan to send any financial information to holders of
Certificates. The Trustee, however, will include with each distribution on
Certificates of a series a statement containing certain payment information
with respect to the Certificates.
The Company's principal executive offices are located at 2711 N. Haskell,
Suite 1000, Dallas, Texas 75204. Its telephone number is (214) 874-2323.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents heretofore filed by the Company with the Commission
under the Exchange Act are incorporated by reference in this Prospectus:
(1)the Company's Annual Report on Form 10-K for its fiscal year ended
December 31, 1995;
(2)the Company's Report on Form 8-K dated January 30, 1996; and
(3)the Company's Report on Form 8-K dated February 25, 1996.
All documents filed by the Company 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 Certificates 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 an 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 Company 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 or all of the documents referred to above which have been or may be
incorporated in this Prospectus by reference (other than exhibits to such
documents, unless such exhibits are specifically incorporated by reference
into any such document). Requests for such copies should be directed to Attn:
Investor Relations, CMC Securities II, 2711 N. Haskell Avenue, Suite 1000,
Dallas, Texas 75204 (214/874-2323).
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUPPLEMENT OR CURRENT REPORT ON FORM 8-K....................... 2
AVAILABLE INFORMATION..................................................... 3
TABLE OF CONTENTS......................................................... 4
GLOSSARY OF PRINCIPAL TERMS............................................... 6
SUMMARY OF PROSPECTUS..................................................... 9
RISK FACTORS.............................................................. 17
DESCRIPTION OF THE CERTIFICATES........................................... 21
General.................................................................. 22
Classes of Certificates.................................................. 23
Distributions of Principal and Interest.................................. 24
Redemption of Certificates............................................... 26
Book Entry Registration.................................................. 26
THE TRUST FUND............................................................ 27
Mortgage Loans........................................................... 27
Agency Securities........................................................ 29
Private Mortgage-Backed Securities....................................... 35
Other Mortgage Securities................................................ 36
CREDIT ENHANCEMENT........................................................ 36
General.................................................................. 36
Subordination............................................................ 36
Cross-Support............................................................ 37
Pool Insurance........................................................... 37
Special Hazard Insurance................................................. 38
Bankruptcy Bond.......................................................... 38
Reserve Funds............................................................ 39
Other Insurance, Guarantees and Similar Instruments or Agreements........ 39
SERVICING OF THE MORTGAGE LOANS........................................... 40
Servicing Agreements..................................................... 40
Payments on Mortgage Loans............................................... 40
Advances................................................................. 41
Servicing Procedures..................................................... 41
Primary Mortgage Insurance Policies...................................... 42
Standard Hazard Insurance Policies....................................... 42
Title Insurance Policies................................................. 43
Claims Under Primary Mortgage Insurance Policies and Standard Hazard
Insurance Policies; Other Realization Upon Defaulted Loans.............. 43
Administration and Servicing Compensation and Payment of Expenses........ 44
POOLING AND ADMINISTRATION................................................ 45
Assignment of Mortgage Assets............................................ 45
Evidence as to Compliance................................................ 47
List of Certificateholders............................................... 47
The Trustee.............................................................. 47
Administration of the Certificate Account................................ 48
Reports to Certificateholders............................................ 49
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Events of Default........................................................ 49
Rights Upon Event of Default............................................. 49
Amendment................................................................ 50
Termination.............................................................. 50
USE OF PROCEEDS........................................................... 51
THE COMPANY............................................................... 52
General.................................................................. 52
CMC Securities Corporation II............................................ 52
Mortgage Loan Underwriting............................................... 53
CERTAIN LEGAL ASPECTS OF THE MORTGAGE LOANS............................... 54
General.................................................................. 54
Foreclosure.............................................................. 55
Right of Redemption...................................................... 57
Anti-Deficiency Legislation and Other Limitations on Lenders............. 57
Enforceability of Certain Provisions..................................... 58
Adjustable Rate Loans.................................................... 59
Environmental Legislation................................................ 59
Applicability of Usury Laws.............................................. 60
Soldiers' and Sailors' Civil Relief Act.................................. 60
LEGAL INVESTMENT MATTERS.................................................. 60
ERISA CONSIDERATIONS...................................................... 61
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 63
Federal Income Tax Consequences for REMIC Certificates................... 63
General................................................................. 63
Status of REMIC Certificates............................................ 63
Qualification as a REMIC................................................ 64
Taxation of Regular Certificates........................................ 65
Taxation of Residual Certificates....................................... 72
Limitations on Deductions of Certain Expenses........................... 80
Taxation of Certain Foreign Investors................................... 80
Backup Withholding...................................................... 81
Reporting Requirements.................................................. 81
Federal Income Tax Consequences for Certificates as to Which No REMIC
Election Is Made........................................................ 82
Standard Certificates................................................... 82
Stripped Certificates................................................... 85
Reporting Requirements and Backup Withholding........................... 88
Taxation of Certain Foreign Investors................................... 88
PLAN OF DISTRIBUTION...................................................... 88
LEGAL MATTERS............................................................. 89
FINANCIAL INFORMATION..................................................... 89
</TABLE>
5
<PAGE>
GLOSSARY OF PRINCIPAL TERMS
<TABLE>
<CAPTION>
TERM PAGE
---- ------
<S> <C>
Administrator............................................................ 9
Advance Account.......................................................... 44
Agency Securities........................................................ 1,9,12
Agreement................................................................ 9,21
Beneficial Owners........................................................ 14,26
Bonds.................................................................... 52
Book Entry Certificates.................................................. 14,26
Certificate Account...................................................... 24
Certificate Interest Rate................................................ 23
Certificate Principal Balance............................................ 25
CI....................................................................... 9
Certificates............................................................. 1
Clearing Agency.......................................................... 14,26
Clearing Agency Participants............................................. 14,26
CMC...................................................................... 52
Code..................................................................... 15
Committee Report......................................................... 65
Companion Certificates................................................... 24
Company.................................................................. 1,9
Compound Interest Certificates........................................... 23
Cooperative Loans........................................................ 28
Cooperatives............................................................. 12
Credit Enhancement....................................................... 14
Custodial Account........................................................ 40
Cut-off Date............................................................. 23
Distribution Date........................................................ 24
ERISA.................................................................... 15,61
FDIC..................................................................... 40
FHA Loans................................................................ 29
FHLMC.................................................................... 1,9,32
FHLMC Certificate Pool................................................... 33
FHLMC Certificates....................................................... 12
FmHA Loans............................................................... 29
FNMA..................................................................... 1,9,31
FNMA Certificates........................................................ 12
GNMA..................................................................... 1,9,29
GNMA Certificates........................................................ 12
GNMA Issuer.............................................................. 30
Guaranty Agreement....................................................... 30
Insurance Proceeds....................................................... 40
Interest Accrual Period.................................................. 25
Liquidation Proceeds..................................................... 40
Loan Sale Agreement...................................................... 52
Loan-to-Value Ratio...................................................... 29
Monthly Advance.......................................................... 41
Mortgage Assets.......................................................... 1,9
Mortgage Loans........................................................... 1,9
Mortgage Notes........................................................... 27
Mortgage Pool............................................................ 9
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
---- --------
<S> <C>
Mortgage Pool Insurance Policy......................................... 37
Mortgage Rates......................................................... 11,23,29
Mortgaged Properties................................................... 28
Mortgages.............................................................. 27
Mortgagors............................................................. 40
NCUA................................................................... 40
Non-Priority Certificates.............................................. 24
Nonrecoverable Advance................................................. 41
Notional Principal Balance............................................. 25
OID Regulations........................................................ 65
Original Value......................................................... 29
Other Mortgage Securities.............................................. 1,10
Partnership............................................................ 52
Pass-Through Certificates.............................................. 52
Pass-Through Rate...................................................... 11
Permitted Instruments.................................................. 48
Pool Insurer........................................................... 38
Prepayment Assumption.................................................. 65
Primary Mortgage Insurance Policy...................................... 42
Principal Balance...................................................... 29
Principal Prepayments.................................................. 25
Priority Certificates.................................................. 24
PMBS Agreement......................................................... 35
PMBS Issuer............................................................ 35
PMBS Servicer.......................................................... 35
PMBS Trustee........................................................... 35
Premium REMIC Regular Certificates..................................... 70
Private Mortgage-Backed Securities..................................... 1,9
Proposed Regulations................................................... 69
PTC.................................................................... 30
Record Date............................................................ 24
Regular Certificateholder.............................................. 65
Regular Certificates................................................... 63
REIT................................................................... 64
REMIC.................................................................. 2
REMIC Certificates..................................................... 63
REMIC Pool............................................................. 63
Remittance Date........................................................ 41
Remittance Rate........................................................ 41
Reserve Fund........................................................... 39
Residual Certificateholders............................................ 19,72
Residual Certificates.................................................. 19,63
Retail Class Certificate............................................... 65
Scheduled Amortization Certificates.................................... 24
Scheduled Principal.................................................... 33
Seller................................................................. 52
Senior Certificates.................................................... 36
Servicers.............................................................. 40
Servicing Agreement.................................................... 40
SMMEA.................................................................. 16,60
Special Allocation Certificates........................................ 24
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
TERM PAGE
---- ----
<S> <C>
Special Hazard Insurance Policy............................................ 38
Standard Hazard Insurance Policy........................................... 42
Subordinated Certificates.................................................. 36
Trust Fund................................................................. 1
Trustee.................................................................... 9
UCC........................................................................ 56
Underlying Mortgage Loans.................................................. 17
VA Loans................................................................... 29
</TABLE>
8
<PAGE>
SUMMARY OF PROSPECTUS
The following summary is qualified in its entirety by reference to the
detailed information appearing elsewhere in this Prospectus and by reference to
the Prospectus Supplement relating to a particular series of Certificates and
to the related Agreement (as defined below) which will be prepared in
connection with each series of Certificates. Unless otherwise specified,
capitalized terms used and not defined in this Summary of Prospectus have the
meanings given to them in this Prospectus and in the related Prospectus
Supplement.
Title of Securities..... Pass-Through Certificates, issuable in series, as de-
scribed in the Prospectus Supplement.
The Company............. CMC Securities Corporation II (the "Company") is a
limited purpose Delaware corporation formed on Janu-
ary 4, 1993. The Company is a wholly-owned limited
purpose finance subsidiary of Capstead Inc., a Dela-
ware corporation ("CI"). The Company's principal ex-
ecutive offices are located at 2711 N. Haskell Ave-
nue, Suite 1000, Dallas, Texas 75204; telephone num-
ber (214) 874-2323. See "The Company."
The Administrator....... The entity or entities named as the Administrator in
the Prospectus Supplement (the "Administrator"),
will act as administrator, and may act as a
servicer, with respect to the Mortgage Loans in-
cluded in the related Trust Fund. The Administrator
may be an affiliate of the Depositor. See "Servicing
of the Mortgage Loans" and "Pooling and Administra-
tion" for a description of the rights and obliga-
tions of the Administrator.
The Trustee............. The trustee (the "Trustee") for each series of Cer-
tificates will be specified in the related Prospec-
tus Supplement.
Description of
Certificates........... Each Certificate will represent a beneficial owner-
ship interest in a Trust Fund created by the Company
from time to time pursuant to a pooling and adminis-
tration agreement (each, an "Agreement") between the
Company and the Administrator and the Trustee for
the related series. The assets of a Trust Fund will
include certain mortgage-related assets (the "Mort-
gage Assets") consisting of one or more of the fol-
lowing types of assets:
(i) a pool (a "Mortgage Pool") of first lien, one-
to four-family residential mortgage loans, multi-
family residential mortgage loans or participation
interests therein ("Mortgage Loans"),
(ii) mortgage-backed certificates, mortgage pass-
through securities or mortgage participation cer-
tificates ("Agency Securities") issued or guaran-
teed by the Government National Mortgage Associa-
tion ("GNMA"), the Federal National Mortgage Asso-
ciation ("FNMA") or the Federal Home Loan Mortgage
Corporation ("FHLMC"),
(iii) mortgage pass-through certificates repre-
senting beneficial interests in certain mortgage
loans or certain mortgage-backed securities and
collateralized mortgage obligations secured by cer-
tain mortgage loans or certain mortgage-backed se-
curities (collectively, "Private Mortgage-Backed
Securities") and
9
<PAGE>
(iv) residual interests in Agency Securities and
Private Mortgage-Backed Securities, and other mort-
gage-related assets and securities (collectively,
"Other Mortgage Securities"). A Trust Fund may also
include: reinvestment income, reserve funds, cash
accounts, insurance policies, guarantees, letters
of credit or other assets as described in the re-
lated Prospectus Supplement or similar instruments
or agreements intended to decrease the likelihood
that Certificateholders will experience delays in
distributions of scheduled payments on, or losses
in respect of, the assets in such Trust Fund. The
Certificates of any series will be entitled to pay-
ment only from the assets of the related Trust Fund
and any other assets pledged for the benefit of
Certificateholders as specified in the related Pro-
spectus Supplement.
The Certificates of any series may be issued in one
or more classes, as specified in the Prospectus Sup-
plement or Supplements. One or more classes of Cer-
tificates of each series
(i) may be entitled to receive distributions allo-
cable only to principal, only to interest or to any
combination thereof;
(ii) may be entitled to receive distributions only
of prepayments of principal throughout the lives of
the Certificates or during specified periods;
(iii) may be subordinated in the right to receive
distributions of scheduled payments of principal,
prepayments of principal, interest or any combina-
tion thereof to one or more other classes of Cer-
tificates of such series throughout the lives of
the Certificates or during specified periods;
(iv) may be entitled to receive such distributions
only after the occurrence of events specified in
the Prospectus Supplement;
(v) may be entitled to receive distributions in
accordance with a schedule or formula or on the ba-
sis of collections from designated portions of the
assets in the Trust Fund;
(vi) as to Certificates entitled to distributions
allocable to interest, may be entitled to receive
interest at a fixed rate or a rate that is subject
to change from time to time;
(vii) may accrue interest, with such accrued in-
terest added to the principal amount of the Certif-
icates and no payments being made thereon until
certain other Classes of the Series have been paid
in full; and
(viii) as to Certificates entitled to distribu-
tions allocable to interest, may be entitled to
distributions allocable to interest only after the
occurrence of events specified in the Prospectus
Supplement and may accrue interest until such
events occur, in each case as specified in the Pro-
spectus Supplement.
The timing and amounts of such distributions may vary
among classes, over time, or otherwise as specified
in the related Prospectus Supplement.
10
<PAGE>
The Company or its affiliates may retain or hold for
sale from time to time one or more classes of a se-
ries of Certificates.
The Certificates of each class of such series will be
issued either in fully registered form or in book
entry form in the authorized denominations specified
in the Prospectus Supplement. The Certificates will
not be guaranteed or insured by any governmental
agency or instrumentality or, unless otherwise spec-
ified in the related Prospectus Supplement, by any
other person and, except as otherwise specified in
the Prospectus Supplement, the Mortgage Assets
(other than Agency Securities) included in the re-
lated Trust Fund will not be guaranteed or insured
by any governmental agency or instrumentality or any
other insurer.
Distributions on the
Certificates........... Distributions on the Certificates entitled thereto
will be made monthly, quarterly, semi-annually or at
such other intervals and on the dates specified in
the related Prospectus Supplement out of the pay-
ments received in respect of the Mortgage Assets in-
cluded in the related Trust Fund and any other as-
sets pledged for the benefit of the related
Certificateholders as specified in the related Pro-
spectus Supplement. The amount allocable to payments
of principal and interest on any distribution date
will be determined as specified in the Prospectus
Supplement. Unless otherwise specified in the Pro-
spectus Supplement, all distributions will be made
pro rata to Certificateholders of the class entitled
thereto.
Unless otherwise specified in the related Prospectus
Supplement, the aggregate original principal balance
of the Certificates will equal the aggregate distri-
butions allocable to principal that such Certifi-
cates will be entitled to receive. If specified in
the Prospectus Supplement, the Certificates will
have an aggregate original principal balance equal
to the aggregate unpaid principal balance of the re-
lated Mortgage Assets as of the first day of the
month of creation of the Trust Fund and, unless oth-
erwise specified in the related Prospectus Supple-
ment, will bear interest in the aggregate at a rate
equal to the interest rate borne by the related
Mortgage Loans (the "Mortgage Rates"), Agency Secu-
rities, Private Mortgage-Backed Securities or Other
Mortgage Securities, net of the aggregate servicing
fees and any other amounts specified in the related
Prospectus Supplement (the "Pass-Through Rate"). If
specified in the Prospectus Supplement, the aggre-
gate original principal balance of the Certificates
and interest rates on the classes of Certificates
will be determined based on the cash flow on the re-
lated Mortgage Assets.
The rate at which interest will be passed through to
holders of each class of Certificates entitled
thereto may be a fixed rate or a rate that is sub-
ject to change from time to time from the time and
for the periods, in each case as specified in the
Prospectus Supplement. Any such rate may be calcu-
lated on a loan-by-loan, weighted average or other
basis, in each case as described in the Prospectus
Supplement.
11
<PAGE>
Redemption of
Certificates........... To the extent provided in the related Prospectus Sup-
plement, the Certificates of any class of a series
may be (i) redeemed at the request of
Certificateholders; (ii) redeemed at the option of
the Company, the Administrator or another party
specified in the related Agreement, or (iii) subject
to special redemption under certain circumstances.
The circumstances and terms under which the Certifi-
cates of a series may be redeemed will be described
in the related Prospectus Supplement.
Trust Fund Assets....... The Trust Fund for a series of Certificates will in-
clude certain Mortgage Assets consisting of one or
more of the following types of assets:
(i) Mortgage Loans,
(ii) Agency Securities,
(iii) Private Mortgage-Backed Securities, and
(iv) Other Mortgage Securities. Each Trust Fund
will also include payments in respect of such Mort-
gage Assets and certain accounts, obligations or
agreements, in each case as specified in the Pro-
spectus Supplement.
A. The Mortgage
Loans............... Unless otherwise specified in the Prospectus Supple-
ment, the Mortgage Loans will be conventional, first
lien Mortgage Loans originated or acquired by the
Company and secured by one- to four-family residen-
tial properties or multifamily residential proper-
ties located in one or more states of the United
States or the District of Columbia. If so specified
in the Prospectus Supplement, the Mortgage Loans may
include cooperative apartment loans secured by secu-
rity interests in shares issued by private, non-
profit, cooperative housing corporations ("Coopera-
tives") and in the related proprietary leases or oc-
cupancy agreements granting exclusive rights to oc-
cupy specific dwelling units in such Cooperatives'
buildings.
The Prospectus Supplement for a series of Certifi-
cates will describe any Mortgage Loans to be in-
cluded in the Trust Fund for such series, and will
specify certain information regarding the payment
terms of such Mortgage Loans. See "The Trust Fund--
Mortgage Loans."
B. The Agency
Securities.......... The Agency Securities evidenced by a series of Cer-
tificates will consist of one or more of the follow-
ing:
(i) "fully modified pass-through" mortgage-backed
certificates guaranteed as to timely payment of
principal and interest by the Government National
Mortgage Association ("GNMA Certificates"),
(ii) guaranteed mortgage pass-through certificates
issued and guaranteed as to timely payment of prin-
cipal and interest by the Federal National Mortgage
Association ("FNMA Certificates"),
(iii) mortgage participation certificates issued
and guaranteed as to timely payment of interest
and, unless otherwise specified in the related Pro-
spectus Supplement, ultimate payment of principal
by the Federal Home Loan Mortgage Corporation
("FHLMC Certificates"),
12
<PAGE>
(iv) stripped mortgage-backed securities repre-
senting an undivided interest in all or a part of
either the principal distributions (but not the in-
terest distributions) or the interest distributions
(but not the principal distributions) or in some
specified portion of the principal and interest
distributions (but not all of such distributions)
on certain GNMA, FNMA or FHLMC Certificates and,
unless otherwise specified in the Prospectus Sup-
plement, guaranteed to the same extent as the un-
derlying securities,
(v) another type of mortgage-backed certificate,
mortgage pass-through certificate or mortgage par-
ticipation certificate issued or guaranteed by
GNMA, FNMA or FHLMC and described in the related
Prospectus Supplement or
(vi) a combination of such Agency Securities.
All GNMA Certificates will be backed by the full
faith and credit of the United States. No FHLMC or
FNMA Certificates will be backed, directly or indi-
rectly, by the full faith and credit of the United
States.
The Prospectus Supplement for a series of Certifi-
cates will describe any Agency Securities to be in-
cluded in the Trust Fund for such series, and will
specify certain characteristics of the mortgage
loans underlying such Agency Securities. See "The
Trust Fund--Agency Securities."
C. Private Mortgage-
Backed Securities... Private Mortgage-Backed Securities may include (a)
mortgage pass-through certificates representing ben-
eficial interests in certain mortgage loans or cer-
tain mortgage-backed securities or (b) collateral-
ized mortgage obligations secured by certain mort-
gage loans or certain mortgage-backed securities.
Private Mortgage-Backed Securities may include
stripped mortgage-backed securities representing an
undivided interest in all or a part of either the
principal distributions (but not the interest dis-
tributions) or the interest distributions (but not
the principal distributions) or in some specified
portion of the principal and interest distributions
(but not all of such distributions) on certain mort-
gage loans. Although individual mortgage loans un-
derlying a Private Mortgage-Backed Security may be
insured or guaranteed by the United States or an
agency or instrumentality thereof, they need not be,
and the Private Mortgage-Backed Securities them-
selves will not be so insured or guaranteed. Unless
otherwise specified in the related Prospectus Sup-
plement relating to a Series of Certificates, pay-
ments on the Private Mortgage-Backed Securities will
be distributed directly to the Trustee as registered
owner of such Private Mortgage-Backed Securities.
The related Prospectus Supplement for a series of
Certificates will describe any Private Mortgage-
Backed Securities to be included in the Trust Fund
for such series, and will specify certain character-
istics of the mortgage loans underlying such Private
Mortgage-Backed Securities. See "The Trust Fund--
Private Mortgage-Backed Securities."
D. Other Mortgage
Securities.......... Other Mortgage Securities include any securities
other than Agency Securities and Private Mortgage-
Backed Securities that directly or indirectly
13
<PAGE>
represent an ownership interest in, or are secured
by and payable from, mortgage loans on real property
or mortgage-backed securities. Other Mortgage Secu-
rities may include residual interests in issuances
of collateralized mortgage obligations or mortgage
pass-through certificates, as well as new types of
mortgage-related assets and securities that may be
developed and marketed from time to time. The re-
lated Prospectus Supplement for a series of Certifi-
cates will describe any Other Mortgage Securities to
be included in the Trust Fund for such series. See
"The Trust Fund--Other Mortgage Securities."
Advances................ Unless otherwise specified in the Prospectus Supple-
ment, the related Servicer of the Mortgage Loans
will be obligated to advance delinquent installments
of principal and interest (less applicable servicing
fees) on the Mortgage Loans in a Trust Fund. Unless
otherwise specified in the related Prospectus Sup-
plement, in the event a Servicer fails to make such
advances, the Administrator shall be obligated to
make the advance. Any such obligation to make ad-
vances may be limited to amounts due holders of Cer-
tificates of the related series, to amounts deemed
to be recoverable from late payments or liquidation
proceeds, to specified periods or any combination
thereof, in each case as specified in the related
Prospectus Supplement. Any such advance will be re-
coverable by Servicer or the Administrator as speci-
fied in the related Prospectus Supplement.
Credit Enhancement...... If specified in the Prospectus Supplement, a series
of Certificates, or certain classes within such se-
ries, may have the benefit of one or more types of
credit enhancement ("Credit Enhancement") including
but not limited to subordination, cross support,
mortgage pool insurance, special hazard insurance, a
bankruptcy bond, reserve funds, other insurance,
guarantees and similar instruments and arrangements.
The protection against losses afforded by any such
Credit Enhancement will be limited. See "Credit En-
hancement."
Book Entry
Registration........... If the Prospectus Supplement for a series so pro-
vides, Certificates of one or more classes of such
series may be issued in book entry form ("Book Entry
Certificates") 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 Certificates 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 Partici-
pants") or their nominees. Transfers and pledges by
purchasers and other beneficial owners of Book Entry
Certificates ("Beneficial Owners") other than Clear-
ing Agency Participants may be effected only through
Clearing Agency Participants. Beneficial Owners will
receive payments of principal and interest, and, if
applicable, may tender Certificates for redemption
to the Trustee, only through the Clearing Agency and
Clearing Agency Participants. Except as otherwise
specified in this Prospectus or a related Prospectus
Supplement, the terms "Certificateholders" and
"holders"
14
<PAGE>
shall be deemed to include Beneficial Owners. See
"Risk Factors--Book Entry Registration" and "De-
scription of the Certificates--Book Entry Registra-
tion."
Certain Federal Income
Tax Consequences....... For Federal income tax purposes, the
Certificateholders of a series of Certificates as to
which a REMIC election is made will be considered to
own "regular interests" or "residual interests" in
the REMIC. Holders of Certificates designated in the
applicable Prospectus Supplement as "regular inter-
ests" will be treated as holders of debt of the
REMIC for federal income tax purposes. Such
Certificateholders must include in income interest
due and original issue discount on their Certifi-
cates using the accrual method of accounting, re-
gardless of their usual methods of accounting. Hold-
ers of Certificates designated in the applicable
Prospectus Supplement as "residual interests" will
be taxable on their allocable share of the taxable
income of the REMIC regardless of the cash distrib-
utable on such interests. See "Certain Federal In-
come Tax Consequences--Federal Income Tax Conse-
quences for REMIC Certificates--Taxation of Residual
Certificates." The Certificateholders of a series of
Certificates as to which a REMIC election is not
made generally will be treated as owners of undi-
vided interests in a trust created to hold the re-
lated Mortgage Assets, which trust will not be
treated as an association taxable as a corporation.
Accordingly, the Certificateholders of such series
generally will be taxed on the basis of their allo-
cable shares of the principal and/or interest from
the related Mortgage Assets and generally will be
allowed to deduct their allocable shares of the
Company's and the Servicers' servicing fees, consis-
tent with their methods of accounting and their tax
status.
With certain exceptions described herein, Certifi-
cates held by a "domestic building and loan associa-
tion" will be considered to represent "loans secured
by an interest in real property" within the meaning
of Section 7701(a)(19)(C)(v) of the Internal Revenue
Code of 1986, as amended (the "Code"), and to repre-
sent "qualifying real property loans" within the
meaning of Section 593(d) of the Code, regardless of
whether a REMIC election is made with respect to a
particular series.
ERISA Considerations.... A fiduciary of any employee benefit plan subject to
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), or the Code should carefully
review with its own legal advisors whether the
purchase or holding of Certificates could give rise
to a transaction prohibited or otherwise
impermissible under ERISA or the Code. See "ERISA
Considerations." Certain classes of Certificates may
not be transferred unless the Trustee and the
Company are furnished with a letter of
representation or an opinion of counsel to the
effect that such transfer will not result in a
violation of the prohibited transaction provisions
of ERISA and the Code and will not subject the
Trustee, the Company or the Administrator to
additional obligations. Additionally, unless
otherwise specified in the related Prospectus
Supplement, Certificates representing an interest in
a Mortgage Pool consisting of
15
<PAGE>
multifamily mortgage loans may not be transferred to
an employee benefit plan or other retirement plan or
arrangement subject to ERISA. See "Description of
the Certificates--General" and "ERISA
Considerations."
Legal Investment
Matters................ Unless otherwise specified in the Prospectus Supple-
ment, Certificates 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 invest-
ments for certain types of institutional investors
to the extent provided in SMMEA, subject, in any
case, to any other regulations which may govern in-
vestments by such institutional investors. See "Le-
gal Investment Matters."
Use of Proceeds......... Substantially all of the net proceeds from the sale
of a series of Certificates offered hereby and by
the related Prospectus Supplement will be applied to
the simultaneous purchase of the Mortgage Assets in-
cluded in the Trust Fund for such series of Certifi-
cates or to reimburse the amounts previously used to
effect such purchase, the costs of carrying the
Mortgage Assets until sale of the Certificates and
to pay other expenses connected with pooling the
Mortgage Assets and issuing the Certificates. See
"Use of Proceeds."
Rating.................. It is a condition to the issuance of each class of
Certificates specified as being offered by the re-
lated Prospectus Supplement for each series of Cer-
tificates that they be rated in one of the four
highest rating categories of a nationally recognized
statistical rating agency, provided, however, that
one or more classes of Subordinated Certificates and
Residual Certificates within a series need not be so
rated.
16
<PAGE>
RISK FACTORS
Prospective Certificateholders should consider, among other things, the
following factors in connection with the purchase of the Certificates:
General. An investment in Certificates evidencing interests in a Trust Fund
including 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
Certificates 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. See
"The Trust Fund--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 Credit Enhancement, Holders of the
Certificates of a series evidencing interests in the related Mortgage Loan
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 Certificates will not represent an interest in or
obligation of the Company. The Certificates of each series will not be insured
or guaranteed by any government agency or instrumentality, the Company, 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
Private Mortgage-Backed Securities and the Other Mortgage Securities (the
"Underlying Mortgage Loans") will affect the average life of each class of
Certificates relating to a Trust Fund including such Mortgage Assets.
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
Certificateholders of such series may be unable to reinvest such payments in
securities of comparable quality having interest rates similar to those borne
by the Certificates 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
17
<PAGE>
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 Certificates 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
Certificateholders with liquidity of investment or will continue for the life
of the Certificates of such Series. The market value of the Certificates will
fluctuate with changes in prevailing rates of interest. Consequently, the sale
of Certificates by a Certificateholder in any market that may develop may be
at a discount from the Certificates' par value or such Certificateholder's
purchase price. Unless otherwise specified in the Prospectus Supplement for a
series of Certificates, Certificateholders have no right to request redemption
of Certificates, and the Certificates are subject to redemption only under the
limited circumstances described in each such Prospectus Supplement.
Limited Assets. Holders of Certificates of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of Certificateholders of such Series, for the
payment of principal of, and interest on, that series of Certificates. In
addition, immediately after each required payment of principal of, and
interest on, a series of Certificates has been paid in full, funds held in one
or more accounts maintained pursuant to the related Agreement, if not required
to be deposited in any related Reserve Fund or otherwise applied pursuant to
the related Agreement, may be withdrawn under certain circumstances and
conditions described in the related Prospectus Supplement, or may be
distributed to a party specified in such Agreement. In addition, certain
amounts remaining in related Reserve Funds may likewise be withdrawn or
distributable to a party specified in the related Agreement after such Reserve
Funds reach certain prescribed balances, or after the Certificates have been
paid down to a prescribed level, in which cases such amounts would no longer
be available to make payments on the Certificates. If the assets comprising
the Trust Fund are insufficient to make payments on such Certificates, no
other assets of the Company will be available for payment of the deficiency.
Because payments of principal may, if so provided in the related Prospectus
Supplement, be applied to classes of outstanding Certificates of a series in
the priority specified in the related Prospectus Supplement, a deficiency that
arises after Certificates of any such series having higher priority in payment
have been fully or partially repaid will have a disproportionately greater
effect on the Certificates of classes having lower priority in payment. The
disproportionate effect of any such deficiency is further increased in the
case of classes of Compound Interest Certificates of any series because, prior
to the retirement of all classes of such series having higher priority in
payment than such Compound Interest Certificates, interest is not payable,
unless otherwise provided in the related Prospectus Supplement, but is accrued
and added to the principal of such Compound Interest Certificates. In
addition, due to the priority of payments and the allocation of losses,
defaults experienced on the assets comprising a Trust Fund for a series of
Special Allocation Certificates may have a disproportionate effect on a
specified class or classes within such series.
