<PAGE>
PROSPECTUS SUPPLEMENT
(To Prospectus Dated September 5, 1997)
Filed pursuant to Rule 424(B)(5)
SEC File No. 333-30759
$724,411,000
AMRESCO Residential Securities Corporation Mortgage Loan Trust 1998-3
AMRESCO RESIDENTIAL SECURITIES CORPORATION
Depositor
AMRESCO RESIDENTIAL CAPITAL MARKETS, INC.
Seller, Master Servicer and Special Servicer
---------------
AMRESCO RESIDENTIAL MORTGAGE CORPORATION
Servicer
---------------
LOGO
AMRESCO Residential Securities Corporation
THE AMRESCO RESIDENTIAL SECURITIES CORPORATION MORTGAGE LOAN PASS-THROUGH
CERTIFICATES, SERIES 1998-3 OFFERED HEREBY (THE "OFFERED CERTIFICATES")
WILL CONSIST OF (I) THE CLASS A-7 CERTIFICATES AND THE CLASS A-8
CERTIFICATES (COLLECTIVELY, THE "CLASS A GROUP II CERTIFICATES");
(II) THE CLASS M-1A CERTIFICATES AND THE CLASS M-2A
CERTIFICATES (COLLECTIVELY, THE "MEZZANINE CERTIFICATES");
AND (III) THE CLASS B-1A CERTIFICATES AND THE CLASS B-1F
CERTIFICATES (COLLECTIVELY, THE "CLASS B-1
CERTIFICATES").
FOR A DISCUSSION OF SIGNIFICANT MATTERS AFFECTING INVESTMENT IN THE OFFERED
CERTIFICATES, SEE "RISK FACTORS" BEGINNING ON PAGE S-23 AND "PREPAYMENT AND
YIELD CONSIDERATIONS" BEGINNING ON PAGE S-47 HEREIN AND "RISK FACTORS"
BEGINNING ON PAGE 7 IN THE PROSPECTUS.
(Cover continued on next page)
---------------
THE OFFERED CERTIFICATES REPRESENT BENEFICIAL INTERESTS IN THE TRUST ONLY
AND DO NOT REPRESENT INTERESTS IN OR OBLIGATIONS OF THE DEPOSITOR, THE
SELLER, THE MASTER SERVICER, THE SERVICER, THE SPECIAL SERVICER, THE
TRUSTEE OR ANY OF THEIR AFFILIATES. NEITHER THE OFFERED
CERTIFICATES NOR THE MORTGAGE LOANS ARE INSURED OR
GUARANTEED BY ANY GOVERNMENTAL AGENCY.
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. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PASS-
INITIAL CERTIFICATE THROUGH PRICE TO UNDERWRITING PROCEEDS TO
PRINCIPAL BALANCE RATE PUBLIC(1) DISCOUNT DEPOSITOR(1)(2)
-------------------- --------- --------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Class A-7 Certificates.. $429,657,000 (3) 100.00000% 0.250% $428,582,857.50
Class A-8 Certificates.. 143,000,000 5.940%(3) 99.99980% 0.175% 143,410,124.00
Class M-1A
Certificates........... 55,650,000 (3) 100.00000% 0.300% 55,483,050.00
Class M-2A
Certificates........... 48,470,000 (3) 100.00000% 0.400% 48,276,120.00
Class B-1A
Certificates........... 41,290,000 (3) 100.00000% 0.690% 41,005,099.00
Class B-1F
Certificates........... 6,344,000 8.290%(4) 99.97286% 0.600% 6,345,118.94
</TABLE>
- -------
(1) Plus accrued interest, if any, from September 1, 1998 with respect to the
Class A-8 Certificates and the Class B-1F Certificates.
(2) Before deducting expenses, estimated to be $400,000.
(3) The Pass-Through Rate on each Class of the Group II Certificates (other
than the Class A-8 Certificates) is adjustable based on One-Month LIBOR as
described herein. The Pass-Through Rate on each of the Group II
Certificates is subject to the Group II Net WAC Cap as described herein.
(4) The Class B-1F Pass-Through Rate is subject to the Group I Net WAC Cap as
described herein.
---------------
The Offered Certificates are offered subject to prior sale, when, as, and if
accepted by the Underwriters and subject to the Underwriters' right to reject
orders in whole or in part. It is expected that delivery of the Offered
Certificates will be made in book-entry form through the facilities of The
Depository Trust Company ("DTC"), Cedel Bank, S.A. and the Euroclear System on
or about September 29, 1998. The Offered Certificates will be offered in
Europe and the United States of America.
---------------
MORGAN STANLEY DEAN WITTER
AMRESCO SECURITIES, INC.
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANK SECURITIES
PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus Supplement is September 15, 1998.
<PAGE>
(Cover continued from previous page)
In addition to the Offered Certificates, the AMRESCO Residential Securities
Corporation Mortgage Loan Pass-Through Certificates, Series 1998-3 will
consist of certificates not offered hereby (collectively, the "Nonoffered
Certificates"), including (i) the Class A-1 Certificates, the Class A-2
Certificates, the Class A-3 Certificates, the Class A-4 Certificates, the
Class A-5 Certificates and the Class A-6 Certificates (collectively, the
"Class A Fixed Rate Certificates"); (ii) the Class C-FIO Certificates and the
Class C-AIO Certificates (collectively, the "Class C-IO Certificates");
(iii) the Class S Certificates; (iv) the Class D Certificates; and (v) the
residual class with respect to each REMIC held by the Trust (collectively, the
"Class R Certificates"). The Offered Certificates and the Nonoffered
Certificates are collectively referred to herein as the "Certificates."
The Certificates represent undivided ownership interests in two pools (each,
a "Mortgage Loan Group") of mortgage loans (the "Mortgage Loans") held by
AMRESCO Residential Securities Corporation Mortgage Loan Trust 1998-3 (the
"Trust"). The Class A-1 through Class A-6, Class B-1F and Class C-FIO
Certificates (collectively, the "Group I Certificates") will represent the
undivided ownership interests in a pool of closed-end, fixed rate mortgage
loans ("Group I"). The Class A-7, Class A-8, Class M-1A, Class M-2A, Class B-
1A and Class C-AIO Certificates (collectively, the "Group II Certificates")
will represent the undivided ownership interests in a pool of closed-end
mortgage loans consisting primarily of adjustable rate mortgage loans ("Group
II"). The Mortgage Loans are secured by first and second lien mortgages or
deeds of trust. The Certificates also represent an undivided ownership
interest in all monies due under the respective Mortgage Loans after the close
of business on September 1, 1998 (the "Cut-Off Date"), security interests in
the properties which secure the Mortgage Loans (the "Mortgaged Properties"),
funds on deposit in certain trust accounts, and certain other property.
The Class M-1A Certificates issued with respect to Group II are subordinate
in right of distribution to the Class A Group II Certificates to the extent
described herein. The Class M-2A Certificates are subordinate in right of
distribution to the Class A Group II Certificates and the Class M-1A
Certificates to the extent described herein. The Class B-1A Certificates are
subordinate in right of distribution to the Class A Group II Certificates and
the Mezzanine Certificates to the extent described herein. The Class C-AIO
Certificates are subordinate in right of distribution to the Class A Group II
Certificates, the Mezzanine Certificates and the Class B-1A Certificates to
the extent described herein. The initial aggregate Certificate Principal
Balance of the Mezzanine Certificates and the Class B-1A Certificates which
are subordinate to the Class A Group II Certificates will equal approximately
20.25% of the initial aggregate Certificate Principal Balance of the Group II
Certificates.
The Class B-1F Certificates issued with respect to Group I are subordinate
in right of distribution to the Class A Fixed Rate Certificates to the extent
described herein.
The Trust will be created pursuant to a Pooling and Servicing Agreement (the
"Pooling and Servicing Agreement") to be dated as of September 1, 1998, among
the Depositor, AMRESCO Residential Capital Markets, Inc., as the Seller,
Master Servicer and Special Servicer, AMRESCO Residential Mortgage
Corporation, as the Servicer, the Federal Home Loan Mortgage Corporation, as
guarantor of payments under certain of the Nonoffered Certificates, and
Norwest Bank Minnesota, National Association, as Trustee (the "Trustee").
The Loan Balance of the Mortgage Loans as of the close of business on
September 1, 1998 (the "Statistical Calculation Date") was approximately
$748,047,446. In addition to the Mortgage Loans as of the Statistical
Calculation Date, additional Mortgage Loans with an aggregate principal
balance of approximately $251,952,554 will be purchased by the Trust from the
Depositor on the Closing Date. All of the Mortgage Loans will have a cut-off
date as of the close of business on September 1, 1998. See "The Mortgage Loan
Pool" herein.
<PAGE>
The Offered Certificates initially will be represented by certificates
registered in the name of Cede & Co., as nominee of The Depository Trust
Company ("DTC"), as further described herein. The interests of beneficial
owners of the Offered Certificates will be represented by book entries on the
records of participating members of DTC. Definitive certificates will be
available for the Offered Certificates only under the limited circumstances
described herein. See "Description of the Offered Certificates--Book-Entry
Registration of the Offered Certificates" herein.
Distributions of interest will be made to the owners of the Offered
Certificates (the "Owners") on the 25th day of each month (or, if such day is
not a Business Day, the next Business Day) beginning October 26, 1998 (each
such date, a "Payment Date"). To the extent available, interest will be passed
through on each Payment Date to the Owners of the Offered Certificates based
on the related Certificate Principal Balance (as defined herein), and at the
rate applicable to the related Class of the Offered Certificates (each, a
"Pass-Through Rate"). The Pass-Through Rate for each Class of the Group II
Certificates (other than the Class A-8 Certificates) adjusts monthly based
upon One-Month LIBOR (as defined herein). The Pass-Through Rate on each Class
of Group II Certificates is subject to the Group II Net WAC Cap as described
herein. The Class B-1F Pass-Through Rate is subject to the Group I Net WAC Cap
as described herein. Distributions of principal in reduction of the
Certificate Principal Balances will be made on each Payment Date in the manner
and the amounts described herein.
Except as described further herein, only the Class A Group II Certificates
may be acquired by Plans (as defined herein). See "ERISA Considerations"
herein.
The yield to investors on the Offered Certificates sold at prices other than
par may be sensitive to the rate and timing of principal payments (including
prepayments, repurchases, defaults and liquidations) on the Mortgage Loans in
the related Mortgage Loan Group, which may vary over time. See "Risk Factors"
and "Prepayment and Yield Considerations" herein and "Risk Factors" in the
Prospectus.
The Trust will make one or more elections to treat certain assets thereof as
a "Real Estate Mortgage Investment Conduit" (a "REMIC") for federal income tax
purposes. As described more fully herein, all Classes of the Offered
Certificates will constitute "regular interests" in a REMIC. See "Certain
Federal Income Tax Consequences" herein and in the Prospectus.
Prior to their issuance there has been no market for the Offered
Certificates nor can there be any assurance that one will develop or if it
does develop, that it will provide the Owners of the Offered Certificates with
liquidity or will continue for the life of the Offered Certificates. The
Underwriters intend, but are not obligated, to make a market in the Offered
Certificates.
----------------
UNTIL 90 DAYS AFTER THE DATE OF THIS PROSPECTUS SUPPLEMENT, ALL DEALERS
EFFECTING TRANSACTIONS IN THE OFFERED CERTIFICATES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS
SUPPLEMENT AND THE PROSPECTUS TO WHICH IT RELATES. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS SUPPLEMENT AND PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
THE OFFERED CERTIFICATES OFFERED BY THIS PROSPECTUS SUPPLEMENT WILL BE PART
OF A SEPARATE SERIES OF CERTIFICATES BEING OFFERED BY THE DEPOSITOR PURSUANT
TO ITS PROSPECTUS DATED SEPTEMBER 5, 1997, OF WHICH THIS PROSPECTUS SUPPLEMENT
IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE PROSPECTUS
CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING WHICH IS NOT CONTAINED
HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND THIS
PROSPECTUS SUPPLEMENT IN FULL.
<PAGE>
AVAILABLE INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933 with
respect to the Offered Certificates. This Prospectus Supplement and the
related Prospectus, which form a part of the Registration Statement, omit
certain information contained in such Registration Statement pursuant to the
Rules and Regulations of the Commission. The Registration Statement can be
inspected and copied at the Public Reference Room of the Commission at 450
Fifth Street, N.W., Washington, D.C., and the Commission's regional offices at
Seven World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies
of such materials can be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 and electronically through the Commission's Electronic Data
Gathering Analysis and Retrieval system at the Commission's Web site (http:\\
www.sec.gov).
REPORTS TO OWNERS
Monthly and annual reports concerning the Certificates and the Trust will be
sent by the Trustee to the Owners of Offered Certificates. So long as any
Offered Certificate is in book-entry form, such reports will be sent to Cede &
Co., as the nominee of DTC and as Owner of such Offered Certificates pursuant
to the Pooling and Servicing Agreement. DTC will supply such reports to Owners
of any such Offered Certificates in accordance with its procedures. The
Depositor will file or cause to be filed with the Commission such periodic
reports with respect to the Trust as are required under the Securities
Exchange Act of 1934 and the rules and regulations of the Commission
thereunder. It is the Depositor's intent to suspend the filing of such reports
as soon as such reports are no longer statutorily required.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
PAGE
----
SUMMARY OF TERMS.........................................................S-1
RISK FACTORS............................................................S-23
THE PORTFOLIO OF MORTGAGE LOANS.........................................S-26
General............................................................S-26
Underwriting Guidelines............................................S-26
Prepayment Penalties...............................................S-29
Representations Relating to the Mortgage Loans.....................S-30
Responsibilities of the Master Servicer............................S-30
Servicing..........................................................S-31
USE OF PROCEEDS.........................................................S-32
THE DEPOSITOR...........................................................S-32
THE MORTGAGE LOAN POOL..................................................S-32
General............................................................S-32
Statistical Mortgage Loans -- Group I..............................S-33
Statistical Mortgage Loans -- Group II.............................S-38
PREPAYMENT AND YIELD CONSIDERATIONS.....................................S-47
General............................................................S-47
Prepayment and Yield Scenarios for Offered Certificates............S-48
Payment Lag Feature of Class B-1F Certificates and
Class A-8 Certificates.........................................S-54
THE ORIGINATORS.........................................................S-54
FORMATION OF THE TRUST AND TRUST PROPERTY...............................S-54
ADDITIONAL INFORMATION..................................................S-54
DESCRIPTION OF THE OFFERED CERTIFICATES.................................S-55
General............................................................S-55
Payment Dates......................................................S-55
Distributions......................................................S-55
Calculation of One-Month LIBOR.....................................S-58
Book Entry Registration of the Offered Certificates................S-58
Assignment of Rights...............................................S-61
NONOFFERED CERTIFICATES.................................................S-61
CREDIT ENHANCEMENT......................................................S-62
Subordination......................................................S-62
Application of Realized Losses.....................................S-62
Application of Monthly Excess Cash Flow Amounts....................S-63
THE POOLING AND SERVICING AGREEMENT.....................................S-66
Covenant of the Seller to Take Certain Actions with Respect
to the Mortgage Loans in Certain Situations....................S-66
Assignment of Mortgage Loans.......................................S-66
Servicing..........................................................S-67
Removal and Resignation of the Servicer and the
Special Servicer...............................................S-71
Reporting Requirements.............................................S-71
Removal of Trustee for Cause.......................................S-73
Governing Law......................................................S-73
Amendments.........................................................S-73
Termination of the Trust...........................................S-73
Auction Sale; Step Up on Certain Pass-Through
Rates; Termination.............................................S-74
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................S-74
REMIC Elections....................................................S-74
ERISA CONSIDERATIONS....................................................S-75
RATINGS.................................................................S-77
LEGAL INVESTMENT MATTERS................................................S-77
UNDERWRITING............................................................S-78
CERTAIN LEGAL MATTERS...................................................S-80
GLOBAL CLEARANCE, SETTLEMENT AND
TAX DOCUMENTATION PROCEDURES........................................I-1
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS.............................A-1
PROSPECTUS
PAGE
----
SUMMARY OF PROSPECTUS.................................................... 1
RISK FACTORS............................................................. 7
DESCRIPTION OF THE SECURITIES............................................ 10
General............................................................. 11
Classes of Securities............................................... 11
Distributions of Principal and Interest............................. 12
Book Entry Registration............................................. 14
List of Owners of Securities........................................ 14
THE TRUSTS............................................................... 14
Mortgage Loans...................................................... 15
Contracts........................................................... 17
Mortgage-Backed Securities.......................................... 17
Other Mortgage Securities........................................... 17
CREDIT ENHANCEMENT....................................................... 17
SERVICING OF MORTGAGE LOANS AND CONTRACTS................................ 21
Payments on Mortgage Loans.......................................... 22
Advances............................................................ 22
Collection and Other Servicing Procedures........................... 23
Primary Mortgage Insurance.......................................... 25
Standard Hazard Insurance........................................... 25
Title Insurance Policies............................................ 26
Claims Under Primary Mortgage Insurance Policies and
Standard Hazard Insurance Policies; Other Realization
Upon Defaulted Loan............................................. 26
Servicing Compensation and Payment of Expenses...................... 27
Master Servicer..................................................... 27
ADMINISTRATION........................................................... 27
Assignment of Mortgage Assets....................................... 27
Evidence as to Compliance........................................... 29
The Trustee......................................................... 30
Administration of the Security Account.............................. 30
Reports............................................................. 31
Forward Commitments; Prefunding..................................... 32
Servicer Events of Default.......................................... 32
Rights Upon Servicer Event of Default............................... 32
Amendment........................................................... 33
Termination......................................................... 33
USE OF PROCEEDS.......................................................... 33
THE DEPOSITOR............................................................ 33
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS............................. 34
General............................................................. 34
Foreclosure......................................................... 35
Soldiers' and Sailors' Civil Relief Act............................. 39
The Contracts....................................................... 40
The Title I Program................................................. 42
LEGAL INVESTMENT MATTERS................................................. 42
ERISA CONSIDERATIONS..................................................... 43
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................. 45
Federal Income Tax Consequences For REMIC Securities................ 45
Taxation of Regular Securities...................................... 46
Taxation of Residual Securities..................................... 51
Treatment of Certain Items of REMIC Income
and Expense..................................................... 53
Tax-Related Restrictions on Transfer of
Residual Securities............................................. 55
Sale or Exchange of a Residual Security............................. 57
Taxes That May Be Imposed on the REMIC Pool......................... 57
Liquidation of the REMIC Pool....................................... 58
Administrative Matters.............................................. 58
Limitations on Deduction of Certain Expenses........................ 58
Taxation of Certain Foreign Investors............................... 59
Backup Withholding.................................................. 59
Reporting Requirements.............................................. 60
Federal Income Tax Consequences for Securities as to
Which No REMIC Election Is Made................................. 60
Standard Securities..................................................60
Premium and Discount................................................ 62
Stripped Securities................................................. 63
Reporting Requirements and Backup Withholding....................... 65
Taxation of Certain Foreign Investors............................... 66
Debt Securities......................................................66
Taxation of Securities Classified as Partnership Interests.......... 67
PLAN OF DISTRIBUTION..................................................... 67
RATINGS...................................................................68
LEGAL MATTERS............................................................ 68
FINANCIAL INFORMATION.................................................... 68
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS............................. A1
<PAGE>
SUMMARY OF TERMS
This summary is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus Supplement and the
accompanying Prospectus. Reference is made to the "Index to Location of
Principal Defined Terms" for the location of certain defined terms.
ISSUER: AMRESCO Residential Securities Corporation Mortgage Loan
Trust 1998-3 (the "Trust").
CERTIFICATES
OFFERED: $724,411,000 Mortgage Loan Pass-Through Certificates, Series
1998-3, to be issued in the following Classes (each, a
"Class") and original certificate principal balances (each,
an "Original Certificate Principal Balance") with the
Pass-Through Rates set forth below:
<TABLE>
<CAPTION>
Original Certificate Pass-Through
Class Principal Balance Rate
---------------------------- ----------------------- --------------
<S> <C> <C>
Class A-7 Certificates $429,657,000 (1)(6)
Class A-8 Certificates 143,000,000 5.940%(2)
Class M-1A Certificates 55,650,000 (3)(6)
Class M-2A Certificates 48,470,000 (4)(6)
Class B-1A Certificates 41,290,000 (5)(6)
Class B-1F Certificates 6,344,000 8.290%(7)
</TABLE>
(1) On each Payment Date, the Class A-7 Pass-Through Rate
will be equal to the lesser of (i) with respect to any
Payment Date which occurs on or prior to the Step Up
Date, the rate equal to One Month LIBOR plus 0.24% per
annum (and for any Payment Date thereafter, One-Month
LIBOR plus 0.48% per annum) and (ii) the Group II Net
WAC Cap as defined herein.
(2) On each Payment Date, the Class A-8 Pass-Through Rate
will be equal to the lesser of (i) the Pass-Through
Rate for such Class set forth above and (ii) the Group
II Net WAC Cap.
(3) On each Payment Date, the Class M-1A Pass-Through Rate
will be equal to the lesser of (i) with respect to any
Payment Date which occurs on or prior to the Step Up
Date, the rate equal to One-Month LIBOR plus 0.42% per
annum (and for any Payment Date thereafter, One-Month
LIBOR plus 0.63% per annum) and (ii) the Group II Net
WAC Cap.
(4) On each Payment Date, the Class M-2A Pass-Through Rate
will be equal to the lesser of (i) with respect to any
Payment Date which occurs on or prior to the Step Up
Date, the rate equal to One-Month LIBOR plus 0.70% per
annum (and for any Payment Date thereafter, One-Month
LIBOR plus 1.05% per annum) and (ii) the Group II Net
WAC Cap.
(5) On each Payment Date, the Class B-1A Pass-Through Rate
will be equal to the lesser of (i) with respect to any
Payment Date which occurs on or prior to the Step Up
Date, the rate equal to One-Month LIBOR plus 1.75% per
annum (and for any Payment Date thereafter, One-Month
LIBOR plus 2.625% per annum) and (ii) the Group II Net
WAC Cap.
(6) On any Payment Date, the weighted average of the
Pass-Through Rates applicable to each Class of the
Group II Certificates will be limited to the weighted
average of the Coupon Rates on the Mortgage Loans in
Group II during the related Remittance Period (such
weighted average Coupon Rate, the "ARM WAC") less
approximately 0.52% per annum. Since, however, the
margin over LIBOR is different for each Class of Group
II Certificates, it is possible that, on any particular
Payment Date, the "Formula Pass-Through Rate(s)" (the
rates described using the margins above One-Month
LIBOR) i.e., the rates described in clause (i) of each
of the foregoing footnotes (1), (3), (4) and (5)
applicable to certain Class(es) of Group II
Certificates, may be less than the ARM WAC less
approximately 0.52% per annum, while the Formula
Pass-Through Rate(s) applicable to certain other
Class(es) of Group II Certificates, may exceed the ARM
WAC less approximately 0.52% per annum. In such event,
the Pooling and Servicing Agreement provides that the
excess moneys resulting from the Class(es) having
Formula Pass-Through Rates less than the ARM WAC shall
be applied to increase the maximum rate of interest
payable with respect to any Class(es) having Formula
Pass-Through Rates greater than the ARM WAC up to the
Formula Pass-Through Rate less approximately 0.52% per
annum. The ARM WAC less approximately 0.52% per annum,
increased by the amount of such excess moneys is the
"Group II Net WAC Cap" for a Payment Date.
(7) On each Payment Date, the Class B-1F Pass-Through Rate
will be equal to the lesser of (x) the Pass-Through
Rate for such Class set forth above and (y) the
weighted average Coupon Rate of the Mortgage Loans in
Group I less approximately 0.63% per annum (the "Group
I Net WAC Cap").
S-1
<PAGE>
CERTIFICATE CLASSES The Class A-7 Certificates and Class A-8 Certificates are
AND GROUPS: collectively referred to herein as the "Class A Group II
Certificates." The Class M-1A Certificates and the Class
M-2A Certificates are collectively referred to as the
"Mezzanine Certificates." The Class B-1A Certificates and
the Class B-1F Certificates are collectively referred to as
the "Class B-1 Certificates." The Class A Group II
Certificates, the Mezzanine Certificates and the Class B-1
Certificates are collectively referred to as the "Offered
Certificates."
The Class A-1 Certificates, Class A-2 Certificates, Class
A-3 Certificates, Class A-4 Certificates, Class A-5
Certificates and Class A-6 Certificates are collectively
referred to herein as the "Class A Fixed Rate Certificates."
The Class C-FIO and Class C-AIO Certificates are
collectively referred to herein as the "Class C-IO
Certificates." The Class A Fixed Rate Certificates and the
Class C-IO Certificates, together with the Class S
Certificates, Class D Certificates and Class R Certificates
are collectively referred to herein as the "Nonoffered
Certificates."
The Offered Certificates and the Nonoffered Certificates are
collectively referred to as the "Certificates."
The Class A Group II Certificates and the Class A Fixed Rate
Certificates are collectively referred to as the "Class A
Certificates."
The Class A Fixed Rate Certificates, the Class B-1F
Certificates and the Class C-FIO Certificates are
collectively referred to as the "Group I Certificates."
The Class A Group II Certificates, the Mezzanine
Certificates, the Class B-1A Certificates and the
Class C-AIO Certificates are collectively referred to as the
"Group II Certificates."
The Mezzanine Certificates, the Class B-1 Certificates and
the Class C-IO Certificates are collectively referred to as
the "Subordinate Certificates."
Only the Offered Certificates will be offered hereby.
On any date after the Closing Date, the "Aggregate
Certificate Principal Balance" is the sum of the Certificate
Principal Balance of all Classes of such Certificate Group
or specified Certificates as of such date.
DEPOSITOR: AMRESCO Residential Securities Corporation (the
"Depositor"), a Delaware corporation.
SELLER, MASTER AMRESCO Residential Capital Markets, Inc. (the "Seller,"
SERVICER AND "Master Servicer" or "Special Servicer" as the context may
SPECIAL SERVICER: require), a Delaware corporation.
SERVICER: AMRESCO Residential Mortgage Corporation (the "Servicer" or
"ARMC"), a Delaware corporation, with its principal
executive offices at 16800 Aston Street, Irvine, California
92606.
TRUSTEE: Norwest Bank Minnesota, National Association, a national
banking association (the "Trustee"). The Trustee's principal
executive offices are located at Sixth Street and Marquette
Avenue, Minneapolis, Minnesota 55479-1026.
STATISTICAL
CALCULATION
DATE: As of the close of business on September 1, 1998.
CUT-OFF DATE: As of the close of business on September 1, 1998.
CLOSING DATE: On or about September 29, 1998.
THE POOLING AND The Certificates will be issued pursuant to a Pooling and
SERVICING Servicing Agreement (the "Pooling and Servicing Agreement")
AGREEMENT: to be dated as of September 1, 1998, among the Depositor,
the Seller, the Master Servicer, the Special Servicer, the
Servicer, the
S-2
<PAGE>
Federal Home Loan Mortgage Corporation ("Freddie Mac"), as
the guarantor, and the Trustee.
DENOMINATIONS: The Offered Certificates are issuable in book entry form in
minimum original principal amounts of $1,000 and integral
multiples thereof; provided, that one Certificate of each
Class may be issued in a principal amount that is not an
integral multiple of $1,000.
THE MORTGAGE The statistical information presented in this Prospectus
LOANS: Supplement describes the Mortgage Loans with an aggregate
Loan Balance of approximately $170,456,319 which have been
identified to be included in Group I and approximately
$577,591,127 which have been identified to be included in
Group II, in each case as of the Statistical Calculation
Date (such Mortgage Loans in Groups I and II, the
"Statistical Mortgage Loans"). On the Closing Date, the
Statistical Mortgage Loans and additional Mortgage Loans
with aggregate Loan Balances of approximately $111,476,681
and $140,475,873, respectively, will be conveyed to the
Trust in respect of Group I and Group II, respectively.
Unless otherwise noted, all statistical percentages in this
Prospectus Supplement are approximate and are measured by
the aggregate Loan Balance of the related Statistical
Mortgage Loans in the applicable Mortgage Loan Group (i.e.,
approximately $170,456,319 in respect of Group I and
approximately $577,591,127 in respect of Group II) or of the
Mortgage Loans in both Mortgage Loan Groups (i.e.,
approximately $748,047,446) in each case, as of the
Statistical Calculation Date. Similarly, unless otherwise
noted, any references to Loan Balances represent scheduled
Loan Balances as of the Statistical Calculation Date. The
statistical characteristics of the Mortgage Loans will vary
as a result of the substitution of loans and the transfer
into the Trust of the additional Mortgage Loans on the
Closing Date, although such variance will not be material.
See "Additional Information" herein.
The Mortgage Loans to be conveyed to the Trust by the
Depositor on the Closing Date consist of fixed and
adjustable rate mortgage loans evidenced by promissory notes
(the "Notes") secured by first and second lien deeds of
trust, security deeds or mortgages (the "Mortgages"), which,
as of the Statistical Calculation Date, were located in 49
states and the District of Columbia. The properties securing
the Mortgage Loans (the "Mortgaged Properties") consist
primarily of single family residences (which may be attached
or detached), two- to four-family dwellings, condominium
units, units in planned unit developments and manufactured
homes. The Mortgaged Properties may be either owner occupied
or investment properties. No Combined Loan-to-Value Ratio
(as defined below) exceeded 95% for Group I and no Loan-to-
Value Ratio (as defined below) exceeded 100% for Group II,
in each case, as of the Statistical Calculation Date. The
Mortgage Loans are not insured by either primary or pool
mortgage insurance policies. See "Credit Enhancement"
herein. The Mortgage Loans are not guaranteed by the
Depositor, the Seller, the Master Servicer, the Special
Servicer, the Servicer, Freddie Mac, the Trustee or any
affiliate thereof.
Group I. As of the Statistical Calculation Date, the average
Loan Balance of the Statistical Mortgage Loans in Group I
was approximately $71,953; the interest rates (the "Coupon
Rates") of such Statistical Mortgage Loans ranged from
6.500% per annum to 16.500% per annum; the weighted average
Coupon Rate of such Statistical Mortgage Loans was 10.035%
per annum; the weighted average Combined Loan-to-Value Ratio
(as defined below) of such Statistical Mortgage Loans was
74.14%; and the weighted average remaining term to maturity
of such Statistical Mortgage Loans was approximately 327
months. The "Combined Loan-to-Value Ratio" of a Mortgage
Loan is the ratio, expressed as a percentage, of (a) the sum
of the Loan Balance of such Mortgage Loan and any
outstanding loan balances of Mortgage Loans senior to such
Mortgage Loan each determined at the time of origination to
(b) the lesser of the appraised value of the related
Mortgaged Property and the purchase price of such Mortgaged
Property, each determined at the time of origination. The
remaining terms to maturity as of the Statistical
Calculation Date of the Statistical Mortgage Loans in Group
I ranged from 55 months to 360 months. The maximum Loan
Balance of the Statistical Mortgage Loans in Group I as of
the Statistical Calculation Date was approximately
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$430,989. Not more than 2.66% of the aggregate Loan Balance
of the Statistical Mortgage Loans in Group I, as of the
Statistical Calculation Date, require "balloon payments"
("Balloon Mortgage Loans"). No Statistical Mortgage Loan in
Group I as of the Statistical Calculation Date will mature
later than September 1, 2028. As of the Statistical
Calculation Date, approximately 97.51% of the Statistical
Mortgage Loans in Group I are secured by first lien
mortgages or deeds of trust and the remainder are secured by
second lien mortgages or deeds of trust. As a percentage of
the aggregate Loan Balance of the Statistical Mortgage Loans
in Group I as of the Statistical Calculation Date, 79.95%
were secured by mortgages on single family dwellings, 8.26%
by mortgages on two- to four-family dwellings, 5.95% by
mortgages on planned unit developments, 5.29% by mortgages
on condominiums and 0.56% by mortgages on manufactured
homes. See "The Mortgage Loan Pool - Statistical Mortgage
Loans -- Group I" herein.
17.35% and 13.81% of the Statistical Mortgage Loans in Group
I as of the Statistical Calculation Date were originated by
New Century Mortgage Corporation ("New Century") and ARMC,
respectively.
All of the Statistical Mortgage Loans in Group I as of the
Statistical Calculation Date bear interest at a fixed rate
for the life of such Statistical Mortgage Loans.
Group II. As of the Statistical Calculation Date, the
average Loan Balance of the Statistical Mortgage Loans in
Group II was approximately $114,488; the Coupon Rates of
such Statistical Mortgage Loans ranged from 5.625% per annum
to 16.050% per annum; the weighted average Coupon Rate of
such Statistical Mortgage Loans was 9.838% per annum; the
weighted average Loan-to-Value Ratio (as defined below) of
such Statistical Mortgage Loans was 78.75%; and the weighted
average remaining term to maturity of such Statistical
Mortgage Loans was approximately 355 months. The
"Loan-to-Value Ratio" of a Mortgage Loan is the ratio,
expressed as a percentage, of (a) the Loan Balance of such
Mortgage Loan at origination, to (b) the lesser of the
appraised value of the related Mortgaged Property and the
purchase price of such Mortgaged Property, each determined
at the time of origination. The remaining terms to maturity
as of the Statistical Calculation Date of the Statistical
Mortgage Loans in Group II ranged from 174 months to 360
months. The maximum Loan Balance of the Statistical Mortgage
Loans in Group II as of the Statistical Calculation Date was
approximately $597,096. No Statistical Mortgage Loan in
Group II as of the Statistical Calculation Date will mature
later than September 1, 2028. As a percentage of the
aggregate Loan Balance of the Statistical Mortgage Loans in
Group II as of the Statistical Calculation Date, 81.03% were
secured by mortgages on single family dwellings, 8.32% by
mortgages on two- to four-family dwellings, 6.30% by
mortgages on planned unit developments, 3.57% by mortgages
on condominiums and 0.78% by mortgages on manufactured
homes. See "The Mortgage Loan Pool - Statistical Mortgage
Loans -- Group II" herein.
96.68% of the Statistical Mortgage Loans in Group II have
maximum Coupon Rates. As of the Statistical Calculation
Date, the weighted average maximum Coupon Rate of such
Statistical Mortgage Loans in Group II was 16.540% per
annum, with maximum Coupon Rates that range from
approximately 11.300% per annum to 23.050% per annum. As of
the Statistical Calculation Date, the weighted average gross
margin of such Mortgage Loans in Group II was 6.235%. The
gross margin for such Statistical Mortgage Loans in Group II
as of the Statistical Calculation Date ranged from 2.500% to
10.300%. The minimum Coupon Rates for such Statistical
Mortgage Loans in Group II as of the Statistical Calculation
Date, ranged from 5.625% per annum to 16.050% per annum.
15.53% of the Statistical Mortgage Loans in Group II as of
the Statistical Calculation Date (the "Six-Month LIBOR
Loans") bear interest at rates that adjust, along with the
related monthly payments, semiannually based on Six-Month
LIBOR. As of the Statistical Calculation Date, 81.66% and
18.34% of the Six-Month LIBOR Loans have a semiannual reset
cap of 1.000% and 1.500%, respectively. All of such Mortgage
Loans as of the Statistical Calculation Date have lifetime
reset caps ranging from 11.625% to 22.750%. The Six-Month
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LIBOR Loans consist of Statistical Mortgage Loans as of the
Statistical Calculation Date aggregating approximately
$89,705,718.
67.29% of the Statistical Mortgage Loans in Group II as of
the Statistical Calculation Date (the "2/28 Loans") bear
interest at a fixed rate for a period of two years after
origination and thereafter have semiannual interest rate and
payment adjustments at frequencies and in the same manner as
the Six-Month LIBOR Loans. As of the Statistical Calculation
Date, 85.81%, 14.01% and 0.18% of the 2/28 Loans have a
semiannual reset cap of 1.000%, 1.500% and 3.000%,
respectively. All of such Mortgage Loans as of the
Statistical Calculation Date have lifetime reset caps
ranging from 11.300% to 22.500%. The 2/28 Loans consist of
Statistical Mortgage Loans as of the Statistical Calculation
Date aggregating approximately $388,679,950.
7.22% of the Statistical Mortgage Loans in Group II as of
the Statistical Calculation Date (the "3/27 Loans") bear
interest at a fixed rate for a period of three years after
origination and thereafter have semiannual interest rate and
payment adjustments at frequencies and in the same manner as
the Six-Month LIBOR Loans. As of the Statistical Calculation
Date, 60.75% and 39.25% of the 3/27 Loans have a semiannual
reset cap of 1.000% and 1.500%, respectively. All of such
Mortgage Loans as of the Statistical Calculation Date have
lifetime reset caps ranging from 14.450% to 23.050%. The
3/27 Loans consist of Statistical Mortgage Loans as of the
Statistical Calculation Date aggregating approximately
$41,718,906.
6.59% of the Statistical Mortgage Loans in Group II as of
the Statistical Calculation Date (the "5/25 Loans") bear
interest at a fixed rate for a period of five years after
origination and thereafter have semiannual interest rate and
payment adjustments at frequencies and in the same manner as
the Six-Month LIBOR Loans. As of the Statistical Calculation
Date, 5.78% and 94.22% of the 5/25 Loans have a semiannual
reset cap of 1.000% and 1.500%, respectively. All of such
Mortgage Loans as of the Statistical Calculation Date have
lifetime reset caps ranging from 14.450% to 20.010%. The
5/25 Loans consist of Statistical Mortgage Loans as of the
Statistical Calculation Date aggregating approximately
$38,082,460.
3.32% of the Statistical Mortgage Loans in Group II as of
the Statistical Calculation Date bear interest at a fixed
rate for the life of such Statistical Mortgage Loans as of
the Statistical Calculation Date. Such fixed rate loans
consist of Statistical Mortgage Loans as of the Statistical
Calculation Date aggregating approximately $19,198,393.
0.02% of the Statistical Mortgage Loans in Group II as of
the Statistical Calculation Date bear interest at a fixed
rate for a period of one year after the origination and
thereafter have semiannual interest rate and payment
adjustments at frequencies and in the same manner as the
Six-Month LIBOR Loans. Such Statistical Mortgage Loans as of
the Statistical Calculation Date aggregated approximately
$104,804.
0.01% of the Statistical Mortgage Loans in Group II as of
the Statistical Calculation Date (the "CMT Loans") bear
interest at a rate that adjusts annually based on the weekly
average yield on United States treasury securities adjusted
to a constant maturity of one year. The CMT Loans consist of
Statistical Mortgage Loans as of the Statistical Calculation
Date aggregating approximately $75,022.
18.23% and 14.91% of the Statistical Mortgage Loans in Group
II by Loan Balance as of the Statistical Calculation Date,
were originated by Pan American Bank F.S.B. ("Pan American")
and New Century, respectively.
FINAL SCHEDULED The Final Scheduled Payment Dates for each of the respective
PAYMENT DATES: Classes of Offered Certificates are as follows, although it
is anticipated that the actual final Payment Date for each
Class may occur earlier than the Final Scheduled Payment
Date. See "Prepayment and Yield Considerations" herein.
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Month and Year of Final
Scheduled Payment Date
----------------------
Class A-7 Certificates: July 2028
Class A-8 Certificates: March 2015
Class M-1A Certificates: September 2028
Class M-2A Certificates: September 2028
Class B-1A Certificates: September 2028
Class B-1F Certificates: September 2028
DISTRIBUTIONS -- On the 25th day of each month, or if such day is not a
GENERAL: Business Day, then the next succeeding Business Day,
commencing October 26, 1998 (each such day being a "Payment
Date"), the Trustee will be required, subject to the
availability of amounts therefor, pursuant to the cash flow
priority hereinafter described, to distribute to the Owners
of the Group I Certificates of record as of the last day of
the calendar month immediately preceding the calendar month
in which such Payment Date occurs and to the Owners of the
Group II Certificates of record as of the day immediately
preceding such Payment Date (each such date, the "Record
Date") the applicable "Class Distribution Amount" which
shall be the sum of (x) related Current Interest, (y) the
related Interest Carry Forward Amount and (z) the related
Principal Distribution Amount (each as defined below).
For each Payment Date, interest due with respect to the
Group I Certificates (and the Class A-8 Certificates) will
be interest which has accrued thereon during the calendar
month immediately preceding the month in which such Payment
Date occurs; the interest due with respect to the Group II
Certificates (other than the Class A-8 Certificates) will be
the interest which has accrued thereon at the applicable
Pass-Through Rate from the preceding Payment Date (or from
the Closing Date in the case of the first Payment Date) to
and including the day prior to the current Payment Date.
Each period referred to in the prior sentence relating to
the accrual of interest is the "Accrual Period" for the
related Class of Certificates. All calculations of interest
on the Group I Certificates (and the Class A-8 Certificates)
will be made on the basis of a 360-day year assumed to
consist of twelve 30-day months. Calculations of interest on
the Group II Certificates (other than the Class A-8
Certificates) will be made on the basis of the actual number
of days elapsed in the related Accrual Period and a year of
360 days.
A "Business Day" is any day other than (i) a Saturday or
Sunday, (ii) or a day on which (x) banking institutions in
California, Minnesota or Maryland, or (y) any depositary
holding certificates issued by Freddie Mac and backed by the
Class A Fixed Rate Certificates, are required or authorized
by law or executive order to be closed, or (iii) a day on
which the offices of the federal government located in the
District of Columbia generally or of Freddie Mac are closed
for business.
INTEREST: Group I. On each Payment Date the Group I Interest
Remittance Amount will be distributed in the following order
of priority:
First, to Freddie Mac, the Guarantee Fee and the Guarantor
Reimbursement Amount (as defined below);
Second, to the Trustee, the Trustee Fee, and to the Master
Servicer, the Master Servicer Fee (the Group I Interest
Remittance Amount less the amount paid to Freddie Mac, the
Trustee and the Master Servicer pursuant to clauses First
and Second, the "Group I Interest Amount Available");
Third, to the Owners of the Class A Fixed Rate Certificates,
the related Current Interest plus the Interest Carry Forward
Amount, if any, with respect to each Class of Class A Fixed
Rate Certificates; provided, that if the Group I Interest
Amount Available is not sufficient to make a full
distribution of interest with respect to all Classes of the
Class A Fixed Rate Certificates and Freddie Mac has
defaulted under the Freddie Mac Guarantee, the Group I
Interest Amount Available will be distributed among the
outstanding Classes of Class A Fixed Rate Certificates pro
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rata based on the aggregate amount of interest due on each
such Class, and the amount of the shortfall will be carried
forward with accrued interest at the related Pass-Through
Rate;
Fourth, to the extent of the Group I Interest Amount
Available then remaining, to the Owners of the Class B-1F
Certificates, the related Current Interest;
Fifth, to the extent of the Group I Interest Amount
Available then remaining, to the Owners of the Class C-FIO
Certificates, the related Current Interest; and
Sixth, the amount, if any, of the Group I Interest Amount
Available remaining in the Certificate Account after
application with respect to the priorities set forth above
is defined as the "Monthly Excess Interest Amount" for Group
I for such Payment Date and shall be applied as described
below under "Credit Enhancement - Application of Monthly
Excess Cash Flow Amounts" in this Summary of Terms.
"Group I Interest Remittance Amount" means, as of any
Monthly Remittance Date, the sum, without duplication, of
(i) all interest collected or required to be advanced during
the related Remittance Period on the Mortgage Loans in Group
I (less the Servicing Fee), (ii) all Compensating Interest
paid by the Servicer or the Special Servicer on such Monthly
Remittance Date with respect to Group I, (iii) the portion
of any Substitution Amount relating to interest with respect
to Group I and (iv) all Net Liquidation Proceeds relating to
interest not previously advanced with respect to the
Mortgage Loans in Group I.
"Guarantee Fee" is the fee payable to Freddie Mac as
determined in the manner set forth in the Pooling and
Servicing Agreement.
"Guarantor Reimbursement Amount" means, with respect to any
Payment Date, the sum of all amounts paid by Freddie Mac in
respect of Deficiency Amounts (as defined in the Pooling and
Servicing Agreement) on all prior Payment Dates to the
extent not previously reimbursed, with interest thereon at a
rate equal to the weighted average of the Class A-1, Class
A-2, Class A-3, Class A-4, Class A-5 and Class A-6
Pass-Through Rates, to the extent such Classes are
outstanding.
Group II. On each Payment Date the Group II Interest
Remittance Amount will be distributed in the following order
of priority:
First, to the Trustee, the Trustee Fee, and to the Master
Servicer, the Master Servicer Fee (the Group II Interest
Remittance Amount less the amount paid to the Trustee and
the Master Servicer pursuant to this clause First, the
"Group II Interest Amount Available");
Second, to the Owners of the Class A Group II Certificates,
the related Current Interest plus the Interest Carry Forward
Amount with respect to each Class of Class A Group II
Certificates; provided that if the Group II Interest Amount
Available is not sufficient to make a full distribution of
interest with respect to all Classes of the Class A Group II
Certificates, the Group II Interest Amount Available will be
distributed among the outstanding Classes of Class A Group
II Certificates pro rata based on the aggregate amount of
interest due on each such Class, and the amount of the
shortfall will be carried forward with accrued interest at
the related Pass-Through Rate;
Third, to the extent of the Group II Interest Amount
Available then remaining, to the Owners of the Class M-1A
Certificates, the related Current Interest;
Fourth, to the extent of the Group II Interest Amount
Available then remaining, to the Owners of the Class M-2A
Certificates, the related Current Interest;
Fifth, to the extent of the Group II Interest Amount
Available then remaining, to the Owners of the Class B-1A
Certificates, the related Current Interest;
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Sixth, to the extent of the Group II Interest Amount
Available then remaining, to the Owners of the Class C-AIO
Certificates, the related Current Interest; and
Seventh, the amount, if any, of the Group II Interest Amount
Available remaining in the Certificate Account after
application with respect to the priorities set forth above
is defined as the "Monthly Excess Interest Amount" for Group
II for such Payment Date and shall be applied as described
below under "Credit Enhancement - Application of Monthly
Excess Cash Flow Amounts" in this Summary of Terms.
"Group II Interest Remittance Amount" means, as of any
Monthly Remittance Date, the sum, without duplication, of
(i) all interest collected or required to be advanced during
the related Remittance Period on the Mortgage Loans in Group
II (less the Servicing Fee), (ii) all Compensating Interest
paid by the Servicer or the Special Servicer on such Monthly
Remittance Date with respect to Group II, (iii) the portion
of any Substitution Amount relating to interest with respect
to Group II and (iv) all Net Liquidation Proceeds relating
to interest not previously advanced with respect to the
Mortgage Loans in Group II.
The following definitions are applicable in respect of the
payment of interest on both Group I Certificates and Group
II Certificates:
"Current Interest" with respect to each Class of
Certificates means, with respect to any Payment Date (i) the
aggregate amount of interest accrued during the preceding
Accrual Period on the Certificate Principal Balance (or the
Notional Principal Amount (as defined below) with respect to
the Class C-IO Certificates) of the related Class of
Certificates plus (ii) the Preference Amount as it relates
to interest previously paid on such Class of Certificates
prior to such Payment Date.
