mutual fund that assesses shareholders for some of its promotion expenses. Adopted by the Securities and Exchange Commission in 1980, Rule 12b-1 provides mutual funds and their shareholders with an asset-based alternative method of covering sales and marketing expenses. At least half of the more than 10,000 mutual funds in existence today have a 12b-1 fee typically ranging from .25%, in the case of "no-load" funds that use it to cover advertising and marketing costs, to as high as 8.5%, the maximum "front-end load" allowed under National Association of Securities Dealers (NASD) rules, in cases where annual 12b-1 "spread loads" replaced traditional front-end loads. The predominant use of 12b-1 fees is in funds sold through brokers, insurance agents, and financial planners.

Changes to 12b-1 that became effective July 7, 1993, aim to limit fees paid by most fund investors to the 8.5% limit on front-end loads. This is achieved by an annual limit and by a rolling cap placed on new sales. The annual limit is .85% of assets, with an additional .25% permitted as a service fee. The rolling cap on the total of all sales charges is 6.25% of new sales, plus interest, for funds that charge the service fee, and 7.25%, plus interest, for funds that do not. The new regulation also prohibits funds with front-end, deferred, and/or 12b-1 fees in excess of .25% from being called "no-load."

long-term, deferred interest Collateralized Mortgage Obligation bond, also called a Z-Bond, that pays no interest until all prior bonds have been retired. An accrual bond is similar to a zero-coupon cdzero-coupon cd bond, except that it has an explicit coupon rate and pays both principal and coupon interests.

mortgage-backed bond collateralized by a pool of mortgages. Also called a cash flow bond. These securities are fully amortizing bonds resembling modified pass-through securities, paying interest at scheduled intervals, monthly or quarterly. The scheduled amortization of the bonds is met by collateral cash flow representing loan payments by mortgage borrowers. Early loan prepayments accelerate bond redemptions. An example of a pay-through bond is a Collateralized Mortgage Obligation.

security, representing pooled debt obligations repackaged as shares, that passes income from debtors through the intermediary to investors. The most common type of passthrough is a mortgage-backed certificate, usually government guaranteed, where homeowners' principal and interest payments pass from the originating bank or savings and loan through a government agency or investment bank to investors, net of service charges. Pass-throughs representing other types of assets, such as auto loan paper or student loans, are also widely marketed.

mortgage securities vehicle authorized by the Tax Reform Act of 1986 that holds commercial and residential mortgages in trust, and issues securities representing an undivided interest in these mortgages. A REMIC, which can be a corporation, trust, association, or partnership, assembles mortgages into pools and issues pass-through certificates, multiclass bonds similar to a Collateralized Mortgage Obligation (CMO), or other securities to investors in the secondary mortgage market. Mortgage-backed securities issued through a REMIC can be debt financings of the issuer or a sale of assets. The Tax Reform Act eliminated the double taxation of income earned at the corporate level by an issuer and dividends paid to securities holders, thereby allowing a REMIC to structure a mortgage backed securities offering as a sale of assets, effectively removing the loans from the originating lender's balance sheet, rather than a debt financing in which the loans remain as balance sheet assets. A REMIC itself is exempt from federal taxes, although income earned by investors is fully taxable. As a tax-exempt entity, a REMIC may invest only in qualified mortgages and permitted investments, including single family or multifamily mortgages, commercial mortgages, second mortgages, mortgage participations, and federal agency pass-through securities.

Federal legislation enacted in 2004 (the American Jobs Creation Act) relaxed some of the restrictions on REMIC issuance, allowing securitization of mortgage-related open-end credit, such as homeequity lines of credit.

A REMIC can issue mortgage securities in a wide variety of forms: securities collateralized by (Ginnie Mae) pass-through certificates, whole loans, single-class participation certificates and multiclass mortgage backed securities; multiple class pass-through securities with fast-pay or slow-pay features; securities with a subordinated debt tranche that assumes most of the default risk, allowing the issuer to get a better credit rating; and Collateralized Mortgage Obligations with monthly pass-through of bond interest, eliminating reinvestment risk by giving investors call protectionagainst early prepayment.

Among the major issuers of REMICS are freddie mac and fannie mae,the two leading secondary market buyers of conventional mortgage loans, and also privately operated mortgage conduits owned by mortgage bankers, mortgage insurance companies, and savings institutions.

security, backed by a pool of mortgages and guaranteed by the government national mortgage association (Ginnie Mae), which passes through to investors the interest and principal payments of homeowners. Homeowners make their mortgage payments to the bank or savings and loan that originated their mortgage. After deducting a service charge (usually 1/2%), the bank forwards the mortgage payments to the pass-through buyers, who may be institutional investors or individuals. Ginnie Mae guarantees that investors will receive timely principal and interest payments even if homeowners do not make mortgage payments on time.

Ginnie Maes are available in three types:

1. GNMA 1 securities are single issuer pools whose certificates pay principal and interest separately.
2. GNMA 2 securities represent multiple-issuer pools (called jumbos) that are longer and more geographically diverse than single issuer pools, with certificate holders receiving aggregate principal and interest payments from a central paying agent.
3. GNMA Midgets, a term dealers use that is not an official GNMA designation, are certificates backed by fifteen-year fixed rate mortgages.

The introduction of Ginnie Mae pass-throughs has benefited the home mortgage market, since more capital has become available for lending. Investors, who are able to receive high, government-guaranteed interest payments, have also benefited. For investors, however, the rate of principal repayment on a Ginnie Mae pass-through is uncertain. If interest rates fall, principal will be repaid faster, since homeowners will refinance their mortgages. If rates rise, principal will be repaid more slowly, since homeowners will hold onto the underlying mortgages.