Limitations, Reduction and Substitution of Credit Enhancement. As specified
in the Prospectus Supplement with respect to each series of Certificates,
Credit Enhancement will be provided to the extent required by the rating
agencies requested to rate such series of Certificates. Credit Enhancement
will be provided in one or more of the forms described in the related
Prospectus Supplement, including, but not limited to, prioritization as to
payments of one or more classes of such series, a Mortgage Pool Insurance
Policy, a Special Hazard Insurance Policy, a bankruptcy bond, one or more
Reserve Funds, other insurance, guarantees and similar instruments and
agreements, 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 Trustee will generally be permitted to
reduce, terminate or substitute all or a portion of the credit enhancement for
any series of Certificates, if the applicable rating agencies indicate that
the then-current rating thereof will not be adversely affected.
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Original Issue Discount; Residual Certificates. All of the Compound Interest
Certificates will be, and certain of the other Certificates may be, issued
with original issue discount for federal income tax purposes. A holder of a
Certificate 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 Certificates
generally will be treated as original issue discount for this purpose. At
certain fast Mortgage Asset prepayment rates, original issue discount may
accrue on certain classes of Certificates, including certain Variable Rate
Regular Certificates, that may never be received as cash, resulting in a
subsequent loss on such Certificates. See "Certain Federal Income Tax
Consequences --Federal Income Tax Consequences for REMIC Certificates--
Taxation of Regular Certificates--Original Issue Discount" and "--Variable
Rate Regular Certificates" and "Certain Federal Income Tax Consequences--
Federal Income Tax Consequences for Certificates As To Which No REMIC Election
Is Made--Standard Certificates--Premium and Discount--Original Issue Discount"
and "--Stripped Certificates--Taxation of Stripped Certificates--Original
Issue Discount."
An election may be made to treat any Trust Fund or a portion thereof as a
REMIC for federal income tax purposes. Holders ("Residual Certificateholders")
of certificates representing the residual interests in the related REMIC
("Residual Certificates") 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 Certificateholders 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 Certificateholders, may exceed the cash
distributions on the Residual Certificates during the corresponding period.
Residual Certificateholders who are individuals may be subject to limitations
on the deductibility of servicing fees on the related Mortgage Assets and
other REMIC administrative expenses. Hence, Residual Certificateholders may
experience an after-tax return that is significantly lower than would be
anticipated based upon the stated interest rate of their Residual
Certificates. See "Certain Federal Income Tax Consequences--Federal Income Tax
Consequences for REMIC Certificates--Taxation of Residual Certificates."
Funds Available for Redemptions at the Request of Certificateholders. With
respect to any series of Certificates for which the related Prospectus
Supplement provides for redemptions at the request of Certificateholders,
there can be no assurance that amounts available for such redemption, if any,
for such series of Certificates will be sufficient to permit Certificates to
be redeemed within a reasonable time after redemption is requested, for
reasons including the following:
1. Scheduled principal payments on the related Mortgage Assets generally
will be minimal in the early years and will increase in the later years of
such Mortgage Assets. As a result, funds available to be applied to
redemptions at the request of Certificateholders, may be expected to be
limited in the early years and to increase during the later years of each
such series. Accordingly, the availability of funds for redemptions of
Certificates of any series at the request of Certificateholders will depend
largely upon the rates of prepayment of the Mortgage Assets relating to
such series. See "Yield, Maturity and Prepayment Considerations."
2. Prepayments of principal on Mortgage Assets are least likely to occur
during periods of higher interest rates when it is expected that requests
for redemption by Certificateholders will be greatest. During periods in
which prevailing interest rates are higher than the interest rate paid on a
series of Certificates, greater numbers of Certificates 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
related Mortgage Assets, thus limiting the funds available to satisfy
requested redemption by Certificateholders.
3. As specified in the related Prospectus Supplement, certain
Certificateholders, such as personal representatives of deceased
Certificateholders, may have certain priorities as to redemption at the
request of Certificateholders.
Book Entry Registration. Because transfers and pledges of Book Entry
Certificates can be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary
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market for Book Entry Certificates may be reduced to the extent that some
investors are unwilling to hold Certificates in book entry form in the name of
Clearing Agency Participants and the ability to pledge Book Entry Certificates
may be limited due to lack of a physical certificate. Beneficial Owners of
Book Entry Certificates may, in certain cases, experience delay in the receipt
of payments of principal and interest since such payments will be forwarded by
the 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 Certificates 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 Certificates 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.
Certain Matters Relating to Insolvency. The Sellers of the Mortgage Assets
to the Company and the Company intend that the transfers of such Mortgage
Assets to the Company and, in turn to the applicable Trust Funds, constitute
sales rather than pledges to secure indebtedness of the Seller. However, if a
Seller of Mortgage Assets were to become a debtor under the federal bankruptcy
code, it is possible that a creditor or trustee-in-bankruptcy of such Seller
may argue that the sale thereof by such Seller is a pledge rather than a sale.
This position, if argued or accepted by a court, could result in a delay in or
reduction of distributions to the related Certificateholders.
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 applicable Trust Fund 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, martial 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
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or the Administrator to damages and administrative enforcement. Unless
otherwise specified in the related Prospectus Supplement, the related Seller
or the Company will be required to repurchase any Mortgage Loan which, at the
time of origination, did not comply with such federal laws or regulations.
The Special Hazard and Bankruptcy Account. The Special Hazard and Bankruptcy
Account is a joint trust account available to the holders of each Series of
the Company's Certificates 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 Trustee for the benefit of holders of all Participating Series.
The amount of cash or other assets on deposit in the Special Hazard and
Bankruptcy Account will be determined in accordance with the requirements of
the rating agencies requested to rate the Participating Series (the "Requisite
Amount of the Special Hazard and Bankruptcy Account"). Each Participating
Series will have a limit on the aggregate claims which can be made against the
assets in the Special Hazard and Bankruptcy Account (each, a "Claim Ceiling").
The Trustee will make draws from the Special Hazard and Bankruptcy Account to
pay special hazard and bankruptcy-related claims with respect to each
Participating Series, in the order in which such claims are received by the
Trustee from the Administrator. Should the aggregate draws made by the Trustee
against the Special Hazard and Bankruptcy Account for the benefit of any
Participating Series reach the then applicable Claim Ceiling for such Series,
the holders of such Participating Series may have to bear future bankruptcy
and special hazard-related losses, even though funds remain in the Special
Hazard and Bankruptcy Account for the benefit of holders of other
Participating Series. Conversely, there may be no funds available in the
Special Hazard and Bankruptcy Account even though the Claim Ceiling has not
been reached for any Participating Series, due to payments up to or
approaching the respective Claim Ceilings of other Participating Series. This
is due to the fact that the Requisite Amount of the Special Hazard and
Bankruptcy Account is expected to be less than the sum of the respective Claim
Ceilings for all Participating Series.
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.
DESCRIPTION OF THE CERTIFICATES
Each series of Certificates will be issued pursuant to a separate pooling
and administration agreement (each, an "Agreement") entered into between the
Company, the Trustee and the Administrator. The provisions of each Agreement
will vary depending upon the nature of the Certificates to be issued
thereunder and the nature of the related Trust Fund. The following summaries
and the summaries set forth under "Pooling and Administration" describe
certain provisions which may appear in each Agreement. The Prospectus
Supplement for a series of Certificates will describe any provision of the
Agreement relating to such series that materially differs from the description
thereof contained in this Prospectus. Such summaries do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all of the provisions of the Agreement for each series of Certificates and
the applicable Prospectus Supplement. The Company will provide
Certificateholders, without charge, on written request a copy of the Agreement
for any series. Requests should be addressed to CMC Securities Corporation II,
2711 N. Haskell Avenue, Suite 1000, Dallas, Texas 75204. The Agreement
relating to a series of Certificates will be filed with the Securities and
Exchange Commission within 15 days after the date of issuance of such series
of Certificates.
The Certificates of a series will be entitled to payment only from the
assets of the Trust Fund and any other assets pledged for the benefit of the
Certificateholders as specified in the related Prospectus Supplement and,
unless otherwise specified in the related Prospectus Supplement, will not be
entitled to payments in respect of the assets included in any other trust fund
established by the Company. The Certificates will not represent obligations of
the Company, the Administrator, any Servicer or any affiliate thereof and will
not be guaranteed by any governmental agency or, unless otherwise specified in
the related Prospectus Supplement, by any other person. Unless otherwise
specified in the Prospectus Supplement, the Company's only obligations with
respect to the Certificates will consist of its obligations pursuant to
certain representations and warranties made by it. See "The Trust Fund"
herein.
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The Mortgage Assets relating to a series of Certificates, other than Agency
Securities, will not be insured or guaranteed by any governmental entity or,
unless otherwise specified in the Prospectus Supplement, by any other person.
With respect to a series of Certificates for which the related Trust Fund
includes Mortgage Loans, to the extent that delinquent payments on or losses
in respect of defaulted Mortgage Loans are not advanced by the related
Servicer or the Administrator or any other entity or paid from any applicable
Credit Enhancement, such delinquencies may result in delays in the
distribution of payments to the holders of one or more classes of Certificates
of such series, and such losses will be borne by the holders of one or more
classes of such Certificates.
In addition, with respect to a series of Certificates for which the related
Trust Fund includes Mortgage Assets other than Mortgage Loans, late payments
on such Mortgage Assets may result in delays in the distribution of payments
to the holders of one or more classes of such Certificates, and losses on such
Mortgage Assets will be borne by the holders of one or more classes of such
Certificates, to the extent such late payments and losses are not advanced or
paid from any applicable credit enhancement arrangement described in the
related Prospectus Supplement.
GENERAL
As specified in the Prospectus Supplement, the Certificates of each series
will be issued either in book entry form or in fully registered form. The
minimum original Certificate Principal Balance or Notional Principal Balance
that may be represented by a Certificate (the "denomination") will be
specified in the Prospectus Supplement. Unless otherwise specified in the
related Prospectus Supplement, the original Certificate Principal Balance of
each Certificate will equal the aggregate distributions allocable to principal
to which such Certificate is entitled. Unless otherwise specified in the
Prospectus Supplement, distributions allocable to interest on each Certificate
that is not entitled to distributions allocable to principal will be
calculated based on the Notional Principal Balance of such Certificate. The
Notional Principal Balance of a Certificate will not evidence an interest in
or entitlement to distributions allocable to principal but will be used solely
for convenience in expressing the calculation of interest and for certain
other purposes.
Except as described below under "Book Entry Registration" with respect to
Book Entry Certificates, the Certificates of each series will be transferable
and exchangeable on a Certificate Register to be maintained at the corporate
trust office of the Trustee or such other office or agency maintained for such
purposes by the Trustee in New York City. Unless otherwise specified in the
Prospectus Supplement, under each Agreement, the Trustee will be appointed
initially as the Certificate Registrar. Unless otherwise specified in the
Prospectus Supplement, no service change will be made for any registration of
transfer or exchange of Certificates, but payment of a sum sufficient to cover
any tax or other governmental charge may be required.
Under current law the purchase and holding of a class of Certificates
entitled only to a specified percentage of payments of either interest or
principal or a notional amount of either interest or principal on the related
Mortgage Assets or a class of Certificates entitled to receive payments of
interest and principal on the Mortgage Assets only after payments to other
classes or after the occurrence of certain specified events by or on behalf of
any employee benefit plan or other retirement arrangement (including
individual retirement accounts and annuities, Keogh plans and collective
investment funds in which such plans, accounts or arrangements are invested)
subject to provisions of ERISA or the Code, may result in "prohibited
transactions" within the meaning of ERISA and the Code. See "ERISA
Considerations." Unless otherwise specified in the related Prospectus
Supplement, transfer of Certificates of such a class will not be registered
unless the transferee (i) executes a representation letter stating that it is
not, and is not purchasing on behalf of, any such plan, account or arrangement
or (ii) provides an opinion of counsel satisfactory to the Trustee and the
Company that the purchase of Certificates of such a class by or on behalf of
such plan, account or arrangement is permissible under applicable law and will
not subject the Trustee, the Administrator or the Company to any obligation or
liability in addition to those undertaken in the Agreement.
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As to each series, one or more elections may be made to treat the related
Trust Fund or designated portions thereof as a REMIC for federal income tax
purposes. The related Prospectus Supplement will specify whether a REMIC
election is to be made. Alternatively, the Agreement for a series may provide
that a REMIC election may be made at the discretion of the Company or the
Administrator and may only be made if certain conditions are satisfied. As to
any such series, the terms and provisions applicable to the making of a REMIC
election, as well as any material federal income tax consequences to
Certificateholders not otherwise described herein, will be set forth in the
related Prospectus Supplement. If such an election is made with respect to a
series, one of the classes will be designated as evidencing the "residual
interests" in the related REMIC, as defined in the Code. All other classes of
Certificates in such a series will constitute "regular interests" in the
related REMIC, as defined in the Code. As to each series with respect to which
a REMIC election is to be made, the Administrator, the Trustee, a Residual
Certificateholder or another person as specified in the related Prospectus
Supplement will be obligated to take all actions required in order to comply
with applicable laws and regulations and will be obligated to pay any
prohibited transaction taxes. The person so specified, unless otherwise
provided in the related Prospectus Supplement, will be entitled to
reimbursement for any such payment from the assets of the Trust Fund or, if
applicable, from any Residual Certificateholder.
CLASSES OF CERTIFICATES
Each series of Certificates will be issued in one or more classes. The
Certificates of each class will evidence the beneficial ownership of (i) any
distributions in respect of the assets of the Trust Fund that are allocable to
principal, in the aggregate amount of the original Certificate Principal
Balance, if any, of such class of Certificates as specified in the Prospectus
Supplement and (ii) any distributions in respect of the assets of the Trust
Fund that are allocable to interest on the Certificate Principal Balance or
Notional Principal Balance of such Certificates from time to time at the
Certificate Interest Rate, if any, applicable to such class of Certificates as
specified in the Prospectus Supplement. If specified in the Prospectus
Supplement, one or more classes of a series of Certificates may evidence
beneficial ownership interests in separate groups of assets included in the
related Trust Fund.
If specified in the Prospectus Supplement, the Certificates will have an
aggregate original Certificate Principal Balance equal to the aggregate unpaid
principal balance of the Mortgage Assets as of the close of business on the
first day of the month of creation of the Trust Fund (the "Cut-off Date")
after deducting payments of principal due on or before the Cut-off Date and,
unless otherwise specified in the related Prospectus Supplement, will bear
interest in the aggregate equal to the Pass-Through Rate. The Pass-Through
Rate will equal the rate of interest borne by the related Mortgage Loans (the
"Mortgage Rate"), Agency Securities, Private Mortgage-Backed Securities or
Other Mortgage Securities, net of the aggregate servicing fees and any other
amounts (including fees payable to the Administrator) as are specified in the
Prospectus Supplement. The original Certificate Principal Balance of the
Certificates of a series and the interest rate on the classes of such
Certificates will be determined in the manner specified in the Prospectus
Supplement.
Each class of Certificates that is entitled to distributions allocable to
interest will bear interest at a fixed rate or a rate that is subject to
change from time to time (a) in accordance with schedule, (b) in reference to
an index, or (c) otherwise (each, a "Certificate Interest Rate"), in each case
as specified in the Prospectus Supplement. One or more classes of Certificates
may provide for interest that accrues, but is not currently payable ("Compound
Interest Certificates"). With respect to any class of Compound Interest
Certificates, if specified in the Prospectus Supplement, any interest that has
accrued but is not paid on a given Distribution Date will be added to the
aggregate Certificate Principal Balance of such class of Certificates on that
Distribution Date.
A series of Certificates may include one or more classes entitled only to
distributions (i) allocable to interest, (ii) allocable to principal (and
allocable as between scheduled payments of principal and Principal Prepayments
or (iii) allocable to both principal (and allocable as between scheduled
payments of principal and Principal Prepayments) and interest. A series of
Certificates may consist of one or more classes as to which distributions will
be allocated (i) on the basis of collections from designated portions of the
assets of the Trust Fund, (ii) in accordance with a schedule or formula, (iii)
in relation to the occurrence of events, or (iv) otherwise, in each
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case as specified in the Prospectus Supplement. The timing and amounts of such
distributions may vary among classes, over time or otherwise, in each case as
specified in the Prospectus Supplement.
A series of Certificates may include one or more Classes of Scheduled
Amortization Certificates and Companion Certificates. "Scheduled Amortization
Certificates" are Certificates with respect to which payments of principal are
to be made in specified amounts on specified Distribution Dates, to the extent
of funds available on such Distribution Date. "Companion Certificates" are
Certificates which receive payments of all or a portion of any funds available
on a given Distribution Date which are in excess of amounts required to be
applied to payments on Scheduled Amortization Certificates on such
Distribution Date. Because of the manner of application of payments of
principal to Companion Certificates, the weighted average lives of Companion
Certificates of a series may be expected to be more sensitive to the actual
rate of prepayments on the Mortgage Assets in the related Trust Fund than will
the Scheduled Amortization Certificates of such series.
One or more series of Certificates may constitute series of "Special
Allocation Certificates" which may include Senior Certificates, Subordinated
Certificates, Priority Certificates and Non-Priority Certificates. As
specified in the related Prospectus Supplement for a series of Special
Allocation Certificates, the timing and/or priority of payments of principal
and/or interest may favor one or more classes of Certificates over one or more
other classes of Certificates. Such timing and/or priority may be modified or
reordered upon the occurrence of one or more specified events. Unless
otherwise specified in the related Prospectus Supplement for a series of
Special Allocation Certificates, losses on the Trust Fund assets for such
series may be disproportionately borne by one or more classes of such series,
and the proceeds and distributions from such assets 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. For example, Special Allocation Certificates in a series may be
comprised of one or more classes of Senior Certificates having a priority in
right to distributions of principal and interest over one or more classes of
Subordinated Certificates, to the extent described in the related Prospectus
Supplement, as a form of Credit Enhancement. See "Credit Enhancement--
Subordination." Typically, the Subordinated Certificates will carry a rating
by the rating agencies lower than that of the Senior Certificates. In
addition, one or more classes of Certificates ("Priority Certificates") may be
entitled to a priority of distributions of principal or interest from assets
in the Trust Fund over another class of Certificates ("Non-Priority
Certificates"), but only after the exhaustion of other Credit Enhancement
applicable to such series. The Priority Certificates and Non-Priority
Certificates nonetheless may be within the same rating category.
DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest at the applicable
Certificate Interest Rate (if any) on the Certificates will be made by the
Trustee, to the extent of funds available therefor, on the dates specified in
the Prospectus Supplement (each, a "Distribution Date") and may be made
monthly, quarterly, semi-annually or at such other intervals as are specified
in the Prospectus Supplement. Distributions will be made to the persons in
whose names the Certificates are registered at the close of business on the
dates specified in the Prospectus Supplement (each, a "Record Date"). With
respect to Certificates other than Book Entry Certificates, distributions will
be made by check or money order mailed to the person, thereto at the address
appearing in the Certificate Register or, if specified in the Prospectus
Supplement, in the case of Certificates that are of a certain minimum
denomination as specified in the Prospectus Supplement, upon written request
by the Certificateholder, by wire transfer or by such other means as are
agreed upon with the person entitled thereto; provided, however, that the
final distribution in retirement of the Certificates (other than Book Entry
Certificates) will be made only upon presentation and surrender of the
Certificates at the office or agency of the Trustee specified in the notice to
Certificateholders of such final distribution. With respect to Book Entry
Certificates, such payments will be made as described below under "Book Entry
Registration" and in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement,
distributions allocable to principal and interest on the Certificates of a
series will be made by the Trustee out of, and only to the extent of, funds in
a separate account established and maintained under the related Agreement for
the benefit of holders of the Certificates of such series (the "Certificate
Account" with respect to such series), including any funds transferred
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from any related Reserve Fund. As between Certificates of different classes
and as between distributions of principal (and, if applicable, between
distributions of Principal Prepayments and scheduled payments of principal)
and interest, distributions made on any Distribution Date will be applied as
specified in the Prospectus Supplement. Unless otherwise specified in the
Prospectus Supplement, distributions to any class of Certificates will be made
pro rata to all Certificateholders of that class. If so specified in the
related Prospectus Supplement, the amounts received by the Trustee as
described below under "The Trust Fund" will be invested in the Permitted
Instruments specified herein and in the Prospectus Supplement and all income
or other gain from such investments will be deposited in the related
Certificate Account and will be available to make payments on the Certificates
of the applicable series on the next succeeding Distribution Date in the
manner specified in the Prospectus Supplement.
Distributions of Interest. Unless otherwise specified in the Prospectus
Supplement with respect to a series, interest will accrue on the aggregate
Certificate Principal Balance (or, in the case of Certificates entitled only
to distributions allocable to interest, the aggregate Notional Principal
Balance) of each class of Certificates of such series entitled to interest
from the date, at the applicable Certificate Interest Rate and for the periods
(each, an "Interest Accrual Period") specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement with respect to a
series, the aggregate "Certificate Principal Balance" of any class of
Certificates of such series entitled to distributions of principal will be the
aggregate initial principal balance of such class of Certificates specified in
the Prospectus Supplement, reduced by all distributions and losses reported to
the holders of such Certificates as allocable to principal, and, in the case
of Compound Interest Certificates, unless otherwise specified in the
Prospectus Supplement, increased by all interest accrued but not then
distributable on such Compound Interest Certificates. With respect to a class
of Certificates entitled only to distributions allocable to interest, such
interest will accrue on a notional principal balance (the "Notional Principal
Balance") of such class, computed solely for purposes of determining the
amount of interest accrued and payable on such class of Certificates.
To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Certificates entitled to interest
(other than a class of Compound Interest Certificates) will be distributable
on the Distribution Dates specified in the Prospectus Supplement until the
aggregate Certificate Principal Balance of the Certificates of such class has
been distributed in full or, in the case of Certificates entitled only to
distributions allocable to interest, until the aggregate Notional Principal
Balance of such Certificates is reduced to zero or for the period of time
designated in the Prospectus Supplement. Unless otherwise specified in the
Prospectus Supplement, distributions of interest on each class of Compound
Interest Certificates will commence only after the occurrence of the events
specified in the Prospectus Supplement. Unless otherwise specified in the
Prospectus Supplement, prior to such time, the beneficial ownership interest
of such class of Compound Interest Certificates in the Trust Fund, as
reflected in the aggregate Certificate Principal Balance of such class of
Compound Interest Certificates, will increase on each Distribution Date by the
amount of interest that accrued on such class of Compound Interest
Certificates during the preceding Interest Accrual Period but that was not
required to be distributed to such class on such Distribution Date. Any such
class of Compound Interest Certificates will thereafter accrue interest on its
outstanding Certificate Principal Balance as so adjusted.
Distributions of Principal. The Prospectus Supplement will specify the
method by which the amount of principal to be distributed on the Certificates
on each Distribution Date will be calculated and the manner in which such
amount will be allocated among the classes of Certificates entitled to
distributions of principal.
If so provided in the Prospectus Supplement, one or more classes of Senior
Certificates will be entitled to receive all or a disproportionate percentage
of the payments of principal which are received on the related Mortgage Assets
in advance of their scheduled due dates and are not accompanied by amounts
representing scheduled interest due after the month of such payments
("Principal Prepayments") in the percentages and under the circumstances or
for the periods specified in the Prospectus Supplement. Unless otherwise
provided in the related Prospectus Supplement, any such allocation of
Principal Prepayments to such class or classes of Certificateholders will have
the effect of accelerating the amortization of such Senior Certificates while
increasing the interests evidenced by the Subordinated Certificates in the
Trust Fund. Increasing the interests of
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the Subordinated Certificates relative to that of the Senior Certificates is
intended to preserve the availability of the subordination credit enhancement
provided to the Priority Certificates by the Subordinated Certificates. See
"Credit Enhancement--Subordination".
Unscheduled Distributions. If specified in the Prospectus Supplement, the
Certificates of a series will be subject to receipt of distributions before
the next scheduled Distribution Date under the circumstances and in the manner
described below and in the related Prospectus Supplement. If applicable, the
Trustee will be required to make such unscheduled distributions on the
Certificates of a series on the date and in the amount specified in the
related Prospectus Supplement if, due to substantial payments of principal
(including Principal Prepayments) on the related Mortgage Assets, low rates
then available for reinvestment of such payments or both, the Trustee
determines, based on the assumptions specified in the related Agreement, that
the amount anticipated to be on deposit in the Certificate Account for such
series on the next related Distribution Date, together with, if applicable,
any amounts available to be withdrawn from any related Reserve Fund or from
any other Credit Enhancement provided for series, may be insufficient to make
required distributions on the Certificates on such Distribution Date. Unless
otherwise specified in the Prospectus Supplement, the amount of any such
unscheduled distribution that is allocable to principal will not exceed the
amount that would otherwise have been required to be distributed as principal
on the Certificates on the next Distribution Date. Unless otherwise specified
in the Prospectus Supplement, all unscheduled distributions will include
interest at the applicable Certificate Interest Rate (if any) on the amount of
the unscheduled distribution allocable to principal for the period and to the
date specified in the Prospectus Supplement.
Unless otherwise specified in the Prospectus Supplement, all distributions
allocable to principal in any unscheduled distribution will be made in the
same priority and manner as distributions of principal on the Certificates
would have been made on the next Distribution Date, and with respect to
Certificates of the same class, unscheduled distributions of principal will be
made on a pro rata basis. Notice of any unscheduled distribution will be given
by the Trustee prior to the date of such distribution.
REDEMPTION OF CERTIFICATES
To the extent provided in the related Prospectus Supplement, the
Certificates of any class of a series may be (i) redeemed at the request of
Certificateholders; (ii) redeemed at the option of the Company, the
Administrator or another party specified in the related Agreement, or (iii)
subject to special redemption under certain circumstances. The circumstances
and terms under which the Certificates of a series may be redeemed will be
described in the related Prospectus Supplement.
BOOK ENTRY REGISTRATION
If the Prospectus Supplement for a series so provides, Certificates of any
class of such series may be issued in book entry form ("Book Entry
Certificates") 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
Certificates 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 Certificates.
Purchaser and other Beneficial Owners of Book Entry Certificates
("Beneficial Owners") may not hold Book Entry Certificates directly, but may
hold, transfer or pledge their ownership interest in the Certificates only
through Clearing Agency Participants. Additionally, Beneficial Owners will
receive all payments of principal and interest with respect to the
Certificates, and, if applicable, may request redemption of Certificates, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered holders of Certificates or be entitled to
receive definitive certificates representing their ownership interest in the
Certificates except under the limited circumstances, if any, described in the
related Prospectus Supplement. See "Risk Factors--Book Entry Registration."
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If Certificates of a series are issued as Book Entry Certificates, 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 Certificates of such series, and to receive and
transmit requests for redemption with respect to such Certificates. Clearing
Agency Participants with whom Beneficial Owners have accounts with respect to
such Book Entry Certificates 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 Certificates and will not possess physical
certificates, a method will be provided whereby Beneficial Owners may receive
payments, transfer their interests, and submit redemption requests.
THE TRUST FUND
The Trust Fund for a series of Certificates may consist of one or more of
the following:
(i) the Mortgage Assets (subject, if specified in the Prospectus
Supplement, to certain exclusions);
(ii) all payments (subject, if specified in the Prospectus Supplement, to
certain exclusions) in respect of such Mortgage Assets adjusted, unless
otherwise specified in the related Prospectus Supplement, in the case of
interest payments on Mortgage Assets, to the Pass-Through Rate;
(iii) if specified in the Prospectus Supplement, reinvestment income on
such payments;
(iv) with respect to a Trust Fund that includes Mortgage Loans, all
property acquired by foreclosure or deed in lieu of foreclosure with
respect to any such Mortgage Loan;
(v) with respect to a Trust Fund that includes Mortgage Loans, certain
rights of the Administrator and the Servicers under certain insurance
policies required to be maintained in respect of such Mortgage Loans; and
(vi) if so specified in the Prospectus Supplement, one or more forms of
Credit Enhancement.
The Certificates of each series will be entitled to payment only from the
assets of the related Trust Fund and any other assets pledged for the benefit
of the Certificateholders of such series as specified in the related
Prospectus Supplement and, unless otherwise specified in the related
Prospectus Supplement, will not be entitled to payments in respect of the
assets of any other trust fund established by the Company. The primary assets
of any Trust Fund will consist of Mortgage Assets.
Mortgage Assets may be acquired by the Company from affiliates of the
Company. The following is a brief description of the Mortgage Assets expected
to be included in the Trust Funds. If specific information respecting the
Mortgage Assets is not known at the time the related series of Certificates
initially are offered, more general information of the nature described below
will be provided in the related Prospectus Supplement, and specific
information will be set forth in a report on Form 8-K to be filed with the
Securities and Exchange Commission within fifteen days after the initial
issuance of such Certificates. A copy of the Agreement with respect to each
series of Certificates will be attached to the Form 8-K and will be available
for inspection at the corporate trust office of the Trustee specified in the
related Prospectus Supplement. A schedule of the Mortgage Assets relating to
each series of Certificates, will be attached to the related Agreement
delivered to the Trustee upon delivery of such Certificates.
MORTGAGE LOANS
Certain information regarding the underwriting standards and guidelines
applicable to the Mortgage Loans (unless otherwise specified in the related
Prospectus Supplement) is set forth under "The Company--Mortgage Loan
Underwriting."
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages, deeds of trust or other security instruments
(the "Mortgages") evidencing first liens on residential properties
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(the "Mortgaged Properties"). Such Mortgage Loans will be within the broad
classification of one-to four-family mortgage loans, defined generally as
loans on residences containing one to four dwelling units, loans on
condominium units and may include loans on multifamily residential projects.
The Mortgage Loans may include cooperative apartment loans ("Cooperative
Loans") secured by security interests in shares issued by Cooperatives and in
the related proprietary leases or occupancy agreements granting exclusive
rights to occupy specific dwelling units in such Cooperatives' buildings. The
Mortgaged Properties securing the Mortgage Loans will be located in one or
more states in the United States or the District of Columbia and may include
investment properties and vacation and second homes. Each Mortgage Loan will
be selected by the Company for inclusion in the Trust Fund from among those
acquired by the Company or originated or acquired by one or more affiliates of
the Company, including newly originated loans.
Unless otherwise specified in the related Prospectus Supplement, (i) the
Mortgage Loans included in the Trust Fund for a series of Certificates will be
"conventional" mortgage loans, that is, they will not be insured or guaranteed
by any governmental agency; (ii) principal and interest on such Mortgage Loans
will be payable on the first day of each month; and (iii) interest on such
Mortgage Loans will be calculated based on a 360-day year of twelve 30-day
months. When full payment is made on a Mortgage Loan during a month, the
mortgagor is charged interest only on the days of the month actually elapsed
up to the date of such prepayment, at a daily interest rate that is applied to
the principal amount of the loan so prepaid.
The payment terms of the Mortgage Loans to be included in a Trust Fund for a
series will be described in the related Prospectus Supplement and may include
any of the following features or combinations thereof or other features
described in the related Prospectus Supplement:
(a) Interest may be payable at a fixed rate, a rate adjustable from time
to time in relation to an index, a rate that is fixed for period of time or
under certain circumstances and is followed by an adjustable rate, a rate
that otherwise varies from time to time, or a rate that is convertible from
an adjustable rate to a fixed rate. Changes to an adjustable rate may be
subject to periodic limitations, maximum rates, minimum rates or a
combination of such limitations. Accrued interest may be deferred and added
to the principal of a loan for such periods and under such circumstances as
may be specified in the related Prospectus Supplement. Mortgage Loans may
provide for the payment of interest at a rate lower than the specified
mortgage rate for a period of time or for the life of the Mortgage Loan
with the amount of any difference contributed from funds supplied by the
seller of the Mortgaged Property or another source.