The "Interest Carry Forward Amount" with respect to any
Class of Certificates for any Payment Date is the sum of (x)
the amount, if any, by which (i) the Current Interest for
such Class as of the immediately preceding Payment Date (and
including all prior Payment Dates) exceeded (ii) the amount
of the actual distribution with respect to interest made to
the Owners of such Class of Certificates on such immediately
preceding Payment Date (and including all prior Payment
Dates) plus (y) interest on such amount calculated for the
related Accrual Period at the related Pass-Through Rate in
effect with respect to such Class of Certificates.
"Master Servicer Fee" is the fee payable to the Master
Servicer as determined in the manner set forth in the
Pooling and Servicing Agreement.
"Servicing Fee" means, in respect of each Mortgage Loan, the
fee payable to the Servicer or the Special Servicer, as the
case may be, in respect of the Mortgage Loans serviced by
them as determined in the manner set forth in the Pooling
and Servicing Agreement.
"Trustee Fee" is the fee payable to the Trustee as
determined in the manner set forth in the Pooling and
Servicing Agreement.
PRINCIPAL: Group I. With respect to Group I and on each Payment Date,
Freddie Mac will be entitled to receive payment of any
unpaid Guarantee Fee and any Guarantor Reimbursement Amount
from the Principal Distribution Amount for such Payment Date
before any other distributions of principal are made on such
Payment Date, but only to the extent such amounts have not
been paid from the Group I Interest Remittance Amount for
such Payment Date.
With respect to Group I and on each Payment Date (a) before
the Stepdown Date or (b) on or after the Stepdown Date if a
Trigger Event is in effect with respect to Group I, the
Owners of the Class A Fixed Rate Certificates, will be
entitled to receive payment of 100% of the Principal
Distribution Amount (less amounts paid to Freddie Mac from
principal as described above) with respect to Group I for
such Payment Date until the Certificate Principal Balance of
each Class of Class A Fixed Rate Certificates have been
reduced to zero.
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With respect to Group I and on each Payment Date (a) on or
after the Stepdown Date and (b) as long as a Trigger Event
is not in effect with respect to Group I, the Owners of the
Class A Fixed Rate Certificates and the Class B-1F
Certificates will be entitled to receive payments of
principal, in the order of priority, in the amounts set
forth below and to the extent of the Principal Distribution
Amount (less amounts paid to Freddie Mac from principal as
described above) with respect to Group I as follows:
First, the lesser of (x) the remaining Principal
Distribution Amount with respect to Group I (after making
payments of principal to Freddie Mac as described above) and
(y) the Class A Principal Distribution Amount with respect
to Group I shall be distributed to the Owners of the Class
A-6 Certificates, in an amount equal to the Class A-6
Lockout Distribution Amount, with the remainder paid
sequentially to the Owners of each Class of the Class A
Fixed Rate Certificates in the order of their numerical
Class designations beginning with the Class A-1 Certificates
until the Certificate Principal Balance of each Class of
Class A Fixed Rate Certificates has been reduced to zero;
Second, the lesser of (x) the excess of (i) the remaining
Principal Distribution Amount with respect to Group I (after
making payments of principal to Freddie Mac as described
above) over (ii) the amount distributed to the Owners of the
Class A Fixed Rate Certificates in clause First above and
(y) the Class B-1F Principal Distribution Amount shall be
distributed to the Owners of the Class B-1F Certificates,
until the Class B-1F Certificate Principal Balance has been
reduced to zero; and
Third, any amount of the Principal Remittance Amount with
respect to Group I remaining after making all of the
distributions in clauses First and Second above shall be
included as part of the Monthly Excess Cash Flow Amount with
respect to Group I and shall be applied as described below
under "Credit Enhancement - Application of Monthly Excess
Cash Flow Amounts" in this Summary of Terms.
Group II. With respect to Group II and on each Payment Date
(a) before the Stepdown Date or (a) on or after the Stepdown
Date if a Trigger Event is in effect with respect to Group
II, Owners of the Class A Group II Certificates will be
entitled to receive payment of 100% of the Principal
Distribution Amount with respect to Group II for such
Payment Date as follows: first, to the Owners of the Class
A-8 Certificates, the Class A-8 Lockout Distribution Amount
and then to the Owners of the Class A-7 Certificates until
the Certificate Principal Balance of the Class A-7
Certificates has been reduced to zero and then to the Owners
of Class A-8 Certificates until the Certificate Principal
Balance of the Class A-8 Certificates has been reduced to
zero.
With respect to Group II and on each Payment Date (a) on or
after the related Stepdown Date and (b) as long as a Trigger
Event is not in effect with respect to Group II, the Owners
of the Class A Group II Certificates and the Subordinate
Certificates in Group II (other than the Class C-AIO
Certificates) will be entitled to receive payments of
principal, in the order of priority, in the amounts set
forth below and to the extent of the Principal Distribution
Amount with respect to Group II as follows:
First, the lesser of (x) the Principal Distribution Amount
with respect to Group II and (y) the Class A Principal
Distribution Amount with respect to Group II shall be
distributed to the Owners of the Class A-8 Certificates, in
an amount equal to the Class A-8 Lockout Distribution
Amount, with the remainder paid first to the Owners of the
Class A-7 Adjustable Rate Certificates until the Certificate
Principal Balance of the Class A-7 Adjustable Rate
Certificates has been reduced to zero, and second to Owners
of the Class A-8 Certificates until the Certificate
Principal Balance of the Class A-8 Certificates has been
reduced to zero;
Second, the lesser of (x) the excess of (i) the Principal
Distribution Amount with respect to Group II over (ii) the
amount distributed to the Owners of the Class A Group II
Certificates in clause First above and (y) the Class M-1A
Principal
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Distribution Amount shall be distributed to the Owners of
the Class M-1A Certificates, until the Class M-1A
Certificate Principal Balance has been reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal
Distribution Amount with respect to Group II over (ii) the
sum of the amount distributed to the Owners of the Class A
Group II Certificates in clause First above and the amount
distributed to the Owners of the Class M-1A Certificates in
clause Second above and (y) the Class M-2A Principal
Distribution Amount, shall be distributed to the Owners of
the Class M-2A Certificates, until the Class M-2A
Certificate Principal Balance has been reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal
Distribution Amount with respect to Group II over (ii) the
sum of the amount distributed to the Owners of the Class A
Group II Certificates pursuant to clause First above, the
amount distributed to the Owners of the Class M-1A
Certificates pursuant to clause Second above and the amount
distributed to the Owners of the Class M-2A Certificates
pursuant to clause Third above and (y) the Class B-1A
Principal Distribution Amount, shall be distributed to the
Owners of the Class B-1A Certificates until the Class B-1A
Certificate Principal Balance has been reduced to zero; and
Fifth, any amount of the Principal Remittance Amount with
respect to Group II remaining after making all of the
distributions in clauses First, Second, Third and Fourth
above shall be included as part of the Monthly Excess Cash
Flow Amount with respect to Group II and shall be applied as
described below under "Credit Enhancement - Application of
Monthly Excess Cash Flow Amounts" in this Summary of Terms.
Notwithstanding the foregoing, in the event that the
Certificate Principal Balances of all of the Class A Group
II Certificates relating to Group II have been reduced to
zero prior to the Stepdown Date, all amounts of principal
that would have been distributed to such Class A Group II
Certificates will be distributed to the Subordinate
Certificates in Group II sequentially in the following
order: Class M-1A, Class M-2A and Class B-1A Certificates.
Similarly, if the Certificate Principal Balance of the Class
M-1A Certificates has been reduced to zero, all amounts of
principal that would have been distributed to such Class
M-1A Certificates will be distributed to the related Class
M-2A and Class B-1A Certificates, in that order. If the
Certificate Principal Balance of the Class M-2A Certificates
has been reduced to zero, all amounts of principal that
would have been distributed on such Class M-2A Certificates
will be distributed to the related Class B-1A Certificates.
The Owners of the Class A-8 Certificates are entitled to
receive payments of the Class A-8 Lockout Distribution
Amount specified herein; provided that on any Payment Date
on which the sum of the Certificate Principal Balance of the
Subordinate Certificates in Group II and the
Overcollateralization Amount is zero, any amounts of
principal payable to the Owners of the Class A Group II
Certificates on such Payment Date shall be distributed pro
rata and not sequentially; provided further, that if on any
Payment Date the Class A-7 Certificate Principal Balance is
zero, the Owners of the Class A-8 Certificates will be
entitled to receive the entire Principal Distribution Amount
with respect to Group II for such Payment Date.
"Principal Distribution Amount" means, with respect to
either Mortgage Loan Group and as of any Payment Date, the
sum of (i) the Principal Remittance Amount with respect to
such Mortgage Loan Group (minus, for Payment Dates occurring
on and after the related Stepdown Date, and with respect to
which a Trigger Event is not existing, the
Overcollateralization Release Amount with respect to such
Mortgage Loan Group, if any), and (ii) the Extra Principal
Distribution Amount with respect to such Mortgage Loan
Group, if any.
The "Class A-6 Lockout Distribution Amount" for any Payment
Date will be the product of (i) the applicable Class A-6
Lockout Percentage for such Payment Date
S-10
<PAGE>
and (ii) the Class A-6 Lockout Pro Rata Distribution Amount
for such Payment Date.
The "Class A-6 Lockout Percentage" for each Payment Date
shall be as follows:
Payment Dates Lockout Percentage
------------- ------------------
October 1998 - September 2001 0%
October 2001 - September 2003 45%
October 2003 - September 2004 80%
October 2004 - September 2005 100%
October 2005 and thereafter 300%
The "Class A-6 Lockout Pro Rata Distribution Amount" for any
Payment Date will be an amount equal to the product of (x) a
fraction, the numerator of which is the Certificate
Principal Balance of the Class A-6 Certificates immediately
prior to such Payment Date and the denominator of which is
the aggregate Certificate Principal Balance of all Classes
of the Class A Fixed Rate Certificates immediately prior to
such Payment Date and (y) the Class A Principal Distribution
Amount with respect to Group I for such Payment Date.
The "Class A-8 Lockout Distribution Amount" for any Payment
Date will be the product of (i) the applicable Class A-8
Lockout Percentage for such Payment Date, and (ii) the Class
A-8 Lockout Pro Rata Distribution Amount for such Payment
Date.
The "Class A-8 Lockout Percentage" for each Payment Date
shall be as follows:
Payment Dates Lockout Percentage
------------- ------------------
October 1998 - June 2000 0%
July 2000 - September 2003 500%
October 2003 and thereafter 100%
The "Class A-8 Lockout Pro Rata Distribution Amount" for (i)
any Payment Date prior to October 2003 will be an amount
equal to the product of (x) a fraction, the numerator of
which is the Certificate Principal Balance of the Class A-8
Certificates immediately prior to such Payment Date and the
denominator of which is the aggregate Certificate Principal
Balance of all Classes of the Class A Group II Certificates
immediately prior to such Payment Date and (y) the Class A
Principal Distribution Amount with respect to Group II for
such Payment Date, and (ii) the Payment Date in October 2003
and any Payment Date thereafter, the Class A Principal
Distribution Amount in respect of Group II.
The "Collection Period" with respect to any Monthly
Remittance Date is the calendar month preceding the month in
which the Monthly Remittance Date occurs; provided that the
first Collection Period is the period from September 2, 1998
to September 30, 1998.
The "Remittance Period" with respect to any Monthly
Remittance Date is the period from and including the second
day of the calendar month preceding the month in which the
Monthly Remittance Date occurs to and including the first
day of the calendar month in which the Monthly Remittance
Date occurs. A "Monthly Remittance Date" is any date on
which funds on deposit in the Principal and Interest Account
are required to be remitted by the Servicer and the Special
Servicer to the Certificate Account, which is the 20th day
of each month, or if such day is not a Business Day, the
next succeeding Business Day, commencing in October 1998.
A "Liquidated Mortgage Loan" is, in general, a defaulted
Mortgage Loan as to which the Servicer or the Special
Servicer, as the case may be, has determined that
S-11
<PAGE>
all amounts that it expects to recover on such Mortgage Loan
with respect to the related Mortgaged Property have been
recovered (exclusive of any possibility of a deficiency
judgment).
"Principal Remittance Amount" means for a Mortgage Loan
Group and as of any Monthly Remittance Date, the sum,
without duplication, of (i) the principal collected or
required to be advanced by the Servicer and the Special
Servicer with respect to Mortgage Loans in such Mortgage
Loan Group during the related Remittance Period, including
unscheduled principal collected during the related
Collection Period, (ii) the Loan Balance of each Mortgage
Loan in such Mortgage Loan Group that was repurchased from
the Trust during the related Remittance Period, (iii) any
Substitution Amount relating to principal delivered to the
Trust in connection with a substitution of a Mortgage Loan
in such Mortgage Loan Group during the related Remittance
Period, and (iv) all Net Liquidation Proceeds actually
collected by the Servicer and the Special Servicer during
the related Remittance Period with respect to Mortgage Loans
in such Mortgage Loan Group (to the extent such Net
Liquidation Proceeds relate to principal).
A "Trigger Event" has occurred with respect to a Mortgage
Loan Group on a Payment Date if the percentage obtained by
dividing (x) the principal amount of 60+ Day Delinquent
Loans in such Mortgage Loan Group by (y) the aggregate
outstanding Loan Balance of the Mortgage Loans in such
Mortgage Loan Group, in each case, as of the last day of the
immediately preceding Remittance Period equals or exceeds
(A) in the case of the Group I, 185% of the related Senior
Enhancement Percentage as of the last day of the immediately
preceding Remittance Period or (B) in the case of Group II,
40% of the related Senior Enhancement Percentage as of the
last day of the immediately preceding Remittance Period.
"Stepdown Date" means, with respect to a Mortgage Loan
Group, the later to occur of (x) the Payment Date in October
2001 and (y) the first Payment Date on which the Senior
Enhancement Percentage (calculated for this purpose only
after taking into account distributions of principal on the
related Mortgage Loans on such Payment Date, but prior to
any applications of Principal Distribution Amounts to the
Certificates) is greater than or equal to the related Senior
Specified Enhancement Percentage.
"Class A Principal Distribution Amount" means, with respect
to a Mortgage Loan Group and as of any Payment Date (a)
prior to the related Stepdown Date or on or after the
related Stepdown Date if a Trigger Event is in effect for
such Mortgage Loan Group, 100% of the Principal Distribution
Amount (less amounts paid to Freddie Mac from principal as
described above) for such Mortgage Loan Group or (b) on or
after the related Stepdown Date and as long as a Trigger
Event has not occurred, the excess, if any, of (x) the
Certificate Principal Balance of the Class A Certificates
related to such Mortgage Loan Group immediately prior to
such Payment Date over (y) the lesser of (A) the product of
(i) approximately 91.50% in the case of Group I and
approximately 54.50% in the case of Group II and (ii) the
outstanding Loan Balance of the Mortgage Loans in such
Mortgage Loan Group as of the last day of the related
Remittance Period and (B) the aggregate outstanding Loan
Balance of the Mortgage Loans in such Mortgage Loan Group as
of the last day of the related Remittance Period minus
$1,409,665 for Group I and $3,590,335 for Group II.
"Class M-1A Principal Distribution Amount" means, as of any
Payment Date on or after the related Stepdown Date and as
long as a Trigger Event is not in effect for Group II, the
excess, if any, of (x) the sum of (i) the Certificate
Principal Balance of the Class A Group II Certificates
(after taking into account the payment of the related Class
A Principal Distribution Amount on such Payment Date) and
(ii) the Class M-1A Certificate Principal Balance
immediately prior to such Payment Date over (y) the lesser
of (A) the product of (i) approximately 70.00% and (ii) the
outstanding Loan Balance of the Mortgage Loans in Group II
as of the last day of the related Remittance Period and (B)
the aggregate outstanding Loan Balance of
S-12
<PAGE>
the Mortgage Loans in Group II as of the last day of the
related Remittance Period minus $3,590,335.
"Class M-2A Principal Distribution Amount" means, as of any
Payment Date on or after the related Stepdown Date and as
long as a Trigger Event is not in effect for Group II, the
excess, if any, of (x) the sum of (i) the Certificate
Principal Balance of the Class A Group II Certificates
(after taking into account the payment of the related Class
A Principal Distribution Amount on such Payment Date), (ii)
the Class M-1A Certificate Principal Balance (after taking
into account the payment of the related Class M-1A Principal
Distribution Amount on such Payment Date) and (iii) the
Class M-2A Certificate Principal Balance immediately prior
to such Payment Date over (y) the lesser of (A) the product
of (i) approximately 83.50% and (ii) the outstanding
aggregate Loan Balance of the Mortgage Loans in Group II as
of the last day of the related Remittance Period and (B) the
aggregate outstanding Loan Balance of the Mortgage Loans in
Group II as of the last day of the related Remittance Period
minus $3,590,335.
"Class B-1A Principal Distribution Amount" means, as of any
Payment Date on or after the related Stepdown Date and as
long as a Trigger Event is not in effect for Group II, the
excess, if any, of (x) the sum of (i) the Certificate
Principal Balance of the Class A Group II Certificates
(after taking into account the payment of the related Class
A Principal Distribution Amount on such Payment Date), (ii)
the Class M-1A Certificate Principal Balance (after taking
into account the payment of the related Class M-1A Principal
Distribution Amount on such Payment Date), (iii) the Class
M-2A Certificate Principal Balance (after taking into
account the payment of the related Class M-2A Principal
Distribution Amount on such Payment Date) and (iv) the Class
B-1A Certificate Principal Balance immediately prior to such
Payment Date over (y) the lesser of (A) the product of (i)
approximately 95.00% and (ii) the outstanding aggregate Loan
Balance of the Mortgage Loans in Group II as of the last day
of the related Remittance Period and (B) the aggregate
outstanding Loan Balance of the Mortgage Loans in Group II
as of the last day of the related Remittance Period minus
$3,590,335.
"Class B-1F Principal Distribution Amount" means, as of any
Payment Date on or after the related Stepdown Date and as
long as a Trigger Event is not in effect for Group I, the
excess, if any, of (x) the sum of (i) the Certificate
Principal Balance of the Class A Fixed Rate Certificates
(after taking into account the payment of the related Class
A Principal Distribution Amount on such Payment Date) and
(ii) the Class B1F Certificate Principal Balance immediately
prior to such Payment Date over (y) the lesser of (A) the
product of (i) approximately 96.00% and (ii) the outstanding
aggregate Loan Balance of the Mortgage Loans in Group I as
of the last day of the related Remittance Period and (B) the
aggregate outstanding Loan Balance of the Mortgage Loans in
Group I as of the last day of the related Remittance Period
minus $1,409,665.
"Overcollateralization Amount" means with respect to a
Mortgage Loan Group and as of any Payment Date the excess,
if any, of (x) the Loan Balance of the Mortgage Loans in
such Mortgage Loan Group as of the last day of the
immediately preceding Remittance Period over (y) the
Certificate Principal Balance of the Class A Certificates
and the Subordinate Certificates (other than the Class C-IO
Certificates) related to such Mortgage Loan Group (after
giving effect to all principal distributions for such
Payment Date).
"Senior Enhancement Percentage" with respect to a Mortgage
Loan Group and for any Payment Date is the percentage
obtained by dividing (x) the sum of (i) the aggregate
Certificate Principal Balance of the Subordinate
Certificates related to such Mortgage Loan Group and (ii)
the related Overcollateralization Amount in each case after
taking into account the distribution of the related
Principal Distribution Amount on such Payment Date by (y)
the aggregate Loan Balance of the Mortgage Loans in such
Mortgage Loan Group as of the last day of the related
Remittance Period.
S-13
<PAGE>
"Senior Specified Enhancement Percentage" on any date of
determination thereof is approximately 8.50% with respect to
the Group I and approximately 45.50% with respect to Group
II.
"Extra Principal Distribution Amount" means, for a Mortgage
Loan Group and as of any Payment Date, the lesser of (x) the
Monthly Excess Interest Amount for such Mortgage Loan Group
and Payment Date and (y) the Overcollateralization
Deficiency for such Mortgage Loan Group and Payment Date.
"Overcollateralization Deficiency" means, for a Mortgage
Loan Group and as of any Payment Date, the excess, if any,
of (x) the Targeted Overcollateralization Amount for such
Mortgage Loan Group and Payment Date over (y) the
Overcollateralization Amount for such Mortgage Loan Group
and Payment Date, calculated for this purpose after taking
into account the reduction on such Payment Date of the
Certificate Principal Balance of the Class A Certificates
and the Subordinate Certificates (other than the Class C-IO
Certificates) related to such Mortgage Loan Group resulting
from the distribution of the related Principal Remittance
Amount (but not the related Extra Principal Distribution
Amount) on such Payment Date, but prior to taking into
account any related Applied Realized Loss Amount on such
Payment Date.
"Overcollateralization Release Amount" means, for a Mortgage
Loan Group and as of any Payment Date, the lesser of (x) the
related Principal Remittance Amount for such Payment Date
and (y) the excess, if any, of (i) the related
Overcollateralization Amount for such Payment Date, assuming
that 100% of the related Principal Remittance Amount is
applied on such Payment Date to the payment of principal on
the Class A Certificates and the Subordinate Certificates
related to such Mortgage Loan Group over (ii) the Targeted
Overcollateralization Amount for such Mortgage Loan Group
and Payment Date.
"Subordinated Trigger Event" will be deemed to have occurred
with respect to a Mortgage Loan Group on any Payment Date if
(i) Realized Losses (as defined below) equal or exceed a
specified percentage during the relevant time frame (Group
I: 1.26% through September 2000; 1.50% through September
2001; 2.60% through September 2002; 3.30% through September
2003; and, 3.50% through September 2006; Group II: 1.75%
through September 2000; 2.10% through September 2001; 3.50%
through September 2002; 4.40% through September 2003; 4.80%
through September 2004; 5.20% through September 2005; and,
5.60% through September 2006), and (ii) the aggregate
outstanding principal balance of Mortgage Loans in the
related Mortgage Loan Group that are 60+ Days Delinquent
stated as a percentage of the aggregate outstanding
principal balances of all Mortgage Loans in the related
Mortgage Loan Group equals or exceeds a specified percentage
for such time period (both Mortgage Loan Groups: 4.00% for
October 2000 through September 2002; 5.50% for October 2002
through September 2004; and, 8.00% for October 2004 through
September 2006).
"Targeted Overcollateralization Amount" means, (A) for Group
I and as of any Payment Date, (x) prior to the related
Stepdown Date, 2.00% of the Original Certificate Principal
Balance of the Group I Certificates and (y) on and after the
Stepdown Date, the greater of (i) 4.00% of the aggregate
outstanding Loan Balance of the Mortgage Loans in Group I as
of the last day of the related Remittance Period and (ii)
$1,409,665; and (B) for Group II and as of any Payment Date,
(x) prior to the related Stepdown Date, 2.50% of the
Original Certificate Principal Balance of the Group II
Certificates and (y) on or after the related Stepdown Date,
the greater of (i) 5.00% of the aggregate outstanding Loan
Balance of the Mortgage Loans in Group II as of the last day
of the related Remittance Period and (ii) $3,590,335.
"Preference Amount" means any amount previously distributed
to an Owner on a Certificate that is recoverable and sought
to be recovered as a voidable preference by a trustee in
bankruptcy under the United States Bankruptcy Code (11
U.S.C.) as amended from time to time, in accordance with a
final nonappealable order of a court having competent
jurisdiction.
S-14
<PAGE>
SERVICING: AMRESCO Residential Capital Markets, Inc. will serve as the
Master Servicer and Special Servicer. AMRESCO Residential
Mortgage Corporation will serve as the Servicer.
The Master Servicer will be responsible for reviewing the
Servicer's and the Special Servicer's monthly servicing
reports and identifying inconsistencies in any such reports.
Except as set forth in the Pooling and Servicing Agreement,
the Master Servicer is not liable for the performance or
obligations of the Servicer or the Special Servicer.
The Servicer will be responsible for the servicing of the
Mortgage Loans other than Specially Serviced Mortgage Loans
(as defined below). The Specially Serviced Mortgage Loans
will be serviced by the Special Servicer. In respect of each
Mortgage Loan serviced, either the Servicer or the Special
Servicer, as the case may be, will be entitled to receive
from interest collected on the applicable Mortgage Loans a
monthly servicing fee on each such Mortgage Loan equal to
the Loan Balance of such Mortgage Loan as of the beginning
of the related Remittance Period multiplied by the Servicing
Fee Rate (such product, the "Servicing Fee"). In addition,
the Special Servicer will be entitled to receive certain
additional fees related to the servicing of the Specially
Serviced Mortgage Loans. See "The Pooling and Servicing
Agreement - Servicing" herein.
Each of the Servicer and the Special Servicer is obligated
to make cash advances ("Advances") with respect to
delinquent payments of principal of and interest on any
Mortgage Loan, other than Balloon Payments with respect to
Balloon Mortgage Loans, serviced by it to the extent
described in "The Pooling and Servicing Agreement -
Servicing" herein. The Trustee will be obligated as a
successor servicer to make any such Advance if the Servicer
or the Special Servicer fails in its obligation to do so, to
the extent provided in the Pooling and Servicing Agreement.
The Master Servicer is not obligated to make Advances if the
Servicer, the Special Servicer or the Trustee fails in its
obligation to do so.
In the event the Servicer or the Special Servicer is
terminated or resigns and pending the appointment of a
successor, the Trustee will perform servicing for the
Servicer or the Special Servicer, as the case may be. See
"The Pooling and Servicing Agreement - Servicing" herein.
Under the Pooling and Servicing Agreement, the Special
Servicer will have responsibility for servicing Specially
Serviced Mortgage Loans. The Special Servicer may appoint a
subservicer, subject to the approval of Freddie Mac and the
Rating Agencies, to perform such special servicing duties,
including an affiliate of the Special Servicer. Once a
Mortgage Loan is transferred to the Special Servicer as a
Specially Serviced Mortgage Loan, it will continue to be
serviced by the Special Servicer notwithstanding that such
Mortgage Loan is brought current or otherwise resolved. A
"Specially Serviced Mortgage Loan" is a Mortgage Loan
transferred to the Special Servicer that is a 60+ Day
Delinquent Loan (as defined in the Pooling and Servicing
Agreement). See "The Pooling and Servicing Agreement -
Servicing" herein.
NONOFFERED The Class A Fixed Rate Certificates, the Class C-IO
CERTIFICATES: Certificates, the Class D Certificates, the Class S
Certificates and the Class R Certificates are not offered
hereby. The Pass-Through Rate of the Class C-FIO
Certificates is 7.5% per annum. Interest will be calculated
on the Class C-FIO Certificates on each Payment Date on the
basis of a notional principal balance equal to (i) for the
first Payment Date through the Payment Date in September
2000, the outstanding Class A-6 Certificate Principal
Balance and (ii) thereafter, zero, with the result that the
Owners of the Class C-AIO Certificates will receive no
distributions after the Payment Date in September 2000. The
Pass-Through Rate of the Class C-AIO Certificates on any
Payment Date is 3.0% per annum. Interest will be calculated
on the Class C-AIO Certificates on each Payment Date on the
basis of a notional principal balance equal to (i) for the
first Payment Date through the Payment Date in September
2000, the sum of the Class M-1A Certificate Principal
Balance and the Class M-2A Certificate Principal Balance and
(ii) thereafter, zero, with the
S-15
<PAGE>
result that the Owners of the Class C-AIO Certificates will
receive no distribution after the Payment Date in September
2000. The principal balance of the Class C-IO Certificates
is sometimes referred to herein as the "Notional Principal
Amount." The Class C-IO Certificates will not be entitled to
distributions of principal. The Class D Certificates, the
Class S Certificates and the Class R Certificates will not
have Certificate Principal Balances, Notional Principal
Balances or Pass-Through Rates.
CREDIT ENHANCEMENT: The Credit Enhancement provided for the benefit of the
Owners of the Offered Certificates in Group II consists of
the subordination of the Subordinate Certificates in Group
II, the further subordination within the Subordinate
Certificates in Group II, the priority of application of
Realized Losses in respect of Group II, the application of
Monthly Excess Cash Flow Amounts in respect of Group II and
the crosscollateralization feature of the Trust. The Credit
Enhancement provided for the benefit of the Owners of the
Class B-1F Certificates consists of the priority of
application of Realized Losses in respect of Group I and the
application of Monthly Excess Cash Flow Amounts.
Subordination. The rights of the Owners of the Subordinate
Certificates (other than the Class C-IO Certificates) to
receive distributions with respect to the Mortgage Loans in
a particular Mortgage Loan Group will be subordinated, to
the extent described herein, to such rights of the Owners of
the Class A Certificates related to such Mortgage Loan
Group. This subordination is intended to enhance the
likelihood of regular receipt by the Owners of the related
Class A Certificates of the full amount of their scheduled
monthly payment of interest and principal and to afford such
Owners protection against Realized Losses allocated against
such Mortgage Loan Group.
The protection afforded to the Owners of the Class A
Certificates by means of the subordination of the related
Subordinate Certificates will be accomplished by the
preferential right of the Owners of the Class A Certificates
to receive, prior to any distribution being made on a
Payment Date in respect of such Subordinate Certificates,
the amounts of interest due them and principal available for
distribution on such Payment Date, and, if necessary, by the
right of the Owners of the Class A Certificates to receive
future distributions of amounts that would otherwise be
payable to the Owners of such Subordinate Certificates.
In addition, the rights of the Owners of the Class M-2A and
Class B-1A Certificates to receive distributions will be
subordinated, to the extent described herein, to such rights
of the Owners of the Class A Group II Certificates and Class
M-1A Certificates. This subordination is intended to enhance
the likelihood of regular receipt by the Owners of the Class
A Group II Certificates and Class M-1A Certificates of the
amount of interest due them and principal available for
distribution and to afford such Owners with protection
against Realized Losses.
The rights of the Owners of the Class B-1A Certificates to
receive distributions will be subordinated, to the extent
described herein, to such rights of the Owners of the Class
A Group II Certificates, Class M-1A Certificates and Class
M-2A Certificates.
The rights of the Owners of the Class B-1F Certificates to
receive distributions will be subordinated, to the extent
described herein, to such rights of the Owners of the Class
A Fixed Rate Certificates.
Application of Realized Losses. If a Mortgage Loan becomes a
Liquidated Loan during a Remittance Period, the Net
Liquidation Proceeds relating thereto and allocated to
principal may be less than the Loan Balance of such Mortgage
Loan. The amount of such insufficiency is a "Realized Loss."
Realized Losses will be absorbed first by current Monthly
Excess Interest Amounts as a result of the application of
Monthly Excess Interest Amounts to fund Extra Principal
Distribution Amounts as described below. To the extent that
a Mortgage Loan Group experiences Realized Losses, such
Realized Losses will reduce the aggregate outstanding Loan
Balance of the Mortgage Loans in such Mortgage Loan Group
S-16
<PAGE>
(i.e., a reduction in the collateral balance will occur).
Since the Overcollateralization Amount with respect to a
Mortgage Loan Group is the excess, if any, of the related
collateral balance over the related Aggregate Certificate
Principal Balance, Realized Losses, to the extent
experienced, will reduce the related Overcollateralization
Amount. The Pooling and Servicing Agreement requires that
the Overcollateralization Amount in respect of a Mortgage
Loan Group be maintained at the Targeted
Overcollateralization Amount for such Mortgage Loan Group
through the application of Monthly Excess Interest Amounts
to the funding of the Extra Principal Distribution Amount.
Accordingly, Realized Losses which occur in a Mortgage Loan
Group will, in effect, be absorbed first by the Owners of
the related Nonoffered Certificates that would otherwise
receive a distribution from Monthly Excess Cash Flow
Amounts, and then second by the Owners of the related
Subordinate Certificates.
In the event Realized Losses and principal distributions
during a prior Remittance Period result in the Aggregate
Certificate Principal Balance with respect to a Mortgage
Loan Group exceeding the aggregate Loan Balance of the
Mortgage Loans in such Mortgage Loan Group as of the end of
the related Remittance Period, the Certificate Principal
Balance of the related Subordinate Certificates will be
reduced in reverse order of seniority by an amount equal to
the lesser of (i) the then Aggregate Certificate Principal
Balance of the related Subordinate Certificates and (ii) the
amount of the negative overcollateralization. Once the
Certificate Principal Balance of a Class of Subordinate
Certificates has been "written down," the amount of such
write down will no longer bear interest, nor will such
amount thereafter be "reinstated" or "written up," although
the amount of such write down may, on future Payment Dates,
be paid to Owners of the Subordinate Certificates which
experienced the write down, in direct order of seniority.
The Pooling and Servicing Agreement does not permit the
"write down" of the Certificate Principal Balance of any
Class A Certificate.
Application of Monthly Excess Cash Flow Amounts. The
weighted average net Coupon Rate for the Mortgage Loans in
each Mortgage Loan Group is generally expected to be higher
than the weighted average of the Pass-Through Rates on the
Class A Certificates and Subordinated Certificates related
to such Mortgage Loan Group, thus generating certain excess
interest collections which, in the absence of losses, will
not be necessary to fund interest distributions on the Class
A Certificates and Subordinated Certificates. The Pooling
and Servicing Agreement provides that this excess interest
be applied to the extent available to make accelerated
payments of principal (i.e., the Extra Principal
Distribution Amount) to the Class or Classes then entitled
to receive distributions of principal; such application will
cause the Aggregate Certificate Principal Balance with
respect to a Mortgage Loan Group to amortize more rapidly
than the Mortgage Loans in such Mortgage Loan Group,
resulting in overcollateralization.
The required level of overcollateralization for any Mortgage
Loan Group and Payment Date is the Targeted
Overcollateralization Amount for such Mortgage Loan Group
and Payment Date. The Targeted Overcollateralization Amount
is initially (i.e., prior to the related Stepdown Date)
2.00% of the Original Certificate Principal Balance with
respect to Group I and 2.50% of the Original Certificate
Principal Balance with respect to Group II. Since the actual
Overcollateralization Amount with respect to each Mortgage
Loan Group is essentially zero as of the Closing Date, in
the early months of the transaction, subject to the
availability of Monthly Excess Interest Amounts, Extra
Principal Distribution Amounts will be paid, with the result
that the Overcollateralization Amount with respect to each
Mortgage Loan Group is expected to increase to the level of
the related Targeted Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount with
respect to each Mortgage Loan Group has been reached,
Realized Losses occur in such Mortgage Loan Group, such
Realized Losses will result in an Overcollateralization
Deficiency (since such Realized Losses reduce the Loan
Balance of the related Mortgage Loans without giving rise to
a corresponding reduction of the related Aggregate
Certificate
S-17
<PAGE>
Principal Balance). The cash flow priorities of the Trust
require that an Extra Principal Distribution Amount be paid
(subject to the availability of any Monthly Excess Interest
Amount) for the purpose of re-establishing the
Overcollateralization Amount at the then-required Targeted
Overcollateralization Amount.
On and after the Step-down Date, and as long as no Trigger
Event is in effect, the Targeted Overcollateralization
Amount with respect to Group I and Group II, respectively,
is permitted to decrease or "step-down" below 2.00% and
2.50% of the respective Original Certificate Principal
Balance to levels equal to 4.00% and 5.00% of the then
current aggregate outstanding Loan Balance of the related
Mortgage Loan Group (subject to a floor of $1,409,665 and
$3,590,335, respectively). If the Targeted
Overcollateralization Amount with respect to each Mortgage
Loan Group is permitted to "step-down" on a Payment Date,
the Pooling and Servicing Agreement permits a portion of the
related Principal Remittance Amount for such Payment Date
not to be passed through as a distribution of principal on
such Payment Date. This has the effect of decelerating the
amortization of the Offered Certificates with respect to
each Mortgage Loan Group relative to the aggregate
outstanding Loan Balance of the Mortgage Loans, thereby
reducing the actual level of the related
Overcollateralization Amount. This portion of the Principal
Remittance Amount not distributed as principal on the
related Certificates therefore releases
overcollateralization from the Trust with respect to the
related Mortgage Loan Group. The amount of such releases are
the Overcollateralization Release Amounts.
Application of Monthly Excess Cash Flow Amounts. On any
Payment Date, the sum of the Monthly Excess Interest Amount
and the Overcollateralization Release Amount, if any, with
respect to a Mortgage Loan Group is the "Monthly Excess Cash
Flow Amount."
Group I: In respect of Group I, Monthly Excess Cash Flow
Amounts shall be applied in the following order of priority
on such Payment Date:
(1) to fund the Interest Carry Forward Amount, if any, with
respect to the Class A Fixed Rate Certificates;
(2) to fund the Extra Principal Distribution Amount for
such Payment Date with respect to Group I;
(3) to fund the Interest Carry Forward Amount, if any, with
respect to the Class B-1F Certificates;
(4) to fund the related Class B-1 Realized Loss
Amortization Amount for such Payment Date;
(5) to fund the Interest Carry Forward Amount, if any, with
respect to the Class C-FIO Certificates;
(6) to the Servicer and the Special Servicer, respectively,
to the extent of their respective Delinquency Advances
or Servicing Advances with respect to Mortgage Loans in
Group I deemed nonrecoverable;
(7) to the Special Servicer to the extent of unpaid fees
relating to special servicing of Specially Serviced
Mortgage Loans in Group I; provided that, if a
Subordinated Trigger Event is in effect on such Payment
Date, the amount that would otherwise be paid to the
Special Servicer in respect of any unpaid special
servicing fee will instead be distributed as follows:
first, to the Owners of the Class B-1F Certificates
until the Class B-1F Certificate Principal Balance has
been reduced to zero; and second, to the Special
Servicer in respect of any unpaid fee relating to the
special servicing of Specially Serviced Mortgage Loans
in Group I, if any;
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(8) to fund any Group II Shortfalls for such Payment Date.
A "Group II Shortfall" means the amount equal to the
sum of any unpaid (i) Interest Carry Forward Amounts
for such Payment Date with respect to the Class A Group
II Certificates, the Mezzanine Certificates, the Class
B-1A Certificates and the Class C-AIO Certificates,
(ii) Extra Principal Distribution Amount for such
Payment Date with respect to Group II, and (iii)
Realized Loss Amortization Amount for such Payment Date
with respect to the Mezzanine Certificates and the
Class B-1A Certificates; provided that a Group II
Shortfall will be determined after the application of
the Monthly Excess Cash Flow Amount in respect of Group
II;
(9) to fund a distribution to Owners of the Class D
Certificates; and
(10) to fund a distribution to Owners of the Class R
Certificates.
Group II: In respect of Group II, Monthly Excess Cash Flow
Amounts shall be applied in the following order of priority
on such Payment Date:
(1) to fund the Interest Carry Forward Amount, if any, with
respect to the Class A Group II Certificates;
(2) to fund the Extra Principal Distribution Amount for
such Payment Date with respect to Group II;
(3) to fund the Interest Carry Forward Amount, if any, with
respect to the Class M-1A Certificates;
(4) to fund the Class M-1A Realized Loss Amortization
Amount for such Payment Date;
(5) to fund the Interest Carry Forward Amount, if any, with
respect to the Class M-2A Certificates;
(6) to fund the Class M-2A Realized Loss Amortization
Amount for such Payment Date;
(7) to fund the Interest Carry Forward Amount, if any, with
respect to the Class B-1A Certificates;
(8) to fund the related Class B-1 Realized Loss
Amortization Amount for such Payment Date;
(9) to fund the Interest Carry Forward Amount, if any, with
respect to the Class C-AIO Certificates;
(10) to the Servicer and the Special Servicer, respectively,
to the extent of their respective Delinquency Advances
or Servicing Advances with respect to Mortgage Loans in
Group II deemed nonrecoverable;
(11) to pay an Available Funds Cap Shortfall Amount (defined
below), if any, to the Owners of the Group II
Certificates on a pro rata basis among such Owners;
(12) to the Special Servicer to the extent of any unpaid
fees relating to special servicing of Specially
Serviced Mortgage Loans in Group II, if any; provided
that, if a Subordinated Trigger Event is in effect on
such Payment Date in respect of Group II, the amount
that would otherwise be distributed to the Special
Servicer will instead be distributed as follows: first,
to the Owners of the related Class B-1A Certificates
until the Class B-1A Certificate Principal Balance has
been reduced to zero; second, to the Owners of the
Class M-2A Certificates until the Class M-2A
Certificate Principal Balance has been reduced to zero;
third, to the Owners of the Class M-1A Certificates
until the Class M-1A Certificate Principal Balance has
been
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reduced to zero; and fourth, to the Special Servicer to
the extent of any unpaid fees relating to special
servicing;
(13) to fund a distribution to Owners of the Class D
Certificates; and
(14) to fund a distribution to Owners of the Class R
Certificates.
The Pooling and Servicing Agreement provides that if, on any
Payment Date, the Group II Net WAC Cap limits the
Pass-Through Rate on any Class of the Group II Certificates
(i.e., the rate set by the Group II Net WAC Cap is less than
the Formula Pass-Through Rate for a Class of Group II
Certificates) the amount of any such shortfall will be
carried forward and be due and payable on future Payment
Dates and shall accrue interest at the applicable Formula
Pass-Through Rate, until paid (the amount of such shortfall,
together with such accrued interest is the "Available Funds
Cap Shortfall Amount").
AUCTION SALE;
STEP UP ON CERTAIN
PASS-THROUGH RATES;
TERMINATION: The Pooling and Servicing Agreement requires that, within 90
days following the first Monthly Remittance Date on which
the aggregate outstanding Loan Balance of the Mortgage Loans
in Group I and Group II has declined to less than 10% of the
original aggregate Loan Balance of the Mortgage Loans in
Group I and Group II as of the Cut-Off Date (such date, the
"Auction Sale Bid Date"), the Trustee shall solicit bids for
the purchase of all Mortgage Loans remaining in Group I and
Group II. In the event that satisfactory bids are received
as described in the Pooling and Servicing Agreement, the net
sale proceeds will be distributed to the Owners of
Certificates in the same order of priority as interest and
principal distributions. If satisfactory bids are not
received, the Trustee shall decline to sell the Mortgage
Loans and shall not be under any obligation to solicit any
further bids or otherwise negotiate any further sale of the
Mortgage Loans. Such sale and consequent termination of
Group I and Group II (an "Auction Sale") must constitute a
"qualified liquidation" of the Classes of Certificates under
Section 860F of the Internal Revenue Code of 1986, as
amended (the "Code"), including, without limitation, the
requirement that the qualified liquidation take place over a
period not to exceed 90 days. If the Auction Sale has not
occurred by the 90th day following the Auction Sale Bid Date
(such date, the "Step Up Date"), the Pass-Through Rate of
the Class A-7, the Class M-1A, M-2A and Class B-1A
Certificates will be increased as provided under
"Certificates Offered" in this Summary of Terms for each
Payment Date occurring thereafter. If an Auction Sale does
not occur, the Servicer and the Special Servicer will have
the right to purchase all of the Mortgage Loans serviced by
both of them on any Monthly Remittance Date when the sum of
the aggregate outstanding Loan Balance of the Mortgage Loans
in Group I and Group II has declined to 5% or less of the
original aggregate Loan Balance of the Mortgage Loans in
Group I and Group II as of the Cut-Off Date. Any such
purchase by the Servicer or the Special Servicer will be
required to be made on the same Monthly Remittance Date, so
that liquidation would occur on the next succeeding Payment
Date. In addition, in the event that an Auction Sale has not
occurred and the Servicer and the Special Servicer have not
exercised their rights to purchase all of the Mortgage
Loans, the Owners of the Class R Certificates will have the
obligation to purchase all the Mortgage Loans in Group I and
Group II on the Monthly Remittance Date in September 2028.
See "The Pooling and Servicing Agreement - Auction Sale;
Step Up on Certain Pass-Through Rates; Termination" herein.
BOOK-ENTRY
REGISTRATION
OF THE OFFERED
CERTIFICATES: The Offered Certificates will initially be issued in
book-entry form. Persons acquiring beneficial ownership
interests in such Offered Certificates ("Beneficial Owners")
may elect to hold their interests through The Depository
Trust Company ("DTC"), in the United States, or Cedel Bank,
S.A. ("Cedel") or the Euroclear System ("Euroclear"), in
Europe. Transfers within DTC, Cedel or Euroclear, as the
case may be, will be in accordance with the usual rules and
operating procedures of the relevant system. So long as the
Offered Certificates are Book-Entry Certificates (as defined
herein), such Certificates will be evidenced by one or more
Certificates registered in the name of Cede & Co. ("Cede"),
as the nominee of DTC or one of the European Depositaries
(as defined herein). Cross market transfers between persons
holding directly or indirectly through DTC, on the one hand,
and
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counterparties holding directly or indirectly through Cedel
or Euroclear, on the other, will be effected by DTC through
Citibank N.A. ("Citibank") or The Chase Manhattan Bank
("Chase", and together with Citibank, the "European
Depositaries"), the relevant depositaries of Cedel and
Euroclear, respectively, and each a participating member of
DTC. The Offered Certificates will initially be registered
in the name of Cede. The interests of the Owners of such
Certificates will be represented by book-entries on the
records of DTC and participating members thereof. No
Beneficial Owner will be entitled to receive a definitive
certificate representing such person's interest, except in
the event that Definitive Certificates (as defined herein)
are issued under the limited circumstances described herein.
All references in this Prospectus Supplement to any Offered
Certificates reflect the rights of Beneficial Owners only as
such rights may be exercised through DTC and its
participating organizations for so long as such Offered
Certificates are held by DTC. See "Description of the
Offered Certificates - Book-Entry Registration of the
Offered Certificates" herein, and Annex I hereto, and
"Description of the Securities - Book-Entry Registration" in
the Prospectus.
RATINGS: It is a condition of issuance of the Offered Certificates
that each Class of the Offered Certificates receive ratings
from Moody's Investors Service, Inc. ("Moody's") and Fitch
IBCA, Inc. ("Fitch") as set out below:
CLASS MOODY'S FITCH
----- ------- -----
A Aaa AAA
M-1A Aa2 AA
M-2A A2 A
B-1A Baa3 BBB
B-1F Baa3 BBB
Moody's and Fitch are referred to herein collectively as the
"Rating Agencies."
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 entity. See
"Prepayment and Yield Considerations" and "Ratings" herein.
No person is obligated to maintain any rating on any
Certificate, and, accordingly, there can be no assurance
that the ratings assigned to any Class of Certificates upon
initial issuance thereof will not be lowered or withdrawn at
any time thereafter.
FEDERAL TAX
ASPECTS: For federal income tax purposes, the Trust created by the
Pooling and Servicing Agreement will consist of two or more
REMICs with respect to which elections will be made to treat
each as a "Real Estate Mortgage Investment Conduit"
("REMIC"). Each Class of Certificates (other than the Class
R Certificates) will constitute "regular interests" in a
REMIC. The Class R Certificates will be designated as the
"residual interest" in the upper-tier REMIC.
Owners of the Offered Certificates, including Owners that
generally report income on the cash method of accounting,
will be required to include interest on the Offered
Certificates in income in accordance with the accrual method
of accounting. The Offered Certificates may be considered to
have been issued with original issue discount or at a
premium. Any such original issue discount will be includable
in the income of the Owner as it accrues under a method
taking into account the compounding of interest and using
the Prepayment Assumption. See "Prepayment and Yield
Considerations" and "Certain Federal Income Tax
Consequences" herein. Premium may be deductible by the Owner
either as it accrues or when principal is received. No
representation is made as to whether the Mortgage Loans will
prepay in accordance with the Prepayment Assumption, or any
other rate. In general, as a result of the qualification of
the Offered Certificates as regular interests in a REMIC,
the Offered Certificates will be treated as "regular . . .
interest(s) in a REMIC" under Section 7701(a)(19)(C) of the
Code and "real estate assets" under Section 856(c) of the
Code in the same proportion that the assets in the
upper-tier REMIC consist of qualifying assets under such
sections. In addition, interest on the Offered Certificates
will be treated as "interest on obligations secured by
mortgages on real property" under Section 856(c) of the
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Code to the extent that such Certificates are treated as
"real estate assets" under Section 856(c) of the Code.
ERISA
CONSIDERATIONS: A fiduciary of any employee benefit plan or other retirement
arrangement subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975
of the Code (a "Plan") should review carefully with its
legal advisors whether the purchase or holding of the Class
A Group II Certificates offered hereby could give rise to a
transaction that is prohibited or is not otherwise permitted
either under ERISA or Section 4975 of the Code or whether
there exists any statutory or administrative exemption
applicable to an investment therein. The U.S. Department of
Labor has issued to one or more of the Underwriters
individual prohibited transaction exemptions which generally
exempt from the application of certain of the prohibited
transaction provisions of Section 406 of ERISA and the
excise taxes imposed on such prohibited transactions by
Sections 4975(a) and (b) of the Code transactions relating
to the purchase, sale and holding of pass-through
certificates underwritten by the Underwriters and the
servicing and operation of related asset pools, provided
that certain conditions are satisfied. ONLY CLASS A GROUP II
CERTIFICATES MAY BE PURCHASED BY PLANS THAT ARE SUBJECT TO
ERISA EXCEPT AS PROVIDED HEREIN.
A fiduciary of a Plan should review the sections entitled
"ERISA Considerations" in the Prospectus and this Prospectus
Supplement and consider the issues discussed therein, and
should consult with its legal advisors prior to making an
investment in the Offered Certificates.
LEGAL INVESTMENT
CONSIDERATIONS: The Class A-7 Certificates, the Class A-8 Certificates and
the Class M-1A Certificates will constitute "mortgage
related securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA") for so long as they
are rated in one of the two highest rating categories by one
or more nationally recognized statistical rating
organizations. As such, the Class A-7 Certificates, the
Class A-8 Certificates and the Class M-1A Certificates will
be legal investments for certain entities to the extent
provided in SMMEA, subject to state laws overriding SMMEA.
In addition, institutions whose investment activities are
subject to review by federal or state regulatory authorities
may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the
investment by such institutions in certain forms of mortgage
related securities. Furthermore, certain states have enacted
legislation overriding the legal investment provisions of
SMMEA. In addition, institutions whose activities are
subject to review by federal or state regulatory authorities
may be or may become subject to restrictions, which may be
retroactively imposed by such regulatory authorities, on the
investment by such institutions in certain forms of mortgage
related securities.
The Class M-2A Certificates and the Class B Certificates
will not constitute "mortgage related securities" for
purposes of SMMEA. The appropriate characterization of the
Class M-2A Certificates and the Class B Certificates under
various legal investment restrictions applicable to the
investment activities of certain institutions, and thus the
ability of investors subject to these restrictions to
purchase the Class M-2A Certificates and the Class B
Certificates, may be subject to significant interpretive
uncertainties.
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<PAGE>
RISK FACTORS
Prospective investors in the Offered Certificates should consider the
following risk factors (as well as the risk factors set forth under "Risk
Factors" in the Prospectus) in connection with the purchase of the Offered
Certificates.
SENSITIVITY TO PREPAYMENTS. The Mortgage Loans may be prepaid by the
related mortgagor in whole or in part at any time. However, approximately,
73.65% of the Statistical Mortgage Loans as of the Statistical Calculation Date
require the payment of a fee in connection with certain prepayments. See "The
Portfolio of Mortgage Loans--Prepayment Penalties" herein for a description of
prepayment penalty provisions applicable to the Mortgage Loans. In addition, all
of the Mortgage Loans contain due-on-sale provisions which, to the extent
enforced by the Servicer or the Special Servicer, will result in prepayment of
such Mortgage Loans. Furthermore, the Seller may initiate a refinance policy as
described in "The Portfolio of Mortgage Loans-Prepayment Penalties" herein which
could have an impact on prepayments of the Mortgage Loans. See "Prepayment and
Yield Considerations" herein and "Certain Legal Aspects of the Mortgage Assets"
in the Prospectus. The rate of prepayments on fixed rate mortgage loans, such as
the Mortgage Loans in Group I, and the 2/28 Loans, 3/27 Loans and 5/25 Loans
which are or will be a part of Group II, are sensitive to prevailing interest
rates. Generally, if prevailing interest rates fall significantly below the
interest rates on the Mortgage Loans in Group I or the applicable rates on the
2/28 Loans, 3/27 Loans and 5/25 Loans, such loans are likely to be subject to
higher prepayment rates than if prevailing rates remain at or above the interest
rates on the Mortgage Loans in Group I or the applicable rates on the 2/28
Loans, 3/27 Loans and 5/25 Loans. Conversely, if prevailing interest rates rise
significantly above the interest rates on the Mortgage Loans in Group I or the
applicable rates on the 2/28 Loans, 3/27 Loans and 5/25 Loans, the rate of
prepayments is likely to decrease.
The average life of the Offered Certificates, and, if purchased at other
than par, the yields realized by Owners of the Offered Certificates, will be
sensitive to levels of payment (including prepayments relating to the Mortgage
Loans (the "Prepayments")) on the Mortgage Loans and the method of allocating
such payments among the Offered Certificates. In general, the yield on an
Offered Certificate that is purchased at a premium from the outstanding
principal amount thereof will be adversely affected by a higher than anticipated
level of Prepayments of the Mortgage Loans and enhanced by a lower than
anticipated level. Conversely, the yield on an Offered Certificate that is
purchased at a discount from the outstanding principal amount thereof will be
enhanced by a higher than anticipated level of Prepayments and adversely
affected by a lower than anticipated level. See "Prepayment and Yield
Considerations" herein.
LIMITED OBLIGATIONS. The Offered Certificates represent interests only in
the Trust. Neither the Offered Certificates nor the underlying Mortgage Loans
will be guaranteed or insured by any governmental entity or instrumentality, the
Depositor, the Seller, the Master Servicer, the Special Servicer, the Servicer,
the Trustee or any of their respective affiliates. The assets of the Trust are
the sole source of funds for distributions on the Offered Certificates and there
will be no recourse to the Depositor, the Seller, the Master Servicer, the
Special Servicer, the Servicer, the Trustee or any of their respective
affiliates.
SUBORDINATION-LIMITED PROTECTION AFFORDED TO CLASS A GROUP II CERTIFICATES.
The rights of the Owners of the Class M-1A Certificates to receive distributions
with respect to the Mortgage Loans will be subordinate to the rights of the
holders of the Class A Group II Certificates to receive such distributions. The
rights of Owners of the Class M-2A Certificates to receive distributions with
respect to the Mortgage Loans will be subordinate to the rights of the Owners of
the Class A Group II Certificates and the Class M-1A Certificates to receive
such distributions. The rights of the Owners of the Class B-1A Certificates to
receive distributions with respect to the Mortgage Loans will be subordinate to
the rights of the Owners of the Class A Group II Certificates and the Mezzanine
Certificates to receive such distributions. The rights of the owners of the
Class C-IO Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to the rights of the holders of the related Class A
Group II Certificates, the Mezzanine Certificates, the related Class B-1
Certificates. The subordination of the Subordinate Certificates relative to the
Class A Group II Certificates (and of the more lower-ranking Classes of the
Subordinate Certificates to the higher-ranking Classes thereof) is intended to
enhance the likelihood of regular receipt by the Owners of the Class A Group II
Certificates (and such higher-ranking Classes) of the full amount of the monthly
distributions allocable to them, and to afford such Owners protection against
losses.
SUBORDINATION-ALLOCATION OF LOSSES TO MEZZANINE CERTIFICATES AND CLASS B-1
CERTIFICATES. The rights of the Owners of each Class of Mezzanine Certificates
and Class B-1 Certificates to receive distributions of principal with respect to
the related Mortgage Loan Group will be subordinate to the rights of the Owners
of the related Class A Certificates to receive such distributions and to the
rights of the Owners of each higher-ranking related Class of Subordinate
Certificates to receive such distributions. See "Credit Enhancement-
Subordination" herein.
The yields to maturity on the Mezzanine Certificates and the Class B-1
Certificates will be sensitive, in varying degrees, to defaults on the Mortgage
Loans (and the timing thereof). Investors should fully consider the risks
associated with an investment in the Mezzanine Certificates and the Class B-1
Certificates, including the possibility that such investors may not fully
recover their initial investment as a result of Realized Losses on the Mortgage
Loans. See "Credit Enhancement-Application of Realized Losses" and "Prepayment
and Yield Considerations - Payment and Yield Scenarios for Offered Certificates"
herein.
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The Mezzanine Certificates and Class B-1 Certificates will not be entitled
to any principal distributions until at least the related Stepdown Date and
during the continuation of a Trigger Event in respect of the related Mortgage
Loan Group (unless the aggregate Certificate Principal Balance of the related
Class A Certificates has been reduced to zero). As a result, the weighted
average lives of the Mezzanine Certificates and Class B-1 Certificates will be
longer than would be the case if distributions of principal were to be allocated
on a pro rata basis among the Class A and Mezzanine Certificates and Class B-1
Certificates. As a result of the longer weighted average lives of the Mezzanine
Certificates and Class B-1 Certificates, the Owners of such Certificates have a
greater risk of suffering a loss on their investments.
RISK OF DELINQUENCIES ASSOCIATED WITH GUIDELINES. The Underwriting
Guidelines (as described herein under "The Portfolio of Mortgage Loans -
Guidelines") are intended to assess the credit quality of a mortgagor and the
value of the mortgaged property and to evaluate the adequacy of such property as
collateral for the mortgage loan. The Originators provide loans primarily to
mortgagors who do not qualify for loans conforming to Fannie Mae and FHLMC
guidelines but who have substantial equity in their property. Furthermore, the
Underwriting Guidelines do not prohibit a borrower from obtaining secondary
financing at the time of origination of the Originator's first lien, which
financing would reduce the equity the borrower would otherwise have in the
related mortgaged property from that indicated in the Originators' loan-to-value
determination.
As a result of the Underwriting Guidelines, the Mortgage Loans in Group II
are likely to experience rates of delinquency, foreclosure and bankruptcy that
are higher, and that may be substantially higher, than those experienced by
mortgage loans underwritten to Fannie Mae and FHLMC conforming guidelines.
Furthermore, changes in the values of Mortgaged Properties may have a greater
effect on the delinquency, foreclosure, bankruptcy and loss experience of the
Mortgage Loans in Group II than on mortgage loans originated in a more
traditional manner. No assurance can be given that the values of the Mortgaged
Properties have remained or will remain at the levels in effect on the dates of
origination of the related Mortgage Loans in Group II.
EFFECT OF MORTGAGE LOAN YIELD ON GROUP II CERTIFICATES PASS-THROUGH RATE;
BASIS RISK. The calculation of the Pass-Through Rate on each Class of the Group
II Certificates (other than the Class A-8 Certificates) is based upon the value
of an index (One-Month LIBOR) which is different from the value of the index
applicable to substantially all the Statistical Mortgage Loans in Group II
(primarily Six-Month LIBOR, and, to a lesser extent Mortgage Loans that have
fixed rates for either the term of the Loan or for a period of time) as
described under "The Mortgage Loan Pool -- Statistical Mortgage Loans -- Group
II" herein and is subject to the Group II Net WAC Cap. The Group II Net WAC Cap
effectively limits the amount of interest accrued on each Class of Group II
Certificates to the weighted average of the Coupon Rates on the Mortgage Loans
in Group II, less 0.52% per annum. 96.66% of the Statistical Mortgage Loans in
Group II as of the Statistical Calculation Date, adjust semi-annually, in some
cases after being fixed, for a period of time, based upon the London interbank
offered rate for Six-Month United States dollar deposits ("Six-Month LIBOR"),
whereas the Pass-Through Rate on each Class of the Group II Certificates (other
than the Class A-8 Certificates) adjusts monthly based upon One-Month LIBOR as
described under "Description of the Certificates -- Calculation of One-Month
LIBOR" herein, subject to the Group II Net WAC Cap. In addition, 3.32% of the
Statistical Mortgage Loans in Group II as of the Statistical Calculation Date
are fixed rate loans. Consequently, the Pass-Through Rate on each Class of Group
II Certificates (other than the Class A-8 Certificates) for any Payment Date may
not equal the related Formula Pass-Through Rate for such Class of Group II
Certificates during the related Accrual Period. 0.01% of the Statistical
Mortgage Loans in Group II as of the Statistical Calculation Date are CMT loans
that provide for an interest rate that adjusts annually based on the average
yield on United States treasury securities adjusted to a constant maturity of
one year. 67.29% of the Statistical Mortgage Loans in Group II as of the
Statistical Calculation Date are 2/28 Loans that provide for a fixed interest
rate for a period of approximately two years following origination. 7.22% of the
Statistical Mortgage Loans in Group II as of the Statistical Calculation Date
are 3/27 Loans that provide for a fixed interest rate for a period of
approximately three years following origination. 6.59% of the Statistical
Mortgage Loans in Group II as of the Statistical Calculation Date are 5/25 Loans
that provide for a fixed interest rate for a period of approximately five years
following origination. Thereafter, such Mortgage Loans provide for interest rate
and payment adjustments in a manner similar to the Six-Month LIBOR Loans. One-
Month LIBOR and Six-Month LIBOR may respond to different economic and market
factors, and there is not necessarily a correlation between them. Thus, it is
possible, for example, that One-Month LIBOR may rise during periods in which
Six-Month LIBOR is stable or is falling or that, even if both One-Month LIBOR
and Six-Month LIBOR rise during the same period, One-Month LIBOR may rise more
rapidly than Six-Month LIBOR. Furthermore, even if One-Month LIBOR and Six-Month
LIBOR were at the same level, various factors may cause the Group II Net WAC Cap
to limit the amount of interest that would otherwise accrue on each Class of
Group II Certificates (other than the Class A-8 Certificates). In particular,
the Pass-Through Rate on each Class of Group II Certificates (other than the
Class A-8 Certificates) adjusts monthly, while the interest rates of the
Mortgage Loans in Group II adjust less frequently, with the result that the
Group II Net WAC Cap may be lower than the Formula Pass-Through Rate for such
Class of Group II Certificates for extended periods in a rising interest rate
environment. In addition, the Mortgage Loans in Group II are subject to periodic
(i.e., semiannual) adjustment caps and maximum rate caps, and the weighted
average margin is subject to change based upon prepayment experience, which also
may result in the Group II Net WAC Cap limiting increases in the Pass-Through
Rate for such Class of Group II Certificates. Finally, the Mortgage Loans in
Group II accrue interest on the basis of a 360-day year assumed to consist of
twelve 30-day months, while calculations of interest on each Class of Group II
Certificates which are Offered Certificates (other than the Class A-8
Certificates) will be made on the basis of the actual number of days elapsed in
the related Accrual Period and a year of 360 days. This may result in Group II
Net
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WAC Cap limiting the Pass-Through Rate for such Class of Group II Certificates
in Accrual Periods that have more than 30 days. Consequently, the interest which
becomes due on the Mortgage Loans in Group II (net of the sum of the Servicing
Fee, the Master Servicer Fee, the Trustee Fee and certain required reductions
related to Group II) during any Remittance Period may not equal the amount of
interest that would accrue at One-Month LIBOR plus the margin on each Class of
Group II Certificates during the related Accrual Period. Furthermore, if the
Available Funds Cap determines the Pass-Through Rate for a Class of Group II
Certificates for a Payment Date, the market value of such Class of Group II
Certificates may be temporarily or permanently reduced.
OTHER LEGAL CONSIDERATIONS. Applicable state laws generally regulate
interest rates and other charges, require certain disclosure, and require
licensing of the Originators. In addition, other state laws, public policy and
general principles of equity relating to the protection of consumers, unfair and
deceptive practices and debt collection practices may apply to the origination,
servicing and collection of the Mortgage Loans. The Seller will be required to
repurchase any Mortgage Loans which, at the time of origination, fail to comply
with applicable federal and state laws and regulations, which failure results in
a material adverse effect on the Trust or the parties to the Pooling and
Servicing Agreement. Depending on the provisions of the applicable law and the
specific facts and circumstances involved, violations of these laws, policies
and principles may limit the ability of the Servicer and the Special Servicer to
collect all or part of the principal of or interest on the Mortgage Loans, may
entitle the Mortgagor to a refund of amounts previously paid and, in addition,
could subject the Seller, the Master Servicer, the Servicer, the Special
Servicer or the related Originator to damages and administrative enforcement.
See "Certain Legal Aspects of the Mortgage Assets" in the Prospectus.
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 Mortgagors regarding
the terms of the Mortgage Loans;
(ii) the Equal Credit Opportunity Act and Regulation B promulgated
thereunder, which prohibit discrimination on the basis of age, race, color,
sex, religion, marital status, national origin, receipt of public
assistance or the exercise of any right under the Consumer Credit
Protection Act, in the extension of credit; and
(iii) the Fair Credit Reporting Act, which regulates the use and
reporting of information related to the Mortgagor's credit experience.
Violations of certain provisions of these federal laws may limit the ability of
the Servicer and the Special Servicer to collect all or part of the principal of
or interest on the Mortgage Loans and in addition could subject the Seller, the
Master Servicer, the Servicer or the Special Servicer to damages and
administrative enforcement. The Seller will be required to repurchase any
Mortgage Loans which, at the time of origination, did not comply with such
federal laws or regulations. See "Certain Legal Aspects of the Mortgage Assets"
in the Prospectus.
The federal Soldiers' and Sailors' Civil Relief Act of 1940 may affect the
ability of the Servicer and the Special Servicer to collect full amounts of
interest on certain Mortgage Loans and could interfere with the ability of the
Servicer and the Special Servicer to foreclose on certain properties. See
"Certain Legal Aspects of the Mortgage Assets - Soldiers' and Sailors' Civil
Relief Act" in the Prospectus.
It is possible that some of the Mortgage Loans will be subject to the
Riegle Community Development and Regulatory Improvement Act of 1994 (the "Riegle
Act") which incorporates the Home Ownership and Equity Protection Act of 1994.
The Riegle Act adds certain additional provisions to Regulation Z, the
implementing regulation of the Truth-In-Lending Act. These provisions impose
additional disclosure and other requirements on creditors with respect to non-
purchase money mortgage loans with high interest rates or high up-front fees and
charges. In general, mortgage loans within the purview of the Riegle Act have
annual percentage rates over 10% greater than the yield on Treasury Securities
of comparable maturity and/or fees and points which exceed the greater of 8% of
the total loan amount or $400. The provisions of the Riegle Act apply on a
mandatory basis to all mortgage loans originated on or after October 1, 1995.
These provisions can impose specific statutory liabilities upon creditors who
fail to comply with their provisions and may affect the enforceability of the
related loans. In addition, any assignee of the creditor would generally be
subject to all claims and defenses that the consumer could assert against the
creditor, including, without limitation, the right to rescind the mortgage loan.
RISK OF SELLER INSOLVENCY. The Seller believes that the transfer of the
Mortgage Loans to the Depositor and by the Depositor to the Trust constitutes a
sale by the Seller to the Depositor and by the Depositor to the Trust and,
accordingly, that such Mortgage Loans will not be part of the assets of the
Seller in the event of the insolvency of the Seller and will not be available to
the creditors of the Seller. However, in the event of an insolvency of the
Seller, it is possible that a bankruptcy trustee or a creditor of the Seller may
argue that the transaction between the Seller and the Depositor was a pledge of
such Mortgage Loans in connection with a borrowing by the Seller rather than a
true sale. Such an attempt, even if unsuccessful, could result in delays in
distributions on the Certificates.
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On the Closing Date, the Trustee and the Seller will have received an
opinion of Arter & Hadden LLP, counsel to the Seller and the Depositor, with
respect to the true sale of Mortgage Loans from the Seller to the Depositor and
from the Depositor to the Trust, in form and substance satisfactory to the
Trustee, Freddie Mac and the Rating Agencies.
RISK OF HIGHER DEFAULT RATES ASSOCIATED WITH CALIFORNIA REAL PROPERTY.
Because 24.74% by principal amount of the Mortgaged Properties relating to
Statistical Mortgage Loans as of the Statistical Calculation Date, are located
in the State of California, an overall decline in the related residential real
estate markets could adversely affect the values of the Mortgaged Properties
securing such Statistical Mortgage Loans causing the Loan Balances of the
related Statistical Mortgage Loans to equal or exceed the value of such
Mortgaged Properties.
YEAR 2000 READINESS. The inability of computers, software and other
equipment utilizing microprocessors to recognize and properly process date
fields containing a two-digit year is commonly referred to as the "Year 2000
Issue." As the year 2000 approaches, such systems may recognize a date using
"00" as the year 1900 rather than the year 2000 and be unable to accurately
process certain date-based information. This error could potentially result in a
system failure or miscalculation causing disruptions of operations, including,
among other things, a temporary inability to process transactions or engage in
similar normal business activities.
The mission-critical computer systems of the Master Servicer, the Special
Servicer and the Servicer have been reviewed in conjunction with a review by the
parent company of the Master Servicer, the Special Servicer and Servicer of the
parent company's mission-critical computer systems in order to evaluate
necessary modifications for Year 2000 readiness. With respect to the mission-
critical computer systems, it is not currently anticipated that any material
difficulties will arise in achieving Year 2000 readiness or that material
expenditures will be incurred in connection with any modifications necessary to
achieve Year 2000 readiness. In addition, the parent company of the Master
Servicer, the Special Servicer and the Servicer is in the process of
communicating with others with whom the parent company and its subsidiaries do
significant business to determine their Year 2000 readiness status and the
extent to which the companies could be affected by any third party Year 2000
readiness issues. Although responses from all third parties with whom the Master
Servicer, the Special Servicer and the Servicer do business have not been
received, based on responses that have been received from such third parties, it
is not currently anticipated that the Master Servicer, the Special Servicer or
the Servicer will be materially affected by any third party Year 2000 readiness
issues. However, there can be no assurance that the systems of the Master
Servicer, the Special Servicer or the Servicer, or those of other entities on
which these companies' systems rely, will be timely converted. Furthermore,
there can be no assurance that a failure to convert by another entity, or a
conversion that is incompatible with the systems of the Master Servicer, the
Special Servicer or the Servicer, or those of other entities on which these
companies' systems rely, will be timely converted. Any such failure to timely
convert or incompatible conversion could have a material adverse effect on the
Master Servicer, the Special Servicer or the Servicer. Finally, the Master
Servicer, the Special Servicer and the Servicer could be materially adversely
impacted by the occurrence of a Year 2000 problem that impacts businesses
generally (e.g., widespread power outages, nationwide interruptions in
telecommunications, etc.).
The anticipated costs and timeliness of completion of Year 2000
modifications are based on management's best estimates, which were derived using
numerous assumptions relating to future events, including, without limitation,
the continued availability of certain resources and modification plans of third
parties. However, there can be no assurance that the estimates and assumptions
will prove to be accurate.
THE PORTFOLIO OF MORTGAGE LOANS
GENERAL
The pool of Mortgage Loans primarily includes newly originated loans which
were purchased by the Depositor from the Seller, which acquired such loans from
the related Originators.
The Seller has made certain representations and warranties with respect to
the Mortgage Loans, as specified below, and, upon a breach of such
representations and warranties, may be required to repurchase such Mortgage
Loans from the Trust.
UNDERWRITING GUIDELINES
The Mortgage Loans have been originated by the Originators in accordance
with the underwriting guidelines established by each of them and reviewed and
approved by the Seller (the "Underwriting Guidelines"). The Underwriting
Guidelines are primarily intended to evaluate the value and adequacy of the
mortgaged property as collateral and are also intended to consider the
mortgagor's credit standing and repayment ability. On a case-by-case basis, the
Originator may determine that, based upon compensating factors, a prospective
mortgagor not strictly qualifying under the Underwriting Guidelines warrants an
underwriting exception. Compensating factors may include, but are not limited
to, low loan-to-value ratio, low debt-to-income ratio, good credit history,
stable employment, pride of ownership and time in residence at the applicant's
current address. It is expected that a substantial number of the Mortgage Loans
will represent such underwriting exceptions.
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Under the Underwriting Guidelines, the Originators review and verify the
loan applicant's sources of income (except under the stated income programs),
calculate the amount of income from all such sources indicated on the loan
application, review the credit history of the applicant and calculate the debt-
to-income ratio to determine the applicant's ability to repay the loan, and
review the mortgaged property for compliance with their Underwriting Guidelines.
The Underwriting Guidelines are applied in accordance with a procedure which
complies with applicable federal and state laws and regulations and requires (i)
an appraisal of the mortgaged property which conforms to Freddie Mac standards
and (ii) a review of such appraisal, which review may be conducted by the
Originator's staff appraiser or representative and, depending upon the original
principal balance and loan-to-value ratio of the mortgaged property may include
a desk review of the original appraisal or a drive-by review appraisal of the
mortgaged property. The Underwriting Guidelines generally permit single family
loans with loan-to-value ratios at origination of up to 90% for the highest
credit grading category (80% under the stated income programs), depending on the
type and use of the property, the creditworthiness of the mortgagor and the
debt-to-income ratio. Under the Underwriting Guidelines, the maximum combined
loan-to-value ratio for purchase money mortgage loans may differ from those
applicable to refinancings.
All of the Mortgage Loans are based on loan application packages submitted
through mortgage brokerage companies or at the related Originator's retail
branches or are purchased from originators approved by the Originators. Loan
application packages submitted through mortgage brokerage companies, containing
in each case relevant credit, property and underwriting information on the loan
request, are compiled by the applicable mortgage brokerage company and submitted
to the Originator for approval and funding. The mortgage brokerage companies
receive a portion of the loan origination fee charged to the mortgagor at the
time the loan is made.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history
and employment history, as well as certain other personal information. Each
Originator requires a credit report on each applicant from a credit reporting
company. The applicant must provide to the related Originator or the originator
a letter explaining all late payments on mortgage debt and, generally, consumer
(i.e., non-mortgage) debt. The report typically contains information relating to
such matters as credit history with local and national merchants and lenders,
installment debt payments and any record of defaults, bankruptcy, repossession,
suits or judgments. Self-employed individuals are generally required to submit
their two most recent federal income tax returns. As part of their quality
control systems, each Originator generally reverifies information with respect
to the foregoing matters that has been provided by the mortgage brokerage
company prior to funding a loan and periodically audits files based on a random
sample of closed loans. In the course of their pre-funding audit, each
Originator generally reverifies the income of each mortgagor or, for a self-
employed individual, reviews the income documentation obtained pursuant to the
Underwriting Guidelines (except under stated income programs). If the loan-to-
value ratio is greater than a predetermined level, the Originators generally
verify the source of funds for the down payment; however, the related Originator
may not verify the source of funds if the loan-to-value ratio is less than such
level.
Mortgaged properties that are to secure mortgage loans are generally
appraised by qualified independent appraisers who are approved by the related
Originator. In most cases, below-average properties (including properties
requiring major deferred maintenance) are not acceptable as security for
mortgage loans under the Underwriting Guidelines. Each appraisal includes a
market data analysis based on recent sales of comparable homes in the area and,
where deemed appropriate, replacement cost analysis based on the current cost of
constructing a similar home. Except with respect to purchase money mortgage
loans, every independent appraisal is generally reviewed by the related
Originators before the loan is funded, and a drive-by review or appraisal is
generally performed in connection with loan amounts over a certain predetermined
dollar amount established for each State. With respect to purchase money
mortgage loans, an independent appraisal may be reviewed by the Originator.
With respect to the Mortgage Loans in Group II, the Underwriting Guidelines
are less stringent than the standards generally acceptable to Freddie Mac with
regard to the mortgagor's credit standing and repayment ability. Mortgagors who
qualify under the Underwriting Guidelines generally have payment histories and
debt ratios which would not satisfy Freddie Mac underwriting guidelines and may
have a record of major derogatory credit items such as outstanding judgments or
prior bankruptcies. The Underwriting Guidelines establish the maximum permitted
loan-to-value ratio for each loan type based upon these and other risk factors.
The Mortgage Loans were originated consistent with and generally conform to
"Full DocumentationFull Documentation," "Limited Documentation," or "Stated
Income Documentation" residential loan programs. Under each of the programs, the
related Originator generally reviews the applicant's source of income,
calculates the amount of income from sources indicated on the loan application
or similar documentation, reviews the credit history of the applicant,
calculates the debt service-to-income ratio to determine the applicant's ability
to repay the loan, reviews the type and use of the property being financed, and
reviews the property. In determining the ability of the applicant to repay the
loan, a rate is established that generally is equal to the lesser of the fully
indexed interest rate on the loan being applied for or one percent above the
initial interest rate on such loan. The Underwriting Guidelines require that
mortgage loans be underwritten in a standardized procedure which complies with
applicable federal and state laws and regulations and requires the Originator's
underwriters to be satisfied that the value of the property being financed, as
indicated by an appraisal and a review of the appraisal, currently supports the
outstanding loan balance. In general, the maximum loan amount for mortgage loans
originated under the programs is $350,000. Mortgage
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loans may, however, be originated generally up to $500,000, provided the
loan-to-value ratio is at least 5% below the applicable residential loan program
maximum that would otherwise apply. The Underwriting Guidelines permit one- to
four-family loans to have loan-to-value ratios at origination of generally up to
90%, depending on, among other things, the purpose of the mortgage loan, the
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
secured by mortgaged properties acquired by a mortgagor under a "lease option
purchase," the loan-to-value ratio of the related mortgage loan is generally
based on the appraised value at the time of origination of such mortgage loan.
The Underwriting Guidelines require that income be verified for each
applicant and that the source of funds (if any) required to be deposited by the
applicant into escrow under its various programs be as follows: Under the Full
Documentation programs, applicants generally are required to submit two written
forms of verification of stable income for 24 months (or, if the loan-to-value
ratio is less than or equal to 65%, for 12 months). Under the Limited
Documentation programs, generally one such form of verification is required for
12 months. Under the Stated Income Documentation programs, generally an
applicant may be qualified based upon monthly income as stated on the mortgage
loan application if the applicant meets certain criteria. All the foregoing
programs typically require that with respect to each applicant, there be a
telephone verification of the applicant's employment. Verification of the source
of funds (if any) required to be deposited by the applicant into escrow in the
case of a purchase money loan is generally required under the Full Documentation
program guidelines. No such verification is required under the other programs.
The Underwriting Guidelines require title insurance on all mortgage loans
secured by liens on real property. The Underwriting Guidelines also require
that fire and extended coverage casualty insurance be maintained on the secured
property in an amount at least equal to the principal balance of the related
single-family loan or the replacement cost of the property, whichever is less.
Under the Underwriting Guidelines, various risk categories are used to
grade the likelihood that the mortgagor will satisfy the repayment conditions of
the mortgage loan. These risk categories establish the maximum permitted
loan-to-value ratio and loan amount, given the occupancy status of the mortgaged
property and the mortgagor's credit history and debt ratio. In general, higher
credit risk mortgage loans are graded in categories which permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; however, the Underwriting
Guidelines establish lower maximum loan-to-value ratios and maximum loan amounts
for loans graded in such categories.
ARCC Performance Assumption Grouping
The Seller, through its manager AMRESCO Residential Credit Corporation
("ARCC"), performs due diligence on all mortgage loan portfolios which it
acquires from third parties, including the Mortgage Loans included in the Trust.
Part of ARCC's review includes a review of the credit-grading process of the
related Originators (other than ARMC). ARCC has developed Performance Assumption
Groupings ("PAGs") which are similar to a credit-grading criteria. ARCC
determines which PAG the Originators' related credit grade most closely matches,
and all loans which the Originator has placed in that credit grade are placed in
the related PAG category. Because there are multiple factors in both the credit
grades identified by the Originators and the PAG categories, it is unlikely that
any credit grade designation will match up exactly to any PAG category. ARCC
uses its best efforts to match the categories based upon its projection of asset
performance for the related credit grade and PAG. It should be noted that while
the Originators have specific criteria for credit grades, they have the
discretion to place a loan in a credit grade for which it does not meet all of
the criteria, based upon consideration of all relevant factors. It should
further be noted that ARCC does not make any attempt to determine how individual
loans would fall under the PAG criteria described below, but only associates the
existing credit grades of the Originator to the various PAG categories.
SELLER'S PAG I
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 90% or less. The
maximum back-end debt ratio should not exceed 50%. The prospective mortgagor
should have approximately five years of established credit with five trade
lines. In the last 12 months, mortgage credit should show no delinquencies in
excess of 30 days, and in the last 24 months, should show delinquencies only for
30 days or less. The credit history should reveal no foreclosures. In the last
12 months, installment and revolving accounts should indicate no delinquencies
for major credit, and a maximum of 30 days for minor credit. In the last 24
months, both major and minor credit should be a maximum of 30 days delinquent.
There should be no evidence of judgments, charge offs, collections or
bankruptcies affecting the mortgagor. In last 36 months, the prospective
mortgagor should have had only minor collection actions totaling less than $500.
SELLER'S PAG II
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 85% or less. The
maximum back end debt ratio should not exceed 50%. The prospective mortgagor
should have approximately three years of established credit with three trade
lines. In the last 12 months, mortgage credit
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should show no more than two 30-day delinquencies and no 60-day delinquencies,
and all credits should be current at the time of origination; in the last 24
months, the credit history should show a maximum of 30 day delinquencies. In the
last 12 months, installment and revolving accounts should include no more than
two 30-day delinquencies for major credit and a maximum of 60 day delinquency
for minor credit. In the last 24 months, the maximum delinquency should be 60
days for both major and minor credit. In the last 12 months, there should be no
collection action taken against the prospective mortgagor. In the last 24
months, there should be no judgments or charge offs against the prospective
mortgagor, and discharged bankruptcies should have reestablished credit with no
delinquencies. In the last 36 months, mortgagor should be subject to only minor
collection actions totaling less than $1,000.
SELLER'S PAG III
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 80% or less. The
maximum back end debt ratio should not exceed 50%. The prospective mortgagor
should have approximately two years of established credit with two trade lines.
In the last 12 months, mortgage credit should show no more than three 30-day
delinquencies and one 60-day delinquency. Mortgage credit should be a maximum
30 days delinquent at the time of origination, and in the last 24 months, a
maximum of 60 days delinquent. In the last 12 months, installment and revolving
accounts should show no more than two 60-day delinquencies for major credit and
a maximum delinquency of 90 days for minor credit. In the last 24 months,
installment and revolving accounts should be a maximum 90 days delinquent for
both major and minor credit. In the last 12 months, there should be no
judgments or charge offs, and only minor collection actions totaling less than
$500 against the prospective mortgagor. In the last 24 months, the prospective
mortgagor is permitted to have judgments or charge offs totaling less than $500,
and discharged bankruptcies with a maximum 30-day delinquency on reestablished
credit. In the last 36 months, collection actions totaling less than $2,500 are
permitted.
SELLER'S PAG IV
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 75% or less. The
maximum back-end debt ratio should not exceed 55%. There is no requirement for
an established credit history. In the last 12 months, mortgage credit should
include no more than four 30-day delinquencies and two 60-day delinquencies, and
mortgage credit should be a maximum of 90 days delinquent at the time of
origination. In the last 12 months, installment and revolving accounts should
show no more than two 90-day delinquencies for major credit and a maximum
delinquency of 90 days for minor credit. In the last 24 months, installment and
revolving accounts should be a maximum 90 days delinquent for both major and
minor credit. In the last 12 months, mortgagor may have discharged bankruptcies
with maximum 30 day delinquency on reestablished credit, and collection actions
totaling less than $2,500 are permitted. In the last 24 months, total judgments
and charge offs should be less than $2,500.
SELLER'S PAG V
The maximum loan-to-value ratio for all eligible properties, owner or
non-owner occupied, purchase money or refinance, should be 65% or less. The
maximum back-end debt ratio should not exceed 55%. There is no requirement for
an established credit history. In the last 12 months, mortgage credit should be
a maximum of 120 days delinquent, and no foreclosure may be pending at the time
of origination. In the last 24 months, mortgage credit should be a maximum of
120 days delinquent. There are no stipulations regarding other derogatory
information other than that bankruptcies should have been discharged.
Approximately 31.94%, 13.93%, 26.21%, 11.49% and 16.44% of the Statistical
Mortgage Loans in Group I and 13.55%, 51.19%, 20.18%, 6.04% and 9.05% of the
Statistical Mortgage Loans in Group II in each case, as of the Statistical
Calculation Date, are in the Seller's PAG I, PAG II, PAG III, PAG IV, and PAG V
categories, respectively.
Approximately 75.30%, 4.48% and 20.21% of the Statistical Mortgage Loans in
Group I and 70.24%, 5.33% and 24.43% of the Statistical Mortgage Loans in Group
II, in each case, as of the Statistical Calculation Date, are in the Full
Documentation, Limited Documentation and Stated Income Documentation programs,
respectively.
PREPAYMENT PENALTIES
Any Mortgage Loan may be prepaid in full or in part at any time; however,
approximately 75.87% of the Statistical Mortgage Loans in Group I and 73.00% of
the Statistical Mortgage Loans in Group II, in each case, as of the Statistical
Calculation Date, provide for the payment by the Mortgagor of a prepayment
charge in limited circumstances on certain full or partial prepayments made
generally up to five years from the date of execution of the related Note. The
amount of the prepayment charge is as provided in the related Note. In general,
the Note provides that a prepayment charge will apply if, in any twelve-month
period generally up to the first five years from the date of origination of such
Mortgage Loan, the Mortgagor prepays an aggregate amount exceeding 20% of the
original principal balance of such Mortgage Loan. The amount of the prepayment
charge will generally be equal to six months' advance interest calculated on the
basis of the rate in effect at the time of such prepayment on the amount prepaid
in excess of 20% of the original balance of such Mortgage Loan.
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The Seller may initiate a refinance policy with the Originators who
originated Mortgage Loans for the Trust and for other trusts in which the Seller
or an affiliate of the Seller owns a residual interest in an effort to retain
borrowers who the Seller or the Originators believe are likely to refinance
their loans due to interest rate changes or other reasons. Although the policy
is expected to permit the Originators to solicit such borrowers in accordance
with the Seller's policy, the Depositor believes that this practice will not
likely result in a material change in the prepayment experience of the Trust
because the solicited borrowers would have been expected to refinance through
other originators in any event.
REPRESENTATIONS RELATING TO THE MORTGAGE LOANS
In the Pooling and Servicing Agreement, the Seller will make
representations and warranties in respect of the Mortgage Loans that generally
include, among other things, that: (i) the information with respect to each
Mortgage Loan set forth in the related Schedule of Mortgage Loans is true and
correct as of the specified date; (ii) each Mortgaged Property is improved by a
one- to four-family residential dwelling, which may include condominiums, units
in planned unit developments and manufactured housing permanently attached to
foundations; (iii) each Mortgage Loan had, at the time of origination, either an
attorney's certification of title or a title search or title policy; (iv) as of
the Cut-Off Date each Mortgage Loan was secured by a valid and subsisting first
(or, if applicable, second) lien of record on the Mortgaged Property subject in
all cases only to the exceptions to title set forth in the title insurance
policy, if any, with respect to the related Mortgage Loan; (v) as of the Closing
Date it held good and indefeasible title to, and was the sole owner of, each
Mortgage Loan; and (vi) each Mortgage Loan was originated in accordance with
applicable law and is the valid, legal and binding obligation of the related
Mortgagor.
If the Seller cannot cure a breach of any representation or warranty made
by it in respect of a Mortgage Loan that materially and adversely affects the
interests of the Owners in such Mortgage Loan within a time period specified in
the Pooling and Servicing Agreement, the Seller will be obligated under the
Pooling and Servicing Agreement to purchase from the Trust such Mortgage Loan at
a price (the "Loan Purchase Price") which will be equal to the principal balance
thereof as of the date of purchase plus one month's interest at the current Note
Rate (net of the applicable Servicing Fee) (the "Net Coupon Rate").
As to any such Mortgage Loan required to be repurchased by the Seller as
provided above, rather than repurchase the Mortgage Loan, the Seller may, at its
sole option, remove such Mortgage Loan (a "Deleted Mortgage Loan") from the
Trust and cause the substitution in its place of another Mortgage Loan of like
kind (a "Qualified Replacement Mortgage" as such term is defined in the Pooling
and Servicing Agreement); however, such substitution of a defective Mortgage
Loan may not be made if such substitution would cause any of the REMICs created
by the Pooling and Servicing Agreement not to qualify as a REMIC or result in a
prohibited transaction tax under the Code (generally after two years from the
Closing Date).
Upon receipt of notice by the Master Servicer, the Servicer or the Special
Servicer or upon the Master Servicer, the Servicer or the Special Servicer
becoming aware that a representation and warranty made by the Seller in the
Pooling and Servicing Agreement has been breached, the Master Servicer, the
Servicer or the Special Servicer will be required to promptly notify the Trustee
and the Seller of such breach and request that the Seller cure such breach or
honor its repurchase or substitution obligations for the benefit of the Trust.
The foregoing will constitute the sole remedy available to the Trust for a
breach of representation by an Originator.
RESPONSIBILITIES OF THE MASTER SERVICER
The Master Servicer is obligated to review the Servicer's and the Special
Servicer's monthly servicing reports for any inconsistencies between such
reports and information available to the Master Servicer. In addition, the
Master Servicer is obligated to notify the Servicer and the Special Servicer of
the Monthly Remittance Amount to be remitted by them on each Monthly Remittance
Date broken out by principal and interest. The Master Servicer is also required
to review a reconciliation report prepared by the Servicer and the Special
Servicer with respect to its Principal and Interest Account for each Remittance
Period which includes a test of the expected principal and interest balance. To
the extent the Master Servicer and the Servicer or the Special Servicer have not
rectified inconsistencies and disagree as to the amount to be remitted by the
Servicer or the Special Servicer, the Servicer or the Special Servicer, as the
case may be, shall defer to the Master Servicer; provided that the Servicer or
the Special Servicer may withdraw any amounts over-advanced from the Principal
and Interest Account prior to any future distribution to Owners of the
Certificates in accordance with the terms of the Pooling and Servicing
Agreement.
The Master Servicer is not liable for the performance of the Servicer or
the Special Servicer (unless the Master Servicer is also performing as Special
Servicer) except to the extent expressly provided for in the Pooling and
Servicing Agreement. Specifically, the Master Servicer is not obligated to make
cash advances with respect to delinquent payments of principal and interest on
any Mortgage Loans notwithstanding that the Servicer or the Special Servicer
with the primary obligation to make such cash advance or the Trustee as a
successor Servicer or Special Servicer has failed to do so. In addition, the
Master Servicer has not made (and will not make) any representations as to the
validity or sufficiency of the Pooling and Servicing Agreement or of the
Certificates or of any Mortgage Loan or related document. Further, the Master
Servicer is not accountable for the use or application by the Seller or the
Depositor of any of the Certificates or of the proceeds of the Certificates, or
for the use or application of any funds paid to the Servicer or the Special
Servicer in respect of the Mortgage Loans or deposited in or withdrawn from the
Principal or Interest Account by the Servicer or the Special Servicer.
S-30
<PAGE>
The Master Servicer will agree to indemnify the Trustee, the Servicer, the
Special Servicer, Freddie Mac and certain other parties to the extent set forth
in the Pooling and Servicing Agreement.
SERVICING
The information set forth below concerning the Servicer has been provided
to the Depositor by the Servicer. Neither the Depositor, the Seller, the Master
Servicer, the Special Servicer or the Trustee, the Underwriters, Freddie Mac nor
any of their respective affiliates have made any independent investigation of
such information.
The Servicer will be responsible for the servicing of the Mortgage Loans
other than Specially Serviced Mortgage Loans which will be serviced by the
Special Servicer. The Servicer has contracted with Wendover Financial Services
Corporation as a subservicer to provide payment processing and accounting. The
Servicer is a wholly-owned subsidiary of the Seller. To the extent provided in
the Pooling and Servicing Agreement and any related servicing or subservicing
agreement, any arrangements relating to the servicing of Mortgage Loans can be
terminated and such Mortgage Loans and the servicing thereof transferred to
another servicer.
Pursuant to the terms of the Pooling and Servicing Agreement, when a
Mortgage Loan becomes 60+ Days Delinquent, the responsibility for servicing such
Mortgage Loan will be transferred to the Special Servicer. The Special Servicer
shall maintain responsibility for servicing such Mortgage Loan until it is
liquidated.
It is anticipated that the Special Servicer will provide special servicing
duties in accordance with the requirements for the servicing of Mortgage Loans
set forth in the Pooling and Servicing Agreement. Until such time as the
Special Servicer is terminated or resigns, the Special Servicer will perform
substantially all functions related to customer service and the collection of
Specially Serviced Mortgage Loans. Among other things, "special servicing"
involves prompt telephone contact following delinquency, follow-up letters and
notice, collection of mortgage loan payments, escrow payments and other charges,
default management and loss mitigation (i.e., lien maintenance and arranging, if
appropriate, discounted payoffs, foreclosure, cash management programs and other
actions to protect collateral and reduce losses) and when necessary, pursuing
the legal remedies available to the Trust. As compensation for its services in
respect of the servicing of any Specially Serviced Mortgage Loan, the Special
Servicer will be entitled to receive a Servicing Fee (not to exceed 0.50% per
annum), plus a "special servicer fee" and an "incentive fee." The special
servicer fee and the incentive fee are intended to provide the Special Servicer
with the incentive to efficiently service and resolve Specially Serviced
Mortgage Loans to the benefit of the Trust. The special servicer fee and the
incentive fee are capped and may not be earned by the Special Servicer more than
once in respect of any Mortgage Loan. The payment of the special servicer fee
and the incentive fee will not reduce the Class Distribution Amount in respect
of any of the Offered Certificates.
Each of the Servicer and the Special Servicer is obligated to make Advances
with respect to delinquent payments of principal of and interest on any Mortgage
Loan, other than Balloon Payments with respect to Balloon Mortgage Loans,
serviced by it to the extent provided in the Pooling and Servicing Agreement.
In the event the Servicer or Special Servicer is terminated or resigns and
pending the appointment of a successor, the Trustee will perform servicing for
the Servicer or the Special Servicer, as the case may be.
The following table sets forth certain information concerning delinquency
experience including bankruptcies and foreclosures in progress on home equity
loans included in the Servicer's servicing portfolio as of July 31, 1998. No
home equity loan is considered delinquent for these purposes unless it is one
month past due on a contractual basis.