(b) Principal may be payable on a level debt service basis to fully
amortize the loan over its term, may be calculated on the basis of an
amortization schedule that is significantly longer than the original term
to maturity or on an interest rate that is different from the interest rate
on the Mortgage Loan or may not be amortized during all or a portion of the
original term. Payment of all or a substantial portion of the principal may
be due on maturity. Principal may include interest that has been deferred
and added to the principal balance of the Mortgage Loan.
(c) Monthly payments of principal and interest may be fixed for the life
of the loan, may increase over a specified period of time or may change
from period to period. Mortgage Loans may include limits on periodic
increases or decreases in the amount of monthly payments and may include
maximum or minimum amounts of monthly payments.
(d) Prepayments of principal may be subject to a prepayment fee, which
may be fixed for the life of the loan or may decline over time, and may be
prohibited for the life of the loan or for certain periods ("lockout
periods"). Certain loans may permit prepayments after expiration of the
applicable lockout period and may require the payment of a prepayment fee
in connection with any such subsequent prepayment. Other loans may permit
prepayments without payment of a fee unless the prepayment occurs during
specified time periods. The loans may include "due-on-sale" clauses which
permit the mortgagee to demand payment of the entire mortgage loan in
connection with the sale or certain transfers of the related mortgaged
property. Other Mortgage Loans may be assumable by persons meeting the then
applicable underwriting standards of the Company.
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With respect to a series for which the related Trust Fund includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
certain information regarding the interest rates (the "Mortgage Rates"), the
average Principal Balance and the aggregate Principal Balance of such Mortgage
Loans, the years of origination and original principal balances and the
original loan-to-value ratios of such Mortgage Loans. The "Principal Balance"
of any Mortgage Loan will be the unpaid principal balance of such Mortgage
Loan as of the Cut-off Date, after deducting any principal payments due on or
before the Cut-off Date, reduced by all principal payments, including
principal payments advanced pursuant to the related Agreement, previously
distributed to Certificateholders with respect to such Mortgage Loan and
reported to them as allocable to principal.
With respect to Mortgage Loans secured by multifamily residential
properties, the related Prospectus Supplement may specify, among other things,
the dates of origination; the interest rates on the Mortgage Loans, and the
index or formula, if any, used to determine the adjustable rate, if any; the
number of Mortgage Loans secured by multifamily properties; the original loan
amounts or range of original loan amounts; the original Loan-to-Value Ratio on
a weighted average basis; and the original and remaining terms of the loans on
a weighted average basis. The related Prospectus Supplement may also specify
the number and type of units contained in each property, the loan amount per
unit for each project, the percentage of units in each property occupied as of
the Cut-off Date, the appraised value of each property and whether each
property is subject to local rent control ordinances. The related Prospectus
Supplement may set forth the types and locations of properties securing the
Mortgage Loans, the balloon, principal amortization or interest only terms, if
any, and whether the Mortgage Loan financed the acquisition or rehabilitation
of the underlying properties or refinanced prior indebtedness.
Unless otherwise specified in the Prospectus Supplement, the "Loan-to-Value
Ratio" of any Mortgage Loan will be determined by dividing the amount of the
loan by the "Original Value" of the related mortgaged property. The principal
amount of the "loan," for purposes of computation of the Loan-to-Value Ratio
of any Mortgage Loan, will include any part of an origination fee that has
been financed. In some instances, it may also include amounts which the seller
or some other party to the transaction has paid to the mortgagor, such as
minor reductions in the purchase price made at the closing. The "Original
Value" of a mortgage loan is (a) in the case of any newly originated mortgage
loan, the lesser of (i) the value of the mortgaged property, based on an
appraisal thereof acceptable to the Company and (ii) the selling price, and
(b) in the case of any mortgage loan used to retire a previous mortgage loan,
the value of the mortgaged property, based on an appraisal thereof acceptable
to the Company.
There can be no assurance that the Original Value will reflect actual real
estate values during the term of a Mortgage Loan. If the residential real
estate market should experience an overall decline in property values such
that the outstanding principal balances of the Mortgage Loans become equal to
or greater than the values of the Mortgaged Properties, the actual rates of
delinquencies, foreclosures and losses could be significantly higher than
those now generally experienced in the mortgage lending industry. In addition,
adverse economic conditions (which may or may not affect real estate values)
may affect the timely and ultimate payment by mortgagors of scheduled payments
of principal and interest on the Mortgage Loans and, accordingly, the actual
rates of delinquencies, foreclosures and losses with respect to the Mortgage
Loans.
AGENCY SECURITIES
Government National Mortgage Association (GNMA). GNMA is a wholly-owned
corporate instrumentality of the United States within the United States
Department of Housing and Urban Development. Section 306(g) of Title III of
the National Housing Act of 1934, as amended (the "Housing Act"), authorizes
GNMA to guarantee the timely payment of the principal of and interest on
certificates which represent an interest in a pool of mortgage loans insured
by the Federal Housing Administration ("FHA Loans"), guaranteed by the Farmers
Home Administration ("FmHA Loans") or partially guaranteed by the Veterans'
Administration ("VA Loans").
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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 guarantee under this subsection." In order to
meet its obligations under any such guarantee, GNMA may, under Section 306(d)
of the Housing Act, borrow from the United States Treasury in an amount which
is at any time sufficient to enable GNMA, with no limitations as to amount, to
perform its obligations under its guarantee.
GNMA Certificates. Each GNMA Certificate relating to a series (which may be
issued under either the GNMA I program or the GNMA II program, 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
("GNMA Issuer") 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 or VA Loans. Each GNMA Certificate will provide for the payment by
or on behalf of the GNMA Issuer to the registered holder of such GNMA
Certificate of scheduled monthly payments of principal and interest equal to
the registered holder's proportionate interest in the aggregate amount of the
monthly principal and interest payment on each FHA Loan, FmHA Loan or VA Loan
underlying such GNMA Certificate, less the applicable servicing and guarantee
fee which together equal the difference between the interest on the FHA Loan,
FmHA Loan or VA Loan and the pass-through rate on the GNMA Certificate. In
addition, each payment will include proportionate pass-through payments of any
prepayments of principal on the FHA Loans, FmHA Loans or VA Loans underlying
such GNMA Certificate and liquidation proceeds in the event of a foreclosure
or other disposition of any such FHA Loans, FmHA Loans or VA Loans.
The full and timely payment of principal of and interest on each GNMA
Certificate will be guaranteed by GNMA, which obligation is backed by the full
faith and credit of the United States.
Each GNMA Certificate will have an original maturity of not more than 30
years, but may have an original maturity 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.
GNMA will approve the issuance of each such GNMA Certificate in accordance
with a guarantee agreement (a "Guaranty Agreement") between GNMA and the GNMA
Issuer. Pursuant to its Guaranty Agreement, a GNMA Issuer will 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 Issuer on the
mortgage loans underlying such GNMA Certificate are less than the amounts due
on such GNMA Certificate.
If a GNMA Issuer 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 Issuer and the GNMA Issuer 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 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.
All mortgage loans underlying a particular GNMA I Certificate must have the
same interest rate (except for pools of mortgage loans secured by manufactured
homes) over the term of the loan. The interest rate on each GNMA I Certificate
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.
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Mortgage loans underlying a particular GNMA II Certificate may have per
annum interest rates that vary from each other by up to one percentage point.
The interest rate on each GNMA II Certificate will be between one-half
percentage point and one and one-half percentage points lower than the highest
interest rate on the mortgage loans included in the pool of mortgage loans
underlying such GNMA II Certificate (except for pools of mortgage loans
secured by manufactured homes).
Regular monthly installment payments on each GNMA Certificate relating to a
series will be comprised of interest due as specified on such GNMA Certificate
plus the scheduled principal payments on the FHA Loans of VA 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 are required to be paid to the
Trustee as registered holder by the 15th day of each month in the case of a
GNMA I Certificate and are required to be mailed to the Trustee by the 20th
day of each month in the case of a GNMA II Certificate. Any principal
prepayments on any FHA Loans or VA Loans underlying a GNMA Certificate
relating to a series or any other early recovery of principal on such loan
will be passed through to the Trustee as the registered holder of such GNMA
Certificate.
GNMA Certificates may be backed by graduated payment mortgage loans or by
"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 borrowers' monthly payments during the early years of such mortgage loan.
Payments due the registered holders of GNMA Certificates backed by pools
containing "buydown" mortgage loans will be computed in the same manner as
payments derived from non-"buydown" GNMA Certificates and will include amounts
to be collected from both the borrower and the related escrow account. The
graduated payment mortgage loans will provide for graduated interest payments
that, 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 subsequently years. The
obligations of GNMA and of a GNMA Issuer will be the same irrespective of
whether the GNMA Certificates relating to a series of Certificates are backed
by graduated payment mortgage loans or "buydown" mortgage loans. No statistics
comparable to the FHA's prepayment experience on level payment, non-"buydown"
mortgage loans are available in respect of graduated payment or "buydown"
mortgages. GNMA Certificates related to a series of Certificates may be held
in book-entry form.
If specified in the related Prospectus Supplement, GNMA Certificates
included in the Trust Fund for a series of Certificates may be held on deposit
at PTC, a 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 on
whose account the GNMA Certificate is credited.
If specified in a Prospectus Supplement, GNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
Federal National Mortgage Association (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 mortgage
loans from lenders, thereby replenishing their funds for additional lending.
FNMA acquires funds to purchase 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.
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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
Certificates 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 Certificates, 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.
If specified in a Prospectus Supplement, FNMA Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
Federal Home Loan Mortgage Corporation (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 urgently 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
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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 that it deems to be of such
quality, type and class as to meet generally the purchase standards imposed by
private institutional mortgage investors.
FHLMC Certificates. Each FHLMC Certificate represents an undivided interest
in a pool of mortgage loans that may consist of first lien conventional loans.
FHA Loans or VA Loans (a "FHLMC Certificate Pool"). FHLMC Certificates are
sold under the terms of a mortgage participation certificate agreement. A
FHLMC Certificate may be issued under either FHLMC's Cash Program or Guarantor
Program.
Each FHLMC Certificate represents an undivided interest in a pool of
mortgage loans that may consist of first lien conventional loans, FHA Loans or
VA Loans (a "FHLMC Certificate group"). FHLMC Certificates are sold under the
terms of a Mortgage Participation Certificate Agreement. A FHLMC Certificate
may be issued under either FHLMC's Cash Program or Guarantor Program.
Unless otherwise described in the related Prospectus Supplement, mortgage
loans underlying the FHLMC Certificates relating to a series will consist of
mortgage loans with original terms to maturity of between 10 and 30 years.
Each such mortgage loan must meet the applicable standards set forth in FHLMC
Act. A FHLMC Certificate group may include whole loans, participation interest
in whole loans and undivided interests in whole loans and/or participations
comprising another FHLMC Certificate group. Under the Guarantor Program any
such FHLMC Certificate group may include only whole loans or participation
interest in whole loans.
FHLMC guarantees to each registered holder of a FHLMC Certificate the timely
payment of interest at the applicable certificate rate on the registered
holder's pro rata share of the unpaid principal balance outstanding on the
mortgage loans in the related FHLMC Certificate Pool, whether or not received.
FHLMC also guarantees to each registered holder of a FHLMC Certificate
ultimate collection by such holder of all principal on the underlying mortgage
loans, without any offset or deduction, to the extent of such holder's pro
rata share thereof, but does not, except if and to the extent specified in the
Prospectus Supplement for a series, 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 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
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paid on the related mortgage loans. The Prospectus Supplement for each series
of Certificates for which the related Trust Fund includes FHLMC Certificates
will set forth the nature of FHLMC's guarantee with respect to scheduled
principal payments on the mortgage loans in the pools represented by such
FHLMC Certificates.
FHLMC Certificates are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute debts or obligations of the United States
or any Federal Home Loan Bank. The obligations of FHLMC under its guarantee
are obligations solely of FHLMC and are not backed by, nor entitled to, the
full faith and credit of the United States. If FHLMC were unable to satisfy
such obligations, distributions to holders of FHLMC Certificates would consist
solely of payments and other recoveries on the underlying mortgage loans and,
accordingly, monthly distributions to holders of FHLMC Certificates would be
affected by delinquent payments and defaults on such mortgage loans.
Requests for registration of ownership of FHLMC Certificates made on or
before the last business day of a month are made effective as of the first day
of that month. With respect to FHLMC Certificates sold by FHLMC on or after
January 2, 1985, a Federal Reserve Bank which maintains book-entry accounts
with respect thereto will make payments of interest and principal each month
to holders in accordance with the holders' instructions. The first payment to
a holder of a FHLMC Certificate will normally be received by the 15th day of
the second month following the month in which the purchaser became recognized
as the holder of such FHLMC Certificate. Thereafter, payments will normally be
received by the 15th day of each month.
A FHLMC Certificate may be issued under programs created by FHLMC, including
its Cash Program or Guarantor Program. Under FHLMC's Cash Program, the pooled
mortgage loans underlying a FHLMC Certificate are purchased for cash from a
number of sellers. With respect to FHLMC Certificate Pools formed prior to
June 1, 1987, under the Cash Program, there is no limitation on the amount by
which interest rates on the mortgage loans underlying a FHLMC Certificate may
exceed the interest rate on the FHLMC Certificate. Under such program, FHLMC
purchases groups of whole mortgage loans at specified percentages of their
unpaid principal balances, adjusted for accrued or prepaid interest, which,
when applied to the interest rate of the mortgage loans purchased, results in
the yield (expressed as a percentage) required by FHLMC. The required yield,
which includes a minimum servicing fee retained by the servicer, is calculated
using the outstanding principal balance of the mortgage loans, an assumed term
and a prepayment period as determined by FHLMC. No mortgage loan is purchased
by FHLMC at greater than 100% of its outstanding principal balance. Thus, the
range of interest rates on the mortgage loans in a FHLMC Certificate Pool
formed prior to June 1987 under the Cash Program will vary since mortgage
loans are purchased and identified to a FHLMC Certificate Pool based upon
their yield to FHLMC rather than on the interest rates on the mortgage loans.
With respect to FHLMC Certificate Pools formed on or after June 1, 1987, the
range of interest rates on the mortgage loans and participations in a FHLMC
Certificate Pool which is comprised of 15- or 30-year fixed-rate single family
mortgage loans bought by FHLMC under the Cash Program will be restricted to
one percentage point. In addition, the minimum interest rate on any mortgage
loan in a FHLMC Certificate Pool will be greater than or equal to the annual
pass-through rate on the related FHLMC Certificate, and the maximum interest
rate will not be more than two percentage points above such pass-through rate.
Under FHLMC's Guarantor Program, the mortgage loans underlying a FHLMC
Certificate are purchased from a single seller in exchange for such FHLMC
Certificate. The interest rate on a FHLMC Certificate under such program is
established based upon the lowest interest rate on the underlying mortgage
loans, minus a minimum servicing fee and the amount of FHLMC's management and
guaranty income as agreed upon between the seller and FHLMC. Under the
Guarantor Program, the range between the lowest and highest annual interest
rates on the mortgage loans in a FHLMC Certificate Pool may not exceed two
percentage points. For some FHLMC Certificates issued pursuant to purchase
contracts under the Guarantor Program on or after September 1, 1987, the range
of the interest rates on the mortgage loans in a FHLMC Certificate Pool will
not exceed one percentage point.
If specified in a Prospectus Supplement, FHLMC Certificates may be backed by
multifamily mortgage loans having the characteristics specified in such
Prospectus Supplement.
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Stripped Agency Securities. Agency Securities may consist of one or more
stripped mortgage-backed securities, each as described herein and in the
related Prospectus Supplement. Each such Agency Security will represent an
undivided interest in all or part of either the principal distributions (but
not the interest distributions) or the interest distributions (but not the
principal distributions), or in some specified portion of the principal and
interest distributions (but not all of such distributions) on certain GNMA,
FNMA or FHLMC Certificates. The underlying securities will be held under a
trust agreement by GNMA, FNMA or FHLMC each as trustee, or by another trustee
named in the related Prospectus Supplement. GNMA, FNMA or FHLMC will guarantee
each stripped Agency Security to the same extent as such entity guarantees the
underlying securities backing such stripped Agency Security, unless otherwise
specified in the related Prospectus Supplement.
Other Agency Securities. If specified in the related Prospectus Supplement,
a Trust Fund may include other mortgage pass-through certificates issued or
guaranteed by GNMA, FNMA or FHLMC. The characteristics of any such mortgage
pass-through certificates will be described in such Prospectus Supplement. If
so specified, a combination of different types of Agency Securities may be
held in a Trust Fund.
PRIVATE MORTGAGE-BACKED SECURITIES
Private Mortgage-Backed Securities may consist of (a) mortgage pass-through
certificates evidencing an undivided interest in a pool of Underlying Mortgage
Loans or certain mortgage-backed securities, or (b) collateralized mortgage
obligations secured by Underlying Mortgage Loans or certain mortgage-backed
securities. Private Mortgage-Backed Securities may include stripped mortgage-
backed securities representing an undivided interest in all or a part of
either the principal distributions (but not the interest distributions) or the
interest distributions (but not the principal distributions) or in some
specified portion of the principal and interest distributions (but not all of
such distributions) on certain Underlying Mortgage Loans or on certain
underlying mortgage-backed securities. Private Mortgage-Backed Securities will
have been issued pursuant to a pooling and servicing agreement, an indenture
or similar agreement (a "PMBS Agreement"). Generally, the seller/servicer of
the Underlying Mortgage Loans will have entered into the PMBS Agreement with
the trustee under such PMBS Agreement (the "PMBS Trustee"). The PMBS Trustee
or its agent, or a custodian, will possess the Underlying Mortgage Loans
relating to such Private Mortgage-Backed Security. Underlying Mortgage Loans
relating to a Private Mortgage-Backed Security will be serviced by a servicer
(the "PMBS Servicer") directly or by one or more subservicers who may be
subject to the supervision of the PMBS Servicer.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for
the purpose of, among other things, establishing trusts and acquiring and
selling housing loans to such trusts and selling beneficial interests in such
trusts. If so specified in the related Prospectus Supplement, the PMBS Issuer
may be an affiliate of the Company. The obligations of the PMBS Issuer will
generally be limited to certain representations and warranties with respect to
the assets conveyed by it to the related trust. Unless otherwise specified in
the related Prospectus Supplement, neither the PMBS Issuer nor any agency or
instrumentality of the United States nor any other person will have guaranteed
any of the assets conveyed to the related trust or any of the Private
Mortgage-Backed Securities issued under the PMBS Agreement.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-
Backed Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or
the PMBS Servicer may have the right to repurchase assets underlying the
Private Mortgage-Backed Securities after a certain date or under other
circumstances specified in the related Prospectus Supplement.
The Underlying Mortgage Loans relating to the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing loans or
graduated payment mortgage loans, buydown loans, adjustable rate
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mortgage loans, or loans having balloon or other special payment features.
Such Underlying Mortgage Loans may be secured by single family property,
multifamily property, manufactured homes or by an assignment of the
proprietary lease or occupancy agreement relating to a specific dwelling
within a Cooperative and the related shares issued by such Cooperative.
Credit support in the form of reserve funds, subordination of other private
mortgage certificates issued under the PMBS Agreement, letters of credit,
surety bonds, insurance policies, guaranties or other types of credit support
may be provided with respect to the Underlying Mortgage Loans relating to the
Private Mortgage-Backed Securities or with respect to the Private Mortgage-
Backed Securities themselves.
The related Prospectus Supplement for a series of Certificates will describe
any Private Mortgage-Backed Securities to be included in the Trust Fund for
such series, and may specify certain characteristics of the related Underlying
Mortgage Loans.
OTHER MORTGAGE SECURITIES
Other Mortgage Securities include any securities other than Agency
Securities and Private Mortgage-Backed Securities that directly or indirectly
represent an ownership interest in, or are secured by and payable from,
mortgage loans on real property or mortgage-backed securities. Other Mortgage
Securities may include residual interests in issuances of collateralized
mortgage obligations or mortgage pass-through certificates, as well as new
types of mortgage-related assets and securities that may be developed and
marketed from time to time. The Prospectus Supplement for a series of
Certificates will describe any Other Mortgage Securities to be included in the
Trust Fund for such series.
CREDIT ENHANCEMENT
GENERAL
Various forms of Credit Enhancement may be provided with respect to one or
more classes of a series of Certificates or with respect to the assets in the
related Trust Fund. Credit Enhancement may be in the form of the subordination
of one or more classes of the Certificates of such series, the establishment
of one or more Reserve Funds, the use of a cross-support feature, use of a
Mortgage Pool Insurance Policy, Special Hazard Insurance Policy, bankruptcy
bond, or another form of Credit Enhancement described in the related
Prospectus Supplement, or any combination of the foregoing. Unless otherwise
specified in the Prospectus Supplement, any Credit Enhancement will not
provide protection against all risks of loss and will not guarantee repayment
of the entire principal balance of the Certificates and interest thereon. If
losses occur which exceed the amount covered by Credit Enhancement or which
are not covered by Credit Enhancement, Certificateholders will bear their
allocable share of deficiencies.
SUBORDINATION
If so specified in the related Prospectus Supplement, distributions in
respect of scheduled principal, Principal Prepayments, interest or any
combination thereof that otherwise would have been payable to one or more
classes of Certificates of a series (the "Subordinated Certificates") will
instead be payable to holders of one or more other classes of such series (the
"Senior Certificates") under the circumstances and to the extent specified in
the Prospectus Supplement. If specified in the Prospectus Supplement, delays
in receipt of scheduled payments on the Mortgage Assets and losses on
defaulted Mortgage Assets will be borne first by the various classes of
Subordinated Certificates and thereafter by the various classes of Senior
Certificates, in each case under the circumstances and subject to the
limitations specified in the Prospectus Supplement. The aggregate
distributions in respect of delinquent payments on the Mortgage Assets over
the lives of the Certificates or at any time, the aggregate losses in respect
of defaulted Mortgage Assets which must be borne by the Subordinated
Certificates by virtue of subordination and the amount of the distributions
otherwise distributable to the Subordinated Certificateholders that will be
distributable to Senior Certificateholders on any Distribution Date may be
limited
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as specified in the Prospectus Supplement. If aggregate distributions in
respect of delinquent payments on the Mortgage Assets or aggregate losses in
respect of such Mortgage Assets were to exceed the total amounts payable and
available for distribution to holders of Subordinated Certificates of, if
applicable, were to exceed the specified maximum amount, holders of Senior
Certificates could experience losses on the Certificates.
In addition to or in lieu of the foregoing, if so specified in the
Prospectus Supplement, all or any portion of distributions otherwise payable
to holders of Subordinated Certificates on any Distribution Date may instead
be deposited into one or more Reserve Funds (as defined below) established by
the Trustee. If so specified in the Prospectus Supplement, such deposits may
be made on each Distribution Date, on each Distribution Date for specified
periods, or on each Distribution Date until the balance in the Reserve Fund
has reached a specified amount and, following payments from the Reserve Fund
to holders of Senior Certificates or otherwise, thereafter to the extent
necessary to restore the balance in the Reserve Fund to required levels, in
each case as specified in the Prospectus Supplement. If so specified in the
Prospectus Supplement, amounts on deposit in the Reserve Fund may be released
to the Company or the holders of any class of Certificates at the times and
under the circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Senior
Certificates and Subordinated Certificates may themselves be subordinate in
their right to receive certain distributions to other classes of Senior and
Subordinated Certificates, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Certificates and as between classes of
Subordinated Certificates, distributions may be allocated among such classes
(i) in the order of their scheduled final distribution dates, (ii) in
accordance with a schedule or formula, (iii) in relation to the occurrence of
events, or (iv) otherwise, in each case as specified in the Prospectus
Supplement. As between classes of Subordinated Certificates, payments to
holders of Senior Certificates on account of delinquencies or losses and
payments to any Reserve Fund will be allocated as specified in the Prospectus
Supplement.
CROSS-SUPPORT
If specified in the related Prospectus Supplement, the beneficial ownership
of separate groups of assets included in the Trust Fund for a series may be
evidenced by separate classes of related series of Certificates. In such case,
Credit Enhancement may be provided by a cross-support feature which may
require that distributions be made with respect to Certificates evidencing
beneficial ownership of one or more asset groups prior to distributions to
Subordinated Certificates evidencing a beneficial ownership interest in other
asset groups within the same Trust Fund. The Prospectus Supplement for a
series which includes a cross-support feature will describe the manner and
conditions for applying such cross-support feature.
If specified in the Prospectus Supplement, the coverage provided by one or
more forms of Credit Enhancement may apply concurrently to two or more
separate Trust Funds for a separate series of Certificates. If applicable, the
Prospectus Supplement will identify the Trust Funds to which such credit
support relates and the manner of determining the amount of the coverage
provided thereby and of the application of such coverage to the identified
Trust Funds.
POOL INSURANCE
With respect to a series for which the related Trust Fund includes Mortgage
Loans, in order to decrease the likelihood that Certificateholders will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more mortgage pool insurance policies
(each, a "Mortgage Pool Insurance Policy") will be obtained. Such Mortgage
Pool Insurance Policy will, subject to the limitations described below and in
the Prospectus Supplement, cover loss by reason of default in payments on such
Mortgage Loans up to the amounts specified in the Prospectus Supplement or
report on Form 8-K and for the periods specified in the Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the
Administrator under the related Agreement will agree to use its best
reasonable efforts to maintain any such Mortgage Pool
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Insurance Policy and to file claims thereunder with the issuer of such
Mortgage Pool Insurance Policy (the "Pool Insurer"). A Mortgage Pool Insurance
Policy, however, is not a blanket policy against loss, since claims thereunder
may only be made respecting particular defaulted Mortgage Loans and only upon
satisfaction of certain conditions precedent set forth in such policy as
described in the related Prospectus Supplement. Unless otherwise specified in
the related Prospectus Supplement, the Mortgage Pool Insurance Policies, if
any, will not cover losses due to a failure to pay or denial of a claim under
a primary mortgage insurance policy, irrespective of the reason therefor. The
related Prospectus Supplement will describe the terms of any applicable
Mortgage Pool Insurance Policy and will set forth certain information with
respect to the related Pool Insurer.
SPECIAL HAZARD INSURANCE
With respect to a series for which the related Trust Fund includes Mortgage
Loans, in order to decrease the likelihood that Certificateholders will
experience losses in respect of such Mortgage Loans, if specified in the
related Prospectus Supplement, one or more special hazard insurance policies
(each, a "Special Hazard Insurance Policy") will be obtained. Such a Special
Hazard Insurance Policy will, subject to limitations described below and in
the Prospectus Supplement, protect holders of Certificates from (i) loss by
reason of damage to Mortgaged Properties caused by certain hazards (including
earthquakes and, to a limited extent, tidal waves and related water damage)
not covered by the standard form of hazard insurance policy for the respective
states in which the Mortgaged Properties are located or under flood insurance
policies, if any, covering the Mortgaged Properties, and (ii) loss caused by
reason of the application of the co-insurance clause contained in hazard
insurance policies. See "Servicing of the Mortgage Loans--Hazard Insurance."
Any Special Hazard Insurance Policy may not cover losses occasioned by war,
civil insurrection, certain governmental actions, errors in design, faulty
workmanship or materials (except under certain circumstances), nuclear
reaction, flood (if the Mortgaged Property is located in a federally
designated flood area), chemical contamination and certain other risks.
Aggregate claims under each Special Hazard Insurance Policy will be limited as
described in the related Prospectus Supplement. Any Special Hazard Insurance
Policy may also provide that no claim may be paid unless hazard and if
applicable, flood insurance on the Mortgaged Property has been kept in force
and other protection and preservation expenses have been paid.
The related Prospectus Supplement will describe the terms of any applicable
Special Hazard Insurance Policy and will set forth certain information with
respect to the related Special Hazard Insurer.
BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the property securing the related Mortgage Loan at an
amount less than the then outstanding principal balance of such Mortgage Loan.
The amount of the secured debt could be reduced to such value, and the holder
of such Mortgage Loan thus would become an unsecured creditor to the extent
the outstanding principal balance of such Mortgage Loan exceeds the value so
assigned to the property by the bankruptcy court. In addition, certain other
modifications of the terms of a Mortgage Loan can result from a bankruptcy
proceeding, including the reduction in monthly payments required to be made by
the borrower. See "Certain Legal Aspects of the Mortgage Loans" herein. If so
provided in the related Prospectus Supplement, the Company will obtain a
bankruptcy bond or similar insurance contract (the "bankruptcy bond") for
proceedings with respect to borrowers under the Bankruptcy Code. The
bankruptcy bond will cover certain losses resulting from a reduction by a
bankruptcy court of scheduled payments of principal of and interest on a
Mortgage Loan or a reduction by such court of the principal amount of a
Mortgage Loan and will cover certain unpaid interest on the amount of such a
principal reduction from the date of the filing of a bankruptcy petition.
The bankruptcy bond will provide coverage in the aggregate amount specified
in the related Prospectus Supplement. Such amount will be reduced by payments
made under such bankruptcy bond in respect of the related Mortgage Loans,
unless otherwise specified in the related Prospectus Supplement, and will not
be restored.
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If specified in the related Prospectus Supplement, other forms of Credit
Enhancement may be provided to cover such bankruptcy-related losses. Any
bankruptcy bond or other form of Credit Enhancement provided to cover
bankruptcy-related losses will be described in the related Prospectus
Supplement.
RESERVE FUNDS
If specified in the Prospectus Supplement, assets such as cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, demand notes, certificates of deposit or
a combination thereof in the aggregate amount specified in the Prospectus
Supplement will be deposited by the Company on the Delivery Date in one or
more accounts (each, a "Reserve Fund") established and maintained with the
Trustee. Such cash and the principal and interest payments on such other
instruments will be used to enhance the likelihood of timely payment of
principal of, and interest on, or, if so specified in the Prospectus
Supplement, to provide additional protection against losses in respect of, the
assets in the related Trust Fund, to pay the expenses of the Trust Fund or for
such other purposes specified in the Prospectus Supplement. Whether or not the
Company has any obligation to make such a deposit, certain amounts to which
the Subordinated Certificateholders, if any, would otherwise be entitled may
instead be deposited into the Reserve Fund from time to time and in the
amounts as specified in the Prospectus Supplement. Any cash in any Reserve
Fund and the proceeds of any other instrument upon maturity will be invested
in Permitted Instruments. If a letter of credit is deposited with the Trustee,
such letter of credit will be irrevocable. Unless otherwise specified in the
Prospectus Supplement, any instrument deposited therein will name the Trustee,
in its capacity as trustee for the holders of the Certificates, a beneficiary
and will be issued by an entity acceptable to each rating agency that rates
the Certificates. Additional information with respect to such instruments
deposited in the Reserve Funds may be set forth in the Prospectus Supplement.
Any amounts so deposited and payments on instruments so deposited will be
available for withdrawal from the Reserve Fund for distribution to the holders
of Certificates for the purposes, in the manner and at the times specified in
the Prospectus Supplement.
OTHER INSURANCE, GUARANTEES AND SIMILAR INSTRUMENTS OR AGREEMENTS
If specified in the Prospectus Supplement, the related Trust Fund may also
include assets such as 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 included in such Trust
Fund, (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 Certificates, or (v) for such other purpose as is specified
in such Prospectus Supplement. Such arrangements may include agreements under
which Certificateholders are entitled to receive amounts deposited in various
accounts held by the Trustee upon the terms specified in the Prospectus
Supplement. Such arrangements may be in lieu of any obligation of the Services
or the Administrator to advance delinquent installments in respect of the
Mortgage Loans. See "Servicing of Mortgage Loans--Advances".