S-31
<PAGE>
<TABLE>
<CAPTION>
AS OF JULY 31, 1998
-------------------------------------------------------------
BY NUMBER OF PERCENT BY BY DOLLAR OF PERCENT BY
LOANS NUMBER LOANS DOLLAR
-------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Total Portfolio....................... 22,203 N/A $2,012,177,435 N/A
Period of Delinquency(1)
31 - 60 Days..................... 645 2.91% 55,566,021 2.76%
61 - 90 Days..................... 317 1.43 27,398,216 1.36
91 Days or more.................. 640 2.88 51,810,181 2.57
-------------- ------------- ---------------- ------------
Total Delinquencies (not including
bankruptcies or REOs)................ 1,602 7.22% $ 134,774,418 6.70%
============== ============ ================ ============
Bankruptcies........................... 245 1.10 19,909,292 0.99
REO(2)................................. 216 0.97 15,065,303 0.75
Foreclosures(3)........................ 507 2.28 41,093,556 2.04
Net Losses 26,305 0.001
</TABLE>
______________________
(1) The period of delinquency is based on the number of days payments are
contractually past due. The delinquency statistics for the period
include loans in foreclosure.
(2) REO (i.e., "real estate owned" properties, that is, properties
relating to a mortgage foreclosed or for which deeds in lieu of
foreclosure have been accepted and which is held by the Servicer
pending disposition) percentages are calculated using the number of
loans, not the dollar amount.
(3) "Foreclosures" reflect the number of mortgage loans or the dollar
amount of mortgage loans in foreclosure as a percentage of the total
number of mortgage loans or the dollar amount of mortgage loans, as
the case may be, as of the date indicated.
USE OF PROCEEDS
The Depositor will sell the Mortgage Loans to the Trust concurrently with
delivery of the Certificates. Net proceeds from the sale of the Offered
Certificates will be applied by the Depositor to the purchase of the Mortgage
Loans from the Seller. Such net proceeds will (together with the Nonoffered
Certificates) represent the purchase price to be paid by the Trust to the
Depositor for the Mortgage Loans. The net proceeds, after funding transaction
costs, will be used to pay down the Seller's warehouse facilities with certain
affiliates of the Underwriters, and any remaining proceeds will be added to the
Seller's general funds and will be available for general corporate purposes.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on November 9, 1995
and is a wholly-owned subsidiary of AMRESCO, INC. The Depositor maintains its
principal offices at 700 N. Pearl, Suite 2400, Dallas, Texas 75201. Neither
the Depositor nor any of its affiliates will insure or guarantee distributions
on the Certificates.
THE MORTGAGE LOAN POOL
GENERAL
The statistical information presented in this Prospectus Supplement
concerning the pool of Mortgage Loans is based on the pool of Statistical
Mortgage Loans as of the Statistical Calculation Date. The pool of Statistical
Mortgage Loans aggregated approximately $748,047,446 as of the Statistical
Calculation Date. Additional Mortgage Loans with an aggregate Loan Balance of
approximately $251,952,554 as of the Closing Date will be purchased by the Trust
for inclusion in the Trust from the Depositor on the Closing Date. It is
expected that some amortization of the Statistical Mortgage Loans will occur
prior to the Closing Date. Moreover, certain loans included in the pool of
Mortgage Loans as of the Statistical Calculation Date may prepay in full, or may
be determined not to meet the eligibility requirements for the final pool, and
may not be included in the final pool. As a result of the foregoing, the
statistical distribution of characteristics for the Statistical Mortgage Loans
as of the Closing Date will vary from the statistical distribution of such
characteristics for the Mortgage Loans as of the Statistical Calculation Date as
presented in this Prospectus Supplement, although such variance will not be
material. Unless otherwise noted, all statistical percentages in this Prospectus
Supplement are measured by the aggregate Loan Balance of the Statistical
Mortgage Loans as of the Statistical Calculation Date.
The Statistical Mortgage Loans and any Qualified Replacement Mortgages are
referred to herein collectively as the "Mortgage Loans."
This subsection describes generally certain characteristics of the
Statistical Mortgage Loans. Unless otherwise specified herein, references herein
to percentages of Loan Balances relating to the Statistical Mortgage Loans refer
in each case to the
S-32
<PAGE>
approximate percentage of the aggregate Loan Balance of the Statistical Mortgage
Loans as of the Statistical Calculation Date, based on the scheduled principal
balances of the Statistical Mortgage Loans as of the Statistical Calculation
Date, after giving effect to all principal payments due on or prior to the
Statistical Calculation Date. The Statistical Mortgage Loans consist of fixed
rate and adjustable rate Mortgage Loans with remaining terms to maturity of not
more than 360 months (including both fully amortizing Mortgage Loans and Balloon
Mortgage Loans). The Statistical Mortgage Loans have the characteristics set
forth below as of the Statistical Calculation Date. Percentages expressed herein
based on Loan Balances and number of Statistical Mortgage Loans have been
rounded, and in the tables set forth herein the sum of the percentages may not
equal the respective totals due to such rounding.
Each Mortgage Loan in the Trust will be assigned to one of two mortgage
loan groups consisting of Mortgage Loans which bear fixed rates only, in the
case of Group I, and Mortgage Loans which bear adjustable interest rates
(including 2/28 Loans, 3/27 Loans, 5/25 Loans and the CMT Loans) and fixed
rates, in the case of Group II. The Group I Certificates represent undivided
ownership interests in all Mortgage Loans contained in Group I, and
distributions on Group I Certificates will be based primarily on amounts
available for distribution in respect of Mortgage Loans in Group I. The Group II
Certificates represent undivided ownership interests in all Mortgage Loans
contained in Group II, and distributions on Group II Certificates will be based
primarily on amounts available for distribution in respect of Mortgage Loans in
Group II.
The Combined Loan-to-Value Ratios with respect to Mortgage Loans in Group I
and the Loan-to-Value Ratios with respect to Mortgage Loans in Group II were
calculated in accordance with the definitions of Combined Loan-to-Value Ratio
and Loan-to-Value Ratio, respectively, as set forth under "Summary of Terms -
The Mortgage Loans" herein. No assurance can be given that values of the
Mortgaged Properties have remained or will remain at their levels on the dates
of origination of the related Mortgage Loans. If the residential real estate
market has experienced or should experience an overall decline in property
values such that the outstanding balance of any Mortgage Loan becomes equal to
or greater than the value of the Mortgaged Property, the actual rates of
delinquencies, foreclosures and losses could be higher than those now generally
experienced in the mortgage lending industry.
All of the Mortgage Loans are "Actuarial Loans", which provide that
interest is charged to the Mortgagors thereunder, and payments are due from such
Mortgagors, as of a scheduled day of each month which is fixed at the time of
origination. Scheduled monthly payments made by the Mortgagors on the Actuarial
Loans either earlier or later than the scheduled due dates thereof will not
affect the amortization schedule or the relative application of such payments to
principal and interest.
STATISTICAL MORTGAGE LOANS -- GROUP I
The information set forth with respect to Group I is based upon data
provided to the Depositor by each of the related Originators and has been
compiled by the Depositor. Neither the Depositor, the Master Servicer, the
Seller and the Special Servicer, the Servicer, the Underwriters, the
Originators, Freddie Mac nor any of their respective affiliates have made or
will have made any representation as to the accuracy or completeness of such
compiled information.
As of the Statistical Calculation Date, the average Loan Balance of the
Statistical Mortgage Loans in Group I was approximately $71,953; the weighted
average Combined Loan-to-Value Ratio of the Statistical Mortgage Loans in Group
I was 74.14%; the weighted average remaining term to maturity was approximately
327 months; the weighted average original term to maturity was approximately 328
months. The remaining terms to maturity as of the Statistical Calculation Date
of the Statistical Mortgage Loans in Group I ranged from 55 months to 360
months. The minimum and maximum Loan Balances of the Statistical Mortgage Loans
in Group I as of the Statistical Calculation Date were approximately $9,064 and
$430,989, respectively. Balloon Mortgage Loans in Group I represent not more
than 2.66% of the aggregate Loan Balance of the Statistical Mortgage Loans in
Group I as of the Statistical Calculation Date. 97.51% of the Statistical
Mortgage Loans in Group I as of the Statistical Calculation Date are secured by
first lien mortgages or deeds of trust. No Statistical Mortgage Loan in Group I
as of the Statistical Calculation Date will mature later than September 1, 2028.
All of the Statistical Mortgage Loans in Group I as of the Statistical
Calculation Date bear interest at a fixed rate for the life of the Mortgage
Loans. The Statistical Mortgage Loans in Group I as of the Statistical
Calculation Date consist of Mortgage Loans aggregating approximately
$170,456,319. The Coupon Rates of the Statistical Mortgage Loans in Group I as
of the Statistical Calculation Date, ranged from 6.500% per annum to 16.500% per
annum. The weighted average Coupon Rate of the Statistical Mortgage Loans in
Group I was 10.035% per annum as of the Statistical Calculation Date.
Certain columns may not add up to 100% due to rounding.
S-33
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- STATISTICAL MORTGAGE
LOANS - GROUP I
The geographic distribution of Statistical Mortgage Loans in Group I by
state, as of the Statistical Calculation Date, was as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I GROUP I GROUP I
GEOGRAPHIC AREA MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- --------------- -------------- --------------- ---------------
Arizona 33 $ 1,613,104.23 0.95%
Arkansas 75 3,525,076.21 2.07
California 325 29,920,082.79 17.55
Colorado 30 2,246,466.35 1.32
Connecticut 20 1,866,347.09 1.09
Delaware 1 68,525.15 0.04
District of Columbia 9 778,490.23 0.46
Florida 238 16,892,706.61 9.91
Georgia 64 4,712,283.31 2.76
Hawaii 130 20,530,233.17 12.04
Idaho 6 640,264.73 0.38
Illinois 54 3,109,841.34 1.82
Indiana 64 2,923,850.22 1.72
Iowa 4 153,844.07 0.09
Kansas 5 222,084.06 0.13
Kentucky 13 879,796.38 0.52
Louisiana 29 1,749,045.87 1.03
Maine 3 224,391.55 0.13
Maryland 113 8,083,126.12 4.74
Massachusetts 28 2,615,274.27 1.53
Michigan 64 3,597,711.28 2.11
Minnesota 16 710,233.15 0.42
Mississippi 39 1,678,119.55 0.98
Missouri 48 2,266,865.50 1.33
Montana 2 175,100.92 0.10
Nebraska 2 86,202.93 0.05
Nevada 17 1,744,550.48 1.02
New Hampshire 6 327,971.99 0.19
New Jersey 13 1,085,159.18 0.64
New Mexico 9 552,801.55 0.32
New York 23 2,069,001.73 1.21
North Carolina 63 3,543,806.03 2.08
Ohio 162 9,421,923.47 5.53
Oklahoma 44 2,134,809.23 1.25
Oregon 38 3,082,570.81 1.81
Pennsylvania 135 8,346,038.60 4.90
Rhode Island 2 280,998.03 0.16
South Carolina 16 595,552.21 0.35
Tennessee 49 2,540,087.80 1.49
Texas 260 15,374,897.25 9.02
Utah 29 2,101,925.90 1.23
Vermont 1 56,779.12 0.03
Virginia 27 1,973,874.44 1.16
Washington 16 1,534,058.75 0.90
West Virginia 3 133,525.04 0.08
Wisconsin 37 1,961,017.67 1.15
Wyoming 4 325,902.55 0.19
----- --------------- ------
Total 2,369 $170,456,318.91 100.00%
===== =============== ======
S-34
<PAGE>
ORIGINAL COMBINED LOAN-TO-VALUE RATIOS -- STATISTICAL MORTGAGE LOANS -
GROUP I
The original Combined Loan-to-Value Ratios of the Statistical Mortgage
Loans in Group I as of the Statistical Calculation Date were distributed as
follows:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I GROUP I GROUP I
RANGE OF CLTVS (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- -------------------- -------------- --------------- ---------------
10.01 to 20.00 10 $ 359,439.45 0.21%
20.01 to 30.00 31 1,231,379.51 0.72
30.01 to 40.00 52 2,718,214.85 1.59
40.01 to 50.00 102 6,065,259.60 3.56
50.01 to 60.00 192 10,165,185.72 5.96
60.01 to 70.00 569 36,239,435.37 21.26
70.01 to 75.00 340 25,987,462.18 15.25
75.01 to 80.00 470 34,182,149.55 20.05
80.01 to 85.00 300 25,707,946.26 15.08
85.01 to 90.00 191 17,625,608.34 10.34
90.01 to 95.00 112 10,174,238.08 5.97
----- --------------- ------
Total 2,369 $170,456,318.91 100.00%
===== =============== ======
STATISTICAL CALCULATION DATE COUPON RATES -- STATISTICAL MORTGAGE LOANS -
GROUP I
The Coupon Rates of the Notes relating to the Statistical Mortgage Loans in
Group I as of the Statistical Calculation Date were distributed as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF GROUP I GROUP I GROUP I
COUPON RATES (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- -------------------- -------------- --------------- ---------------
6.500 to 7.000 7 $ 1,483,895.25 0.87%
7.001 to 7.500 17 3,024,710.68 1.77
7.501 to 8.000 127 13,986,906.01 8.21
8.001 to 8.250 67 7,253,975.17 4.26
8.251 to 8.500 71 7,859,717.91 4.61
8.501 to 8.750 89 8,795,719.82 5.16
8.751 to 9.000 119 10,730,610.60 6.30
9.001 to 9.250 84 7,605,179.55 4.46
9.251 to 9.500 97 7,026,415.37 4.12
9.501 to 9.750 131 10,941,261.98 6.42
9.751 to 10.000 191 14,546,128.93 8.53
10.001 to 10.250 118 8,028,242.40 4.71
10.251 to 10.500 144 9,837,106.16 5.77
10.501 to 10.750 158 9,903,621.54 5.81
10.751 to 11.000 147 8,984,423.26 5.27
11.001 to 11.250 105 5,629,736.72 3.30
11.251 to 11.500 91 5,147,760.75 3.02
11.501 to 11.750 106 5,448,663.19 3.20
11.751 to 12.000 105 5,197,137.64 3.05
12.001 to 13.000 233 10,975,632.56 6.44
13.001 to 14.000 113 5,311,918.91 3.12
14.001 to 15.000 42 2,467,145.63 1.45
15.001 to 16.000 6 210,939.94 0.12
16.001 to 17.000 1 59,468.94 0.03
----- --------------- ------
Total 2,369 $170,456,318.91 100.00%
===== =============== ======
S-35
<PAGE>
STATISTICAL CALCULATION DATE LOAN BALANCES -- STATISTICAL MORTGAGE LOANS
- GROUP I
The distribution of the scheduled principal balances of the Statistical
Mortgage Loans in Group I as of the Statistical Calculation Date was as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I GROUP I GROUP I
RANGE OF LOAN BALANCES ($) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- --------------------------- -------------- --------------- ---------------
5,000.01 to 10,000.00 7 $ 68,390.55 0.04%
10,000.01 to 15,000.00 21 277,798.18 0.16
15,000.01 to 20,000.00 71 1,334,258.47 0.78
20,000.01 to 25,000.00 134 3,082,012.29 1.81
25,000.01 to 30,000.00 156 4,340,654.40 2.55
30,000.01 to 35,000.00 166 5,435,542.24 3.19
35,000.01 to 40,000.00 165 6,232,979.72 3.66
40,000.01 to 45,000.00 130 5,540,417.26 3.25
45,000.01 to 50,000.00 151 7,186,732.79 4.22
50,000.01 to 55,000.00 124 6,544,667.88 3.84
55,000.01 to 60,000.00 125 7,204,035.15 4.23
60,000.01 to 65,000.00 104 6,523,674.87 3.83
65,000.01 to 70,000.00 95 6,443,659.18 3.78
70,000.01 to 75,000.00 75 5,480,408.40 3.22
75,000.01 to 80,000.00 75 5,815,146.47 3.41
80,000.01 to 85,000.00 77 6,358,497.89 3.73
85,000.01 to 90,000.00 62 5,417,802.41 3.18
90,000.01 to 95,000.00 57 5,278,466.32 3.10
95,000.01 to 100,000.00 68 6,634,587.57 3.89
100,000.01 to 105,000.00 51 5,223,930.56 3.06
105,000.01 to 110,000.00 44 4,719,591.59 2.77
110,000.01 to 115,000.00 35 3,932,880.83 2.31
115,000.01 to 120,000.00 35 4,135,591.63 2.43
120,000.01 to 125,000.00 39 4,772,759.43 2.80
125,000.01 to 130,000.00 28 3,575,825.92 2.10
130,000.01 to 135,000.00 28 3,716,458.99 2.18
135,000.01 to 140,000.00 20 2,759,280.12 1.62
140,000.01 to 145,000.00 20 2,856,541.98 1.68
145,000.01 to 150,000.00 16 2,369,121.76 1.39
150,000.01 to 160,000.00 29 4,520,959.92 2.65
160,000.01 to 170,000.00 29 4,783,648.38 2.81
170,000.01 to 180,000.00 21 3,673,846.15 2.16
180,000.01 to 190,000.00 28 5,187,315.66 3.04
190,000.01 to 200,000.00 17 3,320,469.64 1.95
200,000.01 to 210,000.00 18 3,688,033.28 2.16
210,000.01 to 220,000.00 18 3,892,325.61 2.28
220,000.01 to 230,000.00 8 1,791,818.54 1.05
230,000.01 to 240,000.00 3 712,261.35 0.42
240,000.01 to 250,000.00 3 732,802.16 0.43
250,000.01 to 300,000.00 9 2,467,422.32 1.45
300,000.01 to 350,000.00 5 1,578,032.84 0.93
400,000.01 to 450,000.00 2 845,668.21 0.50
----- --------------- ------
Total 2,369 $170,456,318.91 100.00%
===== =============== ======
S-36
<PAGE>
TYPES OF MORTGAGED PROPERTIES -- STATISTICAL MORTGAGE LOANS - GROUP I
The Mortgaged Properties securing the Statistical Mortgage Loans in Group I
as of the Statistical Calculation Date had the following property types:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I GROUP I GROUP I
PROPERTY TYPES MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ----------------------- -------------- --------------- ---------------
Single Family Residence 1,967 $136,278,814.19 79.95%
Two- to Four-Family 158 14,078,422.66 8.26
PUD 113 10,136,334.24 5.95
Condominium 112 9,014,818.46 5.29
Manufactured Housing 19 947,929.36 0.56
----- --------------- ------
Total 2,369 $170,456,318.91 100.00%
===== =============== ======
MONTHS ELAPSED SINCE ORIGINATION -- STATISTICAL MORTGAGE LOANS - GROUP I
The distribution of the number of months since the date of origination of
the Statistical Mortgage Loans in Group I as of the Statistical Calculation Date
was as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS ELAPSED GROUP I GROUP I GROUP I
SINCE ORIGINATION MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ----------------- -------------- --------------- --------------
0 1,614 $119,412,565.38 70.05%
1 to 6 718 48,869,700.07 28.67
7 to 12 36 2,137,548.71 1.25
13 to 18 1 36,504.75 0.02
----- --------------- ------
Total 2,369 $170,456,318.91 100.00%
===== =============== ======
REMAINING TERM TO MATURITY -- STATISTICAL MORTGAGE LOANS - GROUP I
The distribution of the number of months remaining to maturity of the
Statistical Mortgage Loans in Group I as of the Statistical Calculation Date was
as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS REMAINING GROUP I GROUP I GROUP I
TO MATURITY MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ----------- -------------- --------------- --------------
1 to 60 3 $ 42,009.18 0.02%
61 to 120 15 624,889.99 0.37
121 to 180 574 27,188,378.42 15.95
181 to 240 58 3,171,472.08 1.86
241 to 300 2 196,341.87 0.12
301 to 360 1,717 139,233,227.37 81.68
----- --------------- ------
Total 2,369 $170,456,318.91 100.00%
===== =============== ======
S-37
<PAGE>
OCCUPANCY STATUS -- STATISTICAL MORTGAGE LOANS - GROUP I
The occupancy status of the Mortgaged Properties securing the Statistical
Mortgage Loans in Group I as of the Statistical Calculation Date based on
representations by the Mortgagors at the time of origination of such Mortgage
Loans was as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP I GROUP I GROUP I
OCCUPANCY STATUS MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ------------------ -------------- --------------- ---------------
Owner Occupied 2,038 $149,954,164.45 87.97%
Non Owner Occupied 331 20,502,154.46 12.03
----- --------------- ------
Total 2,369 $170,456,318.91 100.00%
===== =============== ======
STATISTICAL MORTGAGE LOANS - GROUP II
The information set forth with respect to Group II is based upon data
provided to the Depositor by each of the related Originators and has been
compiled by the Depositor. Neither the Depositor, the Master Servicer, Seller
and Special Servicer, the Servicer, the Underwriters, the Originators nor any of
their respective affiliates have made or will have made any representation as to
the accuracy or completeness of such compiled information.
As of the Statistical Calculation Date, the average scheduled Loan Balance
of the Statistical Mortgage Loans in Group II was approximately $114,488; the
Coupon Rates of the Statistical Mortgage Loans in Group II ranged from 5.625%
per annum to 16.050% per annum; the weighted average Coupon Rate of the
Statistical Mortgage Loans in Group II was 9.838% per annum; the weighted
average original Loan-to-Value Ratio of the Statistical Mortgage Loans in Group
II determined as of the date of origination was 78.75%; the weighted average
remaining term to maturity was approximately 355 months; and the weighted
average original term to maturity was approximately 358 months. The remaining
terms to maturity as of the Statistical Calculation Date of the Statistical
Mortgage Loans in Group II ranged from 174 months to 360 months. The minimum and
maximum Loan Balances of the Statistical Mortgage Loans in Group II as of the
Statistical Calculation Date were approximately $10,363 and $597,096,
respectively. No Initial Mortgage Loan in Group II as of the Statistical
Calculation Date will mature later than September 1, 2028.
96.68% of the Statistical Mortgage Loans in Group II have maximum Coupon
Rates. The weighted average maximum Coupon Rate of such Statistical Mortgage
Loans in Group II as of the Statistical Calculation Date was 16.540% per annum,
with maximum Coupon Rates that range from 11.300% per annum to 23.050% per
annum. As of the Statistical Calculation Date, the weighted average minimum
Coupon Rate of such Statistical Mortgage Loans in Group II was 9.842% per annum,
with minimum Coupon Rates that range from 5.625% per annum to 16.050% per annum.
Such Statistical Mortgage Loans in Group II have a weighted average gross margin
as of the Statistical Calculation Date of 6.235%. The gross margin for such
Statistical Mortgage Loans in Group II as of the Statistical Calculation Date
ranges from 2.500% to 10.300%.
15.53% of the Statistical Mortgage Loans in Group II as of the Statistical
Calculation Date are Six-Month LIBOR Loans that bear interest at rates that
adjust, along with the related monthly payments, semiannually based on Six-Month
LIBOR. As of the Statistical Calculation Date, 81.66% and 18.34% of the
Six-Month LIBOR Loans have a semiannual reset cap of 1.000% and 1.500%,
respectively. All of such Mortgage Loans as of the Statistical Calculation Date
have lifetime reset caps ranging from 11.625% to 22.750%. The Six-Month LIBOR
Loans consist of Statistical Mortgage Loans as of the Statistical Calculation
Date aggregating approximately $89,705,718.
67.29% of the Statistical Mortgage Loans in Group II as of the Statistical
Calculation Date are 2/28 Loans that bear interest at a fixed rate of interest
for a period of approximately two years after origination and thereafter have
semiannual interest rate and payment adjustments at the same frequencies and in
the same manner as the Six-Month LIBOR Loans. As of the Statistical Calculation
Date, 85.81%, 14.01% and 0.18% of the 2/28 Loans have a semiannual reset cap of
1.000%, 1.500% and 3.000%, respectively. All of such Mortgage Loans as of the
Statistical Calculation Date have lifetime reset caps ranging from 11.300% to
22.500%. The 2/28 Loans consist of Statistical Mortgage Loans as of the
Statistical Calculation Date aggregating approximately $388,679,950.
7.22% of the Statistical Mortgage Loans in Group II as of the Statistical
Calculation Date are 3/27 Loans that bear interest at a fixed rate of interest
for a period of approximately three years after origination and thereafter have
semiannual interest rate and payment adjustments at the same frequencies and in
the same manner as the Six-Month LIBOR Loans. As of the Statistical Calculation
Date, 60.75% and 39.25% of the 3/27 Loans have a semiannual reset cap of 1.000%
and 1.500%, respectively. All of such Mortgage Loans as of the Statistical
Calculation Date have lifetime reset caps ranging from 14.450% to 23.050%. The
3/27 Loans consist of Statistical Mortgage Loans aggregating approximately
$41,718,906 as of the Statistical Calculation Date.
S-38
<PAGE>
6.59% of the Statistical Mortgage Loans in Group II as of the Statistical
Calculation Date are 5/25 Loans that bear interest at a fixed rate for a period
of five years after origination and thereafter have semiannual interest rate and
payment adjustments at frequencies and in the same manner as the Six-Month LIBOR
Loans. As of the Statistical Calculation Date, 5.78% and 94.22% of the 5/25
Loans have a semiannual reset cap of 1.000% and 1.500%, respectively. All of
such Mortgage Loans as of the Statistical Calculation Date have lifetime reset
caps ranging from 14.450% to 20.010%. The 5/25 Loans consist of Statistical
Mortgage Loans as of the Statistical Calculation Date aggregating approximately
$38,082,460.
3.32% of the Statistical Mortgage Loans in Group II as of the Statistical
Calculation Date bear interest at a fixed rate for the life of such Statistical
Mortgage Loans. Such fixed rate loans consist of Statistical Mortgage Loans as
of the Statistical Calculation Date aggregating approximately $19,198,393.
0.02% of the Statistical Mortgage Loans in Group II as of the Statistical
Calculation Date bear interest at a fixed rate of interest for a period of one
year after the origination and thereafter have semiannual interest rate and
payment adjustments at frequencies and in the same manner as the Six-Month LIBOR
Loans. Such Statistical Mortgage Loans as of the Statistical Calculation Date
aggregated approximately $104,804.
0.01% of the Statistical Mortgage Loans in Group II as of the Statistical
Calculation Date are CMT Loans that bear interest at a rate that adjusts
annually based on the weekly average yield on United States treasury securities
adjusted to a constant maturity of one year. The CMT Loans consist of
Statistical Mortgage Loans aggregating approximately $75,022.
Certain columns may not add up to 100% due to rounding.
S-39
<PAGE>
GEOGRAPHIC DISTRIBUTION OF MORTGAGED PROPERTIES -- STATISTICAL MORTGAGE
LOANS - GROUP II
The geographic distribution of Statistical Mortgage Loans in Group II by
state, as of the Statistical Calculation Date, was as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II GROUP II GROUP II
GEOGRAPHIC AREA MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ---------------------- -------------- --------------- ---------------
Alaska 7 $ 792,631.41 0.14%
Arizona 150 15,851,876.70 2.74
Arkansas 21 1,754,775.88 0.30
California 915 155,110,034.03 26.85
Colorado 182 19,790,938.07 3.43
Connecticut 50 7,225,099.79 1.25
Delaware 7 584,174.82 0.10
District of Columbia 14 1,645,687.92 0.28
Florida 361 34,958,886.24 6.05
Georgia 67 6,878,195.12 1.19
Hawaii 52 13,728,193.73 2.38
Idaho 21 2,219,165.51 0.38
Illinois 410 41,958,614.03 7.26
Indiana 114 8,057,774.86 1.40
Iowa 21 1,094,411.49 0.19
Kansas 18 1,247,861.93 0.22
Kentucky 29 2,265,656.78 0.39
Louisiana 22 1,896,557.27 0.33
Maine 7 719,719.22 0.12
Maryland 99 11,887,918.58 2.06
Massachusetts 128 16,196,678.94 2.80
Michigan 135 10,822,091.50 1.87
Minnesota 89 9,338,058.92 1.62
Mississippi 21 1,436,049.05 0.25
Missouri 132 9,837,235.73 1.70
Montana 16 1,313,688.26 0.23
Nebraska 6 259,812.76 0.04
Nevada 73 8,761,581.53 1.52
New Hampshire 35 3,112,160.61 0.54
New Mexico 49 5,579,209.82 0.97
New Jersey 113 15,272,219.11 2.64
New York 55 6,768,712.60 1.17
North Carolina 117 9,072,628.86 1.57
North Dakota 1 73,161.81 0.01
Ohio 356 28,868,969.12 5.00
Oklahoma 22 1,809,720.76 0.31
Oregon 151 19,334,248.69 3.35
Pennsylvania 131 10,783,508.43 1.87
Rhode Island 30 2,612,821.80 0.45
South Carolina 25 1,974,591.95 0.34
South Dakota 2 191,081.26 0.03
Tennessee 50 4,294,218.64 0.74
Texas 222 22,604,987.47 3.91
Utah 156 20,316,316.27 3.52
Vermont 2 190,422.90 0.03
Virginia 29 3,299,044.69 0.57
Washington 210 25,932,196.79 4.49
West Virginia 8 360,972.10 0.06
Wisconsin 109 7,048,154.76 1.22
Wyoming 5 458,408.26 0.08
----- --------------- ------
Total 5,045 $577,591,126.77 100.00%
===== =============== ======
S-40
<PAGE>
ORIGINAL LOAN-TO-VALUE RATIOS -- STATISTICAL MORTGAGE LOANS - GROUP II
The original Loan-to-Value Ratios of the Statistical Mortgage Loans in
Group II as of the Statistical Calculation Date were distributed as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF GROUP II GROUP II GROUP II
ORIGINAL LTVS (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ------------------- -------------- --------------- ---------------
10.01 to 20.00 4 $ 294,263.27 0.05%
20.01 to 30.00 19 852,792.77 0.15
30.01 to 40.00 37 2,504,974.62 0.43
40.01 to 50.00 80 5,938,495.19 1.03
50.01 to 60.00 224 19,659,950.15 3.40
60.01 to 70.00 845 83,504,955.58 14.46
70.01 to 80.00 1,975 228,704,823.99 39.60
80.01 to 90.00 1,656 210,439,921.28 36.43
90.01 to 100.00 205 25,690,949.92 4.45
----- --------------- ------
Total 5,045 $577,591,126.77 100.00%
===== =============== ======
STATISTICAL CALCULATION DATE COUPON RATES -- STATISTICAL MORTGAGE LOANS -
GROUP II
The Coupon Rates of the Notes relating to the Statistical Mortgage Loans in
Group II as of the Statistical Calculation Date were distributed as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
RANGE OF GROUP II GROUP II GROUP II
COUPON RATES (%) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- -------------------- -------------- --------------- ---------------
5.501 to 7.000 31 $ 4,739,804.98 0.82%
7.001 to 7.500 49 8,535,105.53 1.48
7.751 to 8.000 152 25,288,685.64 4.38
8.001 to 8.250 87 13,422,012.56 2.32
8.251 to 8.500 211 31,614,699.10 5.47
8.501 to 8.750 195 26,994,979.93 4.67
8.751 to 9.000 366 50,005,013.20 8.66
9.001 to 9.250 246 32,496,291.92 5.63
9.251 to 9.500 410 52,495,993.57 9.09
9.501 to 9.750 359 42,628,771.57 7.38
9.751 to 10.000 561 65,766,985.33 11.39
10.001 to 10.250 316 34,596,648.98 5.99
10.251 to 10.500 382 39,832,982.92 6.90
10.501 to 10.750 360 34,385,860.26 5.95
10.751 to 11.000 379 36,141,224.94 6.26
11.001 to 11.250 194 15,540,241.45 2.69
11.251 to 11.500 182 15,302,751.96 2.65
11.501 to 11.750 144 12,192,214.19 2.11
11.751 to 12.000 122 11,477,621.92 1.99
12.001 to 13.000 201 16,727,113.81 2.90
13.001 to 14.000 63 5,024,126.02 0.87
14.001 to 15.000 31 1,972,044.43 0.34
15.001 to 16.000 3 362,374.51 0.06
16.001 to 17.000 1 47,578.05 0.01
----- --------------- ------
Total 5,045 $577,591,126.77 100.00%
===== =============== ======
S-41
<PAGE>
STATISTICAL CALCULATION DATE LOAN BALANCES -- STATISTICAL MORTGAGE LOANS
- GROUP II
The distribution of the scheduled principal balances of the Statistical
Mortgage Loans in Group II as of the Statistical Calculation Date was as
follows:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II GROUP II GROUP II
RANGE OF LOAN BALANCES ($) MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ---------------------------- -------------- --------------- ---------------
10,000.01 to 15,000.00 3 $ 39,642.64 0.01%
15,000.01 to 20,000.00 14 262,116.92 0.05
20,000.01 to 25,000.00 62 1,420,536.86 0.25
25,000.01 to 30,000.00 84 2,312,469.73 0.40
30,000.01 to 35,000.00 127 4,158,832.09 0.72
35,000.01 to 40,000.00 147 5,567,313.85 0.96
40,000.01 to 45,000.00 156 6,698,988.70 1.16
45,000.01 to 50,000.00 204 9,794,181.62 1.70
50,000.01 to 55,000.00 201 10,578,536.57 1.83
55,000.01 to 60,000.00 231 13,307,267.81 2.30
60,000.01 to 65,000.00 191 11,996,048.68 2.08
65,000.01 to 70,000.00 226 15,345,972.88 2.66
70,000.01 to 75,000.00 211 15,278,060.67 2.65
75,000.01 to 80,000.00 182 14,130,295.71 2.45
80,000.01 to 85,000.00 199 16,435,149.15 2.85
85,000.01 to 90,000.00 213 18,696,767.66 3.24
90,000.01 to 95,000.00 136 12,562,051.70 2.17
95,000.01 to 100,000.00 186 18,154,288.47 3.14
100,000.01 to 105,000.00 155 15,913,197.22 2.76
105,000.01 to 110,000.00 131 14,058,291.30 2.43
110,000.01 to 115,000.00 148 16,685,889.26 2.89
115,000.01 to 120,000.00 141 16,572,939.14 2.87
120,000.01 to 125,000.00 103 12,614,298.56 2.18
125,000.01 to 130,000.00 112 14,265,483.12 2.47
130,000.01 to 135,000.00 113 14,992,790.09 2.60
135,000.01 to 140,000.00 96 13,225,613.87 2.29
140,000.01 to 145,000.00 82 11,714,698.79 2.03
145,000.01 to 150,000.00 66 9,721,678.74 1.68
150,000.01 to 160,000.00 122 18,894,341.42 3.27
160,000.01 to 170,000.00 118 19,448,266.22 3.37
170,000.01 to 180,000.00 113 19,774,324.70 3.42
180,000.01 to 190,000.00 91 16,869,330.82 2.92
190,000.01 to 200,000.00 82 16,039,352.57 2.78
200,000.01 to 210,000.00 61 12,501,211.17 2.16
210,000.01 to 220,000.00 50 10,752,055.20 1.86
220,000.01 to 230,000.00 51 11,474,979.23 1.99
230,000.01 to 240,000.00 51 11,996,362.39 2.08
240,000.01 to 250,000.00 35 8,601,611.54 1.49
250,000.01 to 300,000.00 173 47,063,919.99 8.15
300,000.01 to 350,000.00 75 24,260,345.10 4.20
350,000.01 to 400,000.00 46 17,102,655.93 2.96
400,000.01 to 450,000.00 28 12,066,193.05 2.09
450,000.01 to 500,000.00 24 11,421,054.85 1.98
500,000.01 to 600,000.00 5 2,821,720.79 0.49
----- --------------- ------
Total 5,045 $577,591,126.77 100.00%
===== =============== ======
S-42
<PAGE>
TYPES OF MORTGAGED PROPERTIES -- STATISTICAL MORTGAGE LOANS - GROUP II
The Mortgaged Properties securing the Statistical Mortgage Loans in Group
II as of the Statistical Calculation Date had the following property types:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II GROUP II GROUP II
PROPERTY TYPES MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ----------------------- --------------- --------------- ---------------
Single Family Residence 4,119 $468,000,228.65 81.03%
Two- to Four-Family 417 48,059,590.34 8.32
PUD 246 36,377,219.14 6.30
Condominium 201 20,644,729.63 3.57
Manufactured Housing 62 4,509,359.01 0.78
----- --------------- ------
Total 5,045 $577,591,126.77 100.00%
===== =============== ======
MONTHS SINCE ORIGINATION -- STATISTICAL MORTGAGE LOANS - GROUP II
The distribution of the number of months since the date of origination of
the Statistical Mortgage Loans in Group II as of the Statistical Calculation
Date was as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS ELAPSED GROUP II GROUP II GROUP II
SINCE ORIGINATION MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ----------------- -------------- --------------- ---------------
0 1,195 $137,487,088.32 23.80%
1 to 6 3,556 408,504,919.88 70.73
7 to 12 289 31,289,033.95 5.42
13 to 18 4 221,081.59 0.04
19 to 24 1 89,003.03 0.02
----- --------------- ------
Total 5,045 $577,591,126.77 100.00%
===== =============== ======
REMAINING TERM TO MATURITY -- STATISTICAL MORTGAGE LOANS - GROUP II
The distribution of the number of months remaining to maturity of the
Statistical Mortgage Loans in Group II as of the Statistical Calculation Date
was as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
MONTHS REMAINING GROUP II GROUP II GROUP II
TO MATURITY MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ---------------- -------------- --------------- --------------
121 to 180 44 $ 4,733,017.04 0.82%
181 to 240 3 380,608.12 0.07
241 to 300 4 397,727.10 0.07
301 to 360 4,994 572,079,774.51 99.05
----- --------------- ------
Total 5,045 $577,591,126.77 100.00%
===== =============== ======
S-43
<PAGE>
OCCUPANCY STATUS -- STATISTICAL MORTGAGE LOANS - GROUP II
The occupancy status of the Mortgaged Properties securing the Statistical
Mortgage Loans in Group II as of the Statistical Calculation Date based on
representations by the mortgagors at the time of origination of such Mortgage
Loans was as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II GROUP II GROUP II
OCCUPANCY STATUS MORTGAGE LOANS LOAN BALANCE LOAN BALANCE
- ------------------- -------------- --------------- --------------
Owner Occupied 4,456 $523,406,293.51 90.62%
Non Owner Occupied 589 54,184,833.26 9.38
----- --------------- ------
Total 5,045 $577,591,126.77 100.00%
===== =============== ======
MARGINS - STATISTICAL MORTGAGE LOANS - GROUP II
The margins borne by the Notes relating to the Statistical Mortgage Loans
in Group II as of the Statistical Calculation Date were as follows:
NUMBER OF AGGREGATE % OF AGGREGATE
GROUP II GROUP II GROUP II
MARGINS (%) MORTGAGE LOANS/(1)/ LOAN BALANCE/(1)/ LOAN BALANCE/(1)/
--------------- ------------------- ---------------- ----------------
1.001 to 2.500 1 $ 55,262.87 0.01%
3.501 to 4.000 2 564,690.14 0.10
4.001 to 4.500 29 3,248,492.76 0.58
4.501 to 5.000 249 29,372,109.57 5.26
5.001 to 5.500 866 104,601,935.56 18.73
5.501 to 6.000 1,089 130,638,713.66 23.40
6.001 to 6.500 1,113 119,613,737.66 21.42
6.501 to 7.000 827 89,945,005.85 16.11
7.001 to 7.500 425 43,652,910.10 7.82
7.501 to 8.000 218 19,941,124.69 3.57
8.001 to 8.500 97 10,128,440.04 1.81
8.501 to 9.000 44 3,843,431.00 0.69
9.001 to 9.500 18 2,157,521.22 0.39
9.501 to 10.000 6 537,351.03 0.10
10.001 to 10.500 2 92,007.55 0.02
----- --------------- ------
Total 4,986 $558,392,733.70 100.00%
===== =============== ======
- ---------------
/(1)/ The information in this table relates only to the adjustable rate
Mortgage Loans in Group II.
S-44
<PAGE>
MAXIMUM COUPON RATES -- STATISTICAL MORTGAGE LOANS - GROUP II
The maximum Coupon Rates borne by the Notes relating to the Statistical
Mortgage Loans in Group II as of the Statistical Calculation Date were as
follows:
NUMBER OF AGGREGATE % OF AGGREGATE
MAXIMUM GROUP II GROUP II GROUP II
COUPON RATES (%) MORTGAGE LOANS/(1)/ LOAN BALANCE/(1)/ LOAN BALANCE/(1)/
- ------------------ ------------------- ----------------- ------------------
11.001 to 11.500 1 $ 99,809.32 0.02%
11.501 to 12.000 1 56,008.74 0.01
12.001 to 12.500 10 1,193,548.73 0.21
12.501 to 13.000 21 3,099,127.82 0.56
13.001 to 13.500 26 4,529,797.90 0.81
13.501 to 14.000 63 9,616,060.40 1.72
14.001 to 14.500 97 15,387,582.43 2.76
14.501 to 15.000 230 33,963,160.29 6.08
15.001 to 15.500 369 50,230,155.11 9.00
15.501 to 16.000 611 78,968,781.84 14.14
16.001 to 16.500 740 91,593,445.20 16.40
16.501 to 17.000 856 92,888,626.85 16.63
17.001 to 17.500 726 70,078,072.88 12.55
17.501 to 18.000 536 50,811,956.32 9.10
18.001 to 18.500 290 22,457,683.03 4.02
18.501 to 19.000 185 16,566,548.42 2.97
19.001 to 19.500 81 6,251,073.10 1.12
19.501 to 20.000 67 5,113,753.69 0.92
20.001 to 20.500 29 2,205,633.84 0.39
20.501 to 21.000 21 1,658,953.45 0.30
21.001 to 21.500 14 721,030.12 0.13
21.501 to 22.000 8 491,971.66 0.09
22.001 to 22.500 2 257,481.10 0.05
22.501 to 23.000 1 104,893.41 0.02
23.001 to 23.500 1 47,578.05 0.01
----- --------------- ------
Total 4,986 $558,392,733.70 100.00%
===== =============== ======
- ----------------
/(1)/ The information in this table relates only to the adjustable rate
Mortgage Loans in Group II.
S-45
<PAGE>
NEXT RATE ADJUSTMENT DATE -- STATISTICAL MORTGAGE LOANS - GROUP II
Next rate adjustment date for each of the Notes relating to the Statistical
Mortgage Loans in Group II as of the Statistical Calculation Date was as
follows:
NUMBER OF AGGREGATE % OF AGGREGATE
DATE OF NEXT GROUP II GROUP II GROUP II
RATE ADJUSTMENT DATE MORTGAGE LOANS/(1)/ LOAN BALANCE/(1)/ LOAN BALANCE/(1)/
- -------------------- ------------------- ----------------- -----------------
July 1998 109 $ 12,554,221.73 2.25%
August 1998 162 21,599,653.14 3.87
September 1998 190 25,385,987.91 4.55
October 1998 73 8,078,906.01 1.45
November 1998 38 4,559,327.86 0.82
December 1998 71 7,335,928.36 1.31
January 1999 73 7,308,627.86 1.31
February 1999 24 2,701,158.44 0.48
March 1999 3 312,584.14 0.06
April 1999 1 75,021.67 0.01
May 1999 2 100,594.98 0.02
June 1999 3 296,587.78 0.05
July 1999 5 356,532.72 0.06
August 1999 8 795,432.90 0.14
September 1999 13 1,557,692.18 0.28
October 1999 92 9,481,739.49 1.70
November 1999 116 12,700,954.84 2.27
December 1999 458 43,343,649.32 7.76
January 2000 387 42,157,832.71 7.55
February 2000 280 31,464,527.35 5.63
March 2000 390 46,223,195.43 8.28
April 2000 393 43,982,183.78 7.88
May 2000 303 37,718,658.13 6.75
June 2000 232 27,244,209.22 4.88
July 2000 384 42,062,025.94 7.53
August 2000 435 44,268,758.58 7.93
September 2000 66 4,925,375.00 0.88
November 2000 2 260,278.98 0.05
December 2000 16 1,257,668.67 0.23
January 2001 36 5,512,655.31 0.99
February 2001 16 2,516,901.04 0.45
March 2001 47 6,073,562.20 1.09
April 2001 82 8,147,670.31 1.46
May 2001 76 8,033,677.72 1.44
June 2001 80 7,183,269.82 1.29
July 2001 12 1,141,473.55 0.20
August 2001 10 1,591,748.78 0.29
November 2002 1 262,469.77 0.05
December 2002 20 2,053,053.38 0.37
January 2003 250 32,650,353.07 5.85
February 2003 3 207,694.93 0.04
March 2003 6 954,201.28 0.17
April 2003 2 203,557.76 0.04
May 2003 4 376,178.48 0.07
June 2003 5 400,587.27 0.07
July 2003 3 256,327.28 0.05
August 2003 4 718,036.63 0.13
----- --------------- ------
Total 4,986 $558,392,733.70 100.00%
===== =============== ======
- ----------------
/(1)/ The information in this table relates only to the adjustable rate
Mortgage Loans in Group II.
S-46
<PAGE>
PREPAYMENT AND YIELD CONSIDERATIONS
GENERAL
The weighted average life of, and, if purchased at other than par
(disregarding, for purposes of this discussion, the effect on an investor's
yield resulting from the timing of the settlement date and those considerations
discussed below under "Payment Lag Feature of Group I Certificates and Class A-8
Certificates"), the yield to maturity on the Offered Certificates will be
affected by the rate of payment of principal of the Mortgage Loans in the
related Mortgage Loan Group, including for this purpose Prepayments,
liquidations due to defaults, casualties and condemnations, and repurchases by
the Originators of Mortgage Loans. Approximately 73.65% of the Statistical
Mortgage Loans as of the Statistical Calculation Date require the payment of a
fee in connection with certain prepayments which may affect the rate of
principal payment. For a discussion of such provisions, see "The Portfolio of
Mortgage Loans - Prepayment Penalties" herein. In addition, the actual rate of
principal prepayments on pools of mortgage loans is influenced by a variety of
economic, tax, geographic, demographic, social, legal and other factors and has
fluctuated considerably in recent years. In addition, the rate of principal
prepayments may differ among pools of mortgage loans at any time because of
specific factors relating to the mortgage loans in the particular pool,
including, among other things, the age of the mortgage loans, the geographic
locations of the properties securing the loans and the extent of the mortgagors'
equity in such properties, changes in the mortgagors' housing needs, job
transfers and unemployment.
The Mortgage Loans in Group I are fixed rate Mortgage Loans. As with fixed
rate obligations generally, the rate of prepayment on a pool of mortgage loans
with fixed rates such as the Mortgage Loans in Group I are affected by
prevailing market rates for mortgage loans of a comparable term and risk level.
When the market interest rate is below the mortgage coupon, mortgagors may have
an increased incentive to refinance their mortgage loans. Depending on
prevailing market rates, the future outlook for market rates and economic
conditions generally, some mortgagors may sell or refinance mortgaged properties
in order to realize their equity in the mortgaged properties, to meet cash flow
needs or to make other investments.
The Mortgage Loans in Group II consist primarily of adjustable rate mortgage
loans. 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 encourage mortgagors to refinance their adjustable rate mortgage loan
to "lock in" a lower fixed interest rate. However, no assurance can be given as
to the level of prepayments that the Mortgage Loans will experience.
The prepayment behavior of the 2/28 Loans, 3/27 Loans and the 5/25 Loans may
differ from that of the fixed rate Mortgage Loans in Group I. As a 2/28 Loan,
3/27 Loan or 5/25 Loan approaches its initial adjustment date, the borrower may
become more likely to refinance such loan to avoid an increase in the Coupon
Rate, even if fixed rate loans are only available at rates that are slightly
lower or higher than the Coupon Rate before adjustment. The existence of the
applicable periodic rate cap, lifetime cap and lifetime floor also may affect
the likelihood of prepayments resulting from refinancings. In addition, the
delinquency and loss experience on the Mortgage Loans in Group II may differ
from that on the Mortgage Loans in Group I because the amount of the monthly
payments on the Mortgage Loans in Group II are subject to adjustment on each
adjustment date.
The prepayment experience on non-conventional mortgage loans may differ from
that on conventional first mortgage loans, primarily due to the credit quality
of the typical borrower. Because the credit histories of many non-conventional
borrowers may preclude them from other traditional sources of financing, such
borrowers may be less likely to refinance due to a decline in market interest
rates. Non-conventional mortgage loans may experience more prepayments in a
rising interest rate environment as the borrowers' finances are stressed to the
point of default. Prepayments may also affect the yield to the Owners of Group
II Certificates, if the weighted average margins are reduced.
In addition to the foregoing factors affecting the weighted average life of
each Class of the Offered Certificates, the overcollateralization provisions of
the Trust result in an additional reduction of the Certificate Principal
Balances of the related Class A Certificates relative to the amortization of the
related Mortgage Loans in the early months of the transaction. The accelerated
amortization is achieved by the application of the related Monthly Excess
Interest Amount to the payment of the Certificate Principal Balance of the
related Classes of the Offered Certificates. This creates overcollateralization
which results from the excess of the aggregate Loan Balances of the Mortgage
Loans over the Aggregate Certificate Principal Balance. Once the Targeted
Overcollateralization Amount is reached, the application of the Monthly Excess
Interest Amount to pay down principal will cease, unless necessary to maintain
the Overcollateralization Amount at the Targeted Overcollateralization Amount.
Balloon Mortgage Loans. Approximately 2.66% of the aggregate Loan Balance of
the Statistical Mortgage Loans in Group I as of the Statistical Calculation Date
are Balloon Mortgage Loans. Such Balloon Mortgage Loans provide for equal
S-47
<PAGE>
monthly payments, consisting of principal and interest, generally based on a 30-
year amortization schedule, and a single payment of the remaining balance of the
Balloon Mortgage Loan 15 years after origination. Amortization of a Balloon
Mortgage Loan based on a scheduled period that is longer than the term of the
loan results in a remaining principal balance at maturity that is substantially
larger than the regular scheduled payments. The ability of mortgagors to make
payments of Balloon Payments will normally depend on the mortgagor's ability to
obtain refinancing of their Balloon Mortgage Loans. The ability to obtain
refinancing will depend on a number of factors prevailing at the time
refinancing is required, including, without limitation, real estate values, the
mortgagor's financial situation and prevailing mortgage loan interest rates.
Although the Originators sometimes provide refinancing of Balloon Mortgage Loans
and may refinance any Mortgage Loan, they are under no obligation to do so, and
make no representation or warranty that they will do so in the case of any
Mortgage Loan. Delinquencies, if any, in the payment of balloon payments may
delay the date on which the Certificate Principal Balance of one or more Classes
of Group I Certificates is reduced to zero, and may increase the weighted
average lives of such Certificates. Although a low interest rate environment
may facilitate the refinancing of a Balloon Mortgage Loan, the receipt and
reinvestment by Owners of the proceeds in such an environment may produce a
lower return than that previously received in respect of the related Balloon
Mortgage Loan. Conversely, a high interest rate environment may make it more
difficult for the mortgagor to accomplish a refinancing and may result in
delinquencies or defaults.
There are no Balloon Mortgage Loans in Group II.
PREPAYMENT AND YIELD SCENARIOS FOR OFFERED CERTIFICATES
As indicated above, if purchased at other than par, the yield to maturity on
an Offered Certificate will be affected by the rate of the payment of principal
of the Mortgage Loans. If the actual rate of payments on the Mortgage Loans is
slower than the rate anticipated by an investor who purchases an Offered
Certificate at a discount, the actual yield to such investor will be lower than
such investor's anticipated yield. If the actual rate of payments on the
Mortgage Loans is faster than the rate anticipated by an investor who purchases
an Offered Certificate at a premium, the actual yield to such investor will be
lower than such investor's anticipated yield.
The "Final Scheduled Payment Date" for each Class of the Offered Certificates
is set forth in the Summary of Terms hereof. For the Class A-7 and Class A-8
Certificates such dates are the dates on which the Original Certificate
Principal Balance set forth in the Summary of Terms hereof for the related Class
of Offered Certificates would be reduced to zero assuming, among other things,
that no Prepayments are received on the Mortgage Loans, that no Monthly Excess
Interest Amount will be used to make accelerated payments of principal to
holders of the Class A-7 and Class A-8 Certificates, that scheduled monthly
payments of principal and interest on the Mortgage Loans are timely received and
that the Auction Sale is not completed. The Final Scheduled Payment Date for
each Class of Subordinate Certificates is the Payment Date in September 2028.
The weighted average life of each Class of the Offered Certificates is likely to
be shorter than would be the case if payments actually made on the Mortgage
Loans conformed to the foregoing assumptions, and the final Payment Date with
respect to each Class of the Offered Certificates could occur significantly
earlier than the related Final Scheduled Payment Date because (i) Prepayments
are likely to occur, (ii) Monthly Excess Interest Amounts are likely to be used
to make accelerated payments of principal to holders of the related Class A
Group II Certificates, (iii) a termination of the Classes of Certificates in
Group I and Group II may occur when the aggregate outstanding Loan Balance of
the Mortgage Loans in Group I and Group II is less than 10% of the original
aggregate Loan Balance of the Mortgage Loans in Group I and Group II as of the
Cut-Off Date, and (iv) the Servicer and the Special Servicer may purchase all
Mortgage Loans, thereby causing a termination of the Trust, when the aggregate
outstanding Loan Balance of the Mortgage Loans in Group I and Group II is less
than 5% of the original aggregate Loan Balance of the Mortgage Loans in Group I
and Group II as of the Cut-Off Date.
"Weighted average life" refers to the average amount of time that will elapse
from the date of issuance of a security until each dollar of principal of such
security will be repaid to the investor. The weighted average life of any Class
of the Offered Certificates will be influenced by the rate at which principal of
the Mortgage Loans in the related Mortgage Loan Group is paid, which may be in
the form of scheduled amortization or prepayments (for this purpose, the term
"prepayment" includes Prepayments and liquidations due to default).
Each Accrual Period for the Group II Certificates (except for the Class A-8
Certificates) which are Offered Certificates will consist of the actual number
of days elapsed from the 25th day of the month preceding the month of the
applicable Payment Date (or, in the case of the first Accrual Period, from the
Closing Date) through the 24th day of the month of such Payment Date. After the
initial Accrual Period, the Pass-Through Rate of each Class of the Group II
Certificates (except for the Class A-8 Certificates will be adjusted by
reference to changes in the level of One-Month LIBOR, subject to the effects of
the applicable limitation described herein.
The Pass-Through Rate of each Class of the Group II Certificates may be
calculated by reference to the Coupon Rates on the Mortgage Loans in the Group
II. Although the Coupon Rates on the Mortgage Loans in the Group II are subject
to adjustment, the Coupon Rates adjust less frequently than the Pass-Through
Rate of each Class of the Group II Certificates (other than the Class A-8
Certificates) which adjust by reference to One-Month LIBOR. Changes in
One-Month LIBOR may not correlate with changes in Six-Month LIBOR and either may
not correlate with prevailing interest rates. It is possible
S-48
<PAGE>
that an increased level of One-Month LIBOR could occur simultaneously with a
lower level of prevailing interest rates, which would be expected to result in
faster prepayments, thereby reducing the weighted average life of the Group II
Certificates.
Certain of the Mortgage Loans in Group II, including the 2/28 Loans, the 3/27
Loans and the 5/25 Loans, were originated with initial Coupon Rates that were
based on competitive conditions. As a result, the Coupon Rates on such Mortgage
Loans in the Group II are more likely to adjust on their first, and possibly
subsequent adjustment dates subject to the effects of the applicable periodic
rate cap and lifetime cap. Because the Pass-Through Rate of each Class of the
Group II Certificates is limited by the Group II Net WAC Cap on each Payment
Date, limits on changes in the Coupon Rates of the Mortgage Loans in Group II
may limit changes in the Pass-Through Rate of each Class of the Group II
Certificates. In addition, the Coupon Rates for the 2/28 Loans will not adjust
until approximately the date on which the 24th scheduled monthly payment is due
the Coupon Rates for the 3/27 Loans will not adjust until approximately the date
on which the 36th scheduled monthly payment is due and the Coupon Rates for the
5/25 Loans will not adjust until approximately the date on which the 60th
scheduled monthly payment is due.
The Group II Net WAC Cap on a Payment Date will depend, in part, on the
weighted average of the then-current Coupon Rates of the outstanding Mortgage
Loans in Group II. If the Mortgage Loans in Group II bearing higher Coupon
Rates were to prepay, the weighted average Coupon Rate of the Mortgage Loans in
Group II, and consequently the Group II Net WAC Cap, would be lower than
otherwise would be the case.
Prepayments on mortgage loans are commonly measured relative to a prepayment
model or standard. The model used in this Prospectus Supplement with respect to
any fixed rate Mortgage Loans is the Home Equity Prepayment assumption ("HEP").
HEP assumes that a pool of loans prepays in the first month of the life of such
loans at a constant prepayment rate that corresponds in CPR (as defined below)
to one-tenth the given HEP percentage and increases by an additional one-tenth
each month thereafter until the tenth month, where it remains at a CPR equal to
the given HEP percentage. "CPR" represents an assumed constant rate of
prepayment each month, expressed as an annual rate, relative to the then
outstanding principal balance on a pool of mortgage loans for the life of such
loans. For example, a 24% HEP assumes a CPR of 2.4% for the Mortgage Loans in
Group I in the first month of the life of such Mortgage Loans and an additional
2.4% CPR each month thereafter until the tenth month. Beginning in the tenth
month and in each month thereafter during the life of such Mortgage Loans, 24%
HEP assumes a CPR of 24% each month. The model used in this Prospectus
Supplement with respect to any adjustable rate Mortgage Loans is CPR. Neither
model purports to be a historical description of prepayment experience or a
prediction of the anticipated rate of prepayment of any pool of mortgage loans,
including the Mortgage Loans. The Depositor believes that no existing statistics
of which it is aware provide a reliable basis for Owners of Offered Certificates
to predict the amount or the timing of receipt of prepayments on the Mortgage
Loans.
It is very unlikely that the Mortgage Loans will prepay at rates consistent
with the assumptions made in this Prospectus Supplement until maturity or that
all of the Mortgage Loans in the related Mortgage Loan Group will prepay at the
same rate. There will be discrepancies between the actual characteristics of the
Mortgage Loans included in the Trust and the assumed characteristics used in
preparing the following tables. Any discrepancy may have an effect upon the
percentages of Initial Certificate Principal Balance outstanding set forth in
the table and the weighted average lives of the Offered Certificates. Since the
tables were prepared on the basis of the assumptions in the following paragraph,
there will likely be discrepancies between the characteristics of the actual
Mortgage Loans and the characteristics of the Mortgage Loans assumed in
preparing the tables. Any such discrepancy will likely have an effect upon the
percentages of the Certificate Principal Balances outstanding and weighted
average lives of the Offered Certificates set forth in the tables. In addition,
since the actual Mortgage Loans in the Trust have characteristics which differ
from those assumed in preparing the tables set forth below, the distributions of
principal on the Class A Certificates may be made earlier or later than as
indicated in the tables.
For the purpose of the tables below, it is assumed that: (i) each Mortgage
Loan Group consists of Mortgage Loans with the characteristics set forth in the
tables below, (ii) the Closing Date for the Certificates occurs on September 29,
1998, (iii) distributions on the Certificates are made on the 25th day of each
month regardless of the day on which the Payment Date actually occurs,
commencing in October 1998 in accordance with the priorities described herein,
(iv) prepayments include 30 days' interest thereon, (v) the Targeted
Overcollateralization Amount for each Mortgage Loan Group is set initially as
specified herein and thereafter decreases in accordance with the provisions of
the Pooling and Servicing Agreement, without regard to any delinquency and loss
triggers, (vi) the Auction Sale does not occur, (vii) the Pass-Through Rate of
each Class of the Group II Certificates (other than the Class A-8 Certificates)
is increased on the Step Up Date and for each Payment Date occurring thereafter
as provided under "Summary of Terms - Certificates Offered" herein, (viii) the
Coupon Rate for each Mortgage Loan in Group II is adjusted on its next rate
adjustment date (and on subsequent rate adjustment dates, if necessary) to equal
the sum of (a) an assumed final constant level of the applicable index of
5.40625% per annum, with respect to Six-Month LIBOR and 4.76% per annum with
respect to CMT and (b) the respective gross margin (such sum being subject to
the applicable periodic adjustment cap, maximum interest rate and minimum
interest rate (which minimum interest rate will generally equal the initial
coupon)), (ix) One-Month LIBOR remains constant at a rate of 5.58293% per annum,
(x) all Mortgage Loans pay on their respective due dates in accordance with
their respective terms, and (xi) the Initial Certificate Principal Balance and
Pass-Through Rate of each Class of Certificates is as set forth under "Summary
of Terms -- Certificates Offered" herein.
S-49
<PAGE>
MORTGAGE LOANS - GROUP I/FIXED RATE
<TABLE>
<CAPTION>
REMAINING REMAINING
GROSS RATE NET RATE AMORTIZATION ORIGINAL TERM TERM TO
PRINCIPAL BALANCES COUPON COUPON TERM TO MATURITY MATURITY
------------------ ---------- -------- ------------ ------------- ---------
($) (%) (%) (MONTHS) (MONTHS) (MONTHS)
<S> <C> <C> <C> <C> <C>
7,363,629.14 11.738 11.218 351 180 176
30,875,380.37 10.207 9.687 175 176 175
12,853,706.35 9.731 9.211 203 203 203
230,840,284.14 9.976 9.456 357 358 357
</TABLE>
MORTGAGE LOANS - GROUP II/FIXED RATE
<TABLE>
<CAPTION>
REMAINING REMAINING
GROSS RATE NET RATE AMORTIZATION ORIGINAL TERM TERM TO
PRINCIPAL BALANCES COUPON COUPON TERM TO MATURITY MATURITY
------------------ ---------- -------- ------------ ------------- ---------
($) (%) (%) (MONTHS) (MONTHS) (MONTHS)
<S> <C> <C> <C> <C> <C>
270,808.87 12.206 11.686 356 180 179
4,888,586.03 10.318 9.798 177 178 177
1,070,648.39 10.461 9.941 220 220 220
28,067,956.71 9.067 8.547 358 358 358
</TABLE>
MORTGAGE LOANS - GROUP II/ADJUSTABLE RATE
<TABLE>
<CAPTION>
CURRENT
GROSS CURRENT INITIAL SUBSEQUENT
PRINCIPAL RATE NET RATE GROSS MAXIMUM MINIMUM PERIODIC PERIODIC
BALANCES COUPON COUPON MARGIN RATE RATE RATE CAP RATE CAP
-------- ------ -------- ------ ------- ------- -------- ----------
($) (%) (%) (%) (%) (%) (%) (%)
<S> <C> <C> <C> <C> <C> <C> <C>
$ 20,050,090.20 9.662 9.142 6.079 15.463 9.212 1.137 1.115
27,947,422.50 9.281 8.761 6.164 15.434 9.242 1.073 1.073
28,449,427.21 9.072 8.552 6.176 15.254 9.072 1.057 1.057
7,861,623.59 9.526 9.006 6.216 16.008 9.483 1.186 1.190
7,385,868.26 10.077 9.557 6.493 16.357 9.858 1.126 1.126
11,971,565.42 9.950 9.430 6.122 16.014 9.611 1.151 1.143
4,348,531.01 9.833 9.313 5.858 16.809 9.833 1.000 1.000
459,448,629.69 10.018 9.498 6.289 16.740 10.018 2.269 1.077
69,577,294.76 10.079 9.559 6.103 17.043 10.079 2.033 1.144
46,636,751.00 8.948 8.428 6.065 15.942 8.948 1.486 1.471
91,796.36 9.750 9.230 6.850 15.750 9.750 1.000 2.000
<CAPTION>
MONTHS TO ORIGINAL REMAINING RATE
NEXT RATE TERM TO TERM TO CHANGE
RESET DATE MATURITY MATURITY FREQUENCY INDEX
- ---------- -------- --------- --------- -----
(MONTHS) (MONTHS) (MONTHS)
<C> <C> <C> <C> <C>
1 354 349 6 6 Month LIBOR
2 349 345 6 6 Month LIBOR
3 356 353 6 6 Month LIBOR
4 357 355 6 6 Month LIBOR
5 357 353 6 6 Month LIBOR
6 347 343 6 6 Month LIBOR
7 357 357 6 6 Month LIBOR
21 356 353 6 6 Month LIBOR
32 357 355 6 6 Month LIBOR
55 352 347 6 6 Month LIBOR
10 357 355 12 1 Year CMT
</TABLE>
S-50
<PAGE>
The following tables set forth the percentages of the initial principal
balance of the Offered Certificates that would be outstanding after each of the
dates shown, assuming for the fixed rate Mortgage Loans and the adjustable rate
Mortgage Loans in Group I and Group II prepay in accordance with the following
payment scenarios:
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE INDICATED
PREPAYMENT SCENARIO
<TABLE>
<CAPTION>
CLASS A-7 CLASS A-8
PAYMENT DATE
- ------------------------
Fixed Loans (HEP) 0% 12% 18% 24% 30% 36% 48% 0% 12% 18% 24% 30% 36% 48%
- ----------------------------------------------------------------------------- ------------------------------------------------
ARM Loans (CPR) 0% 13.5% 20.25% 27% 33.75% 40.50% 54% 0% 13.5% 20.25% 27% 33.75% 40.50% 54%
- ----------------------------------------------------------------------------- ------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1999 95 73 62 51 40 29 7 100 100 100 100 100 100 100
September 25, 2000 94 57 41 25 10 0 0 99 86 81 78 76 64 0
September 25, 2001 94 57 40 24 10 0 0 96 34 18 8 2 0 0
September 25, 2002 94 51 35 23 10 0 0 93 10 5 6 2 0 0
September 25, 2003 94 42 28 18 10 0 0 89 3 2 1 2 0 0
September 25, 2004 94 37 23 13 8 0 0 85 0 0 0 0 0 0
September 25, 2005 94 32 18 10 5 0 0 81 0 0 0 0 0 0
September 25, 2006 94 27 14 7 3 0 0 76 0 0 0 0 0 0
September 25, 2007 94 23 11 5 2 0 0 70 0 0 0 0 0 0
September 25, 2008 94 20 9 4 1 0 0 64 0 0 0 0 0 0
September 25, 2009 94 17 7 3 1 0 0 57 0 0 0 0 0 0
September 25, 2010 94 14 5 2 0 0 0 49 0 0 0 0 0 0
September 25, 2011 94 12 4 1 0 0 0 40 0 0 0 0 0 0
September 25, 2012 94 10 3 1 0 0 0 30 0 0 0 0 0 0
September 25, 2013 94 9 3 0 0 0 0 19 0 0 0 0 0 0
September 25, 2014 94 7 2 0 0 0 0 6 0 0 0 0 0 0
September 25, 2015 92 6 2 0 0 0 0 0 0 0 0 0 0 0
September 25, 2016 87 5 1 0 0 0 0 0 0 0 0 0 0 0
September 25, 2017 81 4 1 0 0 0 0 0 0 0 0 0 0 0
September 25, 2018 75 3 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2019 67 3 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2020 60 2 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2021 51 2 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2022 43 1 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2023 37 1 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2024 30 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2025 22 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2026 14 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2027 4 0 0 0 0 0 0 0 0 0 0 0 0 0
September 25, 2028 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg Life/(1)/ 22.17 5.67 3.59 2.36 1.47 0.74 0.52 11.06 2.86 2.61 2.51 2.40 2.22 1.51
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective Offered
Certificate Principal Balance for such Class of Offered Certificate.
S-51
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE INDICATED
PREPAYMENT SCENARIO
<TABLE>
<CAPTION>
CLASS M-1A CLASS M-2A
PAYMENT DATE
- --------------------
Fixed Loans (HEP) 0% 12% 18% 24% 30% 36% 48% 0% 12% 18% 24% 30% 36% 48%
- ------------------------------------------------------------------------- -------------------------------------------------
ARM Loans (CPR) 0% 13.5% 20.25% 27% 33.75% 40.50% 54% 0% 13.5% 20.25% 27% 33.75% 40.50% 54%
- ------------------------------------------------------------------------- -------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 1999 100 100 100 100 100 100 100 100 100 100 100 100 100 100
September 25, 2000 100 100 100 100 100 100 85 100 100 100 100 100 100 100
September 25, 2001 100 100 100 100 100 79 0 100 100 100 100 100 100 25
September 25, 2002 100 100 80 56 92 79 0 100 100 80 56 38 64 25
September 25, 2003 100 94 63 41 33 67 0 100 94 63 41 25 15 24
September 25, 2004 100 81 50 30 17 40 0 100 81 50 30 17 9 7
September 25, 2005 100 69 40 21 11 24 0 100 69 40 21 11 4 0
September 25, 2006 100 59 31 16 7 14 0 100 59 31 16 7 0 0
September 25, 2007 100 51 25 11 5 5 0 100 51 25 11 3 0 0
September 25, 2008 100 43 19 8 3 1 0 100 43 19 8 0 0 0
September 25, 2009 100 37 15 6 0 0 0 100 37 15 6 0 0 0
September 25, 2010 100 31 12 4 0 0 0 100 31 12 2 0 0 0
September 25, 2011 100 27 9 2 0 0 0 100 27 9 0 0 0 0
September 25, 2012 100 23 7 0 0 0 0 100 23 7 0 0 0 0
September 25, 2013 100 19 6 0 0 0 0 100 19 5 0 0 0 0
September 25, 2014 100 16 4 0 0 0 0 100 16 2 0 0 0 0
September 25, 2015 100 13 3 0 0 0 0 100 13 0 0 0 0 0
September 25, 2016 100 11 1 0 0 0 0 100 11 0 0 0 0 0
September 25, 2017 100 9 0 0 0 0 0 100 9 0 0 0 0 0
September 25, 2018 100 8 0 0 0 0 0 100 8 0 0 0 0 0
September 25, 2019 100 6 0 0 0 0 0 100 6 0 0 0 0 0
September 25, 2020 100 5 0 0 0 0 0 100 3 0 0 0 0 0
September 25, 2021 100 4 0 0 0 0 0 100 1 0 0 0 0 0
September 25, 2022 94 2 0 0 0 0 0 94 0 0 0 0 0 0
September 25, 2023 81 0 0 0 0 0 0 81 0 0 0 0 0 0
September 25, 2024 66 0 0 0 0 0 0 66 0 0 0 0 0 0
September 25, 2025 49 0 0 0 0 0 0 49 0 0 0 0 0 0
September 25, 2026 30 0 0 0 0 0 0 30 0 0 0 0 0 0
September 25, 2027 9 0 0 0 0 0 0 9 0 0 0 0 0 0
September 25, 2028 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Weighted Avg
Life/(1)/ 26.8 0 10.64 7.17 5.54 5.18 5.72 2.21 26.80 10.57 7.11 5.38 4.62 4.48 3.49
</TABLE>
- -----------------------------
(1) The weighted average life of the Offered Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective Offered
Certificate Principal Balance for such Class of Offered Certificate.
S-52
<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE OUTSTANDING AT THE INDICATED
PREPAYMENT SCENARIO
<TABLE>
<CAPTION>
CLASS B-1A
PAYMENT DATE
- ------------------------
Fixed Loans (HEP) 0% 12% 18% 24% 30% 36% 48%
- ------------------------------------------------------------------------------
ARM Loans (CPR) 0% 13.5% 20.25% 27% 33.75% 40.50% 54%
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial Percent 100 100 100 100 100 100 100
September 25, 1999 100 100 100 100 100 100 100
September 25, 2000 100 100 100 100 100 100 100
September 25, 2001 100 100 100 100 100 100 100
September 25, 2002 100 100 80 56 38 25 42
September 25, 2003 100 94 63 41 25 13 0
September 25, 2004 100 81 50 30 15 4 0
September 25, 2005 100 69 40 21 7 0 0
September 25, 2006 100 59 31 14 2 0 0
September 25, 2007 100 51 25 7 0 0 0
September 25, 2008 100 43 19 3 0 0 0
September 25, 2009 100 37 13 0 0 0 0
September 25, 2010 100 31 9 0 0 0 0
September 25, 2011 100 27 5 0 0 0 0
September 25, 2012 100 23 2 0 0 0 0
September 25, 2013 100 19 0 0 0 0 0
September 25, 2014 100 14 0 0 0 0 0
September 25, 2015 100 11 0 0 0 0 0
September 25, 2016 100 7 0 0 0 0 0
September 25, 2017 100 5 0 0 0 0 0
September 25, 2018 100 2 0 0 0 0 0
September 25, 2019 100 0 0 0 0 0 0
September 25, 2020 100 0 0 0 0 0 0
September 25, 2021 100 0 0 0 0 0 0
September 25, 2022 94 0 0 0 0 0 0
September 25, 2023 81 0 0 0 0 0 0
September 25, 2024 66 0 0 0 0 0 0
September 25, 2025 49 0 0 0 0 0 0
September 25, 2026 30 0 0 0 0 0 0
September 25, 2027 4 0 0 0 0 0 0
September 25, 2028 0 0 0 0 0 0 0
Weighted Avg Life/(1)/ 26.77 10.28 6.87 5.14 4.28 3.86 3.98
</TABLE>
<TABLE>
<CAPTION>
CLASS B-1F
PAYMENT DATE
- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Loans (HEP) 0% 12% 18% 24% 30% 36% 48%
- ------------------------------------------------------------------------------
ARM Loans (CPR) 0% 13.5% 20.25% 27% 33.75% 40.50% 54%
- ------------------------------------------------------------------------------
Initial Percent 100 100 100 100 100 100 100
September 25, 1999 100 100 100 100 100 100 100
September 25, 2000 100 100 100 100 100 100 100
September 25, 2001 100 100 100 100 100 100 100
September 25, 2002 100 100 92 70 52 37 11
September 25, 2003 100 100 74 52 36 22 0
September 25, 2004 100 90 60 39 24 6 0
September 25, 2005 100 77 48 29 10 0 0
September 25, 2006 100 67 39 19 0 0 0
September 25, 2007 100 57 31 8 0 0 0
September 25, 2008 100 49 25 0 0 0 0
September 25, 2009 100 42 15 0 0 0 0
September 25, 2010 100 36 7 0 0 0 0
September 25, 2011 100 30 1 0 0 0 0
September 25, 2012 100 25 0 0 0 0 0
September 25, 2013 100 17 0 0 0 0 0
September 25, 2014 100 11 0 0 0 0 0
September 25, 2015 100 6 0 0 0 0 0
September 25, 2016 100 1 0 0 0 0 0
September 25, 2017 100 0 0 0 0 0 0
September 25, 2018 100 0 0 0 0 0 0
September 25, 2019 100 0 0 0 0 0 0
September 25, 2020 93 0 0 0 0 0 0
September 25, 2021 84 0 0 0 0 0 0
September 25, 2022 75 0 0 0 0 0 0
September 25, 2023 65 0 0 0 0 0 0
September 25, 2024 54 0 0 0 0 0 0
September 25, 2025 41 0 0 0 0 0 0
September 25, 2026 28 0 0 0 0 0 0
September 25, 2027 1 0 0 0 0 0 0
September 25, 2028 0 0 0 0 0 0 0
Weighted Avg Life/(1)/ 25.96 10.60 7.46 5.65 4.60 3.99 3.43
</TABLE>
_____________________________
(1) The weighted average life of the Offered Certificates is determined by
(i) multiplying the amount of each principal payment by the number of
years from the date of issuance to the related Payment Date, (ii) adding
the results, and (iii) dividing the sum by the initial respective Offered
Certificate Principal Balance for such Class of Offered Certificate.
S-53
<PAGE>
PAYMENT LAG FEATURE OF CLASS B-1F CERTIFICATES AND CLASS A-8 CERTIFICATES
Pursuant to the Pooling and Servicing Agreement, an amount equal to Mortgagor
payments with respect to each fixed rate Mortgage Loan (net of the Servicing Fee
and certain additional fees and amounts described herein) received by the
Servicer and the Special Servicer during each Remittance Period is to be
remitted to the Trustee on or prior to the related Monthly Remittance Date,
which does not occur until the month following the month of receipt. As a
result, the monthly distributions to the Owners of the Class B-1F and Class A-8
Certificates generally reflect an Accrual Period reflecting Mortgagor payments
during the prior Remittance Period, and the first Payment Date will not occur
until October 26, 1998. Thus, the effective yield to the Owners of the Class B-
1F and Class A-8 Certificates will be below that otherwise produced by the
related Pass-Through Rate and purchase price because distributions to Owners of
the Class B-1F and Class A-8 Certificates in respect of any given month will not
be made until on or after the 25th day of the following month.
THE ORIGINATORS
The Mortgage Loan Pool consists of Statistical Mortgage Loans purchased or
originated by a number of originators (the "Originators") with aggregate
outstanding Loan Balances of approximately $748,047,446 as of the Statistical
Calculation Date. Pan American has originated 18.23% of the Statistical
Mortgage Loans in Group II and 2.16% of the Statistical Mortgage Loans in Group
I, in each case as of the Statistical Calculation Date. New Century has
originated 17.35% of the Statistical Mortgage Loans in Group I and 14.91% of the
Statistical Mortgage Loans in Group II, in each case as of the Statistical
Calculation Date. ARMC has originated 13.81% of the Statistical Mortgage Loans
in Group I and 1.62% of the Statistical Mortgage Loans in Group II, in each case
as of the Statistical Calculation Date.
The Servicer is a wholly-owned subsidiary of the Seller.
FORMATION OF THE TRUST AND TRUST PROPERTY
AMRESCO Residential Securities Corporation Mortgage Loan Trust 1998-3 (the
"Trust") will be created and established pursuant to the Pooling and Servicing
Agreement. The Depositor will convey without recourse the Mortgage Loans to the
Trust and the Trust will issue the Certificates.
The property of the Trust will include (a) the Mortgage Loans (other than
payments due on the Mortgage Loans on or prior to the Cut-Off Date together with
the related Mortgage Loan documents and the Seller's interest in any Mortgaged
Property which secures a Mortgage Loan and all payments thereon and proceeds of
the conversion, voluntary or involuntary, of the foregoing, (b) such amounts as
may be held by the Trustee in the Accounts (other than the Principal and
Interest Account) and any other accounts held by the Trustee for the Trust
together with investment earnings on such amounts and such amounts as may be
held in the name of the Trustee in the Principal and Interest Account, if any,
exclusive of investment earnings thereon (except as otherwise provided in the
Pooling and Servicing Agreement) whether in the form of cash, instruments,
securities or other properties, (c) proceeds of all the foregoing (including,
but not by way of limitation, all proceeds of any hazard insurance and title
insurance policy relating to the Mortgage Loans, cash proceeds, accounts,
accounts receivable, notes, drafts, acceptances, chattel paper, checks, deposit
accounts, rights to payment of any and every kind, and other forms of
obligations and receivables which at any time constitute all or part of or are
included in the proceeds of any of the foregoing) to pay the Certificates as
specified in the Pooling and Servicing Agreement and (d) the obligations of
Freddie Mac under the Freddie Mac Guarantee in respect of the Class A Fixed Rate
Certificates.
Neither the Offered Certificates nor the underlying Mortgage Loans will be
guaranteed or insured by any governmental entity or instrumentality, the
Depositor, the Trustee, the Master Servicer, the Seller and the Special
Servicer, the Servicer, the Trustee, the Originators or any of their affiliates.
The Offered Certificates represent interests only in the Trust.
Prior to its formation, the Trust will have had no assets or obligations.
Upon formation, the Trust will not engage in any business activity other than
acquiring, holding and collecting payments on the Mortgage Loans, issuing the
Certificates and distributing payments thereon. The Trust will not acquire any
receivables or assets other than the Mortgage Loans and the rights appurtenant
thereto and will not have any need for additional capital resources. To the
extent that mortgagors make scheduled payments under the Mortgage Loans, the
Trust will have sufficient liquidity to make distributions on the Offered
Certificates. As the Trust does not have any operating history and will not
engage in any business activity other than issuing the Certificates and making
distributions thereon, there has not been included any historical or pro forma
ratio of earnings to fixed charges with respect to the Trust.
ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Statistical Mortgage
Loans and the Mortgaged Properties is based upon the pool as constituted at the
close of business on the Statistical Calculation Date, as adjusted (with respect
to all Statistical Mortgage Loans that were current as of the Cut-Off Date) for
the scheduled principal payments due on or before such date. Prior to the
issuance of the Offered Certificates, Statistical Mortgage Loans may be removed
from the pool as a
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result of incomplete documentation or non-compliance with representations and
warranties set forth in the Pooling and Servicing Agreement, if the Depositor
deems such removal necessary or appropriate. Approximately $251,952,554 of
additional Mortgage Loans will also be included in the pool prior to the
issuance of the Certificates.
A current report on Form 8-K will be available to purchasers of the Offered
Certificates and will be filed and incorporated by reference into the
Registration Statement together with the Pooling and Servicing Agreement with
the Securities and Exchange Commission within fifteen days after the issuance of
the Offered Certificates. In the event Mortgage Loans are removed from or added
to the pool as set forth in the preceding paragraph, such removal or addition
will be noted in the current report on Form 8-K. A description of the pool of
Mortgage Loans, as of the Closing Date, including such additional Mortgage
Loans, will be filed in a current report on Form 8-K within fifteen days after
the initial issuance of the Offered Certificates.
DESCRIPTION OF THE OFFERED CERTIFICATES
GENERAL
Each Certificate will represent certain undivided, fractional ownership
interests in the Trust created and held pursuant to the Pooling and Servicing
Agreement, subject to the limits and the priority of distribution described
therein.
As described in "The Mortgage Loan Pool" herein, the Mortgage Loan Pool is
divided into two Mortgage Loan Groups (each a "Mortgage Loan Group"), Group I,
which contains fixed rate Mortgage Loans and Group II, which contains primarily
adjustable rate Mortgage Loans (including the 2/28 Loans, the 3/27 Loans and
5/25 Loans).
PAYMENT DATES
On each Payment Date, the Owners of each Class of the Offered Certificates
will be entitled to receive, from amounts then on deposit in the certificate
account established and maintained by the Trustee in accordance with the Pooling
and Servicing Agreement (the "Certificate Account") and until the Certificate
Principal Balance of such Class of Offered Certificates is reduced to zero, and
to the extent funds are available therefor, the related Current Interest, any
Interest Carry Forward Amount and the portion of the Principal Distribution
Amount, if any, allocated therefor as of such Payment Date, allocated among the
Classes of Certificates as described below. Distributions will be made in
immediately available funds to Owners of Offered Certificates by wire transfer
or otherwise, to the account of such Owner at a domestic bank or other entity
having appropriate facilities therefor, if such Owner has so notified the
Trustee, or by check mailed to the address of the person entitled thereto as it
appears on the register (the "Register") maintained by the Trustee as registrar
(the "Registrar"). Beneficial Owners may experience some delay in the receipt
of their payments due to the operations of DTC. See "Risk Factors - Book Entry
Registration" in the Prospectus, "Description of the Offered Certificates - Book
Entry Registration of the Offered Certificates" herein and "Description of the
Certificates - Book Entry Registration" in the Prospectus.
The Pooling and Servicing Agreement will provide that an Owner will be
required to send its Certificate to the Trustee prior to receiving the final
distribution on such Owner's Certificate. The Pooling and Servicing Agreement
additionally will provide that, in any event, any Certificate as to which the
final distribution thereon has been made shall be deemed canceled for all
purposes under or pursuant to the Pooling and Servicing Agreement.
Each Owner of record of a Class of the Offered Certificates will be entitled
to receive such Owner's Percentage Interest in the amounts due such Class on
such Payment Date. The "Percentage Interest" of an Offered Certificate as of
any date of determination will be equal to the percentage obtained by dividing
the principal balance of such Certificate as of the Closing Date by the
Certificate Principal Balance for the related Class of the Offered Certificates
as of the Closing Date.
DISTRIBUTIONS
Upon receipt, the Trustee will be required to deposit into the Certificate
Account, (i) the total of the principal and interest collections on the Mortgage
Loans, including any Net Liquidation Proceeds, required to be remitted by the
Servicer and the Special Servicer, together with any Substitution Amount and any
Loan Purchase Price Amount and (ii) the proceeds of any liquidation of the
Trust.
The Pooling and Servicing Agreement establishes a pass-through rate on each
Class of the Certificates (each, a "Pass-Through Rate") as set forth in the
Summary of Terms herein.
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Interest:
Group I: On each Payment Date the Group I Interest Remittance Amount will be
distributed in the following order of priority:
First, to Freddie Mac, the Guarantee Fee and the Guarantor Reimbursement
Amount;
Second, to the Trustee, the Trustee Fee, and to the Master Servicer, the
Master Servicer Fee;
Third, to the Owners of the Class A Fixed Rate Certificates, the related
Current Interest plus the Interest Carry Forward Amount with respect to each
Class of Class A Fixed Rate Certificates without any priority among such Class
A Fixed Rate Certificates; provided, that if the Group I Interest Amount
Available is not sufficient to make a full distribution of interest with
respect to all Classes of the Class A Fixed Rate Certificates and Freddie Mac
has defaulted under the Freddie Mac Guarantee, the Group I Interest Amount
Available will be distributed among the outstanding related Classes of Class A
Fixed Rate Certificates pro rata based on the aggregate amount of interest due
on each such Class, and the amount of the shortfall will be carried forward
with accrued interest at the related Pass-Through Rate;
Fourth, to the extent of the Group I Interest Amount Available then remaining,
to the Owners of the Class B-1F Certificates, the related Current Interest;
Fifth, to the extent of the Group I Interest Amount Available then remaining,
to the Owners of the Class C-FIO Certificates, the related Current Interest;
and
Sixth, the Monthly Excess Interest Amount with respect to Group I shall be
applied as described below under "Credit Enhancement - Application of Monthly
Excess Cash Flow Amounts."
Group II. On each Payment Date the Group II Interest Remittance Amount will
be distributed in the following order of priority:
First, to the Trustee, the Trustee Fee, and to the Master Servicer, the Master
Servicer Fee;
Second, to the Owners of the Class A Group II Certificates, the related
Current Interest plus the Interest Carry Forward Amount with respect to each
Class of Class A Group II Certificates; provided that if the Group II Interest
Amount Available is not sufficient to make a full distribution of interest
with respect to all Classes of the related Class A Group II Certificates, the
Group II Interest Amount Available will be distributed among the outstanding
related Classes of Class A Group II Certificates pro rata based on the
aggregate amount of interest due on each such Class, and the amount of the
shortfall will be carried forward with accrued interest at the related Pass-
Through Rate;
Third, to the extent of the Group II Interest Amount Available then remaining,
to the Owners of the Class M-1A Certificates, the related Current Interest;
Fourth, to the extent of the Group II Interest Amount Available then
remaining, to the Owners of the Class M-2A Certificates, the related Current
Interest;
Fifth, to the extent of the Group II Interest Amount Available then remaining,
to the Owners of the Class B-1A Certificates, the related Current Interest;
Sixth, to the extent of the Group II Interest Amount Available then remaining,
to the Owners of the Class C-AIO Certificates, the related Current Interest;
and
Seventh, the Monthly Excess Interest Amount with respect to Group II shall be
applied as described below under "Credit Enhancement - Application of Monthly
Excess Cash Flow Amounts."
Principal:
Group I: With respect to Group I and on each Payment Date, Freddie Mac will
be entitled to receive payment of any unpaid Guarantee Fee and any Guarantor
Reimbursement Amount from the Principal Distribution Amount with respect to
Group I for such Payment Date before any other distributions are made on such
Payment Date, to the extent such amounts have not been paid from the Group I
Interest Remittance Amount for such Payment Date.
With respect to Group I and on each Payment Date (a) before the Stepdown Date or
(b) on or after the Stepdown Date if a Trigger Event is in effect with respect
to such Mortgage Loan Group, Owners of the Class A Fixed Rate Certificates will
be entitled to receive payment of 100% of the Principal Distribution Amount
(less amounts paid to Freddie Mac as described
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above) with respect to Group I for such Payment Date until the Certificate
Principal Balance of each Class of Class A Fixed Rate Certificates has been
reduced to zero.
With respect to Group I and on each Payment Date (a) on or after the Stepdown
Date and (b) as long as a Trigger Event is not in effect with respect to such
Mortgage Loan Group, the Owners of the Class A Fixed Rate Certificates and the
Class B-1F Certificates will be entitled to receive payments of principal, in
the order of priority, in the amounts set forth below and to the extent of the
Principal Distribution Amount (less amounts paid to Freddie Mac as described
above) with respect to Group I as follows:
First, the lesser of (x) the remaining Principal Distribution Amount with
respect to Group I (after making payments of principal to Freddie Mac as
described above) and (y) the Class A Principal Distribution Amount with
respect to Group I shall be distributed to the Owners of the Class A-6
Certificates, in an amount equal to the Class A-6 Lockout Distribution Amount,
with the remainder paid sequentially to the Owners of each Class of the Class
A Fixed Rate Certificates in the order of their numerical Class designations
beginning with the Class A-1 Certificates until the Certificate Principal
Balance of each Class of Class A Fixed Rate Certificates has been reduced to
zero;
Second, the lesser of (x) the excess of (i) the remaining Principal
Distribution Amount with respect to Group I (after making payments of
principal to Freddie Mac as described above) over (ii) the amount distributed
to the Owners of the Class A Fixed Rate Certificates in clause First above and
(y) the Class B-1F Principal Distribution Amount shall be distributed to the
Owners of the Class B-1F Certificates, until the Class B-1F Certificate
Principal Balance has been reduced to zero; and
Third, any amount of the Principal Remittance Amount with respect to Group I
remaining after making all of the distributions in clauses First and Second
above shall be included as part of the Monthly Excess Cash Flow Amount and
shall be applied as described below under "Credit Enhancement - Application of
Monthly Excess Cash Flow Amounts."
Group II. With respect to Group II and on each Payment Date (a) before the
Stepdown Date or (a) on or after the Stepdown Date if a Trigger Event is in
effect with respect to such Mortgage Loan Group, Owners of the Class A Group II
Certificates will be entitled to receive payment of 100% of the Principal
Distribution Amount with respect to Group II for such Payment Date as follows:
first, to the Owners of the Class A-8 Certificates, the Class A-8 Lockout
Distribution Amount and then to the Owners of the Class A-7 Certificates until
the Certificate Principal Balance of the Class A-7 Certificates has been reduced
to zero and then to the Owners of Class A-8 Certificates until the Certificate
Principal Balance of the Class A-8 Certificates has been reduced to zero.
With respect to Group II and on each Payment Date (a) on or after the related
Stepdown Date and (b) as long as a Trigger Event is not in effect with respect
to such Mortgage Loan Group, the Owners of the Class A Group II Certificates and
the Subordinate Certificates in Group II (other than the Class C-AIO
Certificates) will be entitled to receive payments of principal, in the order of
priority, in the amounts set forth below and to the extent of the Principal
Distribution Amount with respect to Group II as follows:
First, the lesser of (x) the Principal Distribution Amount with respect
to Group II and (y) the Class A Principal Distribution Amount with
respect to Group II shall be distributed to the Owners of the Class A-8
Certificates, in an amount equal to the Class A-8 Lockout Distribution
Amount, with the remainder paid first to the Owners of the Class A-7
Adjustable Rate Certificates until the Certificate Principal Balance of
the Class A-7 Adjustable Rate Certificates has been reduced to zero, and
second to Owners of the Class A-8 Certificates until the Certificate
Principal Balance of the Class A-8 Certificates has been reduced to zero;
Second, the lesser of (x) the excess of (i) the Principal Distribution
Amount with respect to Group II over (ii) the amount distributed to the
Owners of the Class A Group II Certificates in clause First above and (y)
the Class M-1A Principal Distribution Amount shall be distributed to the
Owners of the Class M-1A Certificates, until the Class M-1A Certificate
Principal Balance has been reduced to zero;
Third, the lesser of (x) the excess of (i) the Principal Distribution
Amount with respect to Group II over (ii) the sum of the amount
distributed to the Owners of the Class A Group II Certificates in clause
First above and the amount distributed to the Owners of the Class M-1A
Certificates in clause Second above and (y) the Class M-2A Principal
Distribution Amount, shall be distributed to the Owners of the Class M-2A
Certificates, until the Class M-2A Certificate Principal Balance has been
reduced to zero;
Fourth, the lesser of (x) the excess of (i) the Principal Distribution
Amount with respect to Group II over (ii) the sum of the amount
distributed to the Owners of the Class A Group II Certificates pursuant
to clause First above, the amount distributed to the Owners of the Class
M-1A Certificates pursuant to clause Second above and the amount
distributed to the Owners of the Class M-2A Certificates pursuant to
clause Third above and (y) the Class B-1A Principal
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Distribution Amount, shall be distributed to the Owners of the Class B-1A
Certificates until the Class B-1A Certificate Principal Balance has been
reduced to zero; and
Fifth, any amount of the Principal Remittance Amount with respect to
Group II remaining after making all of the distributions in clauses
First, Second, Third and Fourth above shall be included as part of the
Monthly Excess Cash Flow Amount with respect to Group II and shall be
applied as described below under "Credit Enhancement-Application of
Monthly Excess Cash Flow Amounts."
Notwithstanding the foregoing, in the event that the Certificate Principal
Balances of all of the Class A Group II Certificates have been reduced to zero
prior to the Stepdown Date, all amounts of principal that would have been
distributed to such Class A Group II Certificates will be distributed to the
Subordinate Certificates in Group II sequentially in the following order: Class
M-1A, Class M-2A and Class B-1A Certificates. Similarly, if the Certificate
Principal Balance of the Class M-1A Certificates has been reduced to zero, all
amounts of principal that would have been distributed to such Class M-1A
Certificates will be distributed to the Class M-2A and Class B-1A Certificates,
in that order. If the Certificate Principal Balance of the Class M-2A
Certificates has been reduced to zero, all amounts of principal that would have
been distributed on such Class M-2A Certificates will be distributed to the
Class B-1A Certificates.