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SERVICING OF THE MORTGAGE LOANS
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans relating to a series will be serviced by one or more mortgage
loan servicing institutions (the "Servicers"), which may include the
Administrator, pursuant to servicing agreements between each Servicer and the
Partnership (each, a "Servicing Agreement"). The Partnership's rights, title
and interest under each Servicing Agreement with respect to the applicable
Mortgage Loans will be assigned to CI and CI will assign its rights, title and
interest therein to the Company, which will in turn assign its rights, title
and interest therein to the related Trustee pursuant to the related Agreement.
Pursuant to the related Agreement, the Company will be required to instruct
the Servicers of the related Mortgage Loans to deposit with the Trustee all
collections received by such Servicers on such Mortgage Loans (net of
servicing fees to be retained by the Servicers). The Mortgage Loans may be
covered by Primary Mortgage Insurance Policies, Standard Hazard Insurance
Policies and title insurance policies, as more fully described below and as
specified in the related Prospectus Supplement.
SERVICING AGREEMENTS
Unless otherwise specified in the related Prospectus Supplement, each
Servicer must be a FNMA- or FHLMC-approved servicer of conventional mortgage
loans. In addition, the Company and its affiliates require adequate servicing
experience, where appropriate, and financial stability, generally including a
net worth of at least $1,000,000, as well as satisfaction of certain other
criteria.
Each Servicer will be required to perform the customary functions of a
mortgage loan servicer, including collection of payments from borrowers under
the Mortgage Loans (the "Mortgagors") and remittance of such collections to
the Trustee, maintenance of applicable standard hazard insurance and primary
mortgage insurance policies, maintenance of escrow or impoundment accounts of
Mortgagors for payment of taxes, insurance, and other items required to be
paid by the Mortgagor pursuant to the Mortgage Loan, attempting to cure
delinquencies, supervising foreclosures, management of Mortgaged Properties
under certain circumstances, and maintaining accounting records relating to
the Mortgage Loans. Unless otherwise specified in the related Prospectus
Supplement, each Servicer will also be obligated to make advances in respect
of delinquent installments of principal and interest on Mortgage Loans, as
described more fully under "--Payments on Mortgage Loans" and "--Advances,"
and in respect of certain taxes and insurance premiums not paid on a timely
basis by Mortgagors.
The Servicers will be entitled to a monthly servicing fee as specified in
the related Prospectus Supplement. The Servicers will also generally be
entitled to collect and retain, as part of their servicing compensation, late
payment charges and assumption underwriting fees. The Servicers of the
Mortgage Loans will be reimbursed from proceeds of one or more of the
insurance policies described herein ("Insurance Proceeds") or from proceeds
received in connection with the liquidation of defaulted Mortgage Loans
("Liquidation Proceeds") for certain expenditures. See "--Advances" and "--
Administration and Servicing Compensation and Payment of Expenses" herein.
Each Servicer will be required to service each Mortgage Loan pursuant to the
terms of its Servicing Agreement for the entire term of such Mortgage Loan,
unless such Servicing Agreement is earlier terminated by the Trustee. Upon
termination of a Servicing Agreement, the Administrator will act as Servicer
of the related Mortgage Loans pursuant to a Servicing Agreement on the same
terms and conditions applicable to any other Servicer.
PAYMENTS ON MORTGAGE LOANS
Each Servicer will establish and maintain a separate account (each, a
"Custodial Account"). Subject to the following paragraph, each Custodial
Account must be an account the deposits in which are fully insured by either
the Federal Deposit Insurance Corporation ("FDIC") or the National Credit
Union Administration ("NCUA") or are, to the extent such deposits are in
excess of the coverage provided by such insurance, continuously secured
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by certain obligations issued or guaranteed by the United States of America.
If at any time the amount on deposit in such Custodial Account shall exceed
the amount so insured or secured, the applicable Servicer must remit to the
Trustee the amount on deposit in such Custodial Account which exceeds the
amount so insured or secured, less any amount such Servicer may retain for its
own account pursuant to its Servicing Agreement.
Notwithstanding the foregoing, the deposits in a Servicer's Custodial
Account will not be required to be fully insured or secured as described
above, and such Servicer will not be required to remit amounts on deposit
therein in excess of the amount so insured or secured, so long as such
Servicer meets certain requirements established by the rating agencies
requested to rate the Certificates.
Each Servicer is required to deposit into its Custodial Account on a daily
basis all amounts in respect of each Mortgage Loan received by such Servicer,
with interest adjusted to a rate (the "Remittance Rate") equal to the related
Mortgage Rate less the Servicer's servicing fee rate. On the 18th day of each
month, or such other day specified in the related Prospectus Supplement (the
"Remittance Date"), each Servicer of the Mortgage Loans will remit to the
Trustee all funds held in its Custodial Account with respect to each Mortgage
Loan; provided, however, that Principal Prepayments may be remitted on the
Remittance Date in the month following the month of such prepayment. Each
Servicer will be required, pursuant to the terms of the related Servicing
Agreement, to remit with each Principal Prepayment interest thereon at the
Remittance Rate through the last day of the month in which such Principal
Prepayment is made. Each Servicer is also required to advance its own funds as
described below.
ADVANCES
Unless otherwise specified in the related Prospectus Supplement, with
respect to a delinquent Mortgage Loan, the related Servicer will be obligated
to advance its own funds or funds from its Custodial Account equal to the
aggregate amount of payments of principal and interest (adjusted to the
applicable Remittance Rate) which were due on a Mortgage Loan due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Such advances are required to be made
by the Servicer unless the Servicer, with the concurrence of the
Administrator, determines that such advance ultimately would not be
reimbursable under any applicable insurance policy, from the proceeds of
liquidation of the related Mortgaged Properties, or from any other source (any
amount not so reimbursable being referred to herein as a "Nonrecoverable
Advance"). Such advance obligation will continue through the month following
the month of final liquidation of such Mortgage Loan. Any Servicer funds thus
advanced will be reimbursable to such Servicer out of recoveries on the
Mortgage Loans respecting which such amounts were advanced. The Servicers will
also be obligated to make advances in respect of certain taxes and insurance
premiums not paid by Mortgagors on a timely basis. Funds so advanced are
reimbursable to the Servicers out of recoveries on the related Mortgage Loans.
Each Servicer's right of reimbursement for any advance will be prior to the
rights of the Certificateholders to receive any related Insurance Proceeds or
Liquidation Proceeds.
Unless otherwise specified in the related Prospectus Supplement, the
Administrator will be obligated pursuant to the Agreement to advance on or
before the Distribution Date an amount equal to any Monthly Advance which a
Servicer fails to remit, but will not be obligated to make such advance if the
Administrator determines it to be a Nonrecoverable Advance. Failure by a
Servicer to make a required Monthly Advance will be grounds for termination
under the related Servicing Agreement.
SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans pursuant to written guidelines
promulgated by CMC, the managing general partner of the Partnership. The
Administrator will exercise its best reasonable efforts to insure that the
Servicers service the Mortgage Loans in compliance with such guidelines and in
a manner consistent with industry standards.
In any case in which property subject to a Mortgage is being conveyed by the
Mortgagor, each Servicer will in general be obligated, to the extent it has
knowledge of such conveyance, to exercise its right to accelerate
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the maturity of such Mortgage Loans under any due-on-sale clause applicable
thereto but only if the exercise of such rights is permitted by law and will
not impair or threaten to impair any recovery under any related Primary
Mortgage Insurance Policy. The Servicing Agreements will provide that if the
Servicer is prevented from enforcing such due-on-sale clause under applicable
law, or if the applicable Mortgage Loan does not include a due-on-sale clause,
the Servicer will enter into an assumption and modification agreement with the
person to whom such property has been or is about to be conveyed, pursuant to
which such person will become liable under the Mortgage Note; provided,
however, that the Servicer may not enter into an assumption and modification
agreement with such person unless such person satisfies the criteria necessary
to maintain the coverage provided by all applicable insurance policies or
unless such assumption and modification agreement is otherwise required by
law. Notwithstanding the foregoing, if a Servicer enters into such an
assumption and modification agreement with respect to a Mortgage Loan
including a due-on-sale clause, the Mortgagor will remain liable under the
Mortgage Note to the extent permitted by applicable law. See "Certain Legal
Aspects of Mortgage Loans--Enforceability of Certain Provisions." In
connection with any such assumption, the Mortgage Rate borne by the related
Mortgage Note may not be decreased.
PRIMARY MORTGAGE INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, (i) each
Mortgage Loan having a Loan-to-Value Ratio greater than 80% will be covered by
a primary mortgage insurance policy (a "Primary Mortgage Insurance Policy")
and (ii) the Servicing Agreements will require each Servicer to cause a
Primary Mortgage Insurance Policy to be maintained in full force and effect
with respect to each Mortgage Loan serviced by it which is currently covered
by a Primary Mortgage Insurance Policy until the Loan-to-Value Ratio of such
Mortgage Loan declines to 80%.
Unless otherwise specified in the related Prospectus Supplement, subject to
their provisions and certain conditions and exclusions described below, the
Primary Mortgage Insurance Policies will insure each covered Mortgage Loan
against default as to the principal amount thereof exceeding 75% of the
appraised value of the Mortgaged Property at the time of the origination of
such Mortgage Loan. The Primary Mortgage Insurance Policies will not insure
against certain losses which may be sustained in the event of a personal
bankruptcy of the mortgagor under a Mortgage Loan.
The Primary Mortgage Insurance Policies generally provide that no claim may
be validly presented thereunder unless (i) certain cash advances have been
made, and (ii) where there has been physical loss or damage to the Mortgaged
Property, it has been restored to its condition as of the date it was insured,
reasonable wear and tear excepted. Assuming the satisfaction of these
conditions, the issuer of a Primary Mortgage Insurance Policy will be
required, within the applicable policy limits, to pay either (a) an amount
equal to the principal balance of the defaulted Mortgage Loan covered thereby,
plus accrued and unpaid interest thereon to the date of claim, property
preservation expenses, certain other costs and other advances made by the
insured, against receipt of good and marketable title to the Mortgaged
Property or (b) the product of the amount described in clause (a), subject to
certain exceptions, multiplied by the applicable percentage of insurance
coverage.
Claim payments, if any, under each Primary Mortgage Insurance Policy will be
required to be remitted by the Servicers to the Trustee and will be treated in
the same manner as a prepayment of a Mortgage Loan.
STANDARD HAZARD INSURANCE POLICIES
Unless otherwise specified in the related Prospectus Supplement, the
Servicing Agreements will require each Servicer to cause to be maintained for
each Mortgage Loan serviced by it a standard hazard insurance policy (a
"Standard Hazard Insurance Policy") providing for not less than the coverage
of the standard form of fire insurance policy with extended coverage customary
in the state in which the Mortgaged Property is located. Such coverage will be
in an amount equal to the principal balance owing on such Mortgage Loan or, if
less, the maximum insurable value of the Mortgaged Properties securing such
Mortgage Loan. In all events, such coverage shall be in an amount sufficient
to ensure avoidance of the applicability of the co-insurance provisions
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under the terms and conditions of the applicable policy. The ability of each
Servicer to assure that hazard insurance proceeds are appropriately applied
may be dependent on its being named as an additional insured under any
Standard Hazard Insurance Policy and under any flood insurance policy referred
to below, or upon the extent to which information in this regard is furnished
to such Servicer by Mortgagors. All amounts collected by a Servicer under a
Standard Hazard Insurance Policy will be deposited in such Servicer's
Custodial Account. Unless otherwise specified in the related Prospectus
Supplement, each Servicing Agreement will provide that the related Servicer
may satisfy its obligation to cause hazard insurance policies to be maintained
by maintaining a blanket policy insuring against hazard losses on the Mortgage
Loans serviced by such Servicer.
In general, the standard form of fire and extended coverage policy covers
physical damage to or destruction of the Mortgaged Properties by fire,
lightning, explosion, smoke, windstorm and hail, and riot, strike and civil
commotion, subject to the conditions and exclusions specified in each policy.
Although the policies relating to the Mortgage Loans will be underwritten by
different insurers under different state laws in accordance with different
applicable state forms and therefore will not contain identical terms and
conditions, the basic terms thereof are dictated by respective state laws, and
most such policies typically do not cover any physical damage resulting from
the following: war, revolution, governmental actions, floods and other water-
related causes, earth movement (including earthquakes, landslides and
mudflows), nuclear reactions, wet or dry rot, vermin, rodents, insects,
domestic animals, theft and, in certain cases, vandalism. The foregoing list
is merely indicative of certain kinds of uninsured risks and is not intended
to be all-inclusive. A Standard Hazard Insurance Policy may also contain a
deductible that must be met prior to payment of any claim thereunder.
Since the amount of hazard insurance to be maintained on the Mortgaged
Properties may decline as the principal balances owing thereon decrease, and
since residential properties have generally appreciated in value over time, in
the event of partial loss, hazard insurance proceeds may be sufficient to
restore fully the damaged property.
TITLE INSURANCE POLICIES
The Servicing Agreements will require that a 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 FNMA.
CLAIMS UNDER PRIMARY MORTGAGE INSURANCE POLICIES AND STANDARD HAZARD INSURANCE
POLICIES; OTHER REALIZATION UPON DEFAULTED LOANS
Each Servicer will present claims to any primary insurer under any related
Primary Mortgage Insurance Policy and to the hazard insurer under any related
Standard Hazard Insurance Policy. All collections under any related Primary
Mortgage Insurance Policy or any related Standard Hazard Insurance Policy
(less any proceeds to be applied to the restoration or repair of the related
Mortgaged Property) will be remitted to the Trustee.
If any Mortgage Property securing a defaulted Mortgage Loan is damaged and
proceeds, if any, from the related Standard Hazard Insurance Policy are
insufficient to restore the damaged property to a condition sufficient to
permit recovery under any applicable Mortgage Pool Insurance Policy or any
related Primary Mortgage Insurance Policy, each Servicer will be required to
expend its own funds to restore the damaged property. In the event that a
Servicer fails to make a required expenditure, the Administrator will be
required to make such expenditure. In either case, the Servicer and the
Administrator will be required to make such expenditures only to the extent it
determines such expenditures are recoverable from Insurance Proceeds or
Liquidation Proceeds.
If recovery under any applicable Mortgage Pool Insurance Policy or any
related Primary Mortgage Insurance Policy is not available, the Servicer or
the Administrator, as the case may be, will nevertheless be obligated to
attempt to realize upon the defaulted Mortgage Loan. Foreclosure proceedings
will be conducted by the Servicer. If the proceeds of any liquidation of the
Mortgaged Property securing the defaulted Mortgage Loan are less than the
principal balance of the defaulted Mortgage Loan plus interest accrued
thereon, a loss will be realized on such Mortgage Loan, to the extent the
applicable Credit Enhancement is not sufficient, in the amount
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of such difference plus the aggregate of expenses incurred by the Servicer in
connection with such proceedings and which are reimbursable under the
Agreement. CONSEQUENTLY, ANY DEFAULT BY AN INSURER UNDER ANY INSURANCE POLICY
OR BANKRUPTCY BOND, ANY LOSSES IN EXCESS OF ANY INSURANCE POLICY OR BANKRUPTCY
LIMITS, ANY UNINSURED LOSS AND ANY INTEREST SHORTFALLS NOT OTHERWISE COVERED
AS DESCRIBED HEREIN OR IN THE PROSPECTUS SUPPLEMENT WILL LIKELY RESULT IN
LOSSES BEING BORNE BY ONE OR MORE CERTIFICATEHOLDERS OF THE AFFECTED SERIES.
Because Insurance Proceeds cannot exceed deficiency claims and certain
expenses incurred by the Servicer, no payments under the related Mortgage Pool
Insurance Policy, if any, will result in a recovery on the Mortgage Loans
which exceeds the principal balance of the defaulted Mortgage Loan together
with accrued interest thereon. In addition, where a Mortgaged Property
securing a defaulted Mortgage Loan can be resold for an amount exceeding the
principal balance of the related Mortgage Loan together with accrued interest
and expenses, it may be expected that, where retention of any such amount is
legally permissible, the Pool Insurer will exercise its right under the
related Mortgage Pool Insurance Policy, if any, to purchase such Mortgaged
Property and realize for itself any excess proceeds.
Liquidation Proceeds and Insurance Proceeds may initially be credited to a
separate account (the "Advance Account") in order to facilitate the
reimbursement of advances made by Servicers, the Administrator or an insurer.
Such proceeds will be held in the Advance Account until the earlier of the
date of final reimbursement to the appropriate parties and the second
Remittance Date after the date on which they were deposited in the Advance
Account. Interest shortfalls may be suffered on the Certificates if and to the
extent that Liquidation Proceeds and Insurance Proceeds are retained in the
Advance Account during a period in which Servicers are not making Monthly
Advances.
ADMINISTRATION AND SERVICING COMPENSATION AND PAYMENT OF EXPENSES
With respect to each Mortgage Loan, the Administrator may receive
compensation with respect to each interest payment on such Mortgage Loan in an
amount specified in the related Prospectus Supplement. As compensation for its
servicing duties, each Servicer will be entitled to a monthly servicing fee in
the amount specified in the related Prospectus Supplement. In addition to the
primary compensation, each Servicer will retain all assumption underwriting
fees and late payment charges, to the extent collected from Mortgagors.
The Administrator and each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of
defaulted Mortgage Loans. No loss will be suffered on the Certificates by
reason of such expenses to the extent claims for such expenses are paid
directly under any applicable Mortgage Pool Insurance Policy, Special Hazard
Insurance Policy, Primary Mortgage Insurance Policy, Standard Hazard Insurance
Policy or from other forms of Credit Enhancement. IN THE EVENT, HOWEVER, THAT
THE DEFAULTED MORTGAGE LOANS ARE NOT COVERED BY A MORTGAGE POOL INSURANCE
POLICY, SPECIAL HAZARD INSURANCE POLICY, PRIMARY MORTGAGE INSURANCE POLICIES,
STANDARD HAZARD INSURANCE POLICIES OR ANOTHER FORM OF CREDIT ENHANCEMENT, OR
CLAIMS ARE EITHER NOT MADE OR NOT PAID UNDER SUCH POLICIES OR CREDIT
ENHANCEMENT, OR IF COVERAGE THEREUNDER HAS CEASED, A LOSS WILL OCCUR ON THE
CERTIFICATES OF THE AFFECTED SERIES TO THE EXTENT THAT THE PROCEEDS FROM THE
LIQUIDATION OF A DEFAULTED MORTGAGE LOAN, AFTER REIMBURSEMENT OF THE
ADMINISTRATOR'S AND THE SERVICER'S EXPENSES, ARE LESS THAN THE PRINCIPAL
BALANCE OF SUCH DEFAULTED MORTGAGE LOAN.
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POOLING AND ADMINISTRATION
The following summaries describe certain provisions of the Agreements. The
summaries do not purport to be complete and are subject to, and qualified in
their entirety by reference to, the provisions of the Agreements. Where
particular provisions or terms used in the Agreements are referred to, such
provisions or terms are as specified in the Agreements. In addition, certain
of the following summaries only apply to an Agreement relating to series of
Certificates for which the related Trust Fund includes Mortgage Loans.
Provisions of Agreements relating to series of Certificates for which the
related Trust Fund includes other types of Mortgage Assets will be summarized
and described in the related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of Mortgage Loans. The Company will cause the Mortgage Loans
constituting a Mortgage Pool to be assigned to the Trustee together with all
principal and interest received by the Company on or with respect to such
Mortgage Loans on or after the Cut-off Date, other than principal and interest
due on or before the Cut-off Date. The Trustee will, concurrently with such
assignment, deliver the Certificates to the Company in exchange for the
Mortgage Loans. Each Mortgage Loan will be identified in a schedule appearing
as an exhibit to the Agreement.
In addition, the Company will, as to each Mortgage Loan, deliver to the
Trustee (i) the Mortgage Note endorsed to the order of the Trustee, (ii) the
Mortgage with evidence of recording indicated thereon or, with respect to
Mortgages whose recording has been delayed at the recording office, a copy of
such Mortgage together with a certificate of an authorized officer stating
that a true and correct copy of such Mortgage has been delivered for
recording, and (iii) an assignment in recordable form of the Mortgage. Unless
otherwise specified in the related Prospectus Supplement, assignments of the
Mortgages relating to the Mortgage Loans will be recorded in the name of the
Trustee in the appropriate public office for real property records.
With respect to any Mortgage Loans which are Cooperative Loans, the Company
will cause to be delivered to the Trustee, the related original Cooperative
note endorsed to the order of the Trustee, the original security agreement,
the proprietary lease or occupancy agreement, the recognition agreement, an
executed financing agreement and the relevant stock certificate and related
blank stock powers. The Company will file in the appropriate office an
assignment and a financing statement evidencing the Trustee's security
interest in each Cooperative Loan.
The Trustee is obligated to review the mortgage documents in original form
to ascertain that all the documents required to be delivered by the Agreement
have been executed and received. The Trustee or co-trustees designated by the
Trustee as provided in the Agreement, will hold such documents in trust for
the benefit of Certificateholders. If any document is found by the Trustee not
to have been executed or received and the Company cannot cure such defect, the
Company will repurchase the related Mortgage Loan (as described below).
Pursuant to its respective Loan Sale Agreement, each Seller will have made
certain representations and warranties with respect to each Mortgage Loan sold
by such Seller to the Partnership. See "The Company." Such representations and
warranties will generally have included, among other things: (i) that no
default existed under the Mortgage Loan; (ii) that title insurance and any
required hazard and primary mortgage insurance were effective; (iii) that the
prior owner had good title to each such Mortgage Loan and such Mortgage Loan
was subject to no offsets, defenses, counterclaims or rights of rescission;
(iv) that each Mortgage constituted a valid first lien on the Mortgaged
Property (subject only to certain permissible exceptions) and that the
Mortgaged Property was free from damage and was in good repair; and (v) that
no Mortgage Loan is subject to potential losses because the circumstances of
its origination involved fraudulent or negligent conduct by either the
Mortgagor, the originator or the Servicer (a "Fraudulent Mortgage Loan"). All
of the representations and warranties of any Seller with respect to a Mortgage
Loan will have been made as of the date on which such Seller sold such
Mortgage Loan to the Partnership. However, the Company will represent and
warrant in the Agreement that the representations and warranties of the
Sellers were true and correct as of the Cut-off Date.
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Pursuant to its respective Servicing Agreement, each Servicer will have made
certain representations and warranties with respect to each Mortgage Loan
serviced by such Servicer. Such representations and warranties will generally
have included, among other things: (i) that there is no default under the
terms and covenants of the Mortgage Loan as of the date such Mortgage Loan is
first serviced by such Servicer; (ii) that there are no delinquent tax or
delinquent assessment liens against the Mortgaged Property; (iii) that the
Servicer has not done any act or omitted to do any act which would create an
offset, defense or a counterclaim to the Mortgage Loan; and (iv) that the
Servicer has complied with various laws which impose requirements,
restrictions or conditions on the Servicer in connection with the servicing of
Mortgage Loans under the Servicing Agreement. The Company will represent and
warrant in the Agreement that the representations and warranties of the
Servicers were true and correct as of the Cut-Off Date.
Unless otherwise specified in the related Prospectus Supplement, pursuant to
a purchase agreement between the Partnership and CI, the Partnership will (i)
sell and assign to CI the Mortgage Loans and its rights under the Loan Sale
Agreements and Servicing Agreements with respect to such Mortgage Loans and
(ii) confirm to CI the warranties and representations made by the Sellers
pursuant to their Loan Sale Agreements and by the Servicers pursuant to their
Servicing Agreements. Thereafter, unless otherwise specified in the related
Prospectus Supplement, pursuant to a purchase agreement between CI and the
Company, CI will (i) sell and assign to the Company the Mortgage Loans and its
rights under the Loan Sale Agreements and Servicing Agreements with respect to
such Mortgage Loans and (ii) confirm to the Company the warranties and
representations made by the Sellers pursuant to their Loan Sale Agreements and
by the Servicers pursuant to their Servicing Agreements. See "The Company."
Upon the discovery by the Trustee or the Administrator of a material breach
of any representation or warranty made by the Partnership, CI, the Company, a
Seller or a Servicer in respect of a Mortgage Loan or of a material defect in
the mortgage documents relating to such Mortgage Loan, such Seller or
Servicer, the Company, CI and/or the Partnership will be obligated to cure
such breach or repurchase such Mortgage Loan at a price equal to 100% of the
then outstanding principal amount thereof plus accrued interest thereon to the
date of purchase; provided, however, that the obligation of the Company to
repurchase Fraudulent Mortgage Loans may be limited as described in the
related Prospectus Supplement. In addition, the Sellers and Servicers will
agree to indemnify against any loss or liability incurred by the Trustee on
account of any material breach of any representation or warranty made pursuant
to the applicable Loan Sale Agreements and Servicing Agreements. Unless
otherwise provided in the related Prospectus Supplement, the repurchase
obligation of the Partnership, CI and the Company constitutes the sole remedy
available to the Certificateholders or the Trustee for a material breach of
their respective representations or for a material defect in the mortgage
documents.
The Administrator's obligations with respect to the Mortgage Loans will
consist of its obligation to notify Servicers and Sellers if the documentation
for any Mortgage Loan is found to be defective, its monitoring and supervisory
obligations under the Agreement (including its obligations to enforce certain
repurchase and other obligations of Servicers and Sellers), and its obligation
to make certain cash advances in the event of delinquencies in payments on or
with respect to the Mortgage Loans and the applicable Servicer's failure to
make such advances. The obligations of the Servicers with respect to the
Mortgage Loans will be limited to their servicing duties and their obligation
to make advances pursuant to the Servicing Agreements as described under
"Servicing of the Mortgage Loans."
Notwithstanding the foregoing provisions, with respect to a Trust Fund for
which a REMIC election is to be made, unless the related Prospectus Supplement
otherwise provides, no purchase of a Mortgage Loan will be made if such
purchase would result in a prohibited transaction tax under the Code.
Assignment of Agency Securities, Private Mortgage-Backed Securities and
other Mortgage Securities. With respect to each series, unless otherwise
specified in the related Prospectus Supplement, the Company will cause any
Agency Securities, Private Mortgage-Backed Securities and Other Mortgage
Securities included in the related Trust Fund to be registered in the name of
the Trustee. The Trustee (or its custodian) will have possession of any
certificated Agency Securities, Private Mortgage-Backed Securities and Other
Mortgage Securities. Unless
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otherwise specified in the related Prospectus Supplement, the Trustee will not
be in possession of or be assignee of record of any underlying assets for an
Agency Security, Private Mortgage-Backed Security or Other Mortgage Security.
Each Agency Security, Private Mortgage-Backed Security and Other Mortgage
Security will be identified in a schedule appearing as an exhibit to the
related Agreement which may specify certain information with respect to such
security, including, as applicable, the original principal amount, outstanding
principal balance as of the Cut-off Date, annual pass-through rate or interest
rate and maturity date and certain other pertinent information for each such
security. The Company will represent and warrant to the Trustee, among other
things, the information contained in such schedule is true and correct and
that immediately prior to the transfer of the related securities to the
Trustee, the Company had good title to, and was the sole owner of, each such
security.
EVIDENCE AS TO COMPLIANCE
The related Agreement will provide that on or before a specified date in
each year, beginning the first such date that is at least a specified number
of months after the Cut-off Date, a firm of independent public accountants
will furnish a statement to the Trustee to the effect that, based on an
examination of certain specified documents and records relating to the
servicing of the Administrator's mortgage loan portfolio conducted
substantially in compliance with the audit program for mortgages serviced for
FNMA or FHLMC, the United States Department of Housing and Urban Development
Mortgage Audit Standards or the Uniform Single Audit Program for Mortgage
Bankers (the "Applicable Accounting Standards"), such firm is of the opinion
that such servicing has been conducted in compliance with the Applicable
Accounting Standards except for (a) such expenses as such firm shall believe
to be immaterial and (b) such other exceptions as shall be set forth in such
statement.
LIST OF CERTIFICATEHOLDERS
Upon written request of three or more Certificateholders of record of a
series of Certificates for purposes of communicating with other
Certificateholders with respect to their rights under the Agreement for such
series, the Trustee will afford such Certificateholders access during business
hours to the most recent list of Certificateholders of that series held by the
Trustee. With respect to Book Entry Certificates, the only named
Certificateholder on the Certificate register will be the Clearing Agency.
The Agreements will not provide for the holding of any annual or other
meetings of Certificateholders.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Company. In addition, the Administrator and the
Trustee acting jointly will have the power and the responsibility for
appointing co-trustees or separate trustees of all or any part of the Trust
Fund relating to a particular series of Certificates. In the event of such
appointment, all rights, powers, duties and obligations conferred or imposed
upon the Trustee by the Agreement shall be conferred or imposed upon the
Trustee and such separate trustee or co-trustee jointly, or, in any
jurisdiction in which the Trustee shall be incompetent or unqualified to
perform certain acts, singly upon such separate trustee or co-trustee who
shall exercise and perform such rights, powers, duties and obligations solely
at the direction of the Trustee.
The Trustee will make no representations as to the validity or sufficiency
of the Agreement, the Certificates or of any Mortgage Assets or related
documents, and will not be accountable for the use or application by the
Company of any funds paid to the Company in respect of the Certificates or the
related assets, or amounts deposited into the Certificate Account. If no Event
of Default has occurred, the Trustee will be required to perform only those
duties specifically required of it under the Agreement. However, upon receipt
of the various certificates, reports or other instruments required to be
furnished to it, the Trustee will be required to examine them to determine
whether they conform to the requirements of the Agreement.
The Trustee may resign at any time, and the Company may remove the Trustee
if the Trustee ceases to be eligible to continue as such under the Agreement,
if the Trustee becomes insolvent or in such other instances, if
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any, as are set forth in the Agreement. Following any resignation or removal
of the Trustee, the Company will be obligated to appoint a successor Trustee.
Any resignation or removal of the Trustee and appointment of a successor
Trustee will not become effective until acceptance of the appointment by the
successor Trustee.
ADMINISTRATION OF THE CERTIFICATE ACCOUNT
Each Agreement will require that the Certificate Account be any of the
following: (i) an account maintained with a depository institution the debt
obligations of which (or, in the case of a depository institution which is a
part of a holding company structure, the debt obligations of the holding
company of which) have a long-term or short-term rating acceptable to each
rating agency rating the related Certificates (ii) an account or accounts the
deposits in which are fully insured by either the Bank Insurance Fund (the
"BIF") of the FDIC or the Savings Association Insurance Fund (as successor to
the Federal Savings and Loan Insurance Corporation) ("SAIF") of the FDIC,
(iii) an account maintained with and in the name of the Trustee, in trust, and
in respect of which the amounts from time to time on deposit therein are
insured by the BIF or the SAIF (to the limits established by the FDIC),
provided that all funds in such account are invested in Permitted Instruments
(as defined below) within one business day of receipt or are remitted to the
Certificateholders within one business day of receipt therein; (iv) a trust
account maintained with the corporate trust department of a federal or state
chartered depository institution or trust company with trust powers and acting
in its fiduciary capacity for the benefit of the Trustee; or (v) an account
which will not cause any rating agency rating the relevant Certificates to
downgrade or withdraw its then-current rating assigned to the Certificates.
The instruments in which amounts in the Certificate Account may be invested
are limited to United States government securities and other investments
acceptable to the rating agencies rating such a series of Certificates, and
may include one or more Certificates of a series ("Permitted Instruments").
Unless otherwise specified in the related Prospectus Supplement, a Certificate
Account may be maintained as an interest bearing account, or the funds held
therein may be invested pending each succeeding Distribution Date in Permitted
Instruments. Unless otherwise specified in the related Prospectus Supplement,
the Administrator or the Trustee will be entitled to receive any such interest
or other income earned on funds in the Certificate Account as compensation.