The Owners of the Class A-8 Certificates are entitled to receive payments of
the Class A-8 Lockout Distribution Amount specified herein; provided that on any
Payment Date on which the sum of the Certificate Principal Balance of the
Subordinate Certificates in Group II and the related Overcollateralization
Amount is zero, any amounts of principal payable to the Owners of the Class A
Group II Certificates on such Payment Date shall be distributed pro rata;
provided further, that if on any Payment Date the Class A-7 Certificate
Principal Balance is zero, the Owners of the Class A-8 Certificates will be
entitled to receive the entire Principal Distribution Amount with respect to
Group II for such Payment Date.
The Class C-IO Certificates are interest-only Certificates and are not
entitled to receive distributions of principal.
Each Owner of Class A Certificates and Subordinated Certificates will be
required promptly to notify the Trustee in writing upon the receipt of a court
order relating to a Preference Amount and will be required to enclose a copy of
such order with such notice to the Trustee.
CALCULATION OF ONE-MONTH LIBOR
For the October 1998 Payment Date, the Trustee will determine One-Month LIBOR
on the second Business Day prior to the Closing Date. Thereafter, beginning
with the Payment Date in November 1998, on the second Business Day prior to each
Payment Date (each a "One-Month LIBOR Determination Date"), the Trustee will
determine One-Month LIBOR for the next Accrual Period for each Class of the
Adjustable Rate Group Certificates.
"One-Month LIBOR" means, as of any One-Month LIBOR Determination Date, the
rate for deposits in United States dollars for a period equal to the relevant
Accrual Period (commencing on the first day of such Accrual Period) which
appears in the Telerate Page 3750 as of 11:00 a.m., London time, on such date.
If such rate does not appear on Telerate Page 3750, the rate for that day will
be determined on the basis of the rates at which deposits in United States
dollars are offered by the Reference Banks at approximately 11:00 a.m., London
time, on that day to prime banks in the London interbank market for a period
equal to the relevant Accrual Period (commencing on the first day of such
Accrual Period). The Trustee will request the principal London office of each
of the Reference Banks to provide a quotation of its rate. If at least two such
quotations are provided, the rate for that day will be the arithmetic mean of
the quotations. If fewer than two quotations are provided as requested, the
rate for that day will be the arithmetic mean of the rates quoted by major banks
in New York City, selected by the Trustee, at approximately 11:00 a.m., New York
City time, on that day for loans in United States dollars to leading European
banks for a period equal to the relevant Accrual Period (commencing on the first
day of such Accrual Period).
"Telerate Page 3750" means the display page currently so designated on the
Bridge Telerate (or such other page as may replace that page on that service for
the purpose of displaying comparable rates or prices) and "Reference Banks"
means leading banks selected by the Seller and engaged in transactions in
Eurodollar deposits in the international Eurocurrency market.
BOOK ENTRY REGISTRATION OF THE OFFERED CERTIFICATES
The Offered Certificates will be book-entry Certificates (the "Book-Entry
Certificates"). Persons acquiring beneficial ownership interests in such
Book-Entry Certificates ("Beneficial Owners") may elect to hold their Book-Entry
Certificates directly through DTC in the United States, or Cedel or Euroclear
(in Europe) if they are Participants of such systems ("Participants"), or
indirectly through organizations which are Participants. The Book-Entry
Certificates will be issued in one or more certificates per Class of Offered
Certificates which in the aggregate equal the principal balance of such Offered
Certificates and will initially be registered in the name of Cede & Co., the
nominee of DTC. Cedel and Euroclear will hold omnibus positions on behalf of
their Participants through customers' securities accounts in Cedel's and
Euroclear's names
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on the books of their respective depositaries which in turn will hold such
positions in customers' securities accounts in the depositaries' names on the
books of DTC. Citibank will act as depositary for Cedel and The Chase Manhattan
Bank will act as depositary for Euroclear (in such capacities, individually the
"Relevant Depositary" and collectively the "European Depositaries"). Investors
may hold such beneficial interests in the Book-Entry Certificates in minimum
denominations representing principal amounts of $1,000 and in integral multiples
in excess thereof. Except as described below, no Beneficial Owner will be
entitled to receive a physical certificate representing such Certificate (a
"Definitive Certificate"). Unless and until Definitive Certificates are issued,
it is anticipated that the only "Owner" of such Book-Entry Certificates will be
Cede & Co., as nominee of DTC. Beneficial Owners will not be Owners as that term
is used in the Pooling and Servicing Agreement. Beneficial Owners are only
permitted to exercise their rights indirectly through Participants and DTC.
The Beneficial Owner's ownership of a Book-Entry Certificate will be recorded
on the records of the brokerage firm, bank, thrift institution or other
financial intermediary (each, a "Financial Intermediary") that maintains the
Beneficial Owner's account for such purpose. In turn, the Financial
Intermediary's ownership of such Book-Entry Certificate will be recorded on the
records of DTC (or of a participating firm that acts as agent for the Financial
Intermediary, whose interest will in turn be recorded on the records of DTC, if
the Beneficial Owner's Financial Intermediary is not a DTC Participant and on
the records of Cedel or Euroclear, as appropriate).
Beneficial Owners will receive all distributions of principal of, and interest
on, the Book-Entry Certificates from the Trustee through DTC and DTC
Participants. While such Certificates are outstanding (except under the
circumstances described below), under the rules, regulations and procedures
creating and affecting DTC and its operations (the "Rules"), DTC is required to
make book-entry transfers among Participants on whose behalf it acts with
respect to such Certificates and is required to receive and transmit
distributions of principal of, and interest on, such Certificates. Participants
and indirect Participants with whom Beneficial Owners have accounts with respect
to Book-Entry Certificates are similarly required to make book-entry transfers
and receive and transmit such distributions on behalf of their respective
Beneficial Owners. Accordingly, although Beneficial Owners will not possess
certificates, the Rules provide a mechanism by which Beneficial Owners will
receive distributions and will be able to transfer their interest.
Beneficial Owners will not receive or be entitled to receive certificates
representing their respective interests in the Offered Certificates, except
under the limited circumstances described below. Unless and until Definitive
Certificates are issued, Beneficial Owners who are not Participants may transfer
ownership of Offered Certificates only through Participants and indirect
Participants by instructing such Participants and indirect Participants to
transfer such Offered Certificates, by book-entry transfer, through DTC for the
account of the purchasers of such Offered Certificates, which account is
maintained with their respective Participants. Under the Rules and in
accordance with DTC's normal procedures, transfers of ownership of such Offered
Certificates will be executed through DTC and the accounts of the respective
Participants at DTC will be debited and credited. Similarly, the Participants
and indirect Participants will make debits or credits, as the case may be, on
their records on behalf of the selling and purchasing Beneficial Owners.
Because of time zone differences, credits of securities received in Cedel or
Euroclear as a result of a transaction with a Participant will be made during
subsequent securities settlement processing and dated the business day following
the DTC settlement date. Such credits or any transactions in such securities
settled during such processing will be reported to the relevant Euroclear or
Cedel Participants on such business day. Cash received in Cedel or Euroclear as
a result of sales of securities by or through a Cedel Participant (as defined
below) or Euroclear Participant (as defined below) to a DTC Participant will be
received with value on the DTC settlement date but will be available in the
relevant Cedel or Euroclear cash account only as of the business day following
settlements in DTC. For information with respect to tax documentation
procedures relating to the Certificates, see "Certain Federal Income Tax
Consequences - Taxation of Certain Foreign Investors" and "- Backup Withholding"
in the Prospectus and "Global Clearance, Settlement and Tax Documentation
Procedures - Certain U.S. Federal Income Tax Documentation Requirements" in
Annex I hereto.
Transfers between Participants will occur in accordance with DTC rules.
Transfers between Cedel Participants and Euroclear Participants will occur in
accordance with their respective rules and operating procedures.
Cross-market transfers between persons holding directly or indirectly through
DTC, on the one hand, and directly or indirectly through Cedel Participants or
Euroclear Participants, on the other, will be effected in DTC in accordance with
DTC rules on behalf of the relevant European international clearing system by
the Relevant Depositary; however, such cross-market transactions will require
delivery of instructions to the relevant European international clearing system
by the counterparty in such system in accordance with its rules and procedures
and within its established deadlines (European time). The relevant European
international clearing system will, if the transaction meets its settlement
requirements, deliver instructions to the Relevant Depositary to take action to
effect final settlement on its behalf by delivering or receiving securities in
DTC, and making or receiving payment in accordance with normal procedures for
same day funds settlement applicable to DTC. Cedel Participants and Euroclear
Participants may not deliver instructions directly to the European Depositaries.
DTC, which is a New York-chartered limited purpose trust company, performs
services for its Participants ("DTC Participants"), some of which (and/or their
representatives) own DTC. In accordance with its normal procedures, DTC is
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expected to record the positions held by each DTC Participant in the Book-Entry
Certificates, whether held for its own account or as a nominee for another
person. In general, beneficial ownership of Book-Entry Certificates will be
subject to the rules, regulations and procedures governing DTC and DTC
Participants as in effect from time to time.
Cedel Bank, S.A. was incorporated in 1970 as a limited company under
Luxembourg law. Cedel is owned by banks, securities dealers and financial
institutions, and currently has about 100 shareholders, including United States
financial institutions or their subsidiaries. No single entity may own more
than five percent of Cedel's stock.
Cedel is registered as a bank in Luxembourg, and as such is subject to
regulation by the Institute Monetaire Luxembourgeois, "IML," the Luxembourg
Monetary Authority, which supervises Luxembourg banks.
Cedel holds securities for its participant organizations ("Cedel
Participants") and facilitates the clearance and settlement of securities
transactions between Cedel Participants through electronic book-entry changes in
accounts of Cedel Participants, thereby eliminating the need for physical
movement of certificates. Transactions may be settled in Cedel in any of 28
currencies, including United States dollars. Cedel provides to its Cedel
Participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Cedel interfaces with domestic markets in several
countries. As a professional depository, Cedel is subject to regulation by the
Luxembourg Monetary Institute. Cedel Participants are recognized financial
institutions around the world, including underwriters, securities brokers and
dealers, banks, trust companies, clearing corporations and certain other
organizations. Indirect access to Cedel is also available to others, such as
banks, brokers, dealers and trust companies that clear through or maintain a
custodial relationship with a Cedel Participant, either directly or indirectly.
Euroclear was created in 1968 to hold securities for Participants of Euroclear
("Euroclear Participants") and to clear and settle transactions between
Euroclear Participants through simultaneous electronic book-entry delivery
against payment, thereby eliminating the need for physical movement of
certificates and any risk from lack of simultaneous transfers of securities and
cash. Transactions may now be settled in any of 32 currencies, including United
States dollars. Euroclear includes various other services, including securities
lending and borrowing and interfaces with domestic markets in several countries
generally similar to the arrangements for cross-market transfers with DTC
described above. Euroclear is operated by the Brussels, Belgium office of
Morgan Guaranty Trust Company of New York (the "Euroclear Operator"), under
contract with Euroclear Clearance Systems S.C., a Belgian cooperative
corporation (the "Cooperative"). All operations are conducted by the Euroclear
Operator, and all Euroclear Securities clearance accounts and Euroclear cash
accounts are accounts with the Euroclear Operator, not the Cooperative. The
Cooperative establishes policy for Euroclear on behalf of Euroclear
Participants. Euroclear Participants include banks (including central banks),
securities brokers and dealers and other professional financial intermediaries.
Indirect access to Euroclear is also available to other firms that clear through
or maintain a custodial relationship with a Euroclear Participant, either
directly or indirectly.
The Euroclear Operator is the Belgian branch of a New York banking corporation
which is a member bank of the Federal Reserve System. As such, it is regulated
and examined by the Board of Governors of the Federal Reserve System and the New
York State Banking Department, as well as the Belgian Banking Commission.
Securities clearance accounts and cash accounts with the Euroclear Operator
are governed by the Terms and Conditions Governing Use of Euroclear and the
related Operating Procedures of the Euroclear System and applicable Belgian law
(collectively, the "Terms and Conditions"). The Terms and Conditions govern
transfers of securities and cash within Euroclear, withdrawals of securities and
cash from Euroclear, and receipts of payments with respect to securities in
Euroclear. All securities in Euroclear are held on a fungible basis without
attribution of specific certificates to specific securities clearance accounts.
The Euroclear Operator acts under the Terms and Conditions only on behalf of
Euroclear Participants, and has no record of or relationship with persons
holding through Euroclear Participants.
Distributions on the Book-Entry Certificates will be made on each Payment Date
by the Trustee to DTC. DTC will be responsible for crediting the amount of such
payments to the accounts of the applicable DTC Participants in accordance with
DTC's normal procedures. Each DTC Participant will be responsible for
disbursing such payment 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.
Under a book-entry format, Beneficial Owners of the Book-Entry Certificates
may experience some delay in their receipt of payments, since such payments will
be forwarded by the Trustee to Cede. Distributions with respect to Certificates
held through Cedel or Euroclear will be credited to the cash accounts of Cedel
Participants or Euroclear Participants in accordance with the relevant system's
rules and procedures, to the extent received by the Relevant Depositary. Such
distributions will be subject to tax reporting in accordance with relevant
United States tax laws and regulations. Because DTC can only act on behalf of
Financial Intermediaries, the ability of a Beneficial Owner to pledge Book-Entry
Certificates to persons or entities that do not participate in the Depository
system, or otherwise take actions in respect of such Book-Entry Certificates,
may be limited due to the lack of physical certificates for such Book-Entry
Certificates. In addition, issuance of the Book-Entry
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Certificates in book-entry form may reduce the liquidity of such Certificates in
the secondary market since certain potential investors may be unwilling to
purchase Certificates for which they cannot obtain physical certificates.
Monthly and annual reports on the Trust provided by the Trustee to Cede, as
nominee of DTC, may be made available to Beneficial Owners upon request, in
accordance with the rules, regulations and procedures creating and affecting the
Depository, and to the Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates of such Beneficial Owners are credited.
DTC has advised the Trustee that, unless and until Definitive Certificates are
issued, DTC will take any action permitted to be taken by the Owners of the
Book-Entry Certificates under the Pooling and Servicing Agreement only at the
direction of one or more Financial Intermediaries to whose DTC accounts the
Book-Entry Certificates are credited, to the extent that such actions are taken
on behalf of Financial Intermediaries whose holdings include such Book-Entry
Certificates. Cedel or the Euroclear Operator, as the case may be, will take
any action permitted to be taken by an Owner under the Pooling and Servicing
Agreement on behalf of a Cedel Participant or Euroclear Participant only in
accordance with its relevant rules and procedures and subject to the ability of
the Relevant Depositary to effect such actions on its behalf through DTC. DTC
may take actions, at the direction of the related Participants, with respect to
some Offered Certificates which conflict with actions taken with respect to
other Offered Certificates.
Definitive Certificates will be issued to Beneficial Owners of the Book-Entry
Certificates, or their nominees, rather than to DTC, only if (a) DTC or the
Depositor advises the Trustee in writing that DTC is no longer willing,
qualified or able to discharge properly its responsibilities as a nominee and
depository with respect to the Book-Entry Certificates and the Depositor or the
Trustee is unable to locate a qualified successor, (b) the Depositor, at its
sole option, elects to terminate a book-entry system through DTC or (c) DTC, at
the direction of the Beneficial Owners representing a majority of the
outstanding Percentage Interests of the Offered Certificates, advises the
Trustee in writing that the continuation of a book-entry system through DTC (or
a successor thereto) is no longer in the best interests of Beneficial Owners.
Upon the occurrence of any of the events described in the immediately
preceding paragraph, the Trustee will be required to notify all Beneficial
Owners of the occurrence of such event and the availability through DTC of
Definitive Certificates. Upon surrender by DTC of the global certificate or
certificates representing the Book-Entry Certificates and instructions for
re-registration, the Trustee will issue Definitive Certificates, and thereafter
the Trustee will recognize the holders of such Definitive Certificates as Owners
under the Pooling and Servicing Agreement.
Although DTC, Cedel and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of Certificates among Participants of DTC, Cedel
and Euroclear, they are under no obligation to perform or continue to perform
such procedures and such procedures may be discontinued at any time.
ASSIGNMENT OF RIGHTS
An Owner may pledge, encumber, hypothecate or assign all or any part of its
right to receive distributions under any Certificate, but such pledge,
encumbrance, hypothecation or assignment shall not constitute a transfer of an
ownership interest sufficient to render the transferee an Owner of the Trust
without compliance with the provisions of the Pooling and Servicing Agreement
described above.
NONOFFERED CERTIFICATES
The Class A Fixed Rate Certificates, the Class C-IO Certificates, the Class D
Certificates, the Class S Certificates and the Class R Certificates are not
offered hereby. The Pass-Through Rate of the Class C-FIO Certificates is 7.5%
per annum. Interest will be calculated on the Class C-FIO Certificates on each
Payment Date on the basis of a fixed Notional Principal Amount equal to (i) for
the first Payment Date through the Payment Date in September 2000, the
outstanding Class A-6 Certificate Principal Balance and (ii) thereafter, zero,
with the result that the Owners of the Class C-FIO Certificates will receive no
distributions after the Payment Date in September 2000. The Pass-Through Rate
of the Class C-AIO Certificates is 3.0% per annum. Interest will be calculated
on the Class C-AIO Certificates on each Payment Date on the basis of a fixed
Notional Principal Amount equal to (i) for the period from the Closing Date
through the Payment Date in September 2000, the sum of the Class M-1A
Certificate Principal Balance and the Class M-2A Certificate Principal Balance
and (ii) thereafter, zero, with the result that the Owners of the Class C-AIO
Certificates will receive no distribution after the Payment Date in September
2000. The Class C-IO Certificates will not be entitled to distributions of
principal. The Class D Certificates, the Class S Certificates and the Class R
Certificates will not have Certificate Principal Balances, Notional Principal
Balances or Pass-Through Rates.
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CREDIT ENHANCEMENT
The Credit Enhancement provided for the benefit of the Owners of the Offered
Certificates in Group II consists of the subordination of the Subordinate
Certificates in Group II, the further subordination within the Subordinate
Certificates in Group II, the priority of application of Realized Losses in
respect of Group II, the application of Monthly Excess Cash Flow Amounts in
respect of Group II and the crosscollateralization feature of the Trust. The
Credit Enhancement provided for the benefit of the Owners of the Class B-1F
Certificates consists of the priority of application of Realized Losses in
respect of Group I and the application of Monthly Excess Cash Flow Amounts in
respect of Group I.
SUBORDINATION
The rights of the Owners of the Subordinate Certificates to receive
distributions with respect to the Mortgage Loans in a particular Mortgage Loan
Group will be subordinated, to the extent described herein, to such rights of
the Owners of the Class A Certificates related to such Mortgage Loan Group.
This subordination is intended to enhance the likelihood of regular receipt by
the Owners of the Class A Certificates of the full amount of their scheduled
monthly payment of interest and principal and to afford such Owners protection
against Realized Losses allocated against such Mortgage Loan Group.
The protection afforded to the Owners of the Class A Certificates by means of
the subordination of the related Subordinate Certificates will be accomplished
by the preferential right of the Owners of the Class A Certificates to receive,
prior to any distribution being made on a Payment Date in respect of such
Subordinate Certificates, the amounts of interest due them and principal
available for distribution on such Payment Date, and, if necessary, by the right
of the Owners of the Class A Certificates to receive future distributions of
amounts that would otherwise be payable to the Owners of such Subordinate
Certificates.
In addition, the rights of the Owners of the Class M-2A and Class B-1A to
receive distributions will be subordinated, to the extent described herein, to
such rights of the Owners of the related Class A Group II Certificates and Class
M-1A Certificates. This subordination is intended to enhance the likelihood of
regular receipt by the Owners of the related Class A Group II Certificates and
Class M-1A Certificates of the amount of interest due them and principal
available for distribution and to afford such Owners with protection against
Realized Losses.
The rights of the Owners of the Class B-1A to receive distributions will be
subordinated, to the extent described herein, to such rights of the Owners of
the Class A Group II Certificates, Class M-1A Certificates and Class M-2A
Certificates.
The rights of the Owners of the Class B-1F Certificates to receive
distributions will be subordinated, to the extent described herein, to such
rights of the Owners of the Class A Fixed Rate Certificates.
APPLICATION OF REALIZED LOSSES
If a Mortgage Loan becomes a Liquidated Loan during a Remittance Period, the
Net Liquidation Proceeds relating thereto and allocated to principal may be less
than the Loan Balance of such Mortgage Loan. The amount of such insufficiency
is a "Realized Loss." Realized Losses will be absorbed first by Monthly Excess
Interest Amounts as a result of the application of Monthly Excess Interest
Amounts to fund Extra Principal Distribution Amounts as described below. To the
extent that a Mortgage Loan Group experiences Realized Losses, such Realized
Losses will reduce the aggregate outstanding Loan Balance of the Mortgage Loans
in such Mortgage Loan Group (i.e., a reduction in the collateral balance will
occur). Since the Overcollateralization Amount with respect to a Mortgage Loan
Group is the excess, if any, of the related collateral balance over the related
Aggregate Certificate Principal Balance, Realized Losses, to the extent
experienced, will reduce the related Overcollateralization Amount. The Pooling
and Servicing Agreement requires that the Overcollateralization Amount in
respect of a Mortgage Loan Group be maintained at the Targeted
Overcollateralization Amount for such Mortgage Loan Group through the
application of Monthly Excess Interest Amounts to the funding of the Extra
Principal Distribution Amount. Accordingly, Realized Losses which occur in a
Mortgage Loan Group will, in effect, be absorbed first by the Owners of the
related Nonoffered Certificates that would otherwise receive a distribution from
Monthly Excess Cash Flow Amount, and then second by the Owners of the related
Subordinate Certificates.
In the event Realized Losses and principal distributions during a prior
Remittance Period result in the Aggregate Certificate Principal Balance with
respect to a Mortgage Loan Group exceeding the aggregate Loan Balance of the
Mortgage Loans in such Mortgage Loan Group as of the end of the related
Remittance Period, the Certificate Principal Balance of the related Subordinate
Certificates will be reduced in reverse order of seniority by an amount equal to
the lesser of (i) the then Aggregate Certificate Principal Balance of the
related Subordinate Certificates and (ii) the amount of the negative
overcollateralization. Once the Certificate Principal Balance of a Class of
Subordinate Certificates has been "written down," the amount of such write down
will no longer bear interest, nor will such amount thereafter be "reinstated" or
"written up," although the amount of such write down may, on future Payment
Dates, be paid to Owners of the Subordinate Certificates which experienced the
write down, in direct order of seniority.
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The Pooling and Servicing Agreement does not permit the "write down" of the
Certificate Principal Balance of any Class A Certificate.
APPLICATION OF MONTHLY EXCESS CASH FLOW AMOUNTS
The weighted average net Coupon Rate for the Mortgage Loans in each Mortgage
Loan Group is generally expected to be higher than the weighted average of the
Pass-Through Rates on the Class A Certificates and Subordinate Certificates
related to such Mortgage Loan Group, thus generating certain excess interest
collections which, in the absence of losses will not be necessary to fund
interest distributions on the Class A Certificates and Subordinate
Certificates. The Pooling and Servicing Agreement provides that this excess
interest be applied to the extent available, to make accelerated payments of
principal (i.e., the Extra Principal Distribution Amount) to the Class or
Classes then entitled to receive distributions of principal; such application
will cause the Aggregate Certificate Principal Balance with respect to a
Mortgage Loan Group to amortize more rapidly than the Mortgage Loans in such
Mortgage Loan Group, resulting in overcollateralization. This excess interest
for a Remittance Period and with respect to a Mortgage Loan Group on the related
Payment Date is the Monthly Excess Interest Amount for such Payment Date and
Mortgage Loan Group.
The required level of overcollateralization for any Mortgage Loan Group and
Payment Date is the Targeted Overcollateralization Amount for such Mortgage Loan
Group and Payment Date. The Targeted Overcollateralization Amount is initially
(i.e., prior to the related Stepdown Date) 2.00% of the Original Certificate
Principal Balance with respect to Group I and 2.50% of the Original Certificate
Principal Balance with respect to Group II. Since the actual level of the
Overcollateralization Amount with respect to each Mortgage Loan Group is
essentially zero as of the Closing Date, in the early months of the transaction,
subject to the availability of Monthly Excess Interest Amounts, Extra Principal
Distribution Amounts will be paid, with the result that the
Overcollateralization Amount with respect to each Mortgage Loan Group will
increase to the level of the related Targeted Overcollateralization Amount.
If, once the Targeted Overcollateralization Amount with respect to each
Mortgage Loan Group has been reached, Realized Losses occur in such Mortgage
Loan Group, such Realized Losses will result in an Overcollateralization
Deficiency (since such Realized Losses reduce the Loan Balance of the related
Mortgage Loans without giving rise to a corresponding reduction of the related
Aggregate Certificate Principal Balance). The cash flow priorities of the Trust
require that an Extra Principal Distribution Amount be paid (subject to the
availability of any Monthly Excess Interest Amount) for the purpose of
re-establishing the Overcollateralization Amount at the then-required Targeted
Overcollateralization Amount.
On and after the Stepdown Date, and as long as no Trigger Event is in effect,
the Targeted Overcollateralization Amount with respect to Group I and Group II,
respectively, is permitted to decrease or "step-down" below the 2.00% and 2.50%
of the respective Original Certificate Principal Balance to levels equal to
4.00% and 5.00% of the then current aggregate outstanding Loan Balance of the
related Mortgage Loan Group (subject to a floor of $1,409,665 and $3,590,335,
respectively). If the Targeted Overcollateralization Amount with respect to
each Mortgage Loan Group is permitted to "step-down" on a Payment Date, the
Pooling and Servicing Agreement permits a portion of the related Principal
Remittance Amount for such Payment Date not to be passed through as a
distribution of principal on such Payment Date. This has the effect of
decelerating the amortization of the Offered Certificates with respect to each
Mortgage Loan Group relative to the aggregate outstanding Loan Balance of the
Mortgage Loans, thereby adjusting the actual level of the related
Overcollateralization Amount to the new, lower Targeted Overcollateralization
Amount. This portion of the Principal Remittance Amount not distributed as
principal on the related Certificates therefore releases overcollateralization
from the Trust with respect to the related Mortgage Loan Group. The amount of
such releases are the Overcollateralization Release Amounts. Notwithstanding
the foregoing, any reduction in the Targeted Overcollateralization Amount from
prior periods will be subject to a collateral performance test that is described
in the Pooling and Servicing Agreement.
On any Payment Date, the sum of the Monthly Excess Interest Amount and the
Overcollateralization Release Amount, if any, with respect to a Mortgage Loan
Group is the Monthly Excess Cash Flow Amount for such Mortgage Loan Group, which
is required to be applied in the following order of priority on such Payment
Date:
Group I: In respect of Group I, Monthly Excess Cash Flow Amounts shall be
applied in the following order of priority on such Payment Date:
(1) to fund the Interest Carry Forward Amount, if any, with respect to the
Class A Fixed Rate Certificates;
(2) to fund the Extra Principal Distribution Amount for such Payment Date
with respect to Group I;
(3) to fund the Interest Carry Forward Amount, if any, with respect to the
Class B-1F Certificates;
(4) to fund the related Class B-1 Realized Loss Amortization Amount for
such Payment Date;
(5) to fund the Interest Carry Forward Amount, if any, with respect to the
Class C-FIO Certificates;
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(6) to the Servicer and the Special Servicer, respectively, to the extent of
their respective unreimbursed Delinquency Advances or Servicing Advances
with respect to Mortgage Loans in Group I deemed nonrecoverable;
(7) to the Special Servicer to the extent of unpaid fees relating to special
servicing of Specially Serviced Mortgage Loans in Group I; provided
that, if a Subordinated Trigger Event is in effect on such Payment Date,
the amount of any Overcollateralization Release Amount that would
otherwise be paid to the Special Servicer in respect of any unpaid
special servicing fee will instead be distributed as follows: first, to
the Owners of the Class B-1F Certificates until the Class B-1F
Certificate Principal Balance has been reduced to zero; and second, to
the Special Servicer in respect of any unpaid fees relating to the
special servicing of Specially Serviced Mortgage Loans in Group I, if
any;
(8) to fund any Group II Shortfalls for such Payment Date. A "Group II
Shortfall" means the amount equal to the sum of any unpaid (i) Interest
Carry Forward Amounts for such Payment Date with respect to the Class A
Group II Certificates, the Mezzanine Certificates, the Class B-1A
Certificates and the Class C-AIO Certificates, (ii) Extra Principal
Distribution Amount for such Payment Date with respect to Group II, and
(iii) Realized Loss Amortization Amount for such Payment Date with
respect to the Mezzanine Certificates and the Class B-1A Certificates;
provided that a Group II Shortfall will be determined after the
application of the Monthly Excess Cash Flow
Amount in respect of Group II;
(9) to fund a distribution to Owners of the Class D Certificates; and
(10) to fund a distribution to Owners of the Class R Certificates.
Group II: In respect of Group II, Monthly Excess Cash Flow Amounts shall be
applied in the following order of priority on such Payment Date:
(1) to fund the Interest Carry Forward Amount, if any, with respect to the
Class A Group II Certificates;
(2) to fund the Extra Principal Distribution Amount for such Payment Date
with respect to Group II;
(3) to fund the Interest Carry Forward Amount, if any, with respect to the
Class M-1A Certificates;
(4) to fund the related Class M-1 Realized Loss Amortization Amount for
such Payment Date;
(5) to fund the Interest Carry Forward Amount, if any, with respect to the
Class M-2A Certificates;
(6) to fund the related Class M-2 Realized Loss Amortization Amount for
such Payment Date;
(7) to fund the Interest Carry Forward Amount, if any, with respect to the
Class B-1A Certificates;
(8) to fund the related Class B-1 Realized Loss Amortization Amount for
such Payment Date;
(9) to fund the Interest Carry Forward Amount, if any, with respect to the
Class C-AIO Certificates;
(10) to the Servicer and the Special Servicer to the extent of any
unreimbursed Delinquency Advances or Servicing Advances with respect to
Mortgage Loans in Group II deemed nonrecoverable;
(11) to pay an Available Funds Cap Shortfall Amount (defined below), if any,
to the Owners of the Group II Certificates on a pro rata basis among
such Owners;
(12) to the Special Servicer to the extent of any unpaid fees relating to
special servicing of Specially Serviced Mortgage Loans in Group II, if
any; provided that, if a Subordinated Trigger Event is in effect on
such Payment Date in respect of Group II, the related amount of any
Overcollateralization Release Amount that would otherwise be
distributed to the Special Servicer will instead be distributed as
follows: first, to the Owners of the Class B-1A Certificates until the
Class B-1A Certificate Principal Balance has been reduced to zero;
second, to the Owners of the Class M-2A Certificates until the Class M-
2A Certificate Principal Balance has been reduced to zero; third, to
the Owners of the Class M-1A Certificates until the Class M-1A
Certificate Principal Balance has been reduced to zero; and fourth, to
the Special Servicer to the extent of any unpaid fees relating to the
special servicing of Specially Serviced Mortgage Loans in Group II, if
any;
(13) to fund a distribution to Owners of the Class D Certificates; and
(14) to fund a distribution to Owners of the Class R Certificates.
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The "Certificate Principal Balance" of any Class of the Class A Certificates
is the Original Certificate Principal Balance of such Class as reduced by all
amounts actually distributed as principal to the Owners of such Class of Class A
Certificates on all prior Payment Dates.
"Class B-1 Applied Realized Loss Amount" means, as to either Class of the
Class B-1 Certificates and as to any Payment Date, the lesser of (x) the related
Class B-1 Certificate Principal Balance (after taking into account the
distribution of the related Principal Distribution Amount on such Payment Date,
but prior to the application of the related Class B-1 Applied Realized Loss
Amount, if any, on such Payment Date) and (y) the related Applied Realized Loss
Amount.
"Class B-1 Certificate Principal Balance" means, as to either Class of Class
B-1 Certificates and as of any date of determination, the related Original Class
B-1 Certificate Principal Balance as reduced by the sum of (x) all amounts
actually distributed to the Owners of the related Class B-1 Certificates on all
prior Payment Dates on account of principal and (y) the aggregate, cumulative
amount of related Class B-1 Applied Realized Loss Amounts on all prior Payment
Dates.
"Class B-1 Realized Loss Amortization Amount" means, as to either Class of
Class B-1 Certificates and as of any Payment Date, the lesser of (x) the related
Class B-1 Unpaid Realized Loss Amount as of such Payment Date and (y) the excess
of (i) the related Monthly Excess Cash Flow Amount over (ii) the sum of the
related Extra Principal Distribution Amount, the related Class M-1 Realized Loss
Amortization Amount, the related Class M-2 Realized Loss Amortization Amount,
the related Class M-1A Interest Carry Forward Amount, the related Class M-2A
Interest Carry Forward Amount and the related Class B-1A Interest Carry Forward
Amount in each case for such Payment Date.
"Class M-1A Applied Realized Loss Amount" means, as to the of Class M-1A
Certificates and as to any Payment Date, the lesser of (x) the Class M-1A
Certificate Principal Balance (after taking into account the distribution of the
related Principal Distribution Amount on such Payment Date, but prior to the
application of the related Class M-1 Applied Realized Loss Amount, if any, on
such Payment Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Payment Date over (ii) the sum of the related Class M-2
Applied Realized Loss Amount and the related Class B-1 Applied Realized Loss
Amount as of such Payment Date.
"Class M-1A Certificate Principal Balance" means, as to the Class M-1A
Certificates and as of any date of determination, the related Original Class M-
1A Certificate Principal Balance as reduced by the sum of (x) all amounts
actually distributed to the Owners of the Class M-1A Certificates on all prior
Payment Dates on account of principal and (y) the aggregate, cumulative amount
of related Class M-1 Applied Realized Loss Amounts on all prior Payment Dates.
"Class M-1A Realized Loss Amortization Amount" means, as to the Class M-1A
Certificates and as of any Payment Date, the lesser of (x) the Class M-1 Unpaid
Realized Loss Amount as of such Payment Date and (y) the excess of (i) the
related Monthly Excess Cash Flow Amount over (ii) the sum of the related Extra
Principal Distribution Amount and the Class M-1A Interest Carry Forward Amount,
in each case for such Payment Date.
"Class M-2A Applied Realized Loss Amount" means, as to the Class M-2A
Certificates and as to any Payment Date, the lesser of (x) the Class M-2A
Certificate Principal Balance (after taking into account the distribution of the
related Principal Distribution Amount on such Payment Date, but prior to the
application of the related Class M-2 Applied Realized Loss Amount, if any, on
such Payment Date) and (y) the excess of (i) the related Applied Realized Loss
Amount as of such Payment Date over (ii) the sum of the related Class B-1
Applied Realized Loss Amount , in each case as of such Payment Date.
"Class M-2A Certificate Principal Balance" means, as to the Class M-2A
Certificates and as of any date of determination, the Original Class M-2A
Certificate Principal Balance as reduced by the sum of (x) all amounts actually
distributed to the Owners of the Class M-2A Certificates on all prior Payment
Dates on account of principal and (y) the aggregate, cumulative amount of
related Class M-2 Applied Realized Loss Amounts on all prior Payment Dates.
"Class M-2 Realized Loss Amortization Amount" means, as to Class M-2A
Certificates and as of any Payment Date, the lesser of (x) the Class M-2 Unpaid
Realized Loss Amount as of such Payment Date and (y) the excess of (i) the
related Monthly Excess Cash Flow Amount over (ii) the sum of the related Extra
Principal Distribution Amount, the Class M-1 Realized Loss Amortization Amount,
the Class M-1A Interest Carry Forward Amount and the Class M-2A Interest Carry
Forward Amount, in each case for such Payment Date.
"Unpaid Realized Loss Amount" means for any Class of the Subordinate
Certificates (other than the Class C-IO Certificates) and as to any Payment
Date, the excess of (x) the aggregate cumulative amount of related Applied
Realized Loss Amounts with respect to such Class for all prior Payment Dates
over (y) the aggregate, cumulative amount of related Realized Loss Amortization
Amounts with respect to such Class for all prior Payment Dates.
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THE POOLING AND SERVICING AGREEMENT
In addition to the provisions of the Pooling and Servicing Agreement
summarized elsewhere in the Prospectus and this Prospectus Supplement, there is
set forth below a summary of certain other provisions of the Pooling and
Servicing Agreement.
COVENANT OF THE SELLER TO TAKE CERTAIN ACTIONS WITH RESPECT TO THE MORTGAGE
LOANS IN CERTAIN SITUATIONS
Pursuant to the Pooling and Servicing Agreement, upon the discovery by the
Depositor, the Seller, the Servicer, the Master Servicer, the Special Servicer,
Freddie Mac or the Trustee that any representations and warranties set out in
the Pooling and Servicing Agreement with respect to the Mortgage Loans were
untrue in any material respect as of the Closing Date with the result that the
interests of the Owners are materially and adversely affected, or the value of
the related Mortgage Loan is materially and adversely affected, the party
discovering such breach is required to give prompt written notice to certain
other parties thereto.
Upon the earliest to occur of the Seller's discovery of or its receipt of
notice of a breach described above from any of the other parties, the Seller
will be required promptly to (i) cure such breach in all material respects or
(ii) within the time period specified in the Pooling and Servicing Agreement (a)
substitute in lieu of each affected Mortgage Loan a Qualified Replacement
Mortgage (as such term is defined in the Pooling and Servicing Agreement) and
deliver any Substitution Amount to the Servicer for deposit into its Principal
and Interest Account on behalf of the Trust as part of the Monthly Remittance
remitted by the Servicer on the related Monthly Remittance Date or (b) purchase
such Mortgage Loan from the Trust at a purchase price equal to the Loan Purchase
Price (as defined below) thereof. Notwithstanding any provision of the Pooling
and Servicing Agreement to the contrary, with respect to any Mortgage Loan which
is not in default or as to which no default is imminent, no such repurchase or
substitution will be made unless the Seller obtains for the Trustee an opinion
of counsel experienced in federal income tax matters (which shall be outside
counsel) and acceptable to the Trustee to the effect that such a repurchase or
substitution would not constitute a Prohibited Transaction for the Trust or
otherwise subject the Trust to tax and would not jeopardize the status of any
REMIC in the Trust as a REMIC (a "REMIC Opinion"), addressed and acceptable to
the Servicer, the Master Servicer, the Special Servicer, Freddie Mac and the
Trustee. Any Mortgage Loan as to which repurchase or substitution was delayed
pursuant to the Pooling and Servicing Agreement shall be repurchased or
substituted for (subject to compliance with the provisions of the Pooling and
Servicing Agreement) upon the earlier of (a) the occurrence of a default or
imminent default with respect to such Mortgage Loan and (b) receipt by the
Trustee of a REMIC Opinion. In connection with any breach of a representation,
warranty or covenant or defect in documentation giving rise to such repurchase
or substitution obligation, the Seller, if it believes such opinion may be
necessary, may cause to be delivered to the Trustee a REMIC Opinion, if a
favorable opinion can be rendered, as a result of any such repurchase or
substitution. The obligation of the Seller to cure, substitute or purchase any
such Mortgage Loan in respect of a breach that has not been remedied constitutes
the sole remedy available to the Owners, the Depositor and the Trustee.
"Loan Purchase Price" means generally the outstanding principal balance of
the related Mortgage Loan on the Cut-Off Date, less any principal amounts
previously distributed to the Owners relating to such Mortgage Loan (such
amount, the "Loan Balance" of such Mortgage Loan) as of the date of purchase
(assuming that the Monthly Remittance remitted by the Servicer on such Monthly
Remittance Date has already been remitted), plus one month's interest at the Net
Coupon Rate.
ASSIGNMENT OF MORTGAGE LOANS
Pursuant to the Pooling and Servicing Agreement, the Seller on the Closing
Date will transfer, assign, set over and otherwise convey without recourse to
the Depositor and the Depositor will transfer, assign, set over and otherwise
convey without recourse to Bankers Trust Company of California, N.A., as the
Custodian (the "Custodian"), on behalf of the Trustee, all of its respective
right, title and interest in and to each Mortgage Loan and all its respective
right, title and interest in and to principal and interest due on each such
Mortgage Loan on or after the Cut-Off Date; provided, however, that the
Depositor will reserve and retain all its right, title and interest in and to
principal (including Prepayments) and interest due on each Mortgage Loan on or
prior to the Cut-Off Date (except with respect to Mortgage Loans that were
delinquent on the Cut-Off Date, which payments are not being retained by the
Depositor). Purely as a protective measure and not to be construed as contrary
to the parties' intent that the transfer on the Closing Date is a sale, the
Seller has also been deemed to have granted to the Depositor and the Depositor
has also been deemed to have granted to the Trust a security interest in the
Trust in the event that the transfer of the Trust is deemed to be a loan and not
a sale.
In connection with the transfer and assignment of the Mortgage Loans on the
Closing Date, the Depositor will be required to:
(i) deliver to the Custodian, on behalf of the Trustee, on the
Closing Date with respect to each Mortgage Loan identified in the Schedule
of Mortgage Loans (A) the original Notes, endorsed to the order of the
Trustee, (B) the original title insurance policy or any one of an original
title binder, an original preliminary title report, or an original title
commitment, or a copy certified by the issuer of any of the foregoing, or
the attorney's opinion of title, (C) originals or
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certified copies of all intervening recorded assignments, showing a
complete chain of title from origination to the Trustee, if any, including
warehousing assignments, with evidence of recording thereon, (D) originals
of all assumption, modification, written assurance or substitution
agreements, if any and (E) either: (1) the original Mortgage, with evidence
of recording thereon, (2) a certified copy if such original Mortgage has
not been received from the applicable recording office by the Seller and
returned to the Trustee or (3) a copy of the Mortgage certified by the
public recording office in those instances where the original recorded
Mortgage has been lost;
(ii) cause the Custodian, on behalf of the Trustee, within 60 days
following the Closing Date with respect to the Mortgage Loans, to submit to
the Master Servicer for recording in the appropriate jurisdictions,
assignments of the Mortgages to "Norwest Bank Minnesota, National
Association, as Trustee of AMRESCO Residential Securities Corporation
Mortgage Loan Trust 1998-3 under the Pooling and Servicing Agreement dated
as of September 1, 1998" provided, however, that the Depositor shall not be
required to cause the Servicer or the Special Servicer to record any
assignment of Mortgage for a Mortgage with respect to which the Mortgaged
Property is located in California or the original recording information is
lacking; and
(iii) if not delivered on the Closing Date, deliver the title
insurance policy or title searches, the original Mortgages and such
recorded assignments, together with originals or duly certified copies of
any and all prior assignments, to the Custodian, on behalf of the Trustee,
within 15 days of receipt thereof by the Depositor (but in any event, with
respect to any Mortgage as to which original recording information has been
made available to the Depositor within two years after the Closing Date).
The Custodian, on behalf of the Trustee, will agree, for the benefit of the
Owners, to review the documents contained in each Mortgage Loan File held by the
Custodian (each, a "File") within 45 days after the Closing Date (or the date of
receipt of any documents delivered to the Custodian after such date) to
ascertain that all required documents (or certified copies of documents) have
been executed and received.
If the Custodian during such 45-day period finds any document constituting
a part of a File which is not properly executed, has not been received, or is
unrelated to the Mortgage Loans, or that any Mortgage Loan does not conform in a
material respect to the description thereof as set forth in the Schedule of
Mortgage Loans, the Custodian will be required to promptly notify the Depositor,
the Seller, Freddie Mac and the Owners. The Seller will agree in the Pooling and
Servicing Agreement to use reasonable efforts to remedy a material defect in a
document constituting part of a File of which it is so notified by the
Custodian. If, however, within the time period set forth in the Pooling and
Servicing Agreement after such notice to it respecting such defect the Seller
shall not have remedied the defect and the defect materially and adversely
affects the interest in the related Mortgage Loan of the Owners, the Seller
within the time period specified in the Pooling and Servicing Agreement shall
(i) substitute in lieu of such Mortgage Loan another Mortgage Loan of like kind
(a "Qualified Replacement Mortgage," as such term is defined in the Pooling and
Servicing Agreement) and deliver any "Substitution Amount" (the excess, if any,
of the Loan Balance of a Mortgage Loan being replaced over the outstanding
principal balance of a replacement Mortgage Loan plus accrued and unpaid
interest) to the Servicer or the Special Servicer for deposit into its Principal
and Interest Account on behalf of the Trust as part of the Monthly Remittance to
be remitted by the Servicer or the Special Servicer on the related Monthly
Remittance Date or (ii) purchase such Mortgage Loan at a purchase price equal to
the Loan Purchase Price thereof, which purchase price shall be delivered to the
Servicer or the Special Servicer for deposit in the Principal and Interest
Account as part of the Monthly Remittance to be remitted by the Servicer or the
Special Servicer on the related Monthly Remittance Date.
In addition to the foregoing, the Custodian has agreed to provide an
updated exception report during the 12th month after the Closing Date indicating
the current status of the exceptions previously noted by the Custodian (the
"Final Certification"). After delivery of the Final Certification, the Custodian
shall provide to the Servicer and the Special Servicer no less frequently than
monthly updated certifications indicating the then current status of exceptions,
until all such exceptions have been eliminated.
SERVICING
The Servicer and the Special Servicer will be obligated under the Pooling
and Servicing Agreement to service and administer the Mortgage Loans with
reasonable care, and using that degree of skill and attention that the Servicer
and the Special Servicer exercises with respect to comparable mortgage loans
that it services for itself or others, and shall have full power and authority,
acting alone, to do or cause to be done any and all things in connection with
such servicing and administration which it may deem necessary or desirable.
Consistent with the foregoing, in the performance of its servicing duties, each
of the Servicer and the Special Servicer will be permitted to, in its
discretion, (i) waive any assumption fees, late payment charges, charges for
checks returned for insufficient funds or other fees which may be collected in
the ordinary course of servicing the Mortgage Loans, (ii) if a Mortgagor is in
default or about to be in default because of a Mortgagor's financial condition,
arrange with the Mortgagor a schedule for the payment of delinquent payments due
on the related Mortgage Loan, or (iii) modify payments of monthly principal and
interest on any Mortgage Loan becoming subject to the terms of the
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Soldiers' and Sailors' Civil Relief Act of 1940, as amended, in accordance with
the Servicer's and the Special Servicer's respective general policies with
respect to comparable mortgage loans subject to such Act.
The Servicer and the Special Servicer will be paid a monthly fee from
interest collected with respect to each Mortgage Loan serviced by it (as well as
from any Liquidation Proceeds from a Liquidated Mortgage Loan ("Liquidation
Proceeds") that are applied to accrued and unpaid interest) equal to the Loan
Balance thereof multiplied by the applicable Servicing Fee Rate (such product,
the "Servicing Fee"). The "Servicing Fee Rate" for each Mortgage Loan will be
the rate provided in the Pooling and Servicing Agreement, which will not exceed
0.50% per annum. The amount of the monthly Servicing Fee is subject to
adjustment with respect to prepaid Mortgage Loans, as described below. The
Servicer and the Special Servicer are also entitled to receive, as additional
servicing compensation, all late payment fees, assumption fees and other similar
charges and all reinvestment income earned on amounts on deposit in the related
Principal and Interest Account. In addition, the Servicer and the Special
Servicer will be entitled to retain additional servicing compensation that it
receives in the form of release fees, bad check charges, assumption fees, late
payment charges, or any other servicing-related fees, Net Liquidation Proceeds
not required to be deposited in the related Principal and Interest Account
pursuant to the Pooling and Servicing Agreement, and similar items. Prepayment
penalties may also be retained as additional servicing compensation to the
extent set forth in the Pooling and Servicing Agreement.
Each of the Servicer and the Special Servicer is required to establish, or
cause to be established, in the name of the Trustee at one or more depository
institutions, a principal and interest account maintained as a trust account of
such institution (each, a "Principal and Interest Account"). All funds in the
Principal and Interest Accounts are required to be held (i) uninvested or (ii)
invested in Eligible Investments (as defined in the Pooling and Servicing
Agreement). Any investment of funds in the Principal and Interest Accounts must
mature on or prior to the immediately succeeding Monthly Remittance Date. Any
investment earnings on funds held in the Principal and Interest Accounts are for
the account of, and any losses therein are also for the account of and must be
promptly replenished by, the Servicer or the Special Servicer, as applicable.
The Servicer and the Special Servicer are required to deposit in the
related Principal and Interest Account, on a daily basis (but in no event later
than the second Business Day following receipt) all scheduled principal and
interest due on the related Mortgage Loans, other than "Balloon Payments" (i.e.,
the final payment of principal due with respect to a Balloon Mortgage Loan),
after the Cut-Off Date, and past due interest and principal on any Mortgage
Loan, other than Balloon Payments, that were delinquent as of the Cut-Off Date,
including any Prepayments, the proceeds of any liquidation of a Mortgage Loan
(including any insurance proceeds) net of expenses and unreimbursed Delinquency
Advances and Servicing Advances ("Net Liquidation Proceeds"), any income from
REO Properties received thereafter (net of unreimbursed Servicing Advances and
Delinquency Advances), but net of (i) the Servicing Fee with respect to each
Mortgage Loan and other servicing compensation, (ii) principal collected and
interest accrued on any Mortgage Loan on or prior to the Cut-Off Date, if such
Mortgage Loan was current as of the Cut-Off Date, which amounts shall be
delivered to the Seller, (iii) late payments received on any Mortgage Loan in
respect of unreimbursed Servicing Advances and Delinquency Advances and (iv)
reimbursements for past Delinquency Advances which the Servicer or the Special
Servicer, as applicable, has determined in its good faith business judgment are
not recoverable from the related Mortgage Loan proceeds (all such net amounts
being referred to herein as the "Daily Collections").
The Servicer and the Special Servicer may make withdrawals for its own
account from the amounts on deposit in the related Principal and Interest
Account with respect to the related Mortgage Loan Group, only for the following
purposes:
(i) to withdraw investment earnings on amounts on deposit in its
Principal and Interest Account;
(ii) to withdraw amounts that have been deposited to its Principal
and Interest Account in error, including in respect of over-advances based
on incorrect calculations of the Master Servicer;
(iii) to clear and terminate its Principal and Interest Account
following the termination of the Trust; and
(iv) to reimburse itself for unreimbursed and unrecovered Delinquency
Advances and Servicing Advances to the extent permitted in the Pooling and
Servicing Agreement.
The Servicer and the Special Servicer will remit to the Trustee for deposit
in the Certificate Account the part of the Monthly Remittance Amount due from
them not later than the related Monthly Remittance Date.
Subject to the following limitations, the Servicer and the Special Servicer
will be required to advance on any Mortgage Loan serviced by it prior to each
Payment Date its own funds or other funds made available to it under the Pooling
and Servicing Agreement as set forth in the next paragraph, for such Payment
Date, in an amount equal to the aggregate of payments of principal and interest
on the Mortgage Loans serviced by it in the related Mortgage Loan Group
(adjusted to the applicable Net Coupon Rate) that became due during the related
Remittance Period and were delinquent on the related Determination Date,
together with an amount equivalent to interest on the principal balance of the
Mortgage Loan related to each Mortgaged Property (each, an "REO Property")
acquired by the Trust through liquidation (any such advance, a "Delinquency
Advance"). The Net Coupon Rate is the rate equal to the excess of the Coupon
Rate over the applicable Servicing Fee Rate, the Trustee Fee, the Master
Servicer Fee and the Guarantee Fee.
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Delinquency Advances are intended to maintain a regular flow of scheduled
interest and principal payments on the Certificates rather than to guarantee or
insure against losses. The Servicer and the Special Servicer are obligated to
make Delinquency Advances with respect to delinquent payments of principal of or
interest on each Mortgage Loan, other than delinquent Balloon Payments on
Balloon Mortgage Loans, serviced by it (with such payments of interest adjusted
to the related Net Coupon Rate) to the extent that such Delinquency Advances
are, in its good faith business judgment, recoverable from future payments and
collections or insurance payments or proceeds of liquidation of the related
Mortgage Loan. With respect to a delinquent Balloon Payment, the Servicer and
the Special Servicer are not required to make a Delinquency Advance of such
delinquent Balloon Payment. The Servicer and the Special Servicer will, however,
make monthly Delinquency Advances with respect to Balloon Mortgage Loans with
delinquent Balloon Payments, in each case in an amount equal to the assumed
monthly principal and interest payment that would have been due on the related
Due Date based on the original principal amortization schedule for the
applicable Balloon Mortgage Loan. Such Delinquency Advances shall be required
only to the extent that the Servicer or the Special Servicer, in its good faith
business judgment, determines that such Delinquency Advance will be recoverable
from future payments and collections or insurance payments or proceeds of
liquidation of the related Mortgage Loan. The Servicer and the Special Servicer
shall be permitted to fund its payment of Delinquency Advances on any Business
Day, or to reimburse itself for any Delinquency Advances paid from the
Servicer's or the Special Servicer's own funds, from collections on any Mortgage
Loan deposited to the related Principal and Interest Account subsequent to the
related Remittance Period (including "Prepaid Installments" (i.e., early
payments of scheduled principal and interest intended by the borrower to be
treated as such)) and shall deposit into the related Principal and Interest
Account with respect thereto (i) collections from the Mortgagor whose
delinquency gave rise to the shortfall which resulted in such Delinquency
Advance net of any such Delinquency Advance and (ii) Net Liquidation Proceeds
recovered on account of the related Mortgage Loan to the extent of the amount of
aggregate Delinquency Advances related thereto. Previously unreimbursed
Delinquency Advances that the Servicer or the Special Servicer determines to be
nonrecoverable may be reimbursed to the Servicer or the Special Servicer, as
applicable, out of any Mortgagor payments prior to their deposit to the related
Principal and Interest Account or from funds on deposit in the related Principal
and Interest Account. All Delinquency Advances will be included with the
distribution to Owners of the Certificates of the related Group of Certificates
on the related Payment Date. Any failure by the Servicer or the Special Servicer
to make a Delinquency Advance as required under the Pooling and Servicing
Agreement with respect to the Certificates will constitute an event of default
thereunder for the Servicer or the Special Servicer, in which case the Trustee,
as successor servicer or special servicer, or the successor servicer or special
servicer will be obligated to make any such Delinquency Advance, in accordance
with the terms of the Pooling and Servicing Agreement.
Each of the Servicer and the Special Servicer will be required to pay all
customary, reasonable and necessary "out of pocket" costs and expenses incurred
in the performance of its servicing obligations, including, but not limited to,
(i) expenditures in connection with a foreclosed Mortgage Loan prior to the
liquidation thereof, including, without limitation, expenditures for real estate
property taxes, hazard insurance premiums, property restoration or preservation
("Preservation Expenses"), (ii) the cost of any enforcement or judicial
proceedings, including foreclosures and (iii) the cost of the management and
liquidation of Property acquired in satisfaction of the related Mortgage, to the
extent such expenses are, in its good faith business judgment, recoverable. Such
costs will constitute "Servicing Advances." The Servicer and the Special
Servicer may recover a Servicing Advance (x) to the extent permitted by the
Mortgage Loans or, if not theretofore recovered from the Mortgagor on whose
behalf such Servicing Advance was made, from Liquidation Proceeds realized upon
the liquidation of the related Mortgage Loan or (y), to the extent that such
Servicing Advance is determined by the Servicer or the Special Servicer in its
good faith business judgment to be non-recoverable from such proceeds from the
Monthly Excess Cash Flow Amount and certain other Mortgage Loan proceeds as
specified in the Pooling and Servicing Agreement.
A full month's interest at the related Net Coupon Rate will be due to the
Trust on the outstanding Loan Balance of each Mortgage Loan as of the beginning
of each Remittance Period. If a Prepayment in full of a Mortgage Loan occurs
during any calendar month, any difference between the interest collected from
the Mortgagor in connection with such prepayment and the full month's interest
at the Net Coupon Rate ("Compensating Interest") will be required to be
deposited to the Principal and Interest Account on the Monthly Remittance Date
by the Servicer and the Special Servicer and shall be included in the Monthly
Remittance to be made available to the Trustee on the next succeeding Monthly
Remittance Date.
When a Mortgagor prepays all or a portion of a Mortgage Loan between
scheduled monthly payment dates ("Due Dates"), the Mortgagor pays interest on
the amount prepaid only to the date of prepayment. Prepayments received during
the prior Remittance Period are included in the distribution to Owners on the
current Payment Date thereby causing a shortfall in interest. In order to
mitigate the effect of any such shortfall in interest distributions to the
Owners of the Certificates on any Payment Date, the amount of the Servicing Fee
otherwise payable to the Servicer or the Special Servicer for such month shall,
to the extent of such shortfall, be deposited by the Servicer or the Special
Servicer in the Certificate Account for distribution to the Owners of the
Certificates on such Payment Date. However, any such reduction in the Servicing
Fee will be made only to the extent of the Servicing Fee otherwise payable to
the Servicer or the Special Servicer with respect to Scheduled Payments having a
Due Date to which such Payment Date relates. Any such deposit by the Servicer or
the Special Servicer will be reflected in the distributions to the Owners of the
Certificates made on the Payment Date on which the Prepayment received would be
distributed.
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Each of the Servicer and the Special Servicer will have the right, but not
the obligation, to purchase for its own account any Mortgage Loan serviced by it
which becomes a 90+ Day Delinquent Loan (as defined in the Pooling and Servicing
Agreement), in whole or in part, as to four consecutive monthly installments or
any Mortgage Loan as to which enforcement proceedings have been brought by the
Servicer or the Special Servicer. The purchase price for any such Mortgage Loan
is equal to the Loan Purchase Price thereof, which purchase price shall be
deposited in the related Principal and Interest Account.
The Servicer or the Special Servicer, with respect to Mortgage Loans
serviced by it, shall foreclose upon or otherwise comparably convert the
ownership on behalf of the Trust of Mortgaged Properties relating to defaulted
Mortgage Loans as to which no satisfactory arrangements can be made for
collection of delinquent payments and which the Servicer or the Special Servicer
has not purchased from the Trust. The Servicer or the Special Servicer will be
required to sell any REO Property managed by it within 35 months of its
acquisition by the Trust, unless an appropriate extension is obtained, or an
opinion of counsel is obtained to the effect that the holding by the Trust of
such REO Property for any greater period will not result in the imposition of
taxes on "Prohibited Transactions" of the Trust as defined in Section 860F of
the Code or cause the Trust to fail to qualify as a REMIC under the REMIC
Provisions at any time that any Certificates are outstanding, in which case the
Servicer or the Special Servicer shall sell any REO Property by the end of any
extended period specified in any such opinion or such extension as applicable.
Notwithstanding the generality of the foregoing provisions, the Servicer or
the Special Servicer will be required to manage, conserve, protect and operate
each REO Property managed by it for the Owners solely for the purpose of its
prompt disposition and sale in a manner which does not cause such REO Property
to fail to qualify as "foreclosure property" within the meaning of Section
860G(a)(8) of the Code or result in the receipt by the Trust of any "income from
non-permitted assets" within the meaning of Section 860F(a)(2)(B) of the Code or
any "net income from foreclosure property" which is subject to taxation under
the REMIC Provisions. Pursuant to its efforts to sell such REO Property, the
Servicer or the Special Servicer will be required to either itself or through an
agent selected by the Servicer or the Special Servicer protect and conserve such
REO Property in the same manner and to such extent as is customary in the
locality where such REO Property is located and may, incident to its
conservation and protection of the interests of the Owners and after
consultation with the holder of a majority in interest of the Class R
Certificates, rent the same, or any part thereof, as the Servicer or the Special
Servicer deems to be in the best interest of the Owners for the period prior to
the sale of such REO Property.
If so required by the terms of any Mortgage Loan, the Servicer or the
Special Servicer will be required to cause hazard insurance to be maintained
with respect to the related Mortgaged Property and to advance sums (such
Advances to be treated as Servicing Advances) on account of the premiums
therefor if not paid by the Mortgagor if permitted by the terms of such Mortgage
Loan.
The Servicer and the Special Servicer will have the right under the Pooling
and Servicing Agreement to accept applications of Mortgagors for consent to (i)
partial releases of Mortgages, (ii) alterations and (iii) removal, demolition or
division of Mortgaged Properties. No application for approval may be considered
by the Servicer or the Special Servicer unless: (i) the provisions of the
related Note and Mortgage have been complied with; (ii) the loan-to-value ratio
and debt-to-income ratio after any release does not exceed the maximum
loan-to-value ratio and debt-to-income ratio established in accordance with the
Underwriting Guidelines set forth herein to be applicable to such Mortgage Loan;
and (iii) the lien priority of the related Mortgage is not affected.
The Servicer and the Special Servicer will be permitted under the Pooling
and Servicing Agreement to enter into subservicing agreements for any servicing
and administration of Mortgage Loans with any institution which is reasonably
acceptable to the Owners of a majority of the Percentage Interests of the Class
R Certificates and Freddie Mac and that meets the requirements of the Pooling
and Servicing Agreement.
Notwithstanding any subservicing agreement, neither the Servicer nor the
Special Servicer will be relieved of its obligations under the Pooling and
Servicing Agreement and the Servicer and the Special Servicer will be obligated
to the same extent and under the same terms and conditions as if it alone were
servicing and administering the Mortgage Loans subject to such subservicing
agreement. The Servicer and the Special Servicer shall be entitled to enter into
any agreement with a subservicer for indemnification of such party by such
subservicer and nothing contained in such subservicing agreement shall be deemed
to limit or modify the Pooling and Servicing Agreement.
The Servicer and the Special Servicer (except the Trustee if it is required
to succeed the Servicer or the Special Servicer under the Pooling and Servicing
Agreement) will agree to indemnify and hold the Trustee, the Seller, the Master
Servicer, Freddie Mac and the Depositor harmless against any and all claims,
losses, penalties, fines, forfeitures, legal fees and related costs, judgments,
and any other costs, fees and expenses that the Trustee, the Seller, the Master
Servicer, Freddie Mac and the Depositor may sustain in any way related to the
failure of Servicer or the Special Servicer to perform its duties and service
the Mortgage Loans in compliance with the terms of the Pooling and Servicing
Agreement. A party against whom any such claim is brought shall immediately
notify the other parties and the Rating Agencies if a claim is made by a third
party with respect to the Pooling and Servicing Agreement, and the Servicer or
the Special Servicer may assume the defense of any such claim and, upon a
determination that the claim results from the Servicer's or Special Servicer's
failure to perform in
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accordance with the Pooling and Servicing Agreement, pay all expenses in
connection therewith, including reasonable counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered against such
Servicer, the Special Servicer, the Trustee, the Seller, Freddie Mac or the
Depositor in respect of such claim.
The Servicer and the Special Servicer will be required to deliver to the
Trustee, the Seller, the Depositor, the Master Servicer, Freddie Mac and the
Rating Agencies: (1) on or before April 15 of each year, commencing in 1999, an
officers' certificate stating, as to each signer thereof, that (i) a review of
its activities during such preceding calendar year and of performance under the
Pooling and Servicing Agreement has been made under such officers' supervision,
and (ii) to the best of such officers' knowledge, based on such review, the
Servicer or the Special Servicer has fulfilled all its obligations under the
Pooling and Servicing Agreement for such year, or, if there has been a default
in the fulfillment of all such obligation, specifying each such default known to
such officers and the nature and status thereof including the steps being taken
by the Servicer or the Special Servicer to remedy such default; and (2) on or
before April 15 of any year commencing in or after 1999, a letter or letters of
a firm of independent, nationally recognized certified public accountants dated
as of the date of the Servicer's or the Special Servicer's fiscal year end audit
for each subsequent letter stating that such firm has examined the Servicer's or
the Special Servicer's overall servicing operations in accordance with the
requirements of the Uniform Single Attestation Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
REMOVAL AND RESIGNATION OF THE SERVICER AND THE SPECIAL SERVICER
The Owners, the Trustee, Freddie Mac or the Seller will have the right
pursuant to the Pooling and Servicing Agreement, to remove the Servicer or the
Special Servicer (or both the Servicer and the Special Servicer in the case of
subsection (d) below) upon the occurrence of, and in certain cases after notice
and expiration of the related cure period: (a) certain acts of bankruptcy or
insolvency on the part of the Servicer or the Special Servicer; (b) certain
failures on the part of the Servicer or the Special Servicer perform its
obligations under the Pooling and Servicing Agreement; (c) the failure to cure
material breaches of such Servicer's or the Special Servicer's obligations in
the Pooling and Servicing Agreement; or (d) if the loss and/or delinquency
levels of the related Mortgage Loans are at certain specified levels.
Owners representing greater than 50% of the Percentage Interests of the
most subordinate Class of Certificates outstanding at any time, other than the
Class R Certificates, will be entitled to remove the Special Servicer with or
without cause and to appoint a successor Special Servicer, provided that Freddie
Mac has approved such successor Special Servicer as contemplated by the Pooling
and Servicing Agreement and that each Rating Agency confirms to the Trustee in
writing that such appointment would not cause a downgrade, qualification or
withdrawal of the then current ratings assigned to any Class of Certificates.
The Servicer and the Special Servicer are not permitted to resign from the
obligations and duties imposed on it under the Pooling and Servicing Agreement
except (i) upon determination that its duties thereunder are no longer
permissible under applicable law or are in material conflict by reason of
applicable law with any other activities carried on by it, the other activities
of the Servicer or the Special Servicer so causing such conflict being of a type
and nature carried on by the Servicer or the Special Servicer on the date of the
Pooling and Servicing Agreement or (ii) upon written consent of the Seller, the
Master Servicer, Freddie Mac and the Trustee and confirmation from the Rating
Agencies that the ratings of the Offered Certificates are not reduced. Any such
determination permitting the resignation of the Servicer or the Special Servicer
pursuant to clause (i) above is required to be evidenced by an opinion of
counsel to such effect which shall be delivered to the Master Servicer and the
Trustee.
Upon removal or resignation of a Servicer or the Special Servicer, the
Trustee (x) shall solicit bids for a successor Servicer or the Special Servicer
and (y) pending the appointment of a successor Servicer or the Special Servicer
as a result of soliciting such bids, shall serve as Servicer or the Special
Servicer. The Trustee, if it is unable to obtain a qualifying bid and is
prevented by law from acting as servicer, will be required to appoint, or
petition a court of competent jurisdiction to appoint, any housing and home
finance institution, bank or mortgage servicing institution designated as an
approved servicer meeting the requirements of the Pooling and Servicing
Agreement, as the successor to the Servicer or the Special Servicer in the
assumption of all or any part of the responsibilities, duties or liabilities of
the Servicer or Special Servicer.
No removal or resignation of the Servicer or the Special Servicer will
become effective until the Trustee or a successor Servicer or the Special
Servicer shall have assumed the Servicer's or the Special Servicer's
responsibilities and obligations in accordance with the Pooling and Servicing
Agreement.
REPORTING REQUIREMENTS
On each Payment Date, the Trustee is required to report electronically and
in writing to the Depositor, each Owner, the Master Servicer and their
designees:
(i) the amount of the distribution with respect to the
related Class of the Certificates (based on a Certificate in the
original principal amount of $1,000);
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(ii) the amount of such distribution allocable to scheduled
principal on the Mortgage Loans in each Mortgage Loan Group, separately
identifying the aggregate amount of any Prepayments of principal,
repurchases or Liquidation Proceeds and, with respect to each Mortgage
Loan Group (based on a Certificate in the original principal amount of
$1,000);
(iii) the amount of such distribution allocable to interest
on the related Mortgage Loans in each Mortgage Loan Group (based on a
Certificate in the original principal amount of $1,000);
(iv) the Interest Carry Forward Amount for each Class;
(v) the principal amount of each Class of the Offered
Certificate (based on a Certificate in the original principal amount of
$1,000) which will be outstanding and the aggregate Loan Balance of
each Mortgage Loan Group and in total, in each case after giving effect
to any payment of principal on such Payment Date;
(vi) the aggregate Loan Balance of the Mortgage Loans in
each Mortgage Loan Group and in total, in each case after giving effect
to any payment of principal on such Payment Date;
(vii) the total of any Substitution Amounts or Loan Purchase
Price amounts included in such distribution with respect to each
Mortgage Loan Group and in total;
(viii) the weighted average Coupon Rate and weighted average
remaining term to maturity of the Mortgage Loans with respect to each
Mortgage Loan Group and in total, calculated both as of the first and
last day of the related Collection Period;
(ix) the Extra Principal Distribution Amount for each
Mortgage Loan Group;
(x) the Servicing Fees, the Master Servicer Fee, the
Guarantee Fee and Trustee Fees allocable to each Mortgage Loan Group
and in total;
(xi) whether a Trigger Event has occurred with respect to
each Mortgage Loan Group as shown by percentage of 60+ Day Delinquent
Loans;
(xii) the Senior Enhancement Percentage for each Mortgage
Loan Group;
(xiii) the Overcollateralization Amount for each Mortgage Loan
Group and the Certificate Principal Balance of each Class of the
Offered Certificates then outstanding after giving effect to any
payment of principal on such Payment Date;
(xiv) the amount of any Applied Realized Loss Amount and
Unpaid Realized Loss Amount (as defined in the Pooling and Servicing
Agreement) for each Class as of the close of such Payment Date; and
(xv) the amount of any Guarantor Reimbursement Amount under
the Freddie Mac Guarantee.
Certain obligations of the Trustee to provide information to the Owners are
conditioned upon such information being received from the Servicer.
In addition, on each Payment Date the Trustee will be required to
distribute to the Depositor, the Master Servicer, the Underwriters, the Rating
Agencies and each Owner, together with the information described above, the
following information prepared by the Servicer and furnished to the Trustee for
such purpose and with respect to each Mortgage Loan Group:
(a) the number and aggregate principal balances of Mortgage Loans in
each Mortgage Loan Group (i) 30-59 days delinquent, (ii) 60-89 days
delinquent and (iii) 90 or more days delinquent (exclusive of
foreclosures), as of the close of business on the last day of the prior
calendar month and the number and aggregate Loan Balances of all Mortgage
Loans and related data as of the last day of the Collection Period.
(b) the number and dollar amounts of all Mortgage Loans in
foreclosure proceedings as of the last day of the Collection Period.
(c) the number of Mortgagors and the Loan Balances of the related
Mortgages involved in bankruptcy proceedings as of the last day of the
prior Remittance Period;
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(d) the number and aggregate principal balance of Mortgage Loans
related to REO Properties and, to the extent reported by the Servicer and
the Special Servicer, the aggregate book value of the Mortgage Loans
related to REO Properties;
(e) the amount of cumulative and current period Realized Losses for
each Mortgage Loan Group and the cumulative loss percentage for each
Mortgage Loan Group, in each case as of the last day of the Collection
Period; and
(f) The aggregate Loan Balance of 60+ Day Delinquent Loans in each
Mortgage Loan Group and in the aggregate as of the last day of the
Collection Period.
Within a reasonable time after the end of each calendar year, the Trustee
shall furnish to each person who at any time during the calendar year was an
Owner of a Certificate, if requested in writing by such person, a statement
containing the information described in clauses (ii) and (iii) above, aggregated
for such calendar year or applicable portion thereof during which such person
was an Owner. Such obligation of the Trustee shall be deemed to have been
satisfied to the extent that substantially comparable information has been
prepared and furnished by the Trustee to Owners pursuant to any requirements of
the Code as in effect from time to time.
REMOVAL OF TRUSTEE FOR CAUSE
The Trustee may be removed upon the occurrence of any one of the following
events (whatever the reason for such event and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body) on the part of the Trustee: (1) failure to
make distributions of available amounts; (2) certain breaches of covenants and
representations by the Trustee; (3) certain acts of bankruptcy or insolvency on
the part of the Trustee; and (4) failure to meet the standards of Trustee
eligibility as set forth in the Pooling and Servicing Agreement.
If any such event occurs and is continuing, then and in every such case (x)
the Depositor or (y) the Owners of a majority of the Percentage Interests
represented by the Offered Certificates, the Class A Fixed Rate Certificates,
the Mezzanine Certificates and the Class B-1 Certificates or, if there are no
such Certificates then outstanding, by a majority of the Percentage Interests
represented by the Class R Certificates, may appoint a successor trustee.
GOVERNING LAW
The Pooling and Servicing Agreement and each Certificate will be construed
in accordance with and governed by the laws of the State of New York applicable
to agreements made and to be performed therein.
AMENDMENTS
The Trustee, the Depositor, the Master Servicer, the Seller, the Servicer,
Freddie Mac and the Special Servicer may, at any time and from time to time and
without notice to or the consent of the Owners, amend the Pooling and Servicing
Agreement, and the Trustee will be required to consent to such amendment, for
the purposes of (i) if accompanied by a favorable opinion of counsel experienced
in federal income tax matters, removing the restriction against the transfer of
a Class R Certificate to a Disqualified Organization (as such term is defined in
the Code), (ii) complying with the requirements of the Code including any
amendments necessary to maintain the status of any REMIC in the Trust as a
"REMIC", (iii) curing any ambiguity, (iv) correcting or supplementing any
provisions therein which are inconsistent with any other provisions therein or
(v) for any other purpose, provided that in the case of clause (v), such
amendment shall not adversely affect in any material respect any Owner. Any such
amendment shall be deemed not to adversely affect in any material respect any
Owner if there is delivered to the Trustee written notification from each Rating
Agency that such amendment will not cause such Rating Agency to reduce its then
current rating assigned to any Class of the Offered Certificates.
Notwithstanding anything to the contrary, no such amendment shall (a) change in
any manner the amount of, or delay the timing of, payments which are required to
be distributed to any Owner without the consent of the Owner of such Certificate
or (b) reduce the percentages of Percentage Interest which are required to
consent to any such amendments, without the consent of the Owners of all
Certificates of the Class or Classes affected then outstanding.
The Trustee will be required to furnish written notification of the
substance of any such amendment to each Owner in the manner set forth in the
Pooling and Servicing Agreement.
TERMINATION OF THE TRUST
The Pooling and Servicing Agreement provides that the Trust will terminate
upon the payment to the Owners of all Certificates of all amounts required to be
paid to such Owners upon the last to occur of (a) the final payment or other
liquidation (or any advance made with respect thereto) of the last Mortgage
Loan, (b) the disposition of all property acquired in respect of any Mortgage
Loan remaining in the Trust and (c) at any time when a Qualified Liquidation of
the Trust is
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effected as described below. To effect a termination pursuant to clause (c)
above, the Owners of all Certificates then outstanding will be required (i)
unanimously to direct the Trustee on behalf of each REMIC in the Trust to adopt
a plan of complete liquidation, as contemplated by Section 860F(a)(4) of the
Code and (ii) to furnish to the Trustee and Freddie Mac an opinion of counsel
experienced in federal income tax matters acceptable to the Trustee and Freddie
Mac to the effect that such liquidation constitutes a Qualified Liquidation.
AUCTION SALE; STEP UP ON CERTAIN PASS-THROUGH RATES; TERMINATION
Auction Sale. The Pooling and Servicing Agreement requires that, within 90
days of the Auction Sale Bid Date, the Trustee shall solicit bids for the
purchase of all Mortgage Loans remaining in Group I and Group II. In the event
that satisfactory bids are received as described in the Pooling and Servicing
Agreement, the net sale proceeds will be distributed to the Owners of the
Certificates in the same order of priority as interest and principal
distributions. If satisfactory bids are not received, the Trustee shall decline
to sell the Mortgage Loans and shall not be under any obligation to solicit any
further bids or otherwise negotiate any further sale of the Mortgage Loans. The
Auction Sale must constitute a "qualified liquidation" of the Classes of
Certificates in Group I and Group II under Section 860F of the Code, including,
without limitation, the requirement that the qualified liquidation takes place
over a period not to exceed 90 days.
Step Up on Certain Pass-Through Rates. If an Auction Sale has not occurred
by the Step Up Date, the Pass-Through Rate on each Class of Group II
Certificates (other than the Class A-8 Certificates) will be increased as
provided in "Summary of Terms-Certificates Offered" herein, for each Payment
Date occurring thereafter.
Optional Termination By Servicer and Special Servicer. If an Auction Sale
does not occur, the Servicer and the Special Servicer will also have the right,
collectively, to purchase all of the Mortgage Loans in such Mortgage Loan Group
serviced by both of them on any Monthly Remittance Date when the aggregate
outstanding Loan Balance of the Mortgage Loans in Group I and Group II has
declined to 5% of the original aggregate Loan Balance of the Mortgage Loans in
Group I and Group II as of the Cut-Off Date.
Mandatory Purchase. In the event that an Auction Sale has not occurred, and
the Servicer and the Special Servicer fail to exercise their rights to purchase
all of the Mortgage Loans, the Owners of the Class R Certificates will be
required to purchase all of the Mortgage Loans in Group I and Group II on the
Monthly Remittance Date in September 2028.
Termination Upon Loss of REMIC Status. Following a final determination by
the Internal Revenue Service or by a court of competent jurisdiction, in either
case from which no appeal is taken within the permitted time for such appeal, or
if any appeal is taken, following a final determination of such appeal from
which no further appeal can be taken, to the effect that any REMIC in the Trust
does not and will no longer qualify as a "REMIC" pursuant to Section 860D of the
Code (the "Final Determination"), at any time on or after the date which is 30
calendar days following such Final Determination the Owners of a majority in
Percentage Interests represented by the Offered Certificates then outstanding
may direct the Trustee on behalf of the Trust to adopt a plan of complete
liquidation, as contemplated by Section 860F(a)(4) of the Code.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion of certain of the material anticipated federal
income tax consequences of the purchase, ownership and disposition of the
Offered Certificates is to be considered only in connection with "Certain
Federal Income Tax Consequences" in the Prospectus. The discussion herein and in
the Prospectus is based upon laws, regulations, rulings and decisions now in
effect, all of which are subject to change. The discussion below and in the
Prospectus does not purport to deal with all federal tax consequences applicable
to all categories of investors, some of which may be subject to special rules.
Investors should consult their own tax advisors in determining the federal,
state, local and any other tax consequences to them of the purchase, ownership
and disposition of the Offered Certificates.
REMIC ELECTIONS
The Trust created by the Pooling and Servicing Agreement will consist of
two or more segregated asset pools with respect to which elections will be made
to treat each as a separate REMIC for federal income tax purposes. The
Lower-Tier REMIC will issue several uncertificated subclasses of non-voting
interests (the "Lower-Tier REMIC Regular Interests") and the Class S
Certificates which will be designated as the "regular interests" in the
Lower-Tier REMIC and the uncertificated "Lower-Tier REMIC Residual Interest"
which will be designated as the "residual interest" in the Lower-Tier REMIC. The
assets of the Lower-Tier REMIC will consist of the Mortgage Loans and all other
assets held by the Trust except for the property allocated to the Upper-Tier
REMIC. The Upper-Tier REMIC will issue the Offered Certificates, the Class A
Fixed Rate Certificates, the Class C-IO Certificates and the Class D
Certificates which will be designated as the "regular interests" in the
Upper-Tier REMIC and the Class R Certificates which will be designated as the
"residual interest" in the Upper-Tier REMIC. The assets of the Upper-Tier REMIC
consist of the Lower-Tier REMIC Regular Interests and the Upper-Tier
Distribution Accounts. See "Formation of the Trust and Trust Property" herein.
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Qualification as a REMIC requires ongoing compliance with certain
conditions. Arter & Hadden LLP, special tax counsel, will advise that, in its
opinion, for federal income tax purposes, assuming (i) the REMIC elections are
made and (ii) compliance with the Pooling and Servicing Agreement, each REMIC in
the Trust will be treated as a REMIC, the Lower-Tier REMIC Regular Interests and
the Class S Certificates will be treated as the "regular interests" in the
Lower-Tier REMIC, the Offered Certificates, the Class A Fixed Rate Certificates,
the Class C-IO Certificates and the Class D Certificates will be treated as
"regular interests" in the Upper-Tier REMIC, the Lower-Tier REMIC Residual
Interest will be treated as the sole "residual interest" in the Lower-Tier REMIC
and the Class R Certificates will be the sole "residual interest" in the
Upper-Tier REMIC. Except as indicated below, for federal income tax purposes,
regular interests in a REMIC are treated as debt instruments issued by such
REMIC on the date on which those interests are created, and not as ownership
interests in such REMIC or its assets. Owners of the Offered Certificates that
otherwise report income under a cash method of accounting will be required to
report income with respect to such Offered Certificates under an accrual method.
The prepayment assumption for the fixed rate Mortgage Loans for calculating
original issue discount is 24% HEP and for the adjustable rate Mortgage Loans is
100% Prepayment Assumption. See "Prepayment and Yield Considerations Prepayment
- - and Yield Scenarios for Offered Certificates" herein.
As a result of the qualification of the Lower-Tier REMIC and the Upper-Tier
REMIC, as REMICs, the Trust will not be subject to federal income tax except
with respect to (i) income from prohibited transactions, (ii) "net income from
foreclosure property" and (iii) certain contributions to the Trust after the
Closing Date. The total income of the Trust (exclusive of any income that is
taxed at the REMIC level) will be taxable to the Beneficial Owners of the
Certificates.
Under the laws of New York State and New York City, an entity that is
treated for federal income tax purposes as a REMIC generally is exempt from
entity level taxes imposed by those jurisdictions. This exemption does not
apply, however, to the income on the Offered Certificates.
ERISA CONSIDERATIONS
The Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
imposes certain requirements on those employee benefit plans and individual
retirement arrangements to which it applies ("Plan") and on those persons who
are fiduciaries with respect to such Plans. Any Plan fiduciary which proposes to
cause a Plan to acquire any of the Class A Group II Certificates should consult
with counsel with respect to the consequences under ERISA and the Code of the
Plan's acquisition and ownership of such Certificates. See "ERISA
Considerations" in the Prospectus.
The Department of Labor (the "DOL") has issued to one or more of the
Underwriters individual prohibited transaction exemptions (the "Exemptions");
which generally exempt from the application of the prohibited transaction
provisions of Section 406(a), Section 406(b)(1) and Section 406(b)(2) of ERISA
and the excise taxes imposed pursuant to Sections 4975(a) and (b) of the Code,
transactions with respect to the initial purchase, the holding and the
subsequent resale by Plans of certificates in pass-through trusts that consist
of certain receivables, loans and other obligations that meet the conditions and
requirements of the Exemptions. The loans covered by the Exemptions include
mortgage loans such as the Mortgage Loans.
Among the conditions that must be satisfied for the Exemptions to apply are
the following:
(1) the acquisition of the Class A Group II Certificates by a Plan is
on terms (including the price for the certificates) that are at least as
favorable to the Plan as they would be in an arm's-length transaction with
an unrelated party;
(2) the rights and interests evidenced by the Class A Group II
Certificates acquired by the Plan are not subordinated to the rights and
interests evidenced by other Certificates of the Trust;
(3) the Class A Group II Certificates acquired by the Plan have
received a rating at the time of such acquisition that is one of the three
highest generic rating categories from either Standard & Poor's Rating
Services, a division of the McGraw-Hill Companies ("S&P"), Moody's, Fitch
or Duff & Phelps Credit Rating Co. ("DCR");
(4) the Trustee must not be an affiliate of any other member of the
Restricted Group (as defined below);
(5) the sum of all payments made to and retained by any Underwriter in
connection with the distribution of the Class A Group II Certificates
represents not more than reasonable compensation for underwriting such
Class A Group II Certificates; the sum of all payments made to and retained
by the Seller pursuant to the assignment of the Mortgage Loans to the Trust
represents not more than the fair market value of such loans; the sum of
all payments made to and retained by any servicer represents not more than
reasonable compensation for such person's services under the Agreement and
reimbursement of such person's reasonable expenses in connection therewith;
and
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(6) the Plan investing in the Class A Group II Certificates is an
"accredited investor" as defined in Rule 501(a)(1) of Regulation D of the
Securities and Exchange Commission under the Securities Act of 1933.
The Trust must also meet the following requirements:
(i) the corpus of the Trust must consist solely of a fixed pool 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, Fitch or DCR
for at least one year prior to the Plan's acquisition of Class A Group II
Certificates; and
(iii) certificates evidencing interests in such other investment pools
must have been purchased by investors other than Plans for at least one
year prior to the Plan's acquisition of the Class A Group II Certificates.
Moreover, the Exemptions provide relief from certain self-dealing/conflict
of interest prohibited transactions that may occur when the Plan fiduciary
causes a Plan to acquire certificates in a trust in which the fiduciary (or its
affiliate) is a mortgagor on the receivables held in the trust; provided that,
among other requirements, (i) in the case of an acquisition in connection with
the initial issuance of certificates, at least fifty percent of each class of
certificates in which Plans have invested is acquired by persons independent of
the Restricted Group and at least fifty percent of the aggregate interest in the
trust is acquired by persons independent of the Restricted Group; (ii) such
fiduciary (or its affiliate) is a mortgagor with respect to five percent or less
of the fair market value of the obligations contained in the trust; (iii) the
Plan's investment in certificates of any class does not exceed twenty-five
percent of all of the certificates of that class outstanding at the time of the
acquisition; and (iv) immediately after the acquisition, no more than
twenty-five percent of the assets of the Plan with respect to which such person
is a fiduciary are invested in certificates representing an interest in one or
more trusts containing assets sold or serviced by the same entity. The
Exemptions do not apply to Plans sponsored by the Depositor, the Underwriters,
the Trustee, the Master Servicer, the Special Servicer, the Servicer, any
mortgagor with respect to Mortgage Loans included in the Trust constituting more
than five percent of the aggregate unamortized principal balance of the assets
in the Trust, or any affiliate of such parties (the "Restricted Group").
Prospective Plan investors should consult with their legal advisors
concerning the impact of ERISA and the Code, or other exemptive relief, and all
of the potential consequences in their specific circumstances, prior to making
an investment in a Class A Group II Certificate. Each Plan fiduciary should
determine whether under the general fiduciary standards of investment procedure
and diversification an investment in the Class A Group II 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. In particular,
purchasers that are insurance companies should consult with their counsel with
respect to the United States Supreme Court case, John Hancock Mutual Life
Insurance Co. v. Harris Trust and Savings Bank (decided December 13, 1993). In
John Hancock, the Supreme Court ruled that assets held in an insurance company's
general account may be deemed to be "plan assets" under certain circumstances.
Purchasers should analyze whether the decision may have an impact with respect
to purchases of the Class A Group II Certificates.
The Exemptions do not apply to the initial purchase, the holding or the
subsequent resale of the Mezzanine Certificates and Class B-1 Certificates
because such Certificates are subordinate to certain other Classes of
Certificates. Accordingly, Plans may not purchase the Mezzanine Certificates or
Class B-1 Certificates, except that any insurance company may purchase such
Certificates with assets of its general account if the exemptive relief grated
by the DOL for transactions involving insurance company general accounts in
Prohibited Transaction Exemption 95-60, 60 Fed. Reg. 35925 (July 12, 1995) ("PTE
95-60") is available with resect to such investment. Any insurance company
proposing to purchase such Certificates for its general account should consider
whether such relief would be available. By the transferee's acceptance of the
Mezzanine Certificates or Class B-1 Certificates it shall be deemed to have
represented that PTE 95-60 covers its acquisition and holding of such
Certificates. In the event that such representations are violated, any attempted
transfers or acquisitions shall be void and of no effect.
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RATINGS
It is a condition of the issuance of each Class of the Offered Certificates
that the Offered Certificates receive the ratings set out below:
CLASS MOODY'S FITCH
----- ------- -----
A Aaa AAA
M-1A Aa2 AA
M-2A A2 A
B-1A Baa3 BBB
B-1F Baa3 BBB
Explanations of the significance of such ratings may be obtained from Moody's,
99 Church Street, New York, New York 10007 and Fitch, One State Street Plaza,
33rd Floor, New York, New York 10004. Such ratings will be the views only of
such rating agencies. There is no assurance that any such ratings will continue
for any period of time or that such ratings will not be revised or withdrawn.
Any such revision or withdrawal of such ratings may have an adverse effect on
the market price of the Offered Certificates. A security rating is not a
recommendation to buy, sell or hold securities.
The ratings assigned by Fitch to pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Fitch's ratings address the structural and legal aspects
associated with the Certificates, including the nature of the underlying loans
and the credit quality of the credit support provider. Fitch's ratings on home
equity pass-through Certificates do not represent any assessment of the
likelihood or rate of principal prepayments.
The ratings of Moody's on home equity pass-through certificates address the
likelihood of the receipt by the Owners of all distributions to which such
Owners are entitled. Moody's rating opinions address the structural and legal
issues and tax-related aspects associated with the Certificates, including the
nature of the underlying home equity loans and the credit quality of the credit
support provider, if any. Moody's ratings on pass-through certificates do not
represent any assessment of the likelihood that principal prepayments may differ
from those originally anticipated or that Interest Carry Forward Amounts will be
paid on any Payment Date.
The ratings of each Rating Agency do not address the possibility that, as a
result of principal prepayments, Owners may receive a lower than anticipated
yield.
The ratings 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 Depositor has not requested a rating of the Certificates offered hereby
by any rating agency other than the Rating Agencies and the Depositor has not
provided information relating to the Certificates offered hereby or the Mortgage
Loans to any rating agency other than the Rating Agencies. However, there can be
no assurance as to whether any other rating agency will rate the Certificates
offered hereby or, if another rating agency rates such Certificates, what rating
would be assigned to such Certificates by such rating agency. Any such
unsolicited rating assigned by another rating agency to the Certificates offered
hereby may be lower than the rating assigned to such Certificates by any of the
Rating Agencies.
LEGAL INVESTMENT MATTERS
The Class A-7 Certificates, the Class A-8 Certificates and the Class M-1A
Certificates will constitute "mortgage related securities" for purposes of SMMEA
for so long as they are rated in one of the two highest rating categories by one
or more nationally recognized statistical rating organizations. As such, the
Class A-7 Certificates, the Class A-8 Certificates and the Class M-1A
Certificates will be legal investments for certain entities to the extent
provided in SMMEA, subject to state laws overriding SMMEA. In addition,
institutions whose investment activities are subject to review by federal or
state regulatory authorities may be or may become subject to restrictions, which
may be retroactively imposed by such regulatory authorities, on the investment
by such institutions in certain forms of mortgage related securities.
Furthermore, certain states have enacted legislation overriding the legal
investment provisions of SMMEA. In addition, institutions whose activities are
subject to review by federal or state regulatory authorities may be or may
become subject to restrictions, which may be retroactively imposed by such
regulatory authorities, on the investment by such institutions in certain forms
of mortgage related securities.
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The Class M-2A Certificates and the Class B Certificates will not
constitute "mortgage related securities" for purposes of SMMEA. The appropriate
characterization of the Class M-2A Certificates and the Class B Certificates
under various legal investment restrictions applicable to the investment
activities of certain institutions, and thus the ability of investors subject to
these restrictions to purchase the Class M-2A Certificates and the Class B
Certificates, may be subject to significant interpretive uncertainties.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
relating to the Certificates (the "Underwriting Agreement"), the Depositor has
agreed to cause the Trust to sell to each of the Underwriters named below (the
"Underwriters"), and each of the Underwriters has severally agreed to purchase
the percentage of the principal amount of each Class of the Offered Certificates
as follows:
CLASS A-7 CERTIFICATES
Percentage of
Underwriters Principal Amount
------------ ----------------
Morgan Stanley & Co. Incorporated 32.5%
AMRESCO Securities, Inc. 5.0%
Bear, Stearns & Co. Inc. 10.0%
Credit Suisse First Boston 17.5%
Deutsche Bank Securities Inc. 17.5%
Prudential Securities Incorporated 17.5%
CLASS A-8 CERTIFICATES
Percentage of
Underwriters Principal Amount
------------ ----------------
Morgan Stanley & Co. Incorporated 32.5%
AMRESCO Securities, Inc. 5.0%
Bear, Stearns & Co. Inc. 10.0%
Credit Suisse First Boston 17.5%
Deutsche Bank Securities Inc. 17.5%
Prudential Securities Incorporated 17.5%
CLASS M-1A CERTIFICATES
Percentage of
Underwriters Principal Amount
------------ ----------------
Morgan Stanley & Co. Incorporated 32.5%
AMRESCO Securities, Inc. 5.0%
Bear, Stearns & Co. Inc. 10.0%
Credit Suisse First Boston 17.5%
Deutsche Bank Securities Inc. 17.5%
Prudential Securities Incorporated 17.5%
CLASS M-2A CERTIFICATES
Percentage of
Underwriters Principal Amount
------------ ----------------
Morgan Stanley & Co. Incorporated 32.5%
AMRESCO Securities, Inc. 5.0%
Bear, Stearns & Co. Inc. 10.0%
Credit Suisse First Boston 17.5%
Deutsche Bank Securities Inc. 17.5%
Prudential Securities Incorporated 17.5%
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CLASS B-1F CERTIFICATES
Percentage of
Underwriters Principal Amount
------------ ----------------
Morgan Stanley & Co. Incorporated 32.5%
AMRESCO Securities, Inc. 5.0%
Bear, Stearns & Co. Inc. 10.0%
Credit Suisse First Boston 17.5%
Deutsche Bank Securities Inc. 17.5%
Prudential Securities Incorporated 17.5%
CLASS B-1A CERTIFICATES
Percentage of
Underwriters Principal Amount
------------ ----------------
Morgan Stanley & Co. Incorporated 32.5%
AMRESCO Securities, Inc. 5.0%
Bear, Stearns & Co. Inc. 10.0%
Credit Suisse First Boston 17.5%
Deutsche Bank Securities Inc. 17.5%
Prudential Securities Incorporated 17.5%
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the Certificates
offered hereby, if any are purchased. The Depositor has been advised by the
Underwriters that they propose initially to offer the Offered Certificates to
the public at the respective offering prices set forth on the cover page hereof
and to certain dealers at such price less a concession not in excess of the
respective amounts set forth in the table below (expressed as a percentage of
the relative Certificate Principal Balance). The Underwriters may allow and such
dealers may reallow a discount not in excess of the respective amounts set forth
in the table below to certain other dealers.