Unless otherwise specified in the related Prospectus Supplement, the following
payments and collections received or made subsequent to the Cut-off Date
(including scheduled payments of principal and interest due after the Cut-off
Date but received on or before the Cut-off Date) will be deposited in the
Certificate Account:
(i) all Mortgagor payments on account of principal, including Principal
Prepayments and, if specified in the related Prospectus Supplement,
prepayment penalties;
(ii) all Mortgagor payments on account of interest, adjusted to the
Remittance Rate;
(iii) all Liquidation Proceeds net of certain amounts reimbursed to
Servicers or the Administrator, as described above;
(iv) all Insurance Proceeds, other than proceeds to be applied to the
restoration or repair of the related property or released to the Mortgagor,
and net of certain amounts reimbursed to Servicers or the Administrator, as
described above;
(v) all condemnation awards or settlements which are not released to the
Mortgagor in accordance with normal servicing procedures;
(vi) any Advances made as described under "Servicing of the Mortgage
Loans--Advances" and certain other amounts required under the Agreement to
be deposited in the Certificate Account;
(vii) all proceeds of any Mortgage Loan or property acquired in respect
thereof repurchased by the Company, CI, the Partnership, the Seller or the
Servicer or otherwise as described above or under "Termination" below;
(viii) all amounts, if any, required to be transferred to the Certificate
Account from any Credit Enhancement for the related series; and
(ix) all other amounts required to be deposited in the Certificate
Account pursuant to the related Agreement.
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REPORTS TO CERTIFICATEHOLDERS
Concurrently with each distribution on the Certificates, unless otherwise
specified in the Prospectus Supplement, the Trustee will mail to
Certificateholders a statement generally setting forth, to the extent
applicable to any series, among other things:
(i) the aggregate amount of such distribution allocable to principal,
separately identifying the amount allocable to each class;
(ii) the amount of such distribution allocable to interest, separately
identifying the amount allocable to each class;
(iii) the aggregate Certificate Principal Balance of each class of the
Certificates after giving effect to distributions on such Distribution
Date;
(iv) the aggregate Certificate Principal Balance of any class of Compound
Interest Certificates after giving effect to any increase in such Principal
Balance that results from the accrual of interest that is not yet
distributable thereon;
(v) if applicable, the amount otherwise distributable to holders of any
class of Certificates that was distributed to holders of other classes of
Certificates;
(vi) if any class of Certificates has priority in the right to receive
Principal Prepayments on the Mortgage Loans, the amount of Principal
Prepayments in respect of the Mortgage Loans;
(vii) as of the most recent date for which information was available, the
aggregate Principal Balance and number of Mortgage Loans which (a) were
delinquent 30-59 days, 60-89 days, and 90 days or more, and (b) were in
foreclosure; and
(viii) the amount of coverage then remaining under any Credit
Enhancement.
The Administrator or the Trustee will also furnish annually customary
information deemed necessary for Certificateholders to prepare their tax
returns.
EVENTS OF DEFAULT
An "Event of Default" under the Agreement will consist of (i) any failure by
the Administrator to duly observe or perform in any material respect any of
its covenants or agreements in such Agreement which continues unremedied for
60 days after the giving of written notice of such failure to the Company by
the Trustee or to the Administrator and the Trustee by the holders of
Certificates evidencing interests aggregating not less than 25% of the
affected class of Certificates; and (ii) certain events of insolvency,
readjustment of debt, marshaling of assets and liabilities or similar
proceedings and certain actions by the Administrator indicating its
insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
As long as an Event of Default under an Agreement remains unremedied by the
Administrator, the Trustee, or holders of Certificates of each class affected
thereby evidencing, as to each such class, interests aggregating not less than
51%, may terminate all of the rights and obligations of the Administrator
under such Agreement, whereupon the Trustee or a new Administrator appointed
pursuant to the Agreement will succeed to all the responsibilities, duties and
liabilities of the Administrator under such Agreement and will be entitled to
similar compensation arrangements. Notwithstanding its termination as
Administrator, the Administrator will be entitled to receive amounts earned by
it under the Agreement prior to such termination. Following such a termination
of the Administrator, pursuant to the applicable Agreement, the Company will
be required to appoint any established housing finance institution having a
net worth of not less than $10,000,000 to act as successor to the
Administrator under such Agreement. If no such successor shall have been
appointed within 30 days following such termination, then either the Company
or the Trustee may petition a court of competent jurisdiction for the
appointment of a successor Administrator. Pending the appointment of a
successor Administrator, the Trustee will act as Administrator. The Trustee,
the Company and such successor Administrator may agree upon the
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compensation to be paid to such successor Administrator, which in no event may
be greater than the compensation previously paid to the terminated
Administrator under such Agreement.
No holder of Certificates will have any right under the related Agreement to
institute any proceeding with respect to the Agreement, unless such holder
previously has given to the Trustee written notice of default and unless the
holders of Certificates as specified in the Prospectus Supplement have made
written request to the Trustee to institute such proceeding in its own name as
Trustee thereunder and have offered to the Trustee reasonable indemnity and
the Trustee for 60 days has neglected or refused to institute any such
proceedings. However, the Trustee will not be under any obligation to exercise
any of the trusts or powers vested in it by an 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 Trustee reasonable security or indemnity against the
costs, expenses and liabilities which may be incurred therein or thereby.
AMENDMENT
Each Agreement may be amended by the Company, the Administrator and the
Trustee, without Certificateholder consent, to cure any ambiguity, to correct
or supplement any provision therein which may be defective or inconsistent
with any other provisions therein or to add any other provisions with respect
to matters or questions arising under the Agreement provided that such
amendment is not materially inconsistent with the provisions of the Agreement
and that in each case, subject as stated in the next sentence, such action
will not adversely affect in any material respect the interests of any
Certificateholder of that series. An amendment described above shall not be
deemed to adversely affect in any material respect the interests of the
Certificateholders of that series if either (a) an opinion of counsel
satisfactory to the Trustee is obtained to such effect, or (b) the person
requesting the amendment obtains a letter from the rating agency then rating
the Certificates of that series that the amendment would not result in a
downgrading or withdrawal of the rating then assigned by it to such
Certificates. Notwithstanding the foregoing, the Company, the Administrator
and the Trustee may amend each Agreement without the consent of the
Certificateholders of the relevant series in order to modify, eliminate or add
to any of its provisions to such extent as may be appropriate or necessary to
maintain REMIC status of all or any portion of any Trust Fund as to which a
REMIC election has been made with respect to the applicable Certificates or to
avoid or minimalize the risk of the imposition of any tax on the Trust Fund
created by such Agreement that would be a claim against the Trustee at any
time prior to final redemption of the Certificates, provided that the Trustee
has obtained the opinion of independent counsel to the effect that such action
is necessary or appropriate to maintain REMIC status or to avoid or minimize
the risk of the imposition of such a tax. Unless otherwise specified in the
related Prospectus Supplement, each Agreement may also be amended by the
Company, the Administrator, and the Trustee with the consent of the holders of
Certificates evidencing interests aggregating not less than 66% of the
aggregate Certificate Principal Balance of the Certificates of the applicable
series for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such Agreement or of modifying in any
manner the rights of Certificateholders of that series; provided, however,
that no such amendment may (i) reduce in any manner the amount of, or delay
the timing of, collections of payments received on the related Mortgage Assets
or distributions which are required to be made on any Certificate without the
consent of the holder of such Certificate, (ii) adversely affect in any
material respect the interests of the holders of any class of Certificates in
any manner other than as described in (i), without the consent of the holders
of Certificates of such class evidencing at least 66% of the interests of such
class or (iii) reduce the aforesaid percentage of Certificates of any class
required to consent to any such amendment, without the consent of the holders
of all Certificates of such class then outstanding.
TERMINATION
Unless otherwise specified in the related Prospectus Supplement, the
obligations of the Company, the Administrator, and the Trustee created by each
Agreement will terminate upon the payment to the related Certificateholders of
all amounts required to be paid to them pursuant to the Agreement after the
later of (i) the
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maturity or other liquidation of the last Mortgage Assets subject thereto or
the disposition of all property acquired upon foreclosure of any related
Mortgage Loan or (ii) the repurchase by the Company from the Trust Fund of all
the outstanding Certificates or all remaining assets in the Trust Fund. The
Agreement will establish the repurchase price for the assets in the Trust Fund
and the allocation of such purchase price among the classes of Certificates.
The exercise of such right will effect early retirement of the Certificates of
that series, but the Company's right so to repurchase will be subject to the
conditions set forth in the related Prospectus Supplement. If REMIC election
is to be made with respect to all or a portion of a Trust Fund, there may be
additional conditions to the termination of such Trust Fund which will be
described in the related Prospectus Supplement. In no event, however, will the
trust created by the Agreement continue beyond the expiration of 21 years from
the death of the survivor of certain persons named in the Agreement. The
Trustee will give written notice of termination of the Agreement to each
Certificateholder, and the final distribution will be made only upon surrender
and cancellation of the Certificates at an office or agency of the Trustee
specified in such notice of termination.
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 Certificates will be applied to the simultaneous purchase of the
Mortgage Assets related to such series or to reimburse the amounts previously
used to effect such a purchase, the costs of carrying such Mortgage Assets
until sale of the Certificates and other expenses connected with pooling the
Mortgage Assets and issuing the Certificates.
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THE COMPANY
GENERAL
The Certificates offered hereby and by the related Prospectus Supplements
will be issued in series by Trust Funds created pursuant to the terms of an
Agreement. The Company is a limited purpose finance corporation established
primarily for the purpose of issuing one or more series of Certificates
through one or more Trust Funds. Each series of Certificates will represent
beneficial ownership of the separate assets comprising the related Trust Fund
described in the Prospectus Supplement relating to such series, which,
together with any other assets pledged for the benefit of Certificateholders
of such series, will constitute the only assets available to make payments on
the Certificates of such series. Accordingly, the investment characteristics
of a series of Certificates will be determined by the assets comprising the
Trust Fund for such series.
CI, which is the sole shareholder of the Company, does not intend to cause
the Company to file a voluntary application under any applicable insolvency
laws as long as the Company is solvent and does not foresee becoming
insolvent.
CMC SECURITIES CORPORATION II
The Company was incorporated under the laws of the State of Delaware on
January 4, 1993. The Company was formed primarily for the purpose of (i)
causing the issuance of one or more series of Certificates through one or more
Trust Funds created pursuant to an Agreement and (ii) purchasing, owning and
selling other mortgage-related assets. The Company is a wholly-owned, limited
purpose finance subsidiary of CI.
The Company's principal executive offices are located at 2711 N. Haskell
Avenue, Suite 1000, Dallas, Texas 75204. Its telephone number is (214) 874-
2323.
Unless otherwise specified in the related Prospectus Supplement, the
Mortgage Loans included in a Trust Fund for a series of Certificates will be
acquired by the Company from CI, which will have acquired such Mortgage Loans
from CMC Investment Partnership (the "Partnership"). The Partnership will have
acquired such Mortgage Loans from various sellers (each, a "Seller") pursuant
to Loan Sale Agreements (each, a "Loan Sale Agreement") between the
Partnership, Capstead Mortgage Corporation ("CMC"), the managing general
partner of the Partnership, and each such Seller. The Partnership is a Texas
general partnership having CMC and CI as its sole general partners. In each
Loan Sale Agreement, the related Seller will have made various representations
and warranties regarding the Mortgage Loans sold to the Partnership by such
Seller. The Partnership's rights to require repurchases of Mortgage Loans,
pursuant to the applicable Loan Sale Agreements, for breaches of such
representations and warranties will be assigned to the Trustee pursuant to the
related Agreement. See "Pooling and Administration."
The Company has not engaged, and will not engage, in any business or
investment activities other than, directly or through one or more trusts, (i)
acquiring, owning, holding, transferring and otherwise dealing with Mortgage
Assets, (ii) issuing and selling bonds secured by Mortgage Assets ("Bonds")
and pass-through certificates including the Certificates ("Pass-Through
Certificates") evidencing interests in Mortgage Assets certificates under any
other Agreement, and receiving, owning, holding and transferring therefor
Mortgage Assets (iii) becoming a general partner in limited partnerships
organized for the purpose of engaging in any of the activities which the
Company is authorized by its Certificate of Incorporation to perform, (iv) to
use the proceeds of the sale of Bonds or Pass-Through Certificates in
connection with the funding or acquisition of Mortgage Assets, (v)
transferring, pledging or assigning the rights to any amounts remitted or to
be remitted to the Company under the Agreement, and (vi) engaging in other
activities which are necessary or convenient to accomplish the foregoing and
are incidental thereto. Any class of a series of Certificates offered by the
Prospectus Supplement for such series of Certificates must be rated in one of
the four highest rating categories established by one or more nationally
recognized statistical rating agencies. Article III of the Company's
Certificate of Incorporation limits the Company's purposes to the above, and
Article VIII of the Company's Certificate of Incorporation prohibits the
Company, without obtaining the prior written consent of the Trustee under any
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Agreement, from amending Articles III or VIII of its Certificate of
Incorporation, or from dissolving or liquidating or from merging or
consolidating with any entity or conveying or transferring its properties and
assets to any other entity, except to a corporation wholly owned, directly or
indirectly, by any person or entity owning, directly or indirectly, 100% of
the outstanding common stock of the Company and having articles of
incorporation containing provisions substantially identical to the provisions
of Articles III and VIII of the Company's Certificate of Incorporation.
MORTGAGE LOAN UNDERWRITING
In general, the Partnership has developed underwriting guidelines and
property standards for the acquisition of mortgage loans based on the
anticipated requirements of insurers and management's analysis of the criteria
used by nationally recognized rating agencies to analyze the quality of the
collateral in pass-through certificates backed by mortgage loans. Certain of
the guidelines with respect to substantially all of the Mortgage Loans (other
than "reduced documentation" Mortgage Loans, as referred to below) are as
follows:
(1) 15-30 year, first lien, level payment loans;
(2) single-family, owner-occupied residences at time of origination;
(3) original loan balance must exceed $191,250 in the case of Mortgage
Loans originated during 1991, $202,300 in the case of Mortgage Loans
originated during 1992 and $203,150 in the case of Mortgage Loans
originated during 1993;
(4) Loan-to-Value Ratios and maximum loan amounts:
90% Loan-to-Value Ratio up to $400,000
85% Loan-to-Value Ratio up to $500,000
80% Loan-to-Value Ratio up to $600,000
75% Loan-to-Value Ratio up to $700,000
70% Loan-to-Value Ratio up to $800,000
60% Loan-to-Value Ratio up to $1,000,000; and
(5) mortgage loans may have been subject to cash-out refinancings if the
Loan-to-Value Ratio is 80% or less, subject to certain limitations.
"Reduced documentation" Mortgage Loans may be originated without the
verification of the mortgagor's employment and income according to the
Partnership's Reduced Documentation Program.
Guidelines with respect to substantially all of the "reduced documentation"
Mortgage Loans include those described in clauses (1)-(3) above and as
follows:
(1) Loan-to-Value Ratios and maximum loan amounts:
75% Loan-to-Value Ratio up to $600,000
70% Loan-to-Value Ratio up to $750,000; and
(2) mortgage loans may have been subject to cash-out refinancings if the
Loan-to-Value Ratio is 75% or less, subject to certain limitations.
The Partnership will deviate from its underwriting guidelines when acquiring
mortgage loans on a case-by-case basis where compensating factors exist. Two
guidelines where attributes are known to vary in the Mortgage Loans are the
monthly housing payment as a percentage of the mortgagor's monthly gross
income and total required monthly debt payments as a percentage of the
mortgagor's monthly gross income. In addition, variances may exist because
certain Mortgage Loans were underwritten prior to the adoption of the
foregoing guidelines. Notwithstanding the foregoing, a variance from the
underwriting guidelines will only be made to the extent that the inclusion of
any such mortgage loan would not be expected to prevent such mortgage loan
from being eligible for coverage under a Mortgage Pool Insurance Policy. In
addition, the underwriting guidelines and standards are
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subject to periodic review and may change depending on the investment
objectives of the Partnership, rating agency criteria and other requirements.
Mortgage loans purchased by the Partnership generally conform to FHLMC and
FNMA regulations and guidelines except that certain mortgage loans may have
initial principal balances greater than FHLMC and FNMA guidelines and except
that the Partnership continues to offer a limited documentation program which
has been discontinued by FHLMC and FNMA. The documentation which the
Partnership requires before purchasing a mortgage loan includes, but is not
limited to, a mortgage note, deed of trust or mortgage, commitment to issue a
title policy, HUD-1 or settlement statement, hazard insurance policy, FNMA
loan application, appraisal, credit history, income verification (except for
Reduced Documentation Program loans) and verification of deposit, if such
funds are needed to close the mortgage loan.
In addition, the Partnership requires that a Primary Mortgage Insurance
Policy be obtained (at the expense of the mortgagor) on certain mortgage
loans. All mortgage loans with Loan-to-Value Ratios exceeding 80% are required
to have a Primary Mortgage Insurance Policy in order to reduce the credit risk
to 75%, unless the inclusion of any such mortgage loan would not be expected
to prevent such mortgage loan from being eligible for coverage under a
Mortgage Pool Insurance Policy. If the borrower defaults on the mortgage loan,
the primary mortgage insurer will either purchase the property for a sum equal
to the principal and interest outstanding on the mortgage loan or the insurer
will pay a pre-specified percentage (typically 12% to 17%) of the principal
balance of the mortgage loan.
An appraisal is required on each property securing a mortgage loan.
Appraisals must be performed by independent appraisal companies unaffiliated
with the Partnership.
In addition to its regular mortgage purchase program, the Partnership has
special requirements for reduced documentation program loans, buy-down
Mortgage Loans, cash-out refinances and loans over $650,000. These special
requirements may include lower Loan-to-Value Ratios and stricter underwriting
criteria.
CERTAIN LEGAL ASPECTS OF THE 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 primarily 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 security for the Mortgage Loans is situated. The summaries are qualified
in their entirety be reference to the applicable federal and state laws
governing the Mortgage Loans.
GENERAL
Mortgages. The Mortgage Loans will be secured either by deeds of trust or
mortgages. 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 or the land trustee (as
described below), and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, there are three parties because title
to the property is held by a land trustee under a land trust agreement of
which the borrower/homeowner is the beneficiary; at origination of a mortgage
loan, the borrower executes a separate undertaking to make payments on the
mortgage note. 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 and generally with a power of sale, to the trustee to secure payment
of the obligation. The trustee's authority under a deed of trust and the
mortgagee's authority under a mortgage are governed by law, the express
provisions of the deed of trust or mortgage and, in some cases, the directions
of the beneficiary.
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Cooperatives. Certain of the Mortgage Loans may be Cooperative Loans. The
private, non-profit, cooperative apartment corporation owns all the real
property that comprises the project, including the land, separate dwelling
units and all common areas. The cooperative is directly responsible for
project management and, in most cases, payment of real estate taxes and hazard
and liability insurance. If there is a blanket mortgage on the cooperative
apartment building and/or underlying land, as is generally the case, the
cooperative, as project mortgagor, is also responsible for meeting these
mortgage obligations. A blanket mortgage is ordinarily incurred by the
cooperative in connection with the construction or purchase of the
cooperative's apartment building. The interest of the occupant under
proprietary leases or occupancy agreements to which that cooperative is a
party are generally subordinate to the interest of the holder of the blanket
mortgage in that building. If the cooperative is unable to meet the payment
obligations arising under its blanket mortgage, the mortgagee holding the
blanket mortgage could foreclose on that mortgage and terminate all
subordinate proprietary leases and occupancy agreements. In addition, the
blanket mortgage on a cooperative may provide financing in the form of a
mortgage that does not fully amortize with a significant portion of principal
being due in one lump sum at final maturity. The inability of the cooperative
to refinance this mortgage and its consequent inability to make such final
payment could lead to foreclosure by the mortgagee providing the financing. A
foreclosure in either event by the holder of the blanket mortgage could
eliminate or significantly diminish the value of any collateral held by the
lender who financed the purchase by an individual tenant-stockholder of
cooperative shares or, in the case of a Trust Fund including Cooperative
Loans, the collateral securing the Cooperative Loans.
The cooperative is owned by tenant-stockholders who, through ownership of
stock shares or membership certificates in the corporation, receive
proprietary leases or occupancy agreements which confer exclusive rights to
occupy specific units. Generally, a tenant-stockholder of a cooperative must
make a monthly payment to the cooperative representing such tenant-
stockholder's pro rata share of the cooperative's payments for its blanket
mortgage, real property taxes, maintenance expenses and other capital or
ordinary expenses. An ownership interest in a cooperative and accompanying
occupancy rights is financed through a cooperative share loan evidenced by a
promissory note and secured by a security interest in the occupancy agreement
or proprietary lease and in the related cooperative shares. The lender takes
possession of the share certificate and a counterpart of the proprietary lease
or occupancy agreement and a financing statement covering the proprietary
lease or occupancy agreement and the cooperative shares is filed in the
appropriate state and local offices to perfect the lender's interest in its
collateral. Subject to the limitations discussed below, upon default of the
tenant-stockholder, the lender may sue for judgment on the promissory note,
dispose of the collateral at a public or private sale or otherwise proceed
against the collateral or tenant-stockholder as an individual as provided in
the security agreement covering the assignment of the proprietary lease or
occupancy agreement and the pledge of cooperative shares.
FORECLOSURE
Mortgages. 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
that 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 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 lien holders. 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 law
controls the amount of foreclosure expenses and costs, including attorney's
fees, which may be recovered by a lender. If the deed of trust is not
reinstated, a notice of sale must be posted in a public place and, in most
states, published for a specific period of time in one or more newspapers. In
addition, some state laws require that a copy of the notice of sale be posted
on the property and sent to all parties having an interest in the real
property.
Foreclosure of a mortgage is generally accomplished by judicial action. The
action is initiated by the service of legal pleadings upon all parties having
an interest in the real property. Delays in completion of the foreclosure
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may occasionally result from difficulties in locating necessary parties
defendant. Judicial foreclosure proceedings are often not protested by any of
the parties defendant. However, when the mortgagee's right to foreclose is
contested, the legal proceedings necessary to resolve the issue can be time
consuming. After the completion of judicial foreclosure, the court generally
issues a judgment of foreclosure and appoints a referee or other court officer
to conduct the sale of the property.
In case of foreclosure under either a mortgage or a deed of trust, the sale
by the referee or other designated officer or by the trustee is a public sale.
However, because of the difficulty a potential buyer at the sale would have in
determining the exact status of title and because the physical condition of
the property may have deteriorated during foreclosure proceedings, it is
uncommon for a third party to purchase the property at the foreclosure sale.
Rather, it is common for the lender to purchase the property from the trustee
or referee for an amount equal to the principal amount of the mortgage or deed
of trust, accrued and unpaid interest and expenses of foreclosure. 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 sale of the property. Depending upon market conditions, the ultimate
proceeds of the sale of the property may not equal the lender's investment in
the property. Any loss may be reduced by the receipt of any mortgage insurance
proceeds.
Cooperative Loans. The cooperative shares owned by the tenant-stockholder
and pledged to the lender are, in almost all cases, subject to restrictions on
transfer as set forth in the cooperative's Certificate of Incorporation and
Bylaws, as well as the proprietary lease or occupancy agreement, and may be
canceled by the cooperative for failure by the tenant-stockholder to pay rent
or other obligations or charges owned by such tenant-stockholder, including
mechanics' liens against the cooperative apartment building incurred by such
tenant-stockholder. The proprietary lease or occupancy agreement generally
permits the cooperative to terminate such lease or agreement in the event an
obligor fails to make payments or defaults in the performance of covenants
required thereunder. Typically, the lender and the cooperative enter into a
recognition agreement which establishes the rights and obligations of both
parties in the event of a default by the tenant-stockholder on its obligations
under the proprietary lease or occupancy agreement. A default by the tenant-
stockholder under the proprietary lease or occupancy agreement will usually
constitute a default under the security agreement between the lender and the
tenant-stockholder.
The recognition agreement generally provides that, in the event that the
tenant-stockholder has defaulted under the proprietary lease or occupancy
agreement, the cooperative will take no action to terminate such lease or
agreement until the lender has been provided with an opportunity to cure the
default. The recognition agreement typically provides that if the proprietary
lease or occupancy agreement is terminated, the cooperative will recognize the
lender's lien against proceeds from a sale of the cooperative apartment,
subject, however, to the cooperative's right to sums due under such
proprietary lease or occupancy agreement. The total amount owed to the
cooperative by the tenant-stockholder, which the lender generally cannot
restrict and does not monitor, could reduce the value of the collateral below
the outstanding principal balance of the cooperative loan and accrued and
unpaid interest thereon.
Recognition agreements also provide that in the event of a foreclosure on a
cooperative loan, the lender must obtain the approval or consent of the
cooperative as required by the proprietary lease before transferring the
cooperative shares or assigning the proprietary lease. Generally, the lender
is not limited in any rights it may have to dispossess the tenant-
stockholders.
In some states, foreclosure on the cooperative shares is accomplished by a
sale in accordance with the provisions of Article 9 of the Uniform Commercial
Code (the "UCC") and the security agreement relating to those shares. Article
9 of the UCC requires that a sale be conducted in a "commercially reasonable"
manner. Whether a foreclosure sale has been conducted in a "commercially
reasonable" manner will depend on the facts in each case. In determining
commercial reasonableness, a court will look to the notice given the debtor
and the
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method, manner, time, place and terms of the foreclosure. Generally, a sale
conducted according to the usual practice of banks selling similar collateral
will be considered reasonably conducted.
Article 9 of the UCC provides that the proceeds of the sale will be applied
first to pay the costs and expenses of the sale and then to satisfy the
indebtedness secured by the lender's security interest. The recognition
agreement, however, generally provides that the lender's right to
reimbursement is subject to the right of the cooperative corporation to
receive sums due under the proprietary lease or occupancy agreement. If there
are proceeds remaining, the lender must account to the tenant-stockholder for
the surplus. Conversely, if a portion of the indebtedness remains unpaid, the
tenant-stockholder is generally responsible for the deficiency. See "Anti-
Deficiency Legislation and Other Limitations on Lenders" below.
RIGHT OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the borrower and foreclosed junior lienors are given a statutory
period in which to redeem the property from the foreclosure sale. In some
states, redemption may occur only upon payment of the entire principal balance
of the loan, accrued interest and expenses of foreclosure. In other states,
redemption may be authorized if the former borrower pays only a portion of the
sums due. The effect of a statutory right of redemption is to diminish the
ability of the lender to sell the foreclosed property. The rights of
redemption would defeat the title of any purchaser from the lender subsequent
to foreclosure or sale under a deed of trust. Consequently, the practical
effect of the redemption right is to force the lender to retain the property
and pay the expenses of ownership until the redemption period has run.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions that limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In
some states, statutes limit the right of the beneficiary or mortgagee to
obtain a deficiency judgment against the borrower following foreclosure or
sale under a deed of trust. A deficiency judgment would be a personal judgment
against the former borrower equal in most cases to the difference between the
net amount realized upon the public sale of the real property and the amount
due to the lender. Other 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. Finally, other statutory provisions limit any deficiency
judgment against the former borrower following a judicial sale to the excess
of the outstanding debt over the fair market value of the property at the time
of the public sale. The purpose of these statutes is generally to prevent a
beneficiary or a mortgagee from obtaining a large deficiency judgment against
the former borrower as a result of low or no bids at the judicial sale.
In addition to laws limiting or prohibiting deficiency judgments, numerous
other statutory provisions, including the federal bankruptcy laws and state
laws affording relief to debtors, may interfere with or affect the ability of
the secured mortgage lender to realize upon collateral and/or enforce a
deficiency judgment. For example, with respect to federal bankruptcy law, a
court with federal bankruptcy jurisdiction may permit a debtor through his or
her Chapter 11 or Chapter 13 rehabilitative plan to cure a monetary default in
respect of a mortgage loan on a debtor's residence by paying arrearages within
a reasonable time period and reinstating the original mortgage loan payment
schedule even though the lender accelerated the mortgage loan and final
judgment of foreclosure had been entered in state court (provided no sale of
the residence had yet occurred) prior to the filing of the debtor's petition.
Some courts with federal bankruptcy jurisdiction have approved plans, based on
the particular fact 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 modifications 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.
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The Internal Revenue Code of 1986, as amended, 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.
Generally, Article 9 of the UCC governs foreclosure on cooperative shares
and the related proprietary lease or occupancy agreement. Some courts have
interpreted section 9-504 of the UCC to prohibit a deficiency award unless the
creditor establishes that the sale of the collateral (which, in the case of a
Cooperative Loan, would be the shares of the cooperative and the related
proprietary lease or occupancy agreement) was conducted in a commercially
reasonable manner.
ENFORCEABILITY OF CERTAIN PROVISIONS
Certain of the Mortgage Loans will contain due-on-sale clauses. These
clauses permit the lender to accelerate the maturity of a loan if the borrower
sells, transfers, or conveys the property. The enforceability of these clauses
was the subject of legislation or litigation in many states, and in some cases
the enforceability of these clauses was limited or denied. However, the Garn-
St. Germain Depository Institutions Act of 1982 (the "Garn-St. Germain Act")
preempts state constitutional, statutory and case law prohibiting the
enforcement of due-on-sale clauses and permits lenders to enforce these
clauses in accordance with their terms, subject to certain limited exceptions.
The Garn-St. Germain Act does "encourage" lenders to permit assumption of
loans at the original rate of interest or at some other rate less than the
average of the original rate and the market rate.
Exempted from the general rule of enforceability of due-on-sale clauses were
mortgage loans (originated other than by federal savings and loan associations
and federal savings banks) that were made 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"). However, this exception
applied only to transfers of property underlying Window Period Loans occurring
between October 15, 1982 and October 15, 1985 and does not restrict
enforcement of a due-on-sale clause in connection with current transfers of
property underlying 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 Office of
Thrift Supervision (the "OTS"), as successor to the Federal Home Loan Bank
Board which preempt state law restrictions on the enforcement of due-on-sale
clauses.
The Garn-St. Germain Act also sets forth nine specific instances in which a
mortgage lender covered by the Garn-St. Germain Act (including federal savings
and loan associations and federal savings banks) may not exercise a due-on-
sale clause, notwithstanding the fact that a transfer of the property may have
occurred. These 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. German Act by the
Federal Home Loan Bank Board as succeeded by the OTS, also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to
a due-on-sale clause. If interest rates were to rise above the interest rates
on the Mortgage Loans, then any inability of the Administrator to enforce due-
on-sale clauses may result in the Trust Fund including a greater number of
loans bearing below-market interest rates than would otherwise be the case,
since a transferee of the property underlying a Mortgage Loan would have a
greater incentive in such circumstances to assume the transferor's Mortgage
Loan. Any inability of the Company to enforce due-on-sale clauses may affect
the average life of the Mortgage Loans and the number of Mortgage Loans that
may be outstanding until maturity.
Upon foreclosure, 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 requirements that the lender
undertake affirmative and
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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 provisions 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 borrower.
The standard forms of note, mortgage and deed of trust generally 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. Under the Agreement, late charges (to the extent
permitted by law and not waived by the Administrator) will be retained by the
Administrator as additional servicing compensation.
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 Trustee will not be deemed to be a
"holder in due course" within the meaning of the Uniform Commercial Code and
may take such a Mortgage Note subject to certain restrictions on its ability
to foreclose and to certain contractual defenses available to a Mortgagor.
ENVIRONMENTAL LEGISLATION
Certain states impose a statutory lien for associated costs on property that
is the subject of a cleanup action by the state on account of hazardous wastes
or hazardous substances released or disposed of on, or contained in, the
property. Such a lien will generally have priority over all subsequent liens
on the property and, in certain of these states, will have priority over prior
recorded liens including the lien of a mortgage. In addition, under federal
environmental legislation and under state law in a number of states, a secured
party which takes a deed in lieu of foreclosure or acquires a mortgaged
property at a foreclosure sale or assumes active control over the operation or
management of a property so as to be deemed an "owner" or "operator" of the
property may be liable for the costs of cleaning up a contaminated site.
Although such costs could be substantial, it is unclear whether they would be
imposed on a secured lender (such as a Trust Fund) to homeowners. In the event
that title to a Mortgaged Property securing a Mortgage Loan in a Trust Fund
was acquired by the Trust Fund and cleanup costs were incurred in respect of
the Mortgaged Property, the holders of the related series of Certificates
might realize a loss if such costs were required to be paid by the Trust Fund.
In addition, the presence of certain environmental contamination, including,
but not limited to, lead-based paint, asbestos and leaking underground storage
tanks could result in the holders of the related series of Certificates
realizing a loss if associated costs were required to be paid by the Trust
Fund. The Company, CMC, the Partnership, CI, the Underwriters, the Sellers,
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.
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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. The OTS, as
successor to the Federal Home Loan Bank Board, is authorized to issue rules
and regulations and to publish interpretations governing implementation of
Title V. The statute authorized any state to reimpose interest rate limits by
adopting, before April 1, 1983, a law or constitutional provision which
expressly rejects application of the federal law. Certain states have enacted
legislation rejecting 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.
Under the Agreement for each series of Certificates, the Company will
represent and warrant to the Trustee that the Mortgage Loans comply with
applicable state laws, including usury laws.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act of
1940, as amended (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 Servicers to collect full
amounts of interest on certain of the Mortgage Loans. In addition, the Relief
Act imposes limitations which would impair the ability of the Servicers to
foreclose on 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 realize upon the
Mortgaged Property in a timely fashion.
Unless otherwise provided in the Prospectus Supplement for a series of
Certificates, any shortfalls in interest collections resulting from
application of the Relief Act to the related Mortgage Loans would result in
losses to the holders of such Certificates.
LEGAL INVESTMENT MATTERS
Unless otherwise specified in the related Prospectus Supplement, the
Certificates 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 Certificates will constitute legal investments for persons,
trusts, corporations, partnerships, associations, business trusts and business
entities (including but not limited to state-chartered savings banks,
commercial banks, savings and loan associations and insurance companies, as
well as trustees and state government employee retirement systems) created
pursuant to or existing under the laws of the United States or any State
(including the District of Columbia and Puerto Rico) whose authorized
investments are subject to State regulation to the same extent that, under
applicable law, obligations issued by or guaranteed as to principal and
interest by the United States or any agency or instrumentality thereof
constitute legal investments for such entities. Pursuant to SMMEA, Alaska,
Arkansas, Colorado, Connecticut, Delaware, Florida, Georgia, Illinois, Kansas,
Louisiana, Maryland, Michigan, Missouri, Nebraska, New Hampshire, New York,
North Carolina, Ohio, South Dakota, Utah, Virginia and West Virginia each
enacted legislation prior to the October 4, 1991 deadline for such enactments,
limiting to varying extents the ability of certain entities (in particular,
insurance companies) to invest in "mortgage related securities," in most cases
by requiring the affected investors to rely upon existing state law, and not
SMMEA. Accordingly, the investors affected by such legislation will be
authorized to invest in the Certificates only to the extent provided in such
legislation.
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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 Certificates. 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
FDIC, the OTS, the NCUA or other federal or state agencies with similar
authority should review any applicable rules, guidelines and regulations prior
to purchasing the Certificates. 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
Certificates), 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
Certificates or to purchase Certificates 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
Certificates offered pursuant to this Prospectus will not constitute "mortgage
related securities" under SMMEA. The appropriate characterization of those
Certificates under various legal investment restrictions, and thus the ability
of investors subject to these restrictions to purchase the Certificates, may
be subject to significant interpretive uncertainties. No representation is
made as to the proper characterization of Certificates 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 Certificates under applicable legal investment restrictions. The
uncertainties described above (and any unfavorable future determination
concerning legal investment or financial institution regulatory
characteristics of such Certificates) may adversely affect the liquidity of
such Certificates.
Investors should consult their own legal advisors in determining whether and
to what extent the Certificates constitute legal investments for such
investors.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes requirements on employee benefit plans (and on certain other
retirement plans and arrangements, including individual retirement accounts
and annuities, Keogh plans and collective investment funds and separate
accounts in which such plans, accounts or arrangements are invested)
(collectively, "Plans") subject to ERISA and on persons who are fiduciaries
with respect to such Plans. Among other things, ERISA requires that the assets
of Plans be held in trust and that the trustee, or other duly authorized
fiduciary, have exclusive authority and discretion to manage and control the
assets of such Plans. ERISA also imposes certain duties on persons who are
fiduciaries of Plans. Under ERISA, any person who exercises any authority or
control respecting the management or disposition of the assets of a Plan is
considered to be a fiduciary of such Plan (subject to certain exceptions not
here relevant). In addition to the imposition of general fiduciary standards
of investment prudence and diversification, ERISA prohibits a broad range of
transactions involving Plan assets and persons ("Parties in Interest") having
certain specified relationships to a Plan and imposes additional prohibitions
where Parties in Interest are fiduciaries with respect to such Plan.
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The United States Department of Labor (the "DOL") has issued regulations
concerning the definition of what constitutes the assets of a Plan. (DOL Reg.
Section 2510.3-101) Under this regulation, the underlying assets and
properties of corporations, partnerships and certain other entities in which a
Plan makes an "equity" investment could be deemed for purposes of ERISA to be
assets of the investing Plan in certain circumstances. In such case, the
fiduciary making such an investment for the Plan could be deemed to have
delegated his or her asset management responsibility, and the underlying
assets and properties could be subject to ERISA reporting and disclosure.
Certain exceptions to the regulation may apply in the case of a Plan's
investment in the Certificates, but the Company cannot predict in advance
whether such exceptions apply due to the factual nature of the conditions to
be met. Accordingly, because the Mortgage Loans or Agency Securities may be
deemed Plan assets of each Plan that purchases Certificates, an investment in
the Certificates by a Plan might give rise to a prohibited transaction under
ERISA Sections 406 and 407 and be subject to an excise tax under Code Section
4975 unless a statutory or administrative exemption applies.
DOL Prohibited Transaction Class Exemption 83-1 ("PTCE 83-1") exempts from
ERISA's prohibited transaction rules certain transactions relating to the
operation of residential mortgage pool investment trusts and the purchase,
sale and holding of "mortgage pool pass-through certificates" in the initial
issuance of such certificates. PTCE 83-1 permits, subject to certain
conditions, transactions which might otherwise be prohibited between Plans and
Parties in Interest with respect to those Plans involving the origination,
maintenance and termination of mortgage pools consisting of mortgage loans
secured by first or second mortgages or deeds of trust on single-family
residential property, and the acquisition and holding of certain mortgage pool
pass-through certificates representing an interest in such mortgage pools by
Plans.
PTCE 83-1 sets forth three general conditions which must be satisfied for
any transaction to be eligible for exemption: (i) the maintenance of a system
of insurance or other protection for the pooled mortgage loans and property
securing such loans, and for indemnifying certificateholders against
reductions in pass-through payments due to property damage or defaults in loan
payments in an amount not less than the greater of one percent of the
aggregate principal balance of all covered pooled mortgage loans or the
principal balance of the largest covered pooled mortgage loan; (ii) the
existence of a pool trustee who is not an affiliate of the pool sponsor; and
(iii) a limitation on the amount of the payments retained by the pool sponsor,
together with other funds inuring to its benefit, to not more than adequate
consideration for selling the mortgage loans plus reasonable compensation for
services provided by the pool sponsor to the Mortgage Pool.
Although the Trustee for any series of Certificates will be unaffiliated
with the Company, there can be no assurance that the system of insurance or
subordination will meet the general or specific conditions referred to above.
In addition, the nature of a Trust Fund's assets or the characteristics of one
or more classes of the related series of Certificates may not be included
within the scope of PTCE 83-1 or any other class exemption under ERISA. The
Prospectus Supplement will provide additional information with respect to the
application of ERISA and the Code to the related Certificates.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTCE 83-1. Such exemptions can only apply to mortgage-backed
securities which, among other conditions, are sold in an offering with respect
to which such underwriter serves as the sole or a managing underwriter, or as
a selling or placement agent. Several other underwriters have applied for
similar exemptions. If such an exemption might be applicable to a series of
Certificates, the related Prospectus Supplement will refer to such
possibility.
Each Plan fiduciary who is responsible for making the investment decisions
whether to purchase or commit to purchase and to hold Certificates must make
its own determination as to whether the general and the specific conditions of
PTCE 83-1 have been satisfied, or as to the availability of any other
prohibited transaction exemptions. Each Plan fiduciary should also determine
whether, under the general fiduciary standards of investment prudence and
diversification, an investment in the Certificates is appropriate for the
Plan, taking into account the overall investment policy of the Plan and the
composition of the Plan's investment portfolio.
Any Plan proposing to invest in Certificates should consult with its counsel
to confirm that such investment will not result in a prohibited transaction
and will satisfy the other requirements of ERISA and the Code.
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CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of
Certificates. The discussion below does not purport to address all federal
income tax consequences that may be applicable to particular categories of
investors, some of which may be subject to special rules. The authorities on
which this discussion is based are subject to change or differing
interpretations, and any such change or interpretation could apply
retroactively. This 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 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. Investors should
consult their own tax advisors in determining the federal, state, local and
any other tax consequences to them of the purchase, ownership and disposition
of Certificates, particularly with respect to federal income tax changes
effected by the 1986 Act, TAMRA and the Final REMIC Regulations. The
Prospectus Supplement for each series of Certificates will discuss any special
tax consideration applicable to any Class of Certificates of such series, and
the discussion below is qualified by any such discussion in the related
Prospectus Supplement.
For purposes of this discussion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Loans, Agency
Securities or Private Mortgage-Backed Securities underlying a series of
Certificates, references to the Mortgage Loans, Agency Securities or Private
Mortgage-Backed Securities will be deemed to refer to that portion of the
Mortgage Loans, Agency Securities or Private Mortgage-Backed Securities held
by the Trust Fund which does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC CERTIFICATES
GENERAL
With respect to a particular series of Certificates, an election may be made
to treat the Trust Fund or one or more trusts or segregated pools of assets
therein as one or more REMICs within the meaning of Code Section 860D. A Trust
Fund or a portion or portions thereof as to which one or more REMIC elections
will be made will be referred to as a "REMIC Pool." For purposes of this
discussion, Certificates of a series as to which one or more REMIC elections
are made are referred to as "REMIC Certificates" and will consist of one or
more classes of "Regular Certificates" and one class of "Residual
Certificates" in the case of each REMIC Pool. Qualification as a REMIC
requires ongoing compliance with certain conditions. With respect to each
series of REMIC Certificates, Andrews & Kurth L.L.P., counsel to the Company,
has advised the Company that in the firm's opinion, assuming (i) the making of
an appropriate election, (ii) compliance with the Agreement and (iii)
continuing compliance with the applicable provisions of the Code, as it may be
amended from time to time, and any applicable Treasury regulations adopted
thereunder, each REMIC Pool will qualify as a REMIC. In such case, the Regular
Certificates will be considered to be "regular interests" in the REMIC Pool
and generally will be treated for federal income tax purposes as if they were
newly originated debt instruments, and the Residual Certificates will be
considered to be "residual interests" in the REMIC Pool. The Prospectus
Supplement for each series of Certificates will indicate whether one or more
REMIC elections with respect to the related Trust Fund will be made, in which
event references to "REMIC" or "REMIC Pool" herein shall be deemed to refer to
each such REMIC Pool. For purposes of this discussion, unless otherwise
specified herein or in the applicable Prospectus Supplement, the term
"Mortgage Loans" will be used to refer to Mortgage Loans, Agency Securities
and Private Mortgage-Backed Securities.
STATUS OF REMIC CERTIFICATES
REMIC Certificates held by a mutual savings bank or a domestic building and
loan association (a "Thrift Institution") will constitute "qualifying real
property loans" within the meaning of Code Section 593(d)(1) in the same
proportion that the assets of the REMIC Pool would be so treated. REMIC
Certificates held by a domestic building and loan association will constitute
"a regular or residual interest in a REMIC" within the
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meaning of Code Section 7701(a)(19)(C)(xi) in the same proportion that the
assets of the REMIC Pool would be treated as "loans . . . secured by an
interest in real property" within the meaning of Code Section
7701(a)(19)(C)(v) or as other assets described in Code Section 7701(a)(19)(C).
REMIC Certificates held by a real estate investment trust (a "REIT") will
constitute "real estate assets" within the meaning of Code Section
856(c)(5)(A), and interest on the REMIC Certificates will be considered
"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) in the same
proportion that, for both purposes, the assets of the REMIC Pool would be so
treated. However, if at all times 95% or more of the assets of the REMIC Pool
constitute qualifying assets for Thrift Institutions and REITs, the REMIC
Certificates will be treated entirely as qualifying assets for such entities
(and the income will be treated entirely as qualifying income) . Moreover, the
Final REMIC Regulations provide that, for purposes of Code Sections 593(d)(1)
and 856(c)(5)(A), payments of principal and interest on the Mortgage Loans
that are reinvested pending distribution to holders of REMIC Certificates
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%.
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 "qualifying real
property loans" or "loans . . . secured by an interest in real property" for
purposes of Code Sections 593(d)(1) and 7701(a)(19)(C)(v), respectively, may
be required to be reduced by the amount of the related buy-down funds. REMIC
Certificates held by a regulated investment company will not constitute
"Government securities" within the meaning of Code Section 851(b)(4)(A)(i).
REMIC Certificates held by certain financial institutions will constitute an
"evidence of indebtedness" within the meaning of Code Section 582(c)(1).
However, REMIC Regular Certificates 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).
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 Certificates)
and at all times thereafter, may consist of assets other than "qualified
mortgages" and "permitted investments." The Final REMIC Regulations provide a
"safe harbor" pursuant to which the de minimis requirement will be met if at
all times the aggregate adjusted basis of any nonqualified assets (i.e.,
assets other than qualified mortgages and permitted investments) is less than
1% of the aggregate adjusted basis of all the REMIC Pool's assets.
If a REMIC Pool fails to comply with one or more of the 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 for federal income tax purposes is uncertain. The
REMIC Pool might be entitled to treatment as a grantor trust under the rules
described in "Federal Income Tax Consequences for Certificates as to Which No
REMIC Election Is Made" herein. In that case, no entity-level tax would be
imposed on the REMIC Pool. Alternatively, the Regular Certificates 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 Regular Certificates and any administrative
expenses of the REMIC Pool) would be subject to corporate income tax at the
REMIC Pool level. On the other hand, an entity with multiple classes of
ownership interests may be treated as a separate association taxable as a
corporation under Treasury regulations, and the Regular Certificates may be
treated as equity interests therein. 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
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disqualification of the REMIC Pool would occur absent regulatory relief.
Investors should be aware, however, that 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.
TAXATION OF REGULAR CERTIFICATES
General
Payments received by holders of Regular Certificates generally should be
accorded the same tax treatment under the Code as payments received on
ordinary taxable corporate debt instruments. In general, interest, original
issue discount and market discount on a Regular Certificate will be treated as
ordinary income to a holder of the Regular Certificate (the "Regular
Certificateholder") as they accrue, and principal payments on a Regular
Certificate will be treated as a return of capital to the extent of the
Regular Certificateholder's basis in the Regular Certificate allocable
thereto. Regular Certificateholders must use the accrual method of accounting
with regard to Regular Certificates, regardless of the method of accounting
otherwise used by such Regular Certificateholders.
Original Issue Discount
Regular Certificates may be issued with "original issue discount" within the
meaning of Code Section 1273(a). Holders of any class of Regular Certificates
having original issue discount generally must include original issue discount
in ordinary income for federal income tax purposes as it accrues, in
accordance with a constant interest method that takes into account the
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 under Code Sections 1271 through 1273 and 1275 (the "OID
Regulations") and in part on the provisions of the 1986 Act, the Company
anticipates that the amount of original issue discount required to be included
in a Regular Certificateholder's income in any taxable year will be computed
in a manner substantially as described below. Regular Certificateholders
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 securities, such as the Regular Certificates, 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 Mortgage Loans 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 Certificates. The
Prospectus Supplement for each Series of such Certificates will specify the
Prepayment Assumption determined by the Company 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 ("IRS") 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 Certificates.
Under the OID Regulations, each Regular Certificate (except to the extent
described below with respect to a Regular Certificate 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 Regular
Certificateholder or by random lot (a "Retail Class Certificate")) will be
treated as a single installment obligation for purposes of determining the
original issue discount includible in a Regular Certificateholder's income.
The total amount of original issue discount on a Regular Certificate is the
excess of the "stated redemption price at maturity" of the Regular Certificate
over its "issue price." The issue price of a Regular Certificate is the first
price at which a substantial amount of Regular Certificates of that class are
first sold (other than to bond houses, brokers, underwriters and
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wholesalers). Unless specified otherwise in the Prospectus Supplement, the
Company will determine original issue discount by including the amount paid by
an initial Regular Certificateholder for accrued interest that relates to a
period prior to the issue date of the Regular Certificate in the issue price
of a Regular Certificate and will include in the stated redemption price at
maturity any interest paid on the first Distribution 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 Distribution Date. The stated redemption price
at maturity of a Regular Certificate always includes the original principal
amount of the Regular Certificate, but generally will not include
distributions of stated interest if such interest distributions 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 Regular Certificates 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. Distributions of interest on Regular Certificates 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
Regular Certificates includes all distributions of interest as well as
principal thereon. Moreover, if the interval between the issue date and the
first Distribution Date on a Regular Certificate is longer than the interval
between subsequent Distribution Dates (and interest paid on the first
Distribution 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 Regular Certificate 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 Distribution Date for each day
the Regular Certificate 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 Certificate's stated principal amount over its issue
price. The OID Regulations indicate that all interest on a long first period
Regular Certificate that is issued with non-de minimis original issue discount
will be included in the Regular Certificate's stated redemption price at
maturity. Regular Certificateholders should consult their own tax advisors to
determine the issue price and stated redemption price at maturity of a Regular
Certificate.
Under a de minimis rule, original issue discount on a Regular Certificate
will be considered to be zero if such original issue discount is less than
0.25% of the stated redemption price at maturity of the Regular Certificate
multiplied by the weighted average maturity of the Regular Certificate. For
this purpose, the weighted average maturity of the Regular Certificate is
computed as the sum of the amounts determined by multiplying the number of
full years (i.e., rounding down partial years) from the issue date until each
distribution in reduction of stated redemption price at maturity is scheduled
to be made by a fraction, the numerator of which is the amount of each
distribution included in the stated redemption price at maturity of the
Regular Certificate and the denominator of which is the stated redemption
price at maturity of the Regular Certificate. Although currently unclear, it
appears that the schedule of such distributions 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 Regular Certificate elects to accrue
all discount under a constant yield to maturity method, as described below,
the holder of a debt instrument includes any de minimis original issue
discount in income pro rata as capital gain recognized on retirement of the
Regular Certificate as stated principal payments are received. If a subsequent
Holder of a Regular Certificate issued with de minimis original issue discount
purchases the Regular Certificate at a premium, the subsequent Holder does not
include any original issue discount in income. If a subsequent Holder
purchases such Regular Certificate at a discount all discount is reported as
market discount, as described below.
Of the total amount of original issue discount on a Regular Certificate, the
Regular Certificateholder generally must include in gross income for any
taxable year the sum of the "daily portions," as defined below, of the
original issue discount on the Regular Certificate accrued during an accrual
period for each day on which
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he holds the Regular Certificate, including the date of purchase but excluding
the date of disposition. Although not free from doubt, the Company intends to
treat the monthly period ending on the day before each Distribution Date as
the accrual period, rather than the monthly period corresponding to the prior
calendar month. With respect to each Regular Certificate, a calculation will
be made of the original issue discount that accrues during each successive
full accrual period (or shorter period from the date of original issue) that
ends on the day before the related Distribution Date on the Regular
Certificate. 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 distributions to be made on the Regular Certificate as of the
end of that accrual period that are included in the Regular Certificate's
stated redemption price at maturity and (b) the distributions made on the
Regular Certificate during the accrual period that are included in the Regular
Certificate's stated redemption price at maturity, over (ii) the adjusted
issue price of the Regular Certificate at the beginning of the accrual period.
The present value of the remaining distributions referred to in the preceding
sentence is calculated based on (i) the yield to maturity of the Regular
Certificate at the issue date giving the 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 Regular Certificate at the beginning of any accrual period equals
the issue price of the Regular Certificate, increased by the aggregate amount
of original issue discount with respect to the Regular Certificate that
accrued in all prior accrual periods and reduced by the amount of
distributions included in the Regular Certificate's stated redemption price at
maturity that were made on the Regular Certificate in such prior periods. The
original issue discount accruing during any accrual period (as determined in
this paragraph) will then 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 Regular Certificateholder
generally will increase to take into account prepayments on the Regular
Certificates as a result of prepayments on the 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
Certificates can result in both a change in the priority of principal payments
with respect to certain classes of Regular Certificates and either an increase
or decrease in the daily portions of original issue discount with respect to
such Regular Certificates.
In the case of a Retail Class Certificate, the yield to maturity of such
Certificate 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 Certificate
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 distribution of the entire
principal amount of any Retail Class Certificate (or portion thereof), (a) the
remaining unaccrued original issue discount allocable to such Certificate (or
to such portion) will accrue at the time of such distribution, and (b) the
accrual of original issue discount allocable to each remaining Certificate of
such Class (or the remaining principal amount of a Retail Class Certificate
after a distribution 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
distributed.
A subsequent holder of a Certificate issued with original issue discount who
purchases the Certificate 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 Certificate. In computing
the daily portions of original issue discount for a subsequent purchaser (as
well as an initial purchaser who purchases a Certificate at a price higher
than the issue price but less than the stated redemption price at maturity),
however, the daily portion for any day is reduced by the amount that would be
the daily portion for such day (computed in accordance with the rules set
forth above) multiplied by a fraction, the numerator of which is the amount,
if any,
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by which the price paid by such purchaser for the Regular Certificate 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 holder of the Regular Certificate who purchased the Regular
Certificate at its issue price, over (ii) the amount of any prior
distributions included in the stated redemption price at maturity, and the
denominator of which is the sum of the daily portions for such Regular
Certificate (computed in accordance with the rules set forth above) for all
days beginning on the date after the date of purchase and ending on the date
on which the remaining principal amount of such Regular Certificate is
expected to be reduced to zero 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 Regular
Certificate 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
Regular Certificate with market discount, the Regular Certificateholder 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 Regular Certificateholder acquires during the year of the election
or thereafter. Similarly, a Regular Certificateholder that makes this election
for a Regular Certificate 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 Regular Certificateholder owns or
acquires. The election to accrue interest, discount and premium on a constant
yield method with respect to a Regular Certificate can not be revoked without
the consent of the IRS.
Regular Certificates 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 weighted average maturity or (ii) 15%
of the noncontingent principal payments. Second, the instrument must provide
for stated interest (compounded or paid at least annually) at (i) one or more
qualified floating rates, (ii) a single fixed rate and a single objective rate
that is a qualified inverse floating rate, (iii) a single fixed rate and one
or more qualified floating rates; or (iv) a single objective rate. Third, the
instrument must provide that each qualified floating rate or objective rate in
effect during the term of the Regular Certificate 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 Regular Certificate).
Fourth, the debt instrument must not provide for contingent principal
payments. If interest on a Regular Certificate is stated at a fixed rate for
an initial period of less than 1 year followed by a variable rate that is
either a qualified floating rate or an objective rate and the value of the
variable rate on the issue date is intended to approximate the fixed rate, the
fixed rate and the variable rate together constitute a single qualified
floating rate or objective rate. A rate is a qualified floating rate if
variations in the rate can reasonably be expected to measure contemporaneous
variations in the cost of newly borrowed funds in the Regular Certificate'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 Regular Certificate's term, (ii) the cap or
floor is not reasonably expected to cause the yield on the Regular Certificate
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. Before August 13, 1996, an objective rate is a rate that
is determined using a single fixed formula and is based on (i) the yield or
changes in price of actively traded personal property, (ii) one or more
qualified floating rates, (iii) a rate that would be a qualified rate if the
Regular Certificate were denominated in another currency or (iv) a combination
of such rates. For instruments issued on or after August 13, 1996, an
objective rate is a rate (other than a qualified floating rate) that is
determined using a single fixed formula and that is based on objective
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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 Regular
Certificate's term will be significantly less or greater than the average
value of the rate during the final half of the Regular Certificate's term.
If a variable rate Regular Certificate 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 Regular
Certificate had a fixed rate equal to (A) in the case of a qualified floating
rate or qualified inverse floating rate, the value on the issue date of the
qualified floating rate or qualified inverse floating rate or (B) in the case
of any other objective rate, a fixed rate that reflects the yield that is
reasonably expected for the Regular Certificate and (iii) the qualified stated
interest that accrues is adjusted for the interest actually paid. If a
variable rate Regular Certificate is not described in the previous sentence,
the Regular Certificate is treated as a fixed rate Regular Certificate with a
fixed rate substitute or substitutes equal to the value of the qualified
floating rates or qualified inverse floating rate at the date of issue or, in
the case of a Regular Certificate having an objective rate at a fixed rate
that reflects the yield reasonably expected for the Regular Certificate.
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 Regular Certificate 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 Regular Certificate 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 Regular Certificate would be approximately the same as the
fair market value of the hypothetical security.
Under the OID Regulations, a variable rate Regular Certificate not
qualifying for treatment under the variable rate rules described above is
subject to the contingent payment rules. Treasury regulations dealing with
contingent payment debt obligations were issued June 11, 1996 (the "Contingent
Debt Regulations"), and are generally effective August 13, 1996. The
Contingent Debt Regulations by their terms do not apply to REMIC regular
interests. However, the following paragraph describes the application
Contingent Debt Regulations as a method that may be considered reasonable.
The Contingent Debt Regulations apply a "noncontingent bond method" to a
debt instrument that is publicly traded or that is issued for cash or publicly
traded property. Under the noncontingent bond method, the issuer is required
to determine the comparable yield for the instrument and to construct a
projected payment schedule for the debt instrument consisting of all
noncontingent payments and a projected amount for each contingent payment. The
issuer is required to determine interest expense, and a holder is required to
determine interest income, according to the projected payment schedule
formulated by the issuer. Interest generally is accrued under the
noncontingent bond method according to generally applicable rules of the OID
Regulations as described above. Adjustments in the instrument's issue price
and the holder's basis are determined as if the projected payment schedule
were the actual payment schedule for the instrument. If the actual amount of a
contingent payment differs from the projected amount of the payment,
adjustments to interest accrual are generally taken into account at the time
the payment is made in order to reflect this difference. Gain or loss
recognized by a holder on the sale, exchange, or retirement of the instrument
generally will be treated as interest income or ordinary loss to the holder. A
loss will be treated as ordinary, however, only up to the amount of the
holder's total interest inclusions with respect to the instrument that were
not offset by previous adjustments. Any additional loss generally will be a
capital loss. Investors are urged to consult their tax advisors as to the
proper accrual of original issue discount (including stated interest) on the
Regular Certificates, including Regular Certificates which may be subject to
the contingent payment rules.
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Although unclear at present, the Company intends to treat Certificates
bearing an interest rate that is a weighted average of the net interest rates
on the Mortgage Loans or the mortgage loans underlying the Mortgage Assets as
having qualified stated interest if the Mortgage Loans or the underlying
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 Certificate 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 interest rate on the Certificates. It is possible, however, that
the IRS may treat some or all of the interest on Certificates 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 Certificates.
It is not clear how income should be accrued with respect to Regular
Certificates issued at a significant premium and to REMIC Certificates the
payments on which consist primarily of a specified portion of the interest
payments on qualified mortgages held by the REMIC ("Premium REMIC Regular
Certificates"). One method of income accrual would be to treat the Premium
REMIC Regular Certificate as a Certificate having qualified stated interest
purchased at a premium equal to the excess of the price paid by such holder
for the Premium REMIC Regular Certificate 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 Certificate 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 Certificate as a Certificate which has no qualified stated interest,
as described above. Finally, the IRS could assert that the Premium REMIC
Regular Certificates should be taxable under the contingent payment rules
governing securities issued with contingent payments.
Market Discount
A purchaser of a Regular Certificate also may be subject to the market
discount rules of Code Sections 1276 through 1278. Under these sections and
the principles applied by the OID Regulations in the context of original issue
discount, "market discount" is the amount by which a subsequent purchaser's
initial basis in the Regular Certificate (i) is exceeded by the stated
redemption price at maturity of the Regular Certificate or (ii) in the case of
a Regular Certificate having original issue discount, is exceeded by the sum
of the issue price of such Regular Certificate plus any original issue
discount that would have previously accrued thereon if held by an original
Regular Certificateholder (who purchased the Regular Certificate at its issue
price), in either case less any prior distributions included in the stated
redemption price at maturity of such Regular Certificate. Such purchaser
generally will be required to recognize accrued market discount as ordinary
income as distributions includible in the stated redemption price at maturity
of such Regular Certificate are received, in an amount not exceeding any such
distribution. That recognition rule would apply regardless of whether the
purchaser is a cash-basis or accrual-basis taxpayer. Such market discount
would accrue in a manner to be provided in Treasury regulations and should
take into account the Prepayment Assumption. The Committee Report provides
that until such regulations are issued, such market discount would accrue
either (i) on the basis of a constant interest rate or (ii) in the ratio of
stated interest allocable to the relevant period to the sum of the interest
for such period plus the remaining interest as of the end of such period, or
in the case of a Regular Certificate issued with original issue discount, in
the ratio of original issue discount accrued for the relevant period to the
sum of the original issue discount accrued for such period plus the remaining
original issue discount as of the end of such period. Such purchaser also
generally will be required to treat a portion of any gain on a sale or
exchange of the Regular Certificate 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 distributions in reduction of the stated redemption price at
maturity were received. Such purchaser will be
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required to defer the deduction of a portion of the excess of the interest
paid or accrued on indebtedness incurred to purchase or carry a Regular
Certificate over the interest distributable thereon. The deferred portion of
such interest expense in any taxable year generally will not exceed the
accrued market discount on the Regular Certificate for such year. 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 Certificate is disposed of. As an alternative to the inclusion of
market discount in income on the foregoing basis, the Regular
Certificateholder may elect to include market discount in income currently as
it accrues on all market discount instruments acquired by such Regular
Certificateholder in that taxable year or thereafter, in which case the
interest deferral rule will not apply. In Revenue Procedure 92-67, the
Internal Revenue Service 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.
By analogy to the OID Regulations, market discount with respect to a Regular
Certificate will be considered to be zero if such market discount is less than
0.25% of the remaining stated redemption price at maturity of such Regular
Certificate multiplied by the weighted average maturity of the Regular
Certificate (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, and 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 with respect thereto.
Premium
A Regular Certificate purchased at a cost greater than its remaining stated
redemption price at maturity generally is considered to be purchased at a
premium. If the Regular Certificateholder holds such Regular Certificate as a
"capital asset" within the meaning of Code Section 1221, the Regular
Certificateholder may elect under Code Section 171 to amortize such premium
under a constant yield method that reflects compounding based on the interval
between payments on the Regular Certificates. The Committee Report indicates a
Congressional intent that the same rules that apply to the accrual of market
discount on installment obligations will also apply to amortizing bond premium
under Code Section 171 on installment obligations such as the Regular
Certificates, although it is unclear whether the alternatives to the constant
interest method described above under "Market Discount" are available. Except
as otherwise provided in Treasury regulations yet to be issued, amortizable
bond premium will be treated as an offset to interest income on a Regular
Certificate rather than as a separate deduction item. This election, once
made, applies to all taxable obligations held by the taxpayer at the beginning
of the first taxable year to which such election applies and to all taxable
debt obligations thereafter acquired and is binding on such taxpayer in all
subsequent years. Purchasers who pay a premium for their Regular Certificates
should consult their tax advisors regarding the election to amortize premium
and the method to be employed.
Sale or Exchange of Regular Certificates
If a Regular Certificateholder sells or exchanges a Regular Certificate, the
Regular Certificateholder will recognize gain or loss equal to the difference,
if any, between the amount received and his adjusted basis in the Regular
Certificate. The adjusted basis of a Regular Certificate generally will equal
the cost of the Regular Certificate to the seller, increased by any original
issue discount or market discount previously included in the seller's gross
income with respect to the Regular Certificate and reduced by amounts included
in the stated redemption price at maturity of the Regular Certificate that
were previously received by the seller and by any amortized premium.
Except as described in this paragraph, under "Original Issue Discount" and
under "Market Discount," any gain or loss on the sale or exchange of a Regular
Certificate realized by an investor who holds the Regular Certificate
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as a capital asset will be capital gain or loss and will be long-term or
short-term depending on whether the Regular Certificate has been held for the
long-term capital gain holding period (currently more than one year). Gain
from the disposition of a Regular Certificate that might otherwise be capital
gain will be treated as ordinary income (i) if a Regular Certificate 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
Certificateholder's net investment in the conversion transaction at 120% of
the appropriate applicable Federal rate under Code Section 1274(d) in effect
at the time the taxpayer entered into the transaction minus any amount
previously treated as ordinary income with respect to any prior disposition of
property that was held as part of such transaction, (ii) in the case of a non-
corporate taxpayer, to the extent such taxpayer has made an election under
Code Section 163(d)(4) to have net capital gains taxed as investment income at
ordinary income rates, or (iii) in the case of a Regular Certificate (issued
by a REMIC) to the extent that such gain does not exceed the excess, if any,
of (a) the amount that would have been includible in the gross income of the
holder if his yield on such Regular Certificate were 110% of the applicable
Federal rate under Code Section 1274(d) as of the date of purchase, over (b)
the amount of income actually includible in the gross income of such holder
with respect to the Regular Certificate. Although the legislative history to
the 1986 Act indicates that the portion of the gain from disposition of a
Regular Certificate that will be recharacterized as ordinary income under
clause (iii) is limited to the amount of original issue discount (if any) on
the Regular Certificate that was not previously includible in income, the
applicable Code provision contains no such limitation. In addition, gain or
loss recognized from the sale of a Regular Certificate by certain banks or
thrift institutions will be treated as ordinary income or loss pursuant to
Code Section 582(c). In the case of a Regular Certificate subject to the
Contingent Debt Regulations as described above under "Original Issue
Discount," any gain on the sale or exchange of such Certificate is treated as
interest income.
TAXATION OF RESIDUAL CERTIFICATES
Taxation of REMIC Income
Generally, the "daily portions" of REMIC taxable income or net loss will be
includible as ordinary income or loss in determining the federal taxable
income of holders of Residual Certificates ("Residual Certificateholders"),
and will not be taxed separately to the REMIC Pool. The daily portions of
REMIC taxable income or net loss of a Residual Certificateholder are
determined by allocating the REMIC Pool's taxable income or net loss for each
calendar quarter ratably to each day in such quarter and by allocating such
daily portion among the Residual Certificateholders in proportion to their
respective holdings of Residual Certificates in the REMIC Pool on such day.
REMIC taxable income is generally determined in the same manner as the taxable
income of an individual using a calendar year and the accrual method of
accounting, except that (i) the limitation on deductibility of investment
interest expense and expenses for the production of income do not apply, (ii)
all bad loans will be deductible as business bad debts and (iii) the
limitation on the deductibility of interest and expenses related to tax-exempt
income will apply. REMIC taxable income generally means the REMIC Pool'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 Regular Certificates, servicing fees on the
Mortgage Loans and other administrative expenses of the REMIC Pool,
amortization of premium, if any, with respect to the Mortgage Loans, and any
tax imposed on the REMIC's income from foreclosure property. The requirement
that Residual Certificateholders report their pro rata share of taxable income
or net loss of the REMIC Pool will continue until there are no Certificates of
any class of the related series outstanding.
The taxable income recognized by a Residual Certificateholder in any taxable
year will be affected by, among other factors, the relationship between the
timing of recognition of interest and original issue discount or market
discount income or amortization of premium with respect to the Mortgage Loans,
on the one hand, and the timing of deductions for interest (including original
issue discount) on the Regular Certificates, on the other hand. Because of the
way REMIC taxable income is calculated, a Residual Certificateholder may
recognize "phantom" income (i.e., income recognized for tax purposes in excess
of income as determined under financial accounting or economic principles)
which will be matched in later years by a corresponding tax loss or reduction
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in taxable income, but which could lower the yield to Residual
Certificateholders due to the lower present value of such loss or reduction.
For example, if an interest in the Mortgage Loans is acquired by the REMIC
Pool at a discount, and one or more of such Mortgage Loans is prepaid, the
Residual Certificateholder may recognize taxable income without being entitled
to receive a corresponding amount of cash because (i) the prepayment may be
used in whole or in part to make distributions in reduction of principal on
the Regular Certificates and (ii) the discount income on the Mortgage Loans
which is includible in the REMIC's taxable income may exceed the discount
deduction allowed to the REMIC upon such distributions on the Regular
Certificates. When there is more than one class of Regular Certificates that
distribute principal sequentially, this mismatching of income and deductions
is particularly likely to occur in the early years following issuance of the
Regular Certificates when distributions in reduction of principal are being
made in respect of earlier maturing classes of Regular Certificates to the
extent that such classes are not issued with substantial discount. If taxable
income attributable to such a mismatching is realized, in general, losses
would be allowed in later years as distributions on the later classes of
Regular Certificates are made. Taxable income may also be greater in earlier
years than in later years as a result of the fact that interest expense
deductions, expressed as a percentage of the outstanding principal amount of
such a series of Regular Certificates, may increase over time as distributions
in reduction of principal are made on the lower yielding classes of Regular
Certificates, whereas interest income with respect to any given Mortgage Loan
will remain constant over time as a percentage of the outstanding principal
amount of that loan. Consequently, Residual Certificateholders must have
sufficient other sources of cash to pay any federal, state or local income
taxes due as a result of such mismatching or unrelated deductions against
which to offset such income. Prospective investors should be aware, however,
that a portion of such income may be ineligible for offset by such investor's
unrelated deductions. See the discussion of "excess inclusions" below under
"Limitations on Offset or Exemption of REMIC Income; Excess Inclusions." The
timing of such mismatching of income and deductions described in this
paragraph, if present with respect to a series of Certificates, may have a
significant adverse effect upon the Residual Certificateholder's after-tax
rate of return. In addition, a Residual Certificateholder's taxable income
during certain periods may exceed the income reflected by such Residual
Certificateholder for such periods in accordance with generally accepted
accounting principles. Investors should consult their own advisors concerning
the proper tax and accounting treatment of their investment in Residual
Certificates.
Basis and Losses
The amount of any net loss of the REMIC Pool that may be taken into account
by the Residual Certificateholder is limited to the adjusted basis of the
Residual Certificate as of the close of the quarter (or time of disposition of
the Residual Certificate if earlier), determined without taking into account
the net loss for the quarter. The initial adjusted basis of a purchaser of a
Residual Certificate is the amount paid for such Residual Certificate. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Certificateholder and decreased by the amount
of loss of the REMIC Pool reportable by the Residual Certificateholder. A cash
distribution from the REMIC Pool also will reduce such adjusted basis (but not
below zero). Any loss that is disallowed on account of this limitation may be
carried over indefinitely with respect to the Residual Certificateholder as to
whom such loss was disallowed and may be used by such Residual
Certificateholder only to offset any income generated by the same REMIC Pool.
The ability of a Residual Certificateholder to deduct net losses with respect
to a Residual Certificate may be subject to additional limitations under the
Code, as to which Residual Certificateholders should consult their tax
advisors.
A Residual Certificateholder will not be permitted to amortize directly the
cost of its Residual Certificate as an offset to its share of the taxable
income of the related REMIC Pool. However, such taxable income will not
include cash received by the REMIC Pool that represents a recovery of the
REMIC Pool's basis in its assets. Such recovery of basis by the REMIC Pool
will have the effect of amortization of the issue price of the Residual
Certificates over their life. However, in view of the possible acceleration of
the income of Residual Certificateholders described above under "Taxation of
REMIC Income," the period of time over which such issue price is effectively
amortized may be longer than the economic life of the Residual Certificates.
If a Residual Certificate 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 Pool's basis in its assets. The Final
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REMIC Regulations do not address whether residual interests could have a
negative basis and a negative issue price. The Company does not intend to
treat a class of Residual Certificates as having a value of less than zero for
purposes of determining the bases of the related REMIC Pool in its assets.
Further, to the extent that the initial adjusted basis of a Residual
Certificateholder (other than an original holder) in the Residual Certificate
is greater that the corresponding portion of the REMIC Pool's basis in the
Mortgage Loans or the Mortgage Loans underlying the Agency Securities, the
Residual Certificateholder will not recover a portion of such basis until
termination of the REMIC Pool unless Treasury regulations yet to be issued
provide for periodic adjustments to the REMIC income otherwise reportable by
such holder. The Final REMIC Regulations do not so provide. See "Treatment of
Certain Items of REMIC Income and Expense--Market Discount" below regarding
the basis of Mortgage Loans to the REMIC Pool and "Sale or Exchange of a
Residual Certificate" below regarding possible treatment of a loss upon
termination of the REMIC Pool as a capital loss.
Treatment of Certain Items of REMIC Income and Expense
Original Issue Discount. Generally, the REMIC Pool's deductions for original
issue discount will be determined in the same manner as original issue
discount income on Regular Certificates as described above under "Taxation of
Regular Certificates--Original Issue Discount," without regard to the de
minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in respect
of Mortgage Loans if, in general, the basis of the REMIC Pool in such Mortgage
Loans is exceeded by their unpaid principal balances. The REMIC Pool's basis
in such Mortgage Loans is generally the fair market value of the Mortgage
Loans immediately after the transfer thereof to the REMIC Pool. The Final
REMIC Regulations provide that such basis is equal in the aggregate to the
issue prices of all regular and residual interests in the REMIC Pool. In
respect of Mortgage Loans that have market discount to which Code Section 1276
applies, the accrued portion of such market discount would be recognized
currently by the REMIC as an item of ordinary income. Market discount income
generally should accrue in the manner described above under "Taxation of
Regular Certificates--Market Discount."
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Loans
exceeds the unpaid principal balances thereof, the REMIC Pool will be
considered to have acquired such Mortgage Loans at a premium equal to the
amount of such excess. As stated above, the REMIC Pool's basis in Mortgage
Loans is the fair market value of the Mortgage Loans, based on the aggregate
of the issue prices of the regular and residual interests in the REMIC Pool
immediately after the transfer thereof to the REMIC Pool. In a manner
analogous to the discussion above under "Taxation of Regular Certificates--
Premium," a person that holds a Mortgage Loan as a capital asset under Code
Section 1221 may elect under Code Section 171 to amortize premium on Mortgage
Loans originated after September 27, 1985 under a constant yield method.
Amortizable bond premium will be treated as an offset to interest income on
the Mortgage Loans, rather than as a separate deduction item. Because
substantially all of the mortgagors with respect to the Mortgage Loans are
expected to be individuals, Code Section 171 will not be available for premium
on Mortgage Loans originated on or prior to September 27, 1985. Premium with
respect to such Mortgage Loans may be deductible in accordance with a
reasonable method regularly employed by the holder thereof. The allocation of
such premium pro rata among principal payments should be considered a
reasonable method; however, the Internal Revenue Service may argue that such
premium should be allocated in a different manner, such as allocating such
premium entirely to the final payment of principal.
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions
A portion of the income allocable to a Residual Certificate (referred to in
the Code as an "excess inclusion") for any calendar quarter, with an exception
discussed below for certain thrift institutions, will be subject to federal
income tax in all events. Thus, for example, an excess inclusion (i) cannot,
except as described below, be offset by any unrelated losses or loss
carryovers of a Residual Certificateholder, (ii) will be treated as
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"unrelated business taxable income" within the meaning of Code Section 512 if
the Residual Certificateholder 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 Certificateholder that is a foreign investor, as further
discussed in "Taxation of Certain Foreign Investors--Residual Certificates"
below. Except as discussed below with respect to excess inclusions from
Residual Certificates without "significant value," this general rule does not
apply to thrift institutions to which Code Section 593 applies. For this
purpose a thrift institution and its qualified subsidiary are considered a
single corporation. A qualified subsidiary is one all of the stock of which,
and substantially all of the debt of which, is held by the thrift institution
and which is organized and operating exclusively in connection with the
organization and operation of one or more REMICs. Except in the case of a
thrift institution (including qualified subsidiaries) members of an affiliated
group are treated as one corporation for purposes of applying the limitations
on offset of excess inclusion income.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Certificates without "significant value," for any
Residual Certificateholder, the excess inclusion for any calendar quarter is
the excess, if any, of (i) the income of such Residual Certificateholder for
that calendar quarter from its Residual Certificate, over (ii) the sum of the
"daily accruals" (as defined below) for all days during the calendar quarter
on which the Residual Certificateholder holds such Residual Certificate. For
this purpose, the daily accruals with respect to a Residual Certificate 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 Certificate at the beginning of the calendar quarter and 120 percent
of the "Federal long-term rate" in effect at the time the Residual Certificate
is issued. For this purpose, the "adjusted issue price" of a Residual
Certificate at the beginning of any calendar quarter equals the issue price of
the Residual Certificate (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 Certificate 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 Certificate will be treated as an excess inclusion if
the Residual Certificates 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 did not adopt this rule.
However, the exception from the excess inclusion rules applicable to thrift
institutions does not apply if the Residual Certificates do not have
significant value. Under the Final REMIC Regulations, the Residual
Certificates will have significant value if: (i) the aggregate of the issue
prices of the Residual Certificates is at least two percent of the aggregate
of the issue prices of all Regular Certificates and Residual Certificates in
the REMIC and (ii) the anticipated weighted average life of the Residual
Certificates is at least 20 percent of the REMIC's anticipated weighted
average life based on the prepayment and reinvestment assumptions used in
pricing the transaction and any required or permitted clean up calls or any
required qualified liquidation. Although not entirely clear, the Final REMIC
Regulations indicate that the significant value determination is made only on
the Startup Day. The anticipated weighted average life of a Residual
Certificate with a principal balance and a market rate of interest is computed
by multiplying the amount of each expected principal payment by the number of
years (or fractions thereof) from the Startup Day, adding these sums and
dividing by the total principal expected to be paid on such Residual
Certificate based on the relevant prepayment assumption and expected
reinvestment income. The anticipated weighted average life of a Residual
Certificate with either no specified principal balance or a principal balance
and rights to interest payments disproportionate to such principal balance,
would be computed under the formula described above but would include all
payments expected on the Residual Certificate instead of only the principal
payments. The anticipated weighted average life of a REMIC is a weighted
average of the anticipated weighted average lives of all classes of interests
in the REMIC.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Certificate are to be designated as
excess inclusions in an amount corresponding to the Residual
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Certificate'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
Certificate will be subject to the limitations on excess inclusions described
above. The Final REMIC Regulations do not provide guidance on this issue.
Mark to Market Rules
Under IRS temporary regulations, a "negative value" REMIC residual interest
is not a security for purposes of the mark-to-market rules under the Code. A
negative value REMIC residual interest is a REMIC residual interest whose
present value of anticipated tax liabilities exceeds the present value of the
expected future distributions, as determined on the date of acquisition of the
REMIC residual interest. For purposes of the temporary regulations, the
present value of anticipated tax liabilities is determined net of any
anticipated tax savings associated with holding the residual interest as the
REMIC generates losses. It is possible that a Residual Certificate may
constitute a negative value REMIC residual interest. Such temporary
regulations provide the IRS with the authority to treat any Residual
Certificate having substantially the same economic effect as a "negative
value" residual interest as a "negative value" residual interest. The IRS may
also issue find regulations which may retroactively treat a REMIC residual
interest as a "negative value" REMIC residual interest. The IRS has also
issued proposed regulations that provide that all REMIC residual interests are
not considered securities for purposes of the mark-to-market rules.
Tax-Related Restrictions on Transfer of Residual Certificates
Disqualified Organizations. If legal title or beneficial interest in a
Residual Certificate is transferred to a Disqualified Organization (as defined
below), a tax would be imposed in an amount equal to the product of (i) the
present value of the total anticipated excess inclusions with respect to such
Residual Certificate for periods after the transfer and (ii) the highest
marginal federal income tax rate applicable to corporations. The Final REMIC
Regulations provide that the anticipated excess inclusions are based on actual
prepayment experience to the date of the transfer and projected payments based
on the Prepayment Assumption. The present value discount rate equals the
applicable Federal rate under Code Section 1274(d) that would apply to a debt
instrument that was issued on the date the Disqualified Organization acquired
the Residual Certificate and whose term ended on the close of the last quarter
in which excess inclusions were expected to accrue with respect to the
Residual Certificate. Such a tax generally would be imposed on the transferor
of the Residual Certificate, except that where such transfer is through an
agent (including a broker, nominee, or other middleman) for a Disqualified
Organization, the tax would instead be imposed on such agent. However, a
transferor of a Residual Certificate would in no event be 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. The tax also may be waived by the Treasury Department
if the Disqualified Organization promptly disposes of the residual interest
and the transferor pays income tax at the highest corporate rate on the excess
inclusions for the period the Residual Certificate is actually held by the
Disqualified Organization.
In addition, if a "Pass-Through Entity" (as defined below) has excess
inclusion income with respect to a Residual Certificate during a taxable year
and a Disqualified Organization is the record holder of an equity interest in
such entity, then a tax is imposed on such entity equal to the product of (i)
the amount of excess inclusions that are allocable to the interest in the
Pass-Through Entity during the period such interest is held by such
Disqualified Organization, and (ii) the highest marginal federal corporate
income tax rate. Such tax would be deductible from the ordinary gross income
of the Pass-Through Entity for the taxable year. 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 Certificate, the Pass-Through Entity does not have actual
knowledge that such affidavit is false.
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For these purposes, (i) "Disqualified Organization" means the United States,
any state or political subdivision thereof, any foreign government, any
international organization, any agency or instrumentality of any of the
foregoing (provided, that such term does not include an instrumentality if all
of its activities are subject to tax and a majority of its board of directors
is not selected by any such governmental entity), any cooperative organization
furnishing electric energy or providing telephone service to persons in rural
areas as described in Code Section 1381(a)(2)(C), and any organization (other
than a farmers' cooperative described in Code Section 521) that is exempt from
taxation under the Code unless such organization is subject to the tax on
unrelated business income imposed by Code Section 511, and (ii) "Pass-Through
Entity" means any regulated investment company, real estate investment trust,
common trust fund, partnership, trust or estate and certain corporations
operating on a cooperative basis. Except as may be provided in Treasury
regulations yet to be issued, any person holding an interest in a Pass-Through
Entity as a nominee for another will, with respect to such interest, be
treated as a Pass-Through Entity.
The Agreement with respect to a series of Certificates will provide that
neither legal title nor beneficial interest in a Residual Certificate may be
transferred or registered unless (i) the proposed transferee provides to the
Company and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Certificates 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 Company and the
Trustee that it has no actual knowledge that such affidavit is false.
Moreover, the Agreement 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 Certificate with
respect to a series will bear a legend referring to such restrictions on
transfer, and each Residual Certificateholder will be deemed to have agreed,
as a condition of ownership thereof, to any amendments to the related
Agreement required under the Code or applicable Treasury regulations to
effectuate the foregoing restrictions. Information necessary to compute an
applicable excise tax must be furnished to the Internal Revenue Service and to
the requesting party within 60 days of the request, and the Company or the
Trustee may charge a fee for computing and providing such information.
Noneconomic Residual Interests. The Final REMIC Regulations would disregard
certain transfers of Residual Certificates, in which case the transferor would
continue to be treated as the owner of the Residual Certificates and thus
would continue to be subject to tax on its allocable portion of the net income
of the REMIC Pool. Under the Final REMIC Regulations, a transfer of a
"noneconomic residual interest" (defined below) to a Residual
Certificateholder (other than a Residual Certificateholder who is not a U.S.
Person, as defined below under "Foreign Investors") 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 a 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 and
the present value rate are determined in the same manner as set forth above
under "Disqualified Organizations." A significant purpose to impede the
assessment or collection of tax exists if the transferor, at the time of the
transfer, either knew or should have known (had "improper knowledge") that the
transferee would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the Final REMIC Regulations, a transferor
is presumed not to have improper knowledge if (i) the transferor conducted, at
the time of the transfer, a reasonable investigation of the financial
condition of the transferee and, as a result of the investigation, the
transferor found that the transferee had historically paid its debts as they
came due and found no significant evidence to indicate that the transferee
will not continue to pay its debts as they come due in the future; and (ii)
the transferee represents to the transferor that it understands that, as the
holder of the noneconomic residual interest, the transferee may incur tax
liabilities in excess of any cash flows generated by the residual interest and
that the transferee intends to pay taxes associated with holding of residual
interest as they become due. The Agreement will require the transferee
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of a Residual Certificate to state as part of the affidavit described above
under the heading "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 Certificate, it may incur tax liabilities in
excess of any cash flows generated by the Residual Certificate, and (iv)
intends to pay any and all taxes associated with holding the Residual
Certificate as they become due. The transferor must have no reason to believe
that such statement is untrue.
Foreign Investors. The Final REMIC Regulations provide that the transfer of
a Residual Certificate that has "tax avoidance potential" to a "foreign
person" will be disregarded for all federal tax purposes. This rule appears
intended to apply to a transferee who is not a "U.S. Person" (as defined
below), unless such transferee's income is effectively connected with the
conduct of a trade or business within the United States. A Residual
Certificate is deemed to have tax avoidance potential unless, at the time of
the transfer, the transferor reasonably expects that, for each excess
inclusion, (i) the REMIC Pool 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. If the non-U.S. Person
transfers the Residual Certificate back to a U.S. Person, the transfer will be
disregarded and the foreign transferor will continue to be treated as the
owner unless arrangements are made so that the transfer does not have the
effect of allowing the transferor to avoid tax on accrued excess inclusions.
The Prospectus Supplement relating to a series of Certificates may provide
that a Residual Certificate may not be purchased by or transferred to any
person that is not a U.S. Person or may describe the circumstances and
restrictions pursuant to which such a transfer may be made. The term "U.S.
Person" means a citizen or resident of the United States, a corporation,
partnership or other entity created or organized in or under the laws of the
United States or any political subdivision thereof or an estate or trust that
is subject to U.S. federal income tax regardless of the source of its income.
Sale or Exchange of a Residual Certificate
Upon the sale or exchange of a Residual Certificate, the Residual
Certificateholder will recognize gain or loss equal to the excess, if any, of
the amount realized over the adjusted basis (as described above under
"Taxation of Residual Certificates--Basis and Losses") of such Residual
Certificateholder in such Residual Certificate at the time of the sale or
exchange. In addition to reporting the taxable income of the REMIC Pool, a
Residual Certificateholder will have taxable income to the extent that any
cash distribution to him from the REMIC Pool exceeds such adjusted basis on
that Distribution Date. Such income will be treated as gain from the sale or
exchange of the Residual Certificate. It is possible that the termination of
the REMIC Pool may be treated as a sale or exchange of a Residual
Certificateholder's Residual Certificate, in which case, if the Residual
Certificateholder has an adjusted basis in his Residual Certificate remaining
when his interest in the REMIC Pool terminates, and if he holds such Residual
Certificate as a capital asset under Code Section 1221, then he will recognize
a capital loss at that time in the amount of such remaining adjusted basis.
The Committee Report provides that, except as provided in Treasury
regulations yet to be issued, the wash sale rules of Code Section 1091 will
apply to dispositions of Residual Certificates. Consequently, losses on
dispositions of Residual Certificates will be disallowed where the seller of
the Residual Certificate, during the period beginning six months before the
sale or disposition of the Residual Certificate and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in the application of Code Section 1091) any residual interest in any
REMIC or any interest in a "taxable mortgage pool" (such as a non-REMIC owner
trust) that is economically comparable to a Residual Certificate. In any
event, any loss realized by a Residual Certificateholder on the sale will not
be deductible, but, instead, will increase such Residual Certificateholder's
adjusted basis in the newly acquired assets.
Taxes That May Be Imposed on the REMIC Pool
Prohibited Transactions. Net income from certain transactions by the REMIC
Pool, called prohibited transactions, will not be part of the calculation of
income or loss includible in the federal income tax returns of
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Residual Certificateholders, but rather will be taxed directly to the REMIC
Pool at a 100% rate. 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 Pool 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 Pool 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 Pool property to prevent a default on Regular Certificates 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 Certificates is outstanding). The Final REMIC
Regulations indicate that the modification of a Mortgage Loan generally will
not be treated as a disposition if it is occasioned by a default or reasonably
foreseeable default, an assumption of the Mortgage Loan, the waiver of a due-
on-sale or encumbrance clause or the conversion of an interest rate by a
mortgagor pursuant to the terms of a convertible adjustable rate Mortgage
Loan. Final REMIC Regulations also provide that the modification of mortgage
loans underlying pass-through certificates will not be treated as a
modification of the Agency Securities, provided that the trust issuing the
pass-through certificates was not created to avoid prohibited transaction
rules.
Contributions to the REMIC Pool After the Startup Day. In general, the REMIC
Pool will be subject to a tax at a 100% rate on the value of any property
contributed to the REMIC Pool after the Startup Day. Exceptions are provided
for cash contributions to the REMIC Pool (i) during the three months following
the Startup Day, (ii) made to a qualified reserve fund by a Residual
Certificateholder, (iii) in the nature of a guarantee, (iv) made to facilitate
a qualified liquidation or clean-up call and (v) as otherwise permitted in
Treasury regulations yet to be issued.
Net Income from Foreclosure Property. The REMIC Pool will be subject to
federal income tax at the highest corporate rate on "net income from
foreclosure property," determined by reference to the rules applicable to real
estate investment trusts. Generally, property acquired by the REMIC Pool
through foreclosure or deed in lieu of foreclosure would be treated as
"foreclosure property" for a period of two years, with possible extensions.
Net income from foreclosure property generally means (i) gain from the sale of
a foreclosure property that is inventory property and (ii) gross income from
foreclosure property other than qualifying rents and other qualifying income
for a real estate investment trust.
Liquidation of the REMIC Pool
If a REMIC Pool and the Trustee adopt a plan of complete liquidation, within
the meaning of Code Section 860F(a)(4)(A)(i) and sell all of the REMIC Pool's
assets (other than cash) within a 90-day period beginning on the date of the
adoption of the plan of liquidation, any gain on the sale of its assets will
not result in a prohibited transaction tax, provided that the REMIC Pool
credits or distributes in liquidation all of the sale proceeds plus its cash
(other than amounts retained to meet claims against the REMIC Pool) to holders
of Regular Certificates and Residual Certificateholders within the 90-day
period.
Administrative Matters
The REMIC Pool will be required to maintain its books on a calendar year
basis and to file federal income tax returns for federal income tax purposes
in a manner similar to a partnership. The form for such income tax return is
Form 1066, U.S. Real Estate Mortgage Investment Conduit Income Tax Return.
Treasury regulations provide that, except where there is a single Residual
Certificateholder for an entire taxable year, the REMIC Pool generally will be
subject to the procedural and administrative rules of the Code applicable to
partnerships, including the determination by the Internal Revenue Service of
any adjustments to, among other things, items of REMIC income, gain, loss,
deduction or credit in a unified administrative proceeding. Generally, the
Company
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will be obligated to act as "tax matters person," as defined in applicable
Treasury regulations, with respect to the REMIC Pool, in its capacity as
either Residual Certificateholder or agent of the Residual Certificateholders.
If the Code or applicable Treasury regulations do not permit the Company to
act as tax matters person in its capacity as agent of the Residual
Certificateholders, the Residual Certificateholder chosen by the Residual
Certificateholders or such other person specified pursuant to Treasury
regulations will be required to act as tax matters person.
Treasury regulations provide that a holder of a Residual Certificate is not
required to treat items on its return consistently with their treatment on the
REMIC Pool's return if a holder owns 100% of the Residual Certificates for the
entire calendar year. Otherwise, each holder of a Residual Certificate is
required to treat items on its return consistently with their treatment on the
REMIC Pool's return, unless the holder of a Residual Certificate either files
a statement identifying the inconsistency or establishes that the
inconsistency resulted from incorrect information received from the REMIC
Pool. The IRS may assess a deficiency resulting from a failure to comply with
the consistency requirement without instituting an administrative proceeding
at the REMIC Pool level.
LIMITATIONS ON DEDUCTION OF CERTAIN EXPENSES
An investor who is an individual, estate or trust will be subject to
limitation with respect to certain itemized deductions described in Code
Section 67, to the extent that such itemized deductions, in the aggregate, do
not exceed 2% of the investor's adjusted gross income. In addition, Code
Section 68 provides that itemized deductions otherwise allowable for a taxable
year of an individual taxpayer will be reduced by the lesser of (i) 3% of the
excess, if any, of adjusted gross income over $114,700 for 1995 and adjusted
yearly for inflation ($57,350 for 1995 and adjusted yearly for inflation, in
the case of a married individual filing a separate return), or (ii) 80% of the
amount of itemized deductions otherwise allowable for such year. In the case
of a REMIC Pool, such deductions may include deductions under Code Section 212
for servicing fees and all administrative and other expenses relating to the
REMIC Pool or any similar expenses allocated to the REMIC Pool with respect to
a regular interest it holds in another REMIC. Such investors who hold REMIC
Certificates either directly or indirectly through certain pass-through
entities may have their pro rata share of such expenses allocated to them as
additional gross income, but may be subject to such limitation on deductions.
In addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Treasury regulations provide that the
additional gross income and corresponding amount of expenses generally are to
be allocated entirely to the holders of Residual Certificates in the case of a
REMIC Pool that would not qualify as a fixed investment trust in the absence
of a REMIC election. However, such additional gross income and limitation on
deductions will apply to the allocable portion of such expenses to holders of
Regular Certificates, as well as holders of Residual Certificates, where such
Regular Certificates are issued in a manner that is similar to pass-through
certificates in a fixed investment trust. In general, such allocable portion
will be determined based on the ratio that a REMIC Certificateholder's income,
determined on a daily basis, bears to the income of all holders of Regular
Certificates and Residual Certificates with respect to a REMIC Pool. As a
result, individuals, estates or trusts holding REMIC Certificates (either
directly or indirectly through a grantor trust, partnership, S corporation,
REMIC, or certain other pass-through entities described in the foregoing
Treasury regulations) may have taxable income in excess of the interest income
at the pass-through rate on Regular Certificates that are issued in a single
class or otherwise consistently with fixed investment trust status or in
excess of cash distributions for the related period on Residual Certificates.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Certificate
Interest, including original issue discount, distributable to Regular
Certificateholders who are nonresident aliens, foreign corporations, or other
Non-U.S. Persons (as defined below), will be considered "portfolio interest"
and therefore, generally will not be subject to 30% United States withholding
tax, provided that such Non-U.S. Person (i) is not a "10-percent shareholders"
within the meaning of Code Section 871(h)(3)(B) or a controlled foreign
corporation described in Code Section 881(c)(3)(C) and (ii) provides the
Trustee, or the person who would otherwise be required to withhold tax from
such distributions under Code Section 1441 or 1442, with an appropriate
statement, signed under penalties of perjury, identifying the beneficial owner
and stating, among
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other things, that the beneficial owner of the Regular Certificate is a Non-
U.S. Person. If such statement, or any other required statement, is not
provided, 30% withholding will apply unless reduced or eliminated pursuant to
an applicable tax treaty or unless the interest on the Regular Certificate is
effectively connected with the conduct of a trade or business within the
United States by such Non-U.S. Person. In the latter case, such Non-U.S.
Person will be subject to United States federal income tax at regular rates.
Investors who are Non-U.S. Persons should consult their own tax advisors
regarding the specific tax consequences to them of owning a Regular
Certificate. The term "Non-U.S. Person" means any person who is not a U.S.
Person. Payments on Regular Certificates may subject a Non-U.S. Person to U.S.
federal income and withholding tax where such foreign person also owns,
actually or constructively, Residual Certificates issued by the same REMIC,
notwithstanding compliance with the certification requirements discussed
above.
Residual Certificates
The Committee Report indicates that amounts paid to Residual
Certificateholders who are Non-U.S. Persons are treated as interest for
purposes of the 30% (or lower treaty rate) United States withholding tax.
Treasury regulations provide that amounts distributed to Residual
Certificateholders qualify as "portfolio interest," subject to the conditions
described in "Regular Certificates" above, but only to the extent that (i) the
Mortgage Loans were issued after July 18, 1984 and (ii) the Trust fund or
segregated pool of assets therein (as to which a separate REMIC election will
be made), to which the Residual Certificate relates, consists of obligations
issued in "registered form" within the meaning of Code Section 163(f)(1).
Generally, Mortgage Loans will not be, but certificated regular interests in
another REMIC Pool will be, considered obligations issued in registered form.
Furthermore, a Residual Certificateholder will not be entitled to any
exemption from the 30% withholding tax (or lower treaty rate) to the extent of
that portion of REMIC taxable income that constitutes an "excess inclusion."
See "Taxation of Residual Certificates--Limitations on Offset or Exemption of
REMIC Income; Excess Inclusions." If the amounts paid to Residual
Certificateholders who are Non-U.S. Persons are effectively connected with the
conduct of a trade or business within the United States by such Non-U.S.
Persons, 30% (or lower treaty rate) withholding will not apply. Instead, the
amounts paid to such Non-U.S. Persons will be subject to United States federal
income tax at regular rates. If 30% (or lower treaty rate) withholding is
applicable, such amounts generally will be taken into account for purposes of
withholding only when paid or otherwise distributed (or when the Residual
Certificate is disposed of) under rules similar to withholding upon
disposition of debt instruments that have original issue discount. See "Tax-
Related Restrictions on Transfer of Residual Certificates--Foreign Investors"
above concerning the disregard of certain transfers having "tax avoidance
potential." Investors who are Non-U.S. Persons should consult their own tax
advisors regarding the specific tax consequences to them of owning Residual
Certificates.
BACKUP WITHHOLDING
Distributions made on the Regular Certificates, and proceeds from the sale
of the Regular Certificates to or through certain brokers, may be subject to a
"backup" withholding tax under Code Section 3406 of 31% on "reportable
payments" (including interest distributions, original issue discount, and,
under certain circumstances, principal distributions) unless the Regular
Certificateholder complies with certain reporting and/or certification
procedures, including the provision of its taxpayer identification number to
the Trustee, its agent or the broker who effected the sale of the Regular
Certificate, or such Certificateholder is otherwise an exempt recipient under
applicable provisions of the Code. Any amounts to be withheld from
distribution on the Regular Certificates would be refunded by the Internal
Revenue Service or allowed as a credit against the Regular Certificateholder's
federal income tax liability.
REPORTING REQUIREMENTS
Reports of accrued interest 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 Regular Certificates or beneficial owners who own Regular
Certificates through a broker or middleman as nominee. All brokers, nominees
and all other non-exempt holders of record of Regular Certificates (including
corporations, non-calendar year taxpayers, securities or commodities dealers,
real estate investment
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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 Regular
Certificates. 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 Regular Certificates must also be
furnished.
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. Treasury regulations require that Schedule Q be furnished by
the REMIC Pool to each Residual Certificateholder by the end of the month
following the close of each calendar quarter (41 days after the end of a
quarter under proposed Treasury regulations) in which the REMIC Pool is in
existence.
Treasury regulations require that, in addition to the foregoing
requirements, information must be furnished quarterly to Residual
Certificateholders, furnished annually, if applicable, to holders of Regular
Certificates, and filed annually with the Internal Revenue Service concerning
Code Section 67 expenses (see "Limitations on Deduction of Certain Expenses"
above) allocable to such holders. Furthermore, under such regulations,
information must be furnished quarterly to Residual Certificateholders,
furnished annually to holders of Regular Certificates, and filed annually with
the Internal Revenue Service concerning the percentage of the REMIC Pool's
assets meeting the qualified asset tests described above under "Status of
REMIC Certificates."
FEDERAL INCOME TAX CONSEQUENCES FOR CERTIFICATES
AS TO WHICH NO REMIC ELECTION IS MADE
STANDARD CERTIFICATES
General
If no election is made to treat a Trust Fund (or a segregated pool of assets
therein) with respect to a series of Certificates as a REMIC, the Trust Fund
will be classified as a grantor trust under subpart E, Part 1 of subchapter J
of Chapter 1 of Subtitle A of the Code and not as an association taxable as a
corporation. Where there is no fixed retained yield with respect to the
Mortgage Loans underlying the Certificates of a series, and where such
Certificates are not designated as "Stripped Certificates," the holder of each
such Certificate in such series will be treated as the owner of a pro rata
undivided interest in the ordinary income and corpus portions of the Trust
Fund represented by his Certificate and will be considered the beneficial
owner of a pro rata undivided interest in each of the Mortgage Loans, subject
to the discussion below under "Recharacterization of Servicing Fees."
Accordingly, the holder of a Certificate of a particular series will be
required to report on its federal income tax return its pro rata share of the
entire income from the Mortgage Loans represented by its Certificate,
including interest at the coupon rate on such Mortgage Loans, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by the Company, in accordance with such Certificateholder's method of
accounting. A Certificateholder generally will be able to deduct its share of
servicing fees and all administrative and other expenses of the Trust Fund in
accordance with his method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust Fund. However,
investors who are individuals, estates or trusts who own Certificates, either
directly or indirectly through certain pass-through entities, will be subject
to limitation with respect to certain itemized deductions described in Code
Section 67, including deductions under Code Section 212 for servicing fees and
all such administrative and other expenses of the Trust Fund, to the extent
that such deductions, in the aggregate, do not exceed two percent of an
investor's adjusted gross income. In addition, Code Section 68 provides that
itemized deductions otherwise allowable for a taxable year of an individual
taxpayer will be reduced by the lesser of (i) 3% of the excess, if any, of
adjusted gross income over $114,700 for 1995, adjusted yearly for inflation
($57,350 for 1995, adjusted yearly for inflation, in the case of a married
individual filing a separate return), or (ii) 80% of the amount of itemized
deductions otherwise allowable for such year. As a result such investors
holding Certificates, directly or indirectly through a pass-through entity,
may have aggregate taxable income in excess of the aggregate amount of cash
received on such Certificates with respect to interest at the pass-through
rate on such Certificates or discount thereon. In
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addition, such expenses are not deductible at all for purposes of computing
the alternative minimum tax, and may cause such investors to be subject to
significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Loans underlying a series of Certificates
or where the servicing fees are in excess of reasonable servicing
compensation, the transaction will be subject to the application of the
"stripped bond" and "stripped coupon" rules of the Code, as described below
under "Stripped Certificates" and "Recharacterization of Servicing Fees,"
respectively.
Tax Status
Andrews & Kurth L.L.P. has advised the Company that:
1. A Certificate owned by a "domestic building and loan association"
within the meaning of Code Section 7701(a)(19) will be considered to
represent "loans . . . secured by an interest in real property" within the
meaning of Code Section 7701(a)(19)(C)(v), provided that the real property
securing the Mortgage Loans represented by that Certificate is of the type
described in such section of the Code.
2. A Certificate owned by a financial institution described in Code
Section 593(a) will be considered to represent "qualifying real property
loans" within the meaning of Code Section 593(d)(1), provided that the real
property securing the Mortgage Loans represented by that Certificate is of
the type described in such section of the Code.
3. A Certificate owned by a real estate investment trust will be
considered to represent "real estate assets" within the meaning of Code
Section 856(c)(5)(A) to the extent that the assets of the related Trust
Fund consist of qualified assets, and interest income on such assets will
be considered "interest on obligations secured by mortgages on real
property" within the meaning of Code Section 856(c)(3)(B).
4. A Certificate owned by a REMIC will be considered to represent an
"obligation (including any participation or certificate of beneficial
ownership therein) which is principally secured by an interest in real
property" within the meaning of Code Section 860G(a)(3)(A) to the extent
that the assets of the related Trust Fund consist of "qualified mortgages"
within the meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Loans may be characterized
in their entirety under the Code provisions cited in the immediately preceding
paragraph. Code Section 593(d)(1)(C) provides that the term "qualifying real
property loan" does not include a loan "to the extent secured by a deposit in
or share of the taxpayer." The application of this provision to a buy-down
fund with respect to a buy-down Mortgage Loan is uncertain, but may require
that a taxpayer's investment in a buy-down Mortgage Loan be reduced by the
buy-down fund. As to the treatment of buy-down Mortgage Loans as "qualifying
real property loans" under Code Section 593(d)(1) if the exception of Code
Section 593(d)(1)(C) is inapplicable, as "loans . . . secured by an interest
in real property" under Code Section 7701(a)(19)(C)(v), as "real estate
assets" under Code Section 856(c)(5)(A), and as "obligation[s] . . .
principally secured by an interest in real property" under Code Section
860G(a)(3)(A), there is indirect authority supporting treatment of an
investment in a buy-down Mortgage Loan as entirely secured by real property if
the fair market value of the real property securing the loan exceeds the
principal amount of the loan at the time of issuance or acquisition, as the
case may be. There is no assurance that the treatment described above is
proper. Accordingly, Certificateholders are urged to consult their own tax
advisors concerning the effects of such arrangements on the characterization
of such Certificateholder's investment for federal income tax purposes.
Premium and Discount
Certificateholders are advised to consult with their tax advisors as to the
federal income tax treatment of premium and discount arising either upon
initial acquisition of Certificates or thereafter.
Premium. The treatment of premium incurred upon the purchase of a
Certificate will be determined generally as described above under "Federal
Income Tax Consequences for REMIC Certificates--Taxation of Residual
Certificates--Premium."
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Original Issue Discount. The Internal Revenue Service has stated in
published rulings that, in circumstances similar to those described herein,
the original issue discount rules will be applicable to a Certificateholder's
interest in those Mortgage Loans as to which the conditions for the
application of those sections are met. Rules regarding periodic inclusion of
original issue discount income are applicable to mortgages of corporations
originated after May 27, 1969, mortgages of noncorporate mortgagors (other
than individuals) originated after July 1, 1982, and mortgages of individuals
originated after March 2, 1984. Such original issue discount could arise by
the charging of points by the originator of the mortgages in an amount greater
than a statutory de minimis exception, to the extent that the points are not
for services provided by the lender. It is generally not anticipated that
adjustable rate Mortgage Loans will be treated as issued with original issue
discount. However, the application of the OID Regulations to adjustable rate
mortgage loans with incentive interest rates or annual or lifetime interest
rate caps may result in original issue discount.
Original issue discount must generally be reported as ordinary gross income
as it accrues under a constant yield method that takes into account the
compounding of interest, in advance of the cash attributable to such income.
However, Code Section 1272 provides for a reduction in the amount of original
issue discount includible in the income of a holder of an obligation that
acquires the obligation after its initial issuance at a price greater than the
sum of the original issue price and the previously accrued original issue
discount, less prior payments of principal. Accordingly, if such Mortgage
Loans acquired by a Certificateholder are purchased at a price equal to the
then unpaid principal amount of such Mortgage Loans, no original issue
discount attributable to the difference between the issue price and the
original principal amount of such Mortgage Loans (i.e., points) will be
includible by such holder.
Market Discount. Certificateholders also will be subject to the market
discount rules to the extent that the conditions for application of those
sections are met. Market discount on the Mortgage Loans will be determined and
will be reported as ordinary income generally in the manner described above
under "Federal Income Tax Consequences for REMIC Certificates--Taxation of
Residual Certificates--Market Discount."
Recharacterization of Servicing Fees. If the servicing fees paid to
Servicers were deemed to exceed reasonable servicing compensation, the amount
of such excess would be nondeductible under Code Section 162 or 212. In this
regard, there are no authoritative guidelines for federal income tax purposes
as to either the maximum amount of servicing compensation that may be
considered reasonable in the context of this or similar transactions or
whether, in the case of the Certificates, the reasonableness of servicing
compensation should be determined on a weighted average or loan-by-loan basis.
If a loan-by-loan basis is appropriate, the likelihood that such amount would
exceed reasonable servicing compensation as to some of the Mortgage Loans
would be increased. Recently issued Internal Revenue Service guidance
indicates that a servicing fee in excess of reasonable compensation ("excess
servicing") will cause the Mortgage Loans to be treated under the "stripped
bond" rules. Such guidance provides safe harbors for servicing deemed to be
reasonable and requires taxpayers to demonstrate that the value of servicing
fees in excess of such amounts is not greater than the value of the services
provided.
Accordingly, if the Internal Revenue Service's approach is upheld, a
servicer that receives a servicing fee in excess of such amounts would be
viewed as retaining an ownership interest in a portion of the interest
payments on the Mortgage Loans. Under the rules of Code Section 1286, the
separation of ownership of the right to receive some or all of the interest
payments on an obligation from the right to receive some or all of the
principal payments on the obligation would result in treatment of such
Mortgage Loans as "stripped coupons" and "stripped bonds." While
Certificateholders would still be treated as owners of beneficial interests in
a grantor trust for federal income tax purposes, the corpus of such trust
could be viewed as excluding the portion of the Mortgage Loans the ownership
of which is attributed to a servicer, or as including such portion as a second
class of equitable interest. Applicable Treasury regulations treat such an
arrangement as a fixed investment trust, since the multiple classes of trust
interests should be treated as merely facilitating direct investments in the
trust assets and the existence of multiple classes of ownership interests is
incidental to that purpose. In general, such a recharacterization should not
have any significant effect upon the timing or amount of income reported by a
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Certificateholder, except that the income reported by a cash method holder may
be slightly accelerated. See "Stripped Certificates" below for a further
description of the federal income tax treatment of stripped bonds and stripped
coupons.
In the alternative, the amount, if any, by which the servicing fees paid to
the servicers are deemed to exceed reasonable compensation for servicing could
be treated as deferred payments of purchase price by the Certificateholders to
purchase an undivided interest in the Mortgage Loans. In such event, the
present value of such additional payments might be included in the
Certificateholder's basis in such undivided interests for purposes of
determining whether the Certificate was acquired at a discount, at par, or at
a premium. Under this alternative, Certificateholders may also be entitled to
a deduction for unstated interest with respect to each deferred payment. The
Internal Revenue Service may take the position that the specific statutory
provisions of Code Section 1286 described above override the alternative
described in this paragraph. Certificateholders are advised to consult their
tax advisors as to the proper treatment of the amounts paid to the servicers
as set forth herein as servicing compensation or under either of the
alternatives set forth above.
Sale or Exchange of Certificates
Upon sale or exchange of a Certificate, a Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale
and its aggregate adjusted basis in the Mortgage Loans and other assets
represented by the Certificate. In general, the aggregate adjusted basis will
equal the Certificateholder's cost for the Certificate, increased by the
amount of any income previously reported with respect to the Certificate and
decreased by the amount of any losses previously reported with respect to the
Certificate and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Loans, and
except for certain financial institutions subject to the provisions of Code
Section 582(c), any such gain or loss would be capital gain or loss if the
Certificate was held as a capital asset.
STRIPPED CERTIFICATES
General
Pursuant to Code Section 1286, the separation of ownership of the right to
receive some or all of the principal payments on an obligation from ownership
of the right to receive some or all of the interest payments results in the
creation of "stripped bonds" with respect to principal payments and "stripped
coupons" with respect to interest payments. For purposes of this discussion,
Certificates for which no REMIC election is made and that are subject to those
rules will be referred to as "Stripped Certificates." The Certificates will be
subject to those rules if (i) the Company or any of its affiliates retains
(for its own account or for purposes of resale), in the form of fixed retained
yield or otherwise, an ownership interest in a portion of the payments on the
Mortgage Loans, (ii) the Company, any of its affiliates or a servicer is
treated as having an ownership interest in the Mortgage Loans to the extent it
is paid (or retains) servicing compensation in an amount greater than
reasonable consideration for servicing the Mortgage Loans (see "Certificates--
Recharacterization of the Servicing Fees" above) and (iii) a class of
Certificates are issued in two or more classes or subclasses representing the
right to non-pro-rata percentages of the interest and principal payments on
the Mortgage Loans.
In general, a holder of a Stripped Certificate will be considered to own
"stripped bonds" with respect to its pro rata share of all or a portion of the
principal payments on each Mortgage Loan and/or "stripped coupons" with
respect to its pro rata share of all or a portion of the interest payments on
each Mortgage Loan, including the Stripped Certificate's allocable share of
the servicing fees paid, to the extent that such fees represent reasonable
compensation for services rendered. See discussion above under "Standard
Certificates--Recharacterization of Servicing Fees." For this purpose the
servicing fees will be allocated to the Stripped Certificates in proportion to
the respective offering price of each class (or subclass) of Stripped
Certificates. The holder of a Stripped Certificate generally will be entitled
to a deduction each year in respect of the servicing fees, as described above
under "Standard Certificates--General," subject to the limitation described
therein.
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Code Section 1286 treats a stripped bond or a stripped coupon generally as a
new obligation issued at (i) on the date that the stripped interest is
purchased and (ii) at a price equal to its purchase price or, if more than one
stripped interest is purchased, the share of the purchase price allocable to
such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Although the treatment of Stripped
Certificates for federal income tax purposes is not clear in certain respects
at this time, particularly where such Stripped Certificates are issued with
respect to a Trust Fund containing variable-rate Mortgage Loans, the Company
has been advised by counsel that (i) the Trust Fund will be treated as a
grantor trust under subpart E, Part 1 of subchapter J of Chapter 1 of Subtitle
A of the Code and not as an association taxable as a corporation, and (ii)
each Stripped Certificate should be treated as a single installment obligation
for purposes of calculating original issue discount and gain or loss on
disposition. This treatment is based on the interrelationship of Code Section
1286 and the regulations thereunder, Code Sections 1272 through 1275, and the
OID Regulations. While under Code Section 1286 computations with respect to
Stripped Certificates arguably should be made in one of the ways described
below under "Taxation of Stripped Certificates--Possible Alternative
Characterizations," the OID Regulations state, in general, that all debt
instruments issued in connection with the same transaction must be treated as
a single debt instrument. The Trustee will make and report all computations
described below using this aggregate approach, unless substantial legal
authority requires otherwise.
Furthermore, final Treasury regulations issued December 28, 1992 support the
treatment of a Stripped Certificate as a single debt instrument issued on the
date it is originated for purposes of calculating any original issue discount.
The preamble to such regulations state that such regulations are premised on
the assumption that an aggregation approach is appropriate in determining
whether original issue discount on a stripped bond or stripped coupon is de
minimis. In addition, under these regulations, a Stripped Certificate that
represents a right to payments of both interest and principal may be viewed
either as issued with original issue discount or market discount (as described
below), at a de minimis original issue discount, or, presumably, at a premium.
The preamble to such regulations also provide that such regulations are
premised on the assumption that generally the interest component of such a
Stripped Certificate would be treated as stated interest under the OID
Regulations. Further, the regulations provide that the purchaser of such a
Stripped Certificate may be required to account for any discount as market
discount rather than original issue discount if either (i) the initial
discount with respect to the Stripped Certificate was treated as zero under
the de minimis rule or (ii) no more than 100 basis points in excess of
reasonable servicing is stripped off the related Mortgage Loans. Any such
market discount would be reportable as described above under "Federal Income
Tax Consequences for REMIC Certificates--Taxation of Regular Certificates--
Market Discount," without regard to the de minimis rule therein.
Status of Stripped Certificates
No specific legal authority exists as to whether the character of the
Stripped Certificates, for federal income tax purposes, will be the same as
that of the Mortgage Loans. Although the issue is not free from doubt, counsel
has advised the Company that Stripped Certificates owned by applicable holders
should be considered to represent "qualifying real property loans" within the
meaning of Code Section 593(d)(1), "real estate assets" within the meaning of
Code Section 856(c)(A), "obligations[s] . . . principally secured by an
interest in real property" within the meaning of Code Section 860G(a)(3)(A),
and "loans . . . secured by an interest in real property" within the meaning
of Code Section 7701(a)(19)(C)(v), and interest (including original issue
discount) income attributable to Stripped Certificates should be considered to
represent "interest on obligations secured by mortgages on real property"
within the meaning of Code Section 856(c)(3)(B), provided that in each case
the Mortgage Loans and interest on such Mortgage Loans qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Loans
is uncertain. See "Standard Certificates--Tax Status" above.
Taxation of Stripped Certificates
Original Issue Discount. Except as described above under "--General," each
Stripped Certificate will be considered to have been issued (i) on the date
that the stripped interest is purchased and (ii) at a price equal to its
purchase price or, if more than one stripped interest is purchased, the share
of the purchase price allocable to
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such stripped interest. Each stripped interest generally will have original
issue discount equal to the excess of its stated redemption price at maturity
(or, in the case of a stripped coupon, the amount payable on the due date of
such coupon) over its issue price. Original issue discount with respect to a
Stripped Certificate must be included in ordinary income as it accrues, in
accordance with a constant yield method that takes into account the
compounding of interest, which may be prior to the receipt of the cash
attributable to such income. Based in part on the OID Regulations and the
amendments to the original issue discount sections of the Code made by the
1986 Act, counsel has advised the Company that the amount of original issue
discount required to be included in the income of a holder of a Stripped
Certificate (referred to in this discussion as a "Stripped Certificateholder")
in any taxable year likely will be computed generally as described above under
"Federal Income Tax Consequences for REMIC Certificates--Taxation of Regular
Certificates--Original Issue Discount." However, with the apparent exception
of a Stripped Certificate issued with de minimis original issue discount, as
described above under "--General," the issue price of a Stripped Certificate
will be the purchase price paid by each holder thereof, and the stated
redemption price at maturity will include the aggregate amount of the payments
to be made on the Stripped Certificate to such Stripped Certificateholder,
presumable under the Prepayment Assumption, other than amounts treated as
qualified stated interest.
If the Mortgage Loans prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Certificateholder's recognition of
original issue discount will be either accelerated or decelerated and the
amount of such original issue discount will be either increased or decreased
depending on the relative interests in principal and interest on each Mortgage
Loan represented by such Stripped Certificateholder's Stripped Certificate.
While the matter is not free from doubt, the holder of a Stripped Certificate
should be entitled in the year that it becomes certain (assuming no further
prepayments) that the holder will not recover a portion of its adjusted basis
in such Stripped Certificate to recognize an ordinary loss equal to such
portion of unrecoverable basis.
Possible Alternative Characterizations. As an alternative to the method
described above, the fact that some or all of the interest payments with
respect to the Stripped Certificates will not be made if the Mortgage Loans
are prepaid could lead to the interpretation that such interest payments are
"contingent" within the meaning of the OID Regulations. Under the rules of the
OID Regulations relating to contingent payments, a projected payment schedule
for the Stripped Certificates would be constructed by the Company. Interest
accrual and adjustments relating to the Stripped Certificates would be
determined under the general rules of the noncontingent bond method described
above. While not free from doubt, counsel for the Company believes that
uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Loans should not cause the
contingent payment rules under the OID Regulations to apply to interest with
respect to the Stripped Certificates.
Sale or Exchange of Stripped Certificates. Sale or exchange of a Stripped
Certificate prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Certificateholder's adjusted basis in such Stripped Certificate, as described
above under "Federal Income Tax Consequences for REMIC Certificates--Taxation
of Regular Certificates--Sale or Exchange of Regular Certificates." To the
extent that a subsequent purchaser's purchase price is exceeded by the
remaining payments on the Stripped Certificates, such subsequent purchaser
will be required for federal income tax purposes to accrue and report such
excess as if it were original issue discount in the manner described above. It
is not clear for this purpose whether the assumed prepayment rate that is to
be used in the case of a Stripped Certificateholder other than original
Stripped Certificateholder should be the Prepayment Assumption or a new rate
based on the circumstances at the date of subsequent purchase.
Purchase of More Than One Class of Stripped Certificates. Where an investor
purchases more than one class of Stripped Certificates, it is currently
unclear whether for federal income tax purposes such classes of Stripped
Certificates should be treated separately or aggregated for purposes of the
rules described above.
Because of these possible varying characterizations of Stripped Certificates
and the resultant differing treatment of income recognition, Stripped
Certificateholders are urged to consult their own tax advisors regarding the
proper treatment of Stripped Certificates for federal income tax purposes.
87
<PAGE>
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Certificateholder or Stripped Certificateholder at any
time during such year, such information (prepared on the basis described
above) as the Trustee deems to be necessary or desirable to enable such
Certificateholders to prepare their federal income tax returns. Such
information will include the amount of original issue discount accrued on
Certificates held by persons other than Certificateholders exempted from the
reporting requirements. The amounts required to be reported by the Trustee may
not be equal to the proper amount of original issue discount required to be
reported as taxable income by a Certificateholder, other than an original
Certificateholder. The Trustee will also file such original issue discount
information with the Internal Revenue Service. If a Certificateholder fails to
supply an accurate taxpayer identification number or if the Secretary of the
Treasury determines that a Certificateholder has not reported all interest and
dividend income required to be shown on his federal income tax return, 31%
backup withholding may be required in respect of any reportable payments, as
described above under "Federal Income Tax Consequences for REMIC
Certificates--Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Certificate evidences ownership in Mortgage Loans that
are issued on or before July 18, 1984, interest or original issue discount
paid by the person required to withhold tax under Code Section 1441 or 1442 to
nonresident aliens, foreign corporations, or other Non-U.S. Persons generally
will be subject to 30% United States withholding tax, or such lower rate as
may be provided for interest by an applicable tax treaty. Accrued original
issue discount recognized by the Certificateholder on the sale or exchange of
such a Certificate also will be subject to federal income tax at the same
rate.
Treasury regulations provide that interest or original issue discount paid
by the Trustee or other withholding agent to a Non-U.S. Person evidencing
ownership interest in Mortgage Loans issued after July 18, 1984 will be
"portfolio interest" and will be treated in the manner, and such persons will
be subject to the same certification requirements described above under
"Federal Income Tax Consequences for REMIC Certificates--Taxation of Certain
Foreign Investors--Regular Certificates."
PLAN OF DISTRIBUTION
Certificates are being offered hereby in series through one or more
underwriters or groups of underwriters (the "Underwriters"). The Prospectus
Supplement will set forth the terms of offering of the series of Certificates,
including the public offering or purchase price of each class of Certificates
of such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Company from the sale of each such
class. Such Certificates will 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 fixed public offering prices or at
varying prices to be determined at the time of sale or at the time of
commitment therefor. The managing Underwriter or Underwriters with respect to
the offer and sale of a particular series of Certificates will be set forth on
the cover of the Prospectus Supplement relating to such series and the members
of the underwriting syndicate, if any, will be named in such Prospectus
Supplement.
In connection with the sale of the Certificates, Underwriters may receive
compensation from the Company or from purchasers of the Certificates in the
form of discounts, concessions or commissions. Underwriters and dealers
participating in the distribution of the Certificates may be deemed to be
underwriters in connection with such Certificates, and any discounts or
commissions received by them from the Company and any profit on the resale of
Certificates by them may be deemed to be underwriting discounts and
commissions under the Securities Act of 1933, as amended. The Prospectus
Supplement will describe any such compensation paid by the Company.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Certificates will provide that the obligations of the
underwriters will be subject to certain conditions precedent, that the
Underwriters will be obligated to purchase all such Certificates if any are
purchased and that the Company will indemnify the underwriters against certain
civil liabilities, including liabilities under the Securities Act of 1933, as
amended.
88
<PAGE>
LEGAL MATTERS
The legality of the Certificates offered hereby will be passed upon for the
Company by Andrews & Kurth L.L.P., Dallas, Texas. Certain federal income tax
matters also will be passed upon for the Company by Andrews & Kurth L.L.P.
FINANCIAL INFORMATION
A Trust Fund will be formed with respect to each series of Certificates. No
Trust Fund will have any assets or obligations prior to the issuance of the
related series of Certificates. No Trust Fund will engage in any activities
other than those described herein or in the Prospectus Supplement.
Accordingly, no financial statement with respect to any Trust Fund is included
in this Prospectus or will be included in the Prospectus Supplement.
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 in writing or calling
FHLMC's Investor Relations Department at 8200 Jones Branch Drive, McLean,
Virginia 22102 (800-336-FMPC). The Company 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
Company did not participate in the preparation of FNMA's Prospectus or any
such report, financial statement or other financial information.
89
<PAGE>
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NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS SUP-
PLEMENT OR THE ACCOMPANYING PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMA-
TION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY
THE COMPANY, CMC INVESTMENT PARTNERSHIP, CAPSTEAD INC., CAPSTEAD MORTGAGE COR-
PORATION OR BY THE UNDERWRITER. NEITHER THIS PROSPECTUS SUPPLEMENT NOR THE AC-
COMPANYING PROSPECTUS CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OF-
FER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY, CMC IN-
VESTMENT PARTNERSHIP, CAPSTEAD INC., OR CAPSTEAD MORTGAGE CORPORATION SINCE
SUCH DATE.
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TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary of Terms......................................................... S-5
Risk Factors............................................................. S-11
Certain Legal Considerations............................................. S-11
Description of the Mortgage Loans and the Mortgaged Properties........... S-12
Description of the Certificates.......................................... S-25
Certain Investment, Prepayment, Yield and Weighted Average Life
Considerations.......................................................... S-29
Description of Book Entry Procedures..................................... S-33
The Company.............................................................. S-34
Pooling Agreement........................................................ S-37
Description of the Underlying Certificates............................... S-38
Pooling, Administration and Servicing.................................... S-40
Description of Insurance, Special Hazard Account and Bankruptcy Account.. S-42
Certain Federal Income Tax Consequences.................................. S-57
ERISA Considerations..................................................... S-58
Underwriting............................................................. S-60
Certificate Rating....................................................... S-61
Legal Investment Matters................................................. S-61
Legal Matters............................................................ S-61
Index of Defined Terms................................................... S-62
Prospectus
Prospectus Supplement or Current Report on Form 8-K...................... 2
Available Information.................................................... 3
Incorporation of Certain Documents by Reference.......................... 3
Table of Contents........................................................ 4
Glossary of Principal Terms.............................................. 6
Summary of Prospectus.................................................... 9
Risk Factors............................................................. 17
Description of the Certificates.......................................... 21
The Trust Fund........................................................... 27
Credit Enhancement....................................................... 36
Servicing of the Mortgage Loans.......................................... 40
Pooling and Administration............................................... 45
Use of Proceeds.......................................................... 51
The Company.............................................................. 52
Certain Legal Aspects of Mortgage Loans.................................. 54
Legal Investment Matters................................................. 60
ERISA Considerations..................................................... 61
Certain Federal Income Tax Consequences.................................. 63
Plan of Distribution..................................................... 88
Legal Matters............................................................ 89
Financial Information.................................................... 89
</TABLE>
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CMC SECURITIES CORPORATION II
$207,490,355
(APPROXIMATE)
REMIC PASS-THROUGH CERTIFICATES
SERIES 1996-B
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PROSPECTUS SUPPLEMENT
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LEHMAN BROTHERS
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