Selling Reallowance
Class Concession Discount
----- ---------- --------
A-7 0.250% 0.1250%
A-8 0.175 0.0875
M-1A 0.300 0.1500
M-2A 0.400 0.2000
B-1F 0.600 0.3000
B-1A 0.690 0.3450
In connection with this offering and in compliance with applicable law and
industry practice, the Underwriters may over-allot or effect transactions which
stabilize, maintain or otherwise affect the market price of the Offered
Certificates at a level above that which might otherwise prevail in the open
market, including stabilizing bids, effecting syndicate covering transactions or
imposting penalty bids. A stabilizing bid means the placing of any bid, or the
effecting of any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the placing of any
bid on behalf of the underwriting syndicate or the effecting of any purchase to
reduce a short position created in connection with the offering. A penalty bid
means an arrangement that permits Morgan Stanley & Co. Incorporated, as managing
underwriter, to reclaim a selling concession from a syndicate member in
connection with the offering when Offered Certificates originally sold by the
syndicate member are purchased in syndicate covering transactions. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commended, may be discontinued at any time.
The Depositor has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or contribute
to payments which the Underwriters may be required to make in respect thereof.
AMRESCO Securities, Inc. (formerly Data Financial, Inc.) is a broker-dealer
registered as such with the National Association of Securities Dealers, Inc.
The Depositor and the Seller, Master Servicer and Initial Special Servicer
are each affiliates of AMRESCO Securities, Inc.
S-79
<PAGE>
CERTAIN LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Certificates will be passed upon for the Seller and the Depositor by Arter &
Hadden LLP, Washington, D.C. and by Michael B. Cline, Esquire, Deputy General
Counsel for AMRESCO, INC., the parent of the Depositor. Certain legal matters
relating to insolvency issues and certain federal income tax matters concerning
the Certificates will be passed upon for the Depositor by Arter & Hadden LLP.
Certain legal matters relating to the Certificates will be passed upon for the
Underwriters by Dewey Ballantine LLP, New York, New York.
S-80
<PAGE>
ANNEX I
GLOBAL CLEARANCE, SETTLEMENT AND TAX DOCUMENTATION PROCEDURES
Except in certain limited circumstances, the globally offered AMRESCO
Residential Securities Corporation Mortgage Loan Trust 1998-3 Mortgage Loan
Pass-Through Certificates, Class A Group II Certificates, the Class M-1A
Certificates, Class M-2A Certificates and Class B-1 Certificates (the "Global
Securities") will be available only in book-entry form. Investors in the Global
Securities may hold such Global Securities through any of DTC, Cedel or
Euroclear. The Global Securities will be tradeable as home market instruments in
both the European and U.S. domestic markets. Initial settlement and all
secondary trades will settle in same-day funds.
Secondary market trading between investors through Cedel and Euroclear will
be conducted in the ordinary way in accordance with the normal rules and
operating procedures of Cedel and Euroclear and in accordance with conventional
eurobond practice (i.e., seven calendar day settlement).
Secondary market trading between investors through DTC will be conducted
according to DTC's rules and procedures applicable to U.S. corporate debt
obligations.
Secondary cross-market trading between Cedel or Euroclear and DTC
Participants holding Certificates will be effected on a delivery-against-payment
basis through the respective Depositaries of Cedel and Euroclear (in such
capacity) and as DTC Participants.
Non-U.S. holders (as described below) of Global Securities will be subject
to U.S. withholding taxes unless such holders meet certain requirements and
deliver appropriate U.S. tax documents to the securities clearing organizations
or their Participants.
INITIAL SETTLEMENT
All Global Securities will be held in book-entry form by DTC in the name of
Cede & Co. as nominee of DTC. Investors' interests in the Global Securities will
be represented through financial institutions acting on their behalf as direct
and indirect Participants in DTC. As a result, Cedel and Euroclear will hold
positions on behalf of their Participants through their Relevant Depositary
which in turn will hold such positions in their accounts as DTC Participants.
Investors electing to hold their Global Securities through DTC will follow
DTC settlement practices. Investor securities custody accounts will be credited
with their holdings against payment in same-day funds on the settlement date.
Investors electing to hold their Global Securities through Cedel or
Euroclear accounts will follow the settlement procedures applicable to
conventional eurobonds, except that there will be no temporary global security
and no "lock-up" or restricted period. Global Securities will be credited to the
securities custody accounts on the settlement date against payment in same-day
funds.
SECONDARY MARKET TRADING
Since the purchaser determines the place of delivery, it is important to
establish at the time of the trade where both the purchaser's and seller's
accounts are located to ensure that settlement can be made on the desired value
date.
Trading between DTC Participants. Secondary market trading between DTC
Participants will be settled using the procedures generally applicable to
mortgage loan asset-backed certificates issues in same-day funds.
Trading between Cedel and/or Euroclear Participants. Secondary market
trading between Cedel Participants or Euroclear Participants will be settled
using the procedures applicable to conventional eurobonds in same-day funds.
Trading between DTC, Seller and Cedel or Euroclear Participants. When
Global Securities are to be transferred from the account of a DTC Participant to
the account of a Cedel Participant or a Euroclear Participant, the purchaser
will send instructions to Cedel or Euroclear through a Cedel Participant or
Euroclear Participant at least one business day prior to settlement. Cedel or
Euroclear will instruct the Relevant Depositary, as the case may be, to receive
the Global Securities against payment. Payment will include interest accrued on
the Global Securities from and including the last coupon payment date to and
excluding the settlement date, on the basis of the Accrual Period for the
related Class. For transactions settling on the 31st of the month, payment will
include interest accrued to and excluding the first day of the following month.
Payment will then be made by the Relevant Depositary to the DTC Participant's
account against delivery of the Global Securities. After settlement has been
completed, the Global Securities will be credited to the respective clearing
system and by the clearing system, in accordance with its usual procedures, to
the Cedel Participant's or Euroclear Participant's account. The securities
credit will appear the next day (European time) and the cash debt will be
back-valued to, and the interest on the Global
I-1
<PAGE>
Securities will accrue from, the value date (which would be the preceding day
when settlement occurred in New York). If settlement is not completed on the
intended value date (i.e., the trade fails), the Cedel or Euroclear cash debt
will be valued instead as of the actual settlement date.
Cedel Participants and Euroclear Participants will need to make available
to the respective clearing systems the funds necessary to process same-day funds
settlement. The most direct means of doing so is to preposition funds for
settlement, either from cash on hand or existing lines of credit, as they would
for any settlement occurring within Cedel or Euroclear. Under this approach,
they may take on credit exposure to Cedel or Euroclear until the Global
Securities are credited to their account one day later.
As an alternative, if Cedel or Euroclear has extended a line of credit to
them, Cedel Participants or Euroclear Participants can elect not to preposition
funds and allow that credit line to be drawn upon to finance settlement. Under
this procedure, Cedel Participants or Euroclear Participants purchasing Global
Securities would incur overdraft charges for one day, assuming they cleared the
overdraft when the Global Securities were credited to their accounts. However,
interest on the Global Securities would accrue from the value date. Therefore,
in many cases the investment income on the Global Securities earned during that
one-day period may substantially reduce or offset the amount of such overdraft
charges, although the result will depend on each Cedel Participant's or
Euroclear Participant's particular cost of funds.
Since the settlement is taking place during New York business hours, DTC
Participants can employ their usual procedures for crediting Global Securities
to the respective European Depositary for the benefit of Cedel Participants or
Euroclear Participants. The sale proceeds will be available to the DTC seller on
the settlement date. Thus, to the DTC Participants a cross-market transaction
will settle no differently than a trade between two DTC Participants.
Trading between Cedel or Euroclear Seller and DTC Purchaser. Due to time
zone differences in their favor, Cedel Participants and Euroclear Participants
may employ their customary procedures for transactions in which Global
Securities are to be transferred by the respective clearing system, through the
respective Depositary, to a DTC Participant. The seller will send instructions
to Cedel or Euroclear through a Cedel Participant or Euroclear Participant at
least one business day prior to settlement. In these cases Cedel or Euroclear
will instruct the respective Depositary, as appropriate, to credit the Global
Securities to the DTC Participant's account against payment. Payment will
include interest accrued on the Global Securities from and including the last
coupon payment to and excluding the settlement date on the basis of the Accrual
Period for the related Class. For transactions settling on the 31st of the
month, payment will include interest accrued to and excluding the first day of
the following month. The payment will then be reflected in the account of Cedel
Participant or Euroclear Participant the following day, and receipt of the cash
proceeds in the Cedel Participant's or Euroclear Participant's account would be
back-valued to the value date (which would be the preceding day, when settlement
occurred in New York). Should the Cedel Participant or Euroclear Participant
have a line of credit with its respective clearing system and elect to be in
debt in anticipation of receipt of the sale proceeds in its account, the
back-valuation will extinguish any overdraft incurred over that one-day period.
If settlement is not completed on the intended value date (i.e., the trade
fails), receipt of the cash proceeds in the Cedel Participant's or Euroclear
Participant's account would instead be valued as of the actual settlement date.
Finally, day traders that use Cedel or Euroclear and that purchase Global
Securities from DTC Participants for delivery to Cedel Participants or Euroclear
Participants should note that these trades would automatically fail on the sale
side unless affirmative action is taken. At least three techniques should be
readily available to eliminate this potential problem:
(a) borrowing through Cedel or Euroclear for one day (until the purchase
side of the trade is reflected in their Cedel or Euroclear accounts) in
accordance with the clearing system's customary procedures;
(b) borrowing the Global Securities in the U.S. from a DTC Participant no
later than one day prior to settlement, which would give the Global Securities
sufficient time to be reflected in their Cedel or Euroclear account in order to
settle the sale side of the trade; or
(c) staggering the value dates for the buy and sell sides of the trade so
that the value date for the purchase from the DTC Participant is at least one
day prior to the value date for the sale to the Cedel Participant or Euroclear
Participant.
CERTAIN U.S. FEDERAL INCOME TAX DOCUMENTATION REQUIREMENTS
A beneficial owner of Global Securities holding securities through Cedel or
Euroclear (or through DTC if the holder has an address outside the U.S.) will be
subject to the 30% U.S. withholding tax that generally applies to payments of
interest (including original issue discount) on registered debt issued by U.S.
Persons (as defined below), unless (i) each clearing system, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business in the chain of intermediaries between such beneficial
owner and the U.S. entity required to withhold tax complies with applicable
certification requirements and (ii) such beneficial owner takes one of the
following steps to obtain an exemption or reduced tax rate:
I-2
<PAGE>
Exemption for Non-U.S. Persons (Form W-8). Beneficial Owners of Global
Securities that are Non-U.S. Persons (as defined below) can obtain a complete
exemption from the withholding tax by filing a signed Form W-8 (Certificate of
Foreign Status). If the information shown on Form W-8 changes, a new Form W-8
must be filed within 30 days of such change.
Exemption for Non-U.S. Persons with effectively connected income (Form
4224). A Non-U.S. Person (as defined below), including a non-U.S. corporation or
bank with a U.S. branch, for which the interest income is effectively connected
with its conduct of a trade or business in the United States, can obtain an
exemption from the withholding tax by filing Form 4224 (Exemption from
Withholding of Tax on Income Effectively Connected with the Conduct of a Trade
or Business in the United States).
Exemption or reduced rate for Non-U.S. Persons resident in treaty countries
(Form 1001). Non-U.S. Persons residing in a country that has a tax treaty with
the United States can obtain an exemption or reduced tax rate (depending on the
treaty terms) by filing Form 1001 (Ownership, Exemption or Reduced Rate
Certificate). If the treaty provides only for a reduced rate, withholding tax
will be imposed at that rate unless the filer alternatively files Form W-8. Form
1001 may be filed by Certificate Owners or their agent.
Exemption for U.S. Persons (Form W-9). U.S. Persons can obtain a complete
exemption from the withholding tax by filing Form W-9 (Payer's Request for
Taxpayer Identification Number and Certification).
U.S. Federal Income Tax Reporting Procedure. The Owner of a Global Security
or, in the case of a Form 1001 or a Form 4224 filer, his agent, files by
submitting the appropriate form to the person through whom it holds the security
(the clearing agency, in the case of persons holding directly on the books of
the clearing agency). Form W-8 and Form 1001 are effective for three calendar
years and Form 4224 is effective for one calendar year.
The term "U.S. Person" means (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity organized in or under
the laws of the United States or any political subdivision thereof, (iii) an
estate the income of which is includible in gross income for United States tax
purposes, regardless of its source or (iv) a trust if a court within the United
States is able to exercise primary supervision of the administration of the
trust and one or more United States fiduciaries have the authority to control
all substantial decisions of the trust. The term "Non-U.S. Person" means any
person who is not a U.S. Person. This summary does not deal with all aspects of
U.S. Federal income tax withholding that may be relevant to foreign holders of
the Global Securities. Investors are advised to consult their own tax advisors
for specific tax advice concerning their holding and disposing of the Global
Securities.
I-3
<PAGE>
APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
PAGE
----
2/28 Loans................................................................S-5
3/27 Loans................................................................S-5
5/25 Loans................................................................S-5
Accrual Period............................................................S-6
Actuarial Loans..........................................................S-33
Advances.................................................................S-15
Aggregate Certificate Principal Balance...................................S-2
ARCC.....................................................................S-28
ARM WAC...................................................................S-1
ARMC......................................................................S-2
Auction Sale.............................................................S-20
Auction Sale Bid Date....................................................S-20
Available Funds Cap Shortfall Amount.....................................S-20
Balloon Mortgage Loans....................................................S-4
Balloon Payments.........................................................S-68
Beneficial Owners..................................................S-20, S-58
Book-Entry Certificates..................................................S-58
Business Day..............................................................S-6
Cede.....................................................................S-20
Cedel....................................................................S-20
Cedel Participants.......................................................S-60
Certificate Account......................................................S-55
Certificate Principal Balance............................................S-65
Certificates..............................................................S-2
Chase....................................................................S-21
Citibank.................................................................S-21
Class.....................................................................S-1
Class A Certificates......................................................S-2
Class A Fixed Rate Certificates...........................................S-2
Class A Group II Certificates.............................................S-2
Class A Principal Distribution Amount....................................S-12
Class A-6 Lockout Distribution Amount....................................S-10
Class A-6 Lockout Percentage.............................................S-11
Class A-6 Lockout Pro Rata Distribution Amount...........................S-11
Class A-7 Certificates....................................................S-1
Class A-8 Certificates....................................................S-1
Class A-8 Lockout Distribution Amount....................................S-11
Class A-8 Lockout Percentage.............................................S-11
Class A-8 Lockout Pro Rata Distribution Amount...........................S-11
Class B-1 Certificates....................................................S-2
Class B-1 Applied Realized Loss Amount...................................S-65
Class B-1 Certificate Principal Balance..................................S-65
Class B-1A Principal Distribution Amount.................................S-13
Class B-1 Realized Loss Amortization Amount..............................S-65
Class B-1A Certificates...................................................S-1
Class B-1F Certificates...................................................S-1
Class C-IO Certificates...................................................S-2
Class Distribution Amount.................................................S-2
Class M-1A Realized Loss Amortization Amount.............................S-65
Class M-1A Applied Realized Loss Amount..................................S-65
Class M-1A Certificate Principal Balance.................................S-65
Class M-1A Principal Distribution Amount.................................S-12
Class M-1A Certificates...................................................S-1
Class M-2A Applied Realized Loss Amount..................................S-65
Class M-2A Certificate Principal Balance.................................S-65
Class M-2A Certificates.............................................S-2, S-65
Class M-2A Principal Distribution Amount.................................S-13
Class M-2A Realized Loss Amortization Amount.............................S-65
Closing Date..............................................................S-2
CMT Loans.................................................................S-5
Code.....................................................................S-20
Collection Period........................................................S-11
Combined Loan-to-Value Ratio..............................................S-3
Compensating Interest....................................................S-69
Cooperative..............................................................S-60
Coupon Rates..............................................................S-3
Current Interest..........................................................S-8
Custodian................................................................S-66
Cut-Off Date..............................................................S-2
Daily Collections........................................................S-68
DCR......................................................................S-75
Definitive Certificate...................................................S-59
Deleted Mortgage Loan....................................................S-30
Delinquency Advance......................................................S-68
Depositor.................................................................S-2
DOL......................................................................S-75
DTC......................................................................S-20
DTC Participants.........................................................S-59
Due Dates................................................................S-69
ERISA..............................................................S-22, S-75
Euroclear................................................................S-20
Euroclear Operator.......................................................S-60
Euroclear Participants...................................................S-60
European Depositaries....................................................S-59
Exemptions...............................................................S-75
Extra Principal Distribution Amount......................................S-14
File.....................................................................S-67
Final Certification......................................................S-67
Final Determination......................................................S-74
Final Scheduled Payment Date.............................................S-48
Financial Intermediary...................................................S-59
Fitch....................................................................S-21
Formula Pass-Through Rate(s)..............................................S-1
Freddie Mac...............................................................S-3
Full Documentation.......................................................S-27
Global Securities.........................................................I-1
Group I Certificates......................................................S-2
Group I Interest Amount Available.........................................S-6
Group I Interest Remittance Amount........................................S-7
Group I Net WAC Cap.......................................................S-1
Group II Certificates.....................................................S-2
Group II Interest Amount Available........................................S-7
Group II Interest Remittance Amount.......................................S-8
Group II Net WAC Cap......................................................S-1
Group II Shortfall.................................................S-19, S-64
Guarantor Reimbursement Amount............................................S-7
HEP......................................................................S-49
IML......................................................................S-60
Interest Carry Forward Amount.............................................S-8
Limited Documentation....................................................S-27
Liquidated Mortgage Loan.................................................S-11
Liquidation Proceeds.....................................................S-68
Loan Balance.............................................................S-66
Loan Purchase Price......................................................S-30
Loan-to-Value Ratio.......................................................S-4
Lower-Tier REMIC Regular Interests.......................................S-74
Lower-Tier REMIC Residual Interest.......................................S-74
Master Servicer...........................................................S-2
Master Servicer Fee.......................................................S-8
Monthly Excess Cash Flow Amount..........................................S-18
A-1
<PAGE>
PAGE
----
Monthly Excess Interest Amount.....................................S-7, S-8
Monthly Remittance Date................................................S-11
Moody's................................................................S-21
Mortgage Loan Group....................................................S-55
Mortgage Loans..........................................................S-3
Mortgaged Properties....................................................S-3
Mortgages...............................................................S-3
Net Coupon Rate........................................................S-30
Net Liquidation Proceeds...............................................S-68
New Century.............................................................S-4
Nonoffered Certificates.................................................S-2
Non-U.S. Person.........................................................I-3
Notes...................................................................S-3
Notional Principal Amount..............................................S-16
Offered Certificates....................................................S-2
One-Month LIBOR........................................................S-58
One-Month LIBOR Determination Date.....................................S-58
Original Certificate Principal Balance..................................S-1
Overcollateralization Amount...........................................S-13
Overcollateralization Deficiency.......................................S-14
Overcollateralization Release Amount...................................S-14
Owner..................................................................S-59
PAGs...................................................................S-28
Pan American............................................................S-5
Participants...........................................................S-58
Pass-Through Rate......................................................S-55
Payment Date............................................................S-6
Percentage Interest....................................................S-55
Plan.............................................................S-22, S-75
Pooling and Servicing Agreement.........................................S-2
Preference Amount......................................................S-14
Prepaid Installments...................................................S-69
Prepayments............................................................S-23
Preservation Expenses..................................................S-69
Principal and Interest Account.........................................S-68
Principal Distribution Amount..........................................S-10
Principal Remittance Amount............................................S-12
Prohibited Transactions................................................S-70
PTE 95-60..............................................................S-76
Qualified Replacement Mortgage...................................S-30, S-67
Rating Agencies........................................................S-21
REMIC..................................................................S-21
REMIC Opinion..........................................................S-66
REO Property...........................................................S-68
Realized Loss....................................................S-16, S-62
Record Date.............................................................S-6
Reference Banks........................................................S-58
Register...............................................................S-55
Registrar..............................................................S-55
Relevant Depositary....................................................S-59
Remittance Period......................................................S-11
Restricted Group.......................................................S-76
Riegle Act.............................................................S-25
Rules..................................................................S-59
S&P....................................................................S-75
Seller..................................................................S-2
Senior Enhancement Percentage..........................................S-13
Senior Specified Enhancement Percentage................................S-14
Servicer................................................................S-2
Servicing Advances.....................................................S-69
Servicing Fee...............................................S-8, S-15, S-68
Servicing Fee Rate.....................................................S-68
Six-Month LIBOR........................................................S-24
Six-Month LIBOR Loans...................................................S-4
SMMEA..................................................................S-22
Special Servicer........................................................S-2
Specially Serviced Mortgage Loan.......................................S-15
Stated Income Documentation............................................S-27
Statistical Mortgage Loans..............................................S-3
Step Up Date...........................................................S-20
Stepdown Date..........................................................S-12
Subordinate Certificates................................................S-2
Subordinated Trigger Event.............................................S-14
Substitution Amount....................................................S-67
Targeted Overcollateralization Amount..................................S-14
Telerate Page 3750.....................................................S-58
Terms and Conditions...................................................S-60
Trigger Event..........................................................S-12
Trust.............................................................S-1, S-54
Trustee.................................................................S-2
Trustee Fee.............................................................S-8
U.S. Person.............................................................I-3
Underwriters...........................................................S-78
Underwriting Agreement.................................................S-78
Underwriting Guidelines................................................S-26
Unpaid Realized Loss Amount............................................S-65
Weighted Average Life..................................................S-48
A-2
<PAGE>
- --------------------------------------------------------------------------------
MORTGAGE LOAN ASSET BACKED SECURITIES
(Issuable in Series)
AMRESCO RESIDENTIAL SECURITIES CORPORATION
(DEPOSITOR)
This Prospectus relates to Mortgage Loan Asset Backed Securities
("Securities") to be issued from time to time in one or more series (and one or
more classes within a series), certain classes of which may be offered on terms
determined at the time of sale and described in this Prospectus and the related
Prospectus Supplement. Each series of Securities will be issued by a separate
trust (each, a "Trust") and will evidence a debt obligation of, or a beneficial
ownership interest in such Trust. The assets of a Trust will include one or
more of the following: (i) single family residential mortgage loans, including
mortgage loans secured by junior liens on the related mortgaged properties and
Title I loans and other types of home improvement retail installment contracts
and timeshare mortgages, (ii) conditional sales contracts and installment sales
or loan agreements or participation interests therein secured by manufactured
housing, (iii) mortgage-backed securities, (iv) other mortgage-related assets
and securities and (v) reinvestment income, reserve funds, cash accounts,
insurance policies (including financial guaranty insurance policies and surety
bonds), guaranties, letters of credit or similar types of credit support or
enhancement as more particularly described in the related Prospectus Supplement.
One or more classes of Securities of a series may be (i) entitled to receive
distributions allocable to principal, principal prepayments, interest or any
combination thereof prior to one or more other classes of Securities of such
series or after the occurrence of certain events or (ii) subordinated in the
right to receive such distributions to one or more senior classes of Securities
of such series, in each case as specified in the related Prospectus Supplement.
Interest on each class of Securities entitled to distributions allocable to
interest may 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. The Depositor
or its affiliates may retain or hold for sale from time to time one or more
classes of a series of Securities.
Distributions on the Securities will be made at the intervals and on the dates
specified in the related Prospectus Supplement from the assets of the related
Trust and any other assets pledged for the benefit of the Securities. An
affiliate of the Depositor may make or obtain for the benefit of the Securities
limited representations and warranties with respect to mortgage assets assigned
to the related Trust. Neither the Depositor nor any of its affiliates will have
any other obligation with respect to the Securities.
The yield on Securities will be affected by the rate of payment of principal
(including prepayments) of mortgage assets in the related Trust. Each series of
Securities will be subject to early termination under the circumstances
described herein and in the related Prospectus Supplement.
If specified in a Prospectus Supplement, an election may be made to treat the
Trust for the related series or specified portions thereof as a "real estate
mortgage investment conduit" ("REMIC") for federal income tax purposes. See
"Certain Federal Income Tax Consequences".
It is a condition to the issuance of the Securities that the Securities be
rated in not less than the fourth highest rating category by a nationally
recognized rating organization.
SEE "RISK FACTORS" BEGINNING ON PAGE 7 HEREIN AND IN THE SECTION ENTITLED
"RISK FACTORS" IN THE RELATED PROSPECTUS SUPPLEMENT FOR A DISCUSSION OF
SIGNIFICANT RISK FACTORS.
See "ERISA Considerations" herein and in the related Prospectus Supplement for
a discussion of restrictions on the acquisition of Securities by "plan
fiduciaries."
AN INVESTOR SHOULD CAREFULLY REVIEW THE INFORMATION IN THE RELATED PROSPECTUS
SUPPLEMENT CONCERNING THE RISKS ASSOCIATED WITH THE DIFFERENT TYPES AND CLASSES
OF SECURITIES.
THE ASSETS OF A TRUST ARE THE SOLE SOURCE OF PAYMENTS ON THE RELATED
SECURITIES. THE SECURITIES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR ANY
OF THEIR AFFILIATES, EXCEPT AS SET FORTH HEREIN AND IN THE RELATED PROSPECTUS
SUPPLEMENT. NEITHER THE SECURITIES NOR THE UNDERLYING MORTGAGE ASSETS WILL BE
GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR INSTRUMENTALITY OR BY THE
DEPOSITOR, ANY SERVICER, ANY MASTER SERVICER, ANY ORIGINATOR, ANY TRUSTEE OR ANY
OF THEIR AFFILIATES, EXCEPT AS SET FORTH IN THE RELATED PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
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 Securities may be made through one or more different methods,
including offerings through underwriters, as more fully described herein and in
the related Prospectus Supplement. See "Plan of Distribution" herein and
"Underwriting" in the related Prospectus Supplement.
There will have been no public market for any series of Securities prior to
the offering thereof. There can be no assurance that a secondary market will
develop for the Securities 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 SECURITIES UNLESS ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
- --------------------------------------------------------------------------------
The date of this Prospectus is September 5, 1997.
<PAGE>
AVAILABLE INFORMATION
A Registration Statement under the Securities Act of 1933, as amended (the
"1933 Act"), has been filed with the Securities and Exchange Commission (the
"Commission") with respect to the Securities. The Registration Statement and
amendments thereof and the exhibits thereto, as well as such reports and other
information, are available for inspection without charge at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549; 7 World Trade Center, 13th Floor, New York, New York 10048; and
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. Copies of the Registration Statement and amendments thereof and exhibits
thereto may be obtained from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates and
electronically through the Commission's Electronic Data Gathering, Analysis and
Retrieval system at the Commission's Web site (http:\\www.sec.gov).
No person has been authorized to give any information or to make any
representation other than those contained in this Prospectus and any Prospectus
Supplement with respect hereto and, if given or made, such information or
representations must not be relied upon. This Prospectus and any Prospectus
Supplement with respect hereto do not constitute an offer to sell or a
solicitation of an offer to buy any securities other than the Securities offered
hereby and thereby nor an offer of the Securities to any person in any state or
other jurisdiction in which such offer would be unlawful. The delivery of this
Prospectus at any time does not imply that information herein is correct as of
any time subsequent to its date.
REPORTS TO OWNERS
Periodic and annual reports concerning the Securities and the related Trust
will be provided to the persons in whose names the Securities are registered.
See "Administration-Reports" herein. If specified in the related Prospectus
Supplement, the Securities may be issuable in book-entry form. In such event,
the Securities will be registered in the name of a Clearing Agency (as defined
herein) and, therefore, the Clearing Agency will be the registered owner for
purposes hereof. All reports will be provided to the Clearing Agency, which in
turn will provide such reports to its Clearing Agency Participants (as defined
herein). Such Clearing Agency Participants will then forward such reports to
the beneficial owners of Certificates. See "Description of the Certificates--
Book-Entry Registration." The Depositor will file or cause to be filed with the
Commission such periodic reports with respect to each Trust as are required
under the Securities Exchange Act of 1934 (the "Exchange Act") and the rules and
regulations of the Commission thereunder. It is the Depositor's intent to
suspend filing such reports as soon as such reports are no longer statutorily
required.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents filed with respect to each respective Trust pursuant to
Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act subsequent to the date
of this Prospectus and prior to the termination of the offering of the
Securities of such Trust offered hereby shall be deemed to be incorporated by
reference into this Prospectus when delivered with respect to such Trust. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain, without charge,
upon written or oral request, a copy of any of the documents incorporated by
reference herein, except for the exhibits to such documents (other than the
documents expressly incorporated therein by reference). Requests should be
directed to AMRESCO Residential Securities Corporation, 700 N. Pearl Street,
Suite 2400, Dallas, Texas 75201 (telephone number (214) 953-7700.
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY OF PROSPECTUS......................................... 1
RISK FACTORS.................................................. 7
DESCRIPTION OF THE SECURITIES................................. 10
General..................................................... 11
Classes of Securities....................................... 11
Distributions of Principal and Interest..................... 12
Book Entry Registration..................................... 14
List of Owners of Securities................................ 14
THE TRUSTS.................................................... 14
Mortgage Loans.............................................. 15
Contracts................................................... 17
Mortgage-Backed Securities.................................. 17
Other Mortgage Securities................................... 17
CREDIT ENHANCEMENT............................................ 17
SERVICING OF MORTGAGE LOANS AND CONTRACTS..................... 22
Payments on Mortgage Loans.................................. 22
Advances.................................................... 23
Collection and Other Servicing Procedures................... 23
Primary Mortgage Insurance.................................. 25
Standard Hazard Insurance................................... 25
Title Insurance Policies.................................... 26
Claims Under Primary Mortgage Insurance Policies and
Standard Hazard Insurance Policies; Other Realization
Upon Defaulted Loan....................................... 26
Servicing Compensation and Payment of Expenses.............. 27
Master Servicer............................................. 27
ADMINISTRATION................................................ 27
Assignment of Mortgage Assets............................... 28
Evidence as to Compliance................................... 30
The Trustee................................................. 30
Administration of the Security Account...................... 30
Reports..................................................... 31
Forward Commitments; Pre-Funding............................ 32
Servicer Events of Default.................................. 32
Rights Upon Servicer Event of Default....................... 33
Amendment................................................... 33
Termination................................................. 33
USE OF PROCEEDS............................................... 34
THE DEPOSITOR................................................. 34
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS.................. 34
General..................................................... 34
Foreclosure................................................. 35
Soldiers' and Sailors' Civil Relief Act..................... 40
The Contracts............................................... 40
The Title I Program......................................... 43
LEGAL INVESTMENT MATTERS...................................... 43
ERISA CONSIDERATIONS.......................................... 44
CERTAIN FEDERAL INCOME TAX CONSEQUENCES....................... 45
Federal Income Tax Consequences For REMIC Securities........ 46
Taxation of Regular Securities.............................. 47
Taxation of Residual Securities............................. 52
Treatment of Certain Items of REMIC Income and Expense...... 54
Tax-Related Restrictions on Transfer of Residual Securities. 56
Sale or Exchange of a Residual Security..................... 58
Taxes That May Be Imposed on the REMIC Pool................. 58
Liquidation of the REMIC Pool............................... 59
Administrative Matters...................................... 59
Limitations on Deduction of Certain Expenses................ 59
Taxation of Certain Foreign Investors....................... 60
Backup Withholding.......................................... 61
Reporting Requirements...................................... 61
Federal Income Tax Consequences for Securities as to Which
No REMIC Election Is Made................................. 61
Premium and Discount........................................ 63
Stripped Securities......................................... 64
Reporting Requirements and Backup Withholding............... 66
Taxation of Certain Foreign Investors....................... 67
Debt Securities............................................. 67
Taxation of Securities Classified as Partnership Interests.. 68
PLAN OF DISTRIBUTION.......................................... 68
RATINGS....................................................... 69
LEGAL MATTERS................................................. 69
FINANCIAL INFORMATION......................................... 69
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS..................A-1
<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 Securities and to
the related Agreement (as defined herein) which will be prepared in connection
with each series of Securities. 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.
SECURITIES.............. Mortgage Loan Asset Backed Securities, issuable in
series, in fully registered form or book entry only
form, in authorized denominations, as described in the
Prospectus Supplement (the "Securities"). Each Security
will evidence a debt obligation of, or a beneficial
ownership interest in, a trust (a "Trust") created from
time to time pursuant to a pooling and servicing
agreement or trust agreement (each, an "Agreement").
Securities evidencing a debt obligation of a Trust will
be issued pursuant to a trust indenture (each, an
"Indenture") between the Trust and an indenture
trustee.
THE DEPOSITOR.......... AMRESCO Residential Securities Corporation (the
"Depositor") is a Delaware corporation. The Depositor's
principal executive offices are located at 700 N. Pearl
Street, Suite 2400, Dallas, Texas 75201; telephone
number (214) 953-7700. See "The Depositor" herein. The
Depositor or its affiliates may retain or hold for sale
from time to time one or more classes of a series of
Securities.
THE SERVICER........... The entity or entities named as the Servicer in the
Prospectus Supplement (the "Servicer"), will act as
servicer, with respect to the Mortgage Loans and
Contracts included in the related Trust. The Servicer
may be an affiliate of the Depositor and may be the
seller of Mortgage Assets to the Depositor (each, a
"Seller").
THE MASTER SERVICER.... A "Master Servicer" may be specified in the related
Prospectus Supplement for the related series of
Securities.
THE TRUSTEE............ The trustee (the "Trustee") for each series of
Securities which evidence a beneficial ownership
interest in the Trust will be specified in the related
Prospectus Supplement.
THE INDENTURE TRUSTEE... The indenture trustee (the "Indenture Trustee") for
each series of Securities which evidence a debt
obligation of the Trust will be specified in the
related Prospectus Supplement.
TRUST ASSETS............ The assets of a Trust will be mortgage-related assets
(the "Mortgage Assets") consisting of one or more of
the following types of assets:
A. The Mortgage Loans... "Mortgage Loans" may include: (i) conventional (i.e.,
not insured or guaranteed by any governmental agency)
Mortgage Loans secured by one-to-four family
residential properties; (ii) Mortgage Loans secured by
security interests in shares issued by private, non-
profit, cooperative housing corporations
("Cooperatives") and in the related proprietary leases
or occupancy agreements granting exclusive rights to
occupy specific dwelling units in such Cooperatives'
buildings; (iii) Mortgage Loans secured by junior liens
on the related mortgaged properties, including
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Title I Loans and other types of home improvement
retail installment contracts; and (iv) Mortgage Loans
secured by timeshare estates representing an ownership
interest in common with other owners in one or more
vacation units entitling the owner thereof to the
exclusive use of a unit and access to the accompanying
recreational facilities for the week or weeks owned.
See "The Trusts -- Mortgage Loans" herein.
B. Contracts........... Contracts may include conditional sales contracts and
installment sales or loan agreements or participation
interests therein secured by new or used Manufactured
Homes (as defined herein). Contracts may be
conventional (i.e., not insured or guaranteed by any
government agency) or insured by the Federal Housing
Administration ("FHA"), including Title I Contracts, or
partially guaranteed by the Veterans Administration
("VA"), as specified in the related Prospectus
Supplement. See "The Trusts -- Contracts" herein.
C. Mortgage-Backed
Securities......... "Mortgage-Backed Securities" (or "MBS") may include (i)
private (that is, not guaranteed or insured by the
United States or any agency or instrumentality thereof)
mortgage participations, mortgage pass-through
certificates or other mortgage-backed securities or
(ii) certificates insured or guaranteed by Federal Home
Loan Mortgage Corporation ("FHLMC") or Federal National
Mortgage Association ("FNMA") or Government National
Mortgage Association ("GNMA"). See "The Trusts --
Mortgage-Backed Securities" herein.
D. Other Mortgage
Assets............. Trust assets may also include reinvestment income,
reserve funds, cash accounts, insurance policies
(including financial guaranty insurance policies and
surety bonds), guaranties, letters of credit or similar
types of credit support or enhancement as described in
the related Prospectus Supplement.
The related Prospectus Supplement for a series of
Securities will describe the Mortgage Assets to be
included in the Trust for such series.
THE SECURITIES......... The Securities of any series may be issued in one or
more classes, as specified in the Prospectus
Supplement. One or more classes of Securities of each
series (i) may be entitled to receive distributions
allocable 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 Securities 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
combination thereof to one or more other classes of
Securities of such series throughout the lives of the
Securities 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 basis of collections from designated portions
of the Mortgage Assets in the related Trust; (vi) as to
Securities 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 interest added to the principal or notional
amount of the Securities, and no payments being made
thereon until certain other classes of the series have
been paid in full; and (viii) as to Securities entitled
to distributions allocable to interest,
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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
related Prospectus Supplement. The timing and amounts
of such distributions may vary among classes, over
time, or otherwise as specified in the related
Prospectus Supplement.
DISTRIBUTIONS ON
THE SECURITIES........ The related Prospectus Supplement will specify (i)
whether distributions on the Securities entitled
thereto will be made monthly, quarterly, semi-annually
or at other intervals and dates out of the payments
received in respect of the Mortgage Assets included in
the related Trust and other assets, if any, pledged for
the benefit of the related Owners of Securities; (ii)
the amount allocable to payments of principal and
interest on any Distribution Date; and (iii) whether
all distributions will be made pro rata to Owners of
Securities of the class entitled thereto.
The aggregate original principal balance of the
Securities will equal the aggregate distributions
allocable to principal that such Securities will be
entitled to receive; the Securities will have an
aggregate original principal balance equal to or less
than the aggregate unpaid principal balance of the
related Mortgage Assets (plus amounts held in a Pre-
Funding Account, if any) as of the first day of the
month of creation of the Trust; and the Securities will
bear interest in the aggregate at a rate (the "Pass-
Through Rate") equal to the interest rate borne by the
related Mortgage Assets net of servicing fees and any
other specified amounts.
PRE-FUNDING ACCOUNT.... A Trust may enter into an agreement (each, a "Pre-
Funding Agreement") with the Depositor whereby the
Depositor will agree to transfer additional Mortgage
Assets to such Trust following the date on which such
Trust is established and the related Securities are
issued. Any Pre-Funding Agreement will require that any
Mortgage Loans so transferred conform to the
requirements specified in such Pre-Funding Agreement.
If a Pre-Funding Agreement is to be utilized, the
related Trustee will be required to deposit in a
segregated account (each, a "Pre-Funding Account") all
or a portion of the proceeds received by the Trustee in
connection with the sale of one or more classes of
Securities of the related series; subsequently, the
additional Mortgage Assets will be transferred to the
related Trust in exchange for money released to the
Depositor from the related Pre-Funding Account. Each
Pre-Funding Agreement will set a specified period
during which any such transfers must occur, which
period will not exceed 90 days from the date the Trust
is established. If all moneys originally deposited to
such Pre-Funding Account are not used by the end of
such specified period, then any remaining moneys will
be applied as a mandatory prepayment of a class or
classes of Securities as specified in the related
Prospectus Supplement. The specified period for the
acquisition by a Trust of additional Mortgage Loans
will generally not exceed three months from the date
such Trust is established.
OPTIONAL TERMINATION... The Servicer, the Seller, the Depositor or, if
specified in the related Prospectus Supplement, the
Owners of a related class of Securities or a credit
enhancer may at their respective options effect early
retirement of
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a series of Securities through the purchase of the
Mortgage Assets in the related Trust. See
"Administration -- Termination" herein.
MANDATORY TERMINATION.. The Trustee, the Servicer or certain other entities
specified in the related Prospectus Supplement may be
required to effect early retirement of a series of
Securities by soliciting competitive bids for the
purchase of the Mortgage Assets of the related Trust or
otherwise. See "Administration -- Termination" herein.
ADVANCES............... The Servicer of the Mortgage Loans and Contracts will
be obligated (but only as specified in the related
Prospectus Supplement) to advance delinquent
installments of principal and/or interest (less
applicable servicing fees) on the Mortgage Loans and
Contracts in a Trust. Any such obligation to make
advances may be limited to amounts due to the Owners of
Securities of the related series, to amounts deemed to
be recoverable from late payments or liquidation
proceeds, to specified periods or to any combination
thereof, in each case as specified in the related
Prospectus Supplement. Any such advance will be
recoverable under the terms and conditions specified in
the related Prospectus Supplement. See "Servicing of
Mortgage Loans and Contracts" herein.
CREDIT ENHANCEMENT..... If specified in the related Prospectus Supplement, a
series of Securities, or certain classes within such
series, 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,
financial guaranty insurance policies, a bankruptcy
bond, reserve funds, other insurance, guaranties and
similar instruments and arrangements. The protection
against losses afforded by any such Credit Enhancement
will be limited. If Owners of Securities are materially
dependent upon Credit Enhancement for timely payments
of interest and/or principal on their Securities, the
related Prospectus Supplement will include information,
including financial information, concerning the
provider of such Credit Enhancement. See "Credit
Enhancement" herein.
BOOK ENTRY
REGISTRATION.......... Securities of one or more classes of a series may be
issued in book entry form ("Book Entry Securities") 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
Securities may be made only through entries on the
books of the Clearing Agency in the name of brokers,
dealers, banks and other organizations eligible to
maintain accounts with the Clearing Agency ("Clearing
Agency Participants") or their nominees. Transfers and
pledges by purchasers and other beneficial owners of
Book Entry Securities ("Beneficial Owners") other than
Clearing Agency Participants may be effected only
through Clearing Agency Participants. All references to
the Owners of Securities shall mean Beneficial Owners
to the extent Beneficial Owners may exercise their
rights through a Clearing Agency. Except as otherwise
specified in this Prospectus or a related Prospectus
Supplement, the term "Owners" shall be deemed to
include Beneficial Owners. See "Risk Factors -- Book
Entry Registration" and "Description of the
Securities -- Book Entry Registration" herein.
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CERTAIN FEDERAL INCOME
TAX CONSEQUENCES...... Federal income tax consequences will depend on, among
other factors, whether one or more elections are made
to treat a Trust or specified portions thereof as a
"real estate mortgage investment conduit" ("REMIC")
under the Internal Revenue Code of 1986, as amended
(the "Code"), or, if no REMIC election is made, whether
the Securities are considered to be debt obligations,
Standard Securities, Stripped Securities or Partnership
Interests. The related Prospectus Supplement for each
series of Securities will specify whether a REMIC
election will be made. See "Certain Federal Income Tax
Consequences" herein and in the related Prospectus
Supplement.
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 Securities could give rise to a transaction
prohibited or otherwise impermissible under ERISA or
the Code. Certain classes of Securities may not be
transferred unless the Trustee and the Depositor 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 Depositor or the Servicer to
additional obligations. See "Description of the
Securities -- General" herein and "ERISA
Considerations" herein and in the related Prospectus
Supplement.
LEGAL INVESTMENT
MATTERS............... The Prospectus Supplement for each series of Securities
will specify which, if any, of the classes of
Securities offered thereby constitute "mortgage related
securities" for purposes of the Secondary Mortgage
Market Enhancement Act of 1984 ("SMMEA"). Classes of
Securities that qualify as "mortgage related
securities" will be legal investments for certain types
of institutional investors to the extent provided in
SMMEA, subject, in any case, to any other regulations
which may govern investments by such institutional
investors. Institutions whose investment activities are
subject to review by federal or state authorities
should consult with their counsel or the applicable
authorities to determine whether an investment in a
particular class of Securities (whether or not such
class constitutes a "mortgage related security")
complies with applicable guidelines, policy statements
or restrictions. See "Legal Investment." See "Legal
Investment Considerations" herein and in the related
Prospectus Supplement.
USE OF PROCEEDS........ Substantially all the net proceeds from the sale of a
series of Securities will be applied to the purchase of
the Mortgage Assets included or to be included in the
related Trust (or to reimburse the amounts previously
used to effect such purchase), the costs of carrying
the Mortgage Assets until sale of the Securities and to
pay other expenses. See "Use of Proceeds" herein.
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RATING................. It is a condition to the issuance of each class of
Securities that each class of the Securities of such
Series be rated by one or more of Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings
Services ("S&P") and Fitch Investors Service, Inc.
("Fitch" and each of Fitch, Moody's and S&P, a "Rating
Agency") in one of their four highest rating
categories; provided, however, that one or more classes
of Subordinated Securities and Residual Securities need
not be so rated. A security rating is not a
recommendation to buy, sell or hold securities and may
be subject to revision or withdrawal at any time. No
person is obligated to maintain any rating on any
Security, and, accordingly, there can be no assurance
that the ratings assigned to any class of Securities
upon initial issuance thereof will not be lowered or
withdrawn by a Rating Agency at any time thereafter. If
a rating of any class of Securities of a Series is
revised or withdrawn, the liquidity of such class of
Securities may be adversely affected. In general, the
ratings address credit risk and do not represent any
assessment of the likelihood or rate of principal
prepayments. See "Risk Factors" herein and "Ratings" in
the related Prospectus Supplement.
RISK FACTORS........... Investment in the Securities will be subject to one or
more risk factors, including declines in the value of
Mortgaged Properties, prepayment of Mortgage Loans,
higher risks of defaults on particular types of
Mortgage Loans, limitations on security for the
Mortgage Loans, limitations on credit enhancement,
consumer credit laws affecting the Mortgage Assets,
interest rates on the Mortgage Assets resetting at
different times or using different indices than the
Securities, availability of Mortgage Assets to satisfy
Pre-Funding Agreements and various other factors. See
"Risk Factors" herein and in the related Prospectus
Supplement.
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RISK FACTORS
Prospective investors should consider, among other things, the following
risk factors in connection with the purchase of the Securities:
Declining Real Estate Market; Geographic Concentration. If the residential
real estate market in general or a regional or local area where Mortgage Assets
for a Trust are concentrated should experience an overall decline in property
values, a significant downturn in economic conditions or a natural disaster,
rates of delinquencies, foreclosures and losses could be higher than those now
generally experienced in the mortgage lending industry. See "The Trusts --
Mortgage Loans" herein.
Limited Obligations. The Securities will not represent an interest in or
obligation of the Depositor. The Securities of each series will not be insured
or guaranteed by any government agency or instrumentality, the Depositor, any
Servicer or the Seller.
Prepayment Considerations; Optional Termination. The prepayment experience
on Mortgage Loans or Contracts constituting or underlying the Mortgage Assets
will affect the average life of each class of Securities relating to a Trust.
Prepayments may be influenced by a variety of economic, geographic, social and
other factors, including changes in interest rate levels. In general, if
mortgage interest rates fall, the rate of prepayment would be expected to
increase. Conversely, if mortgage interest rates rise, the rate of prepayment
would be expected to decrease. Other factors affecting prepayment of mortgage
loans include changes in housing needs, job transfers, unemployment and
servicing decisions. See "Prepayment and Yield Considerations" in the related
Prospectus Supplement. In addition, investors in the Securities should be aware
that the Servicer, the Seller or, if specified in the related Prospectus
Supplement, the Owners of a Class of Securities or a credit enhancer may at
their respective options effect early retirement of a series of Securities
through the purchase of Mortgage Assets from the related Trust. See
"Administration -- Termination" herein.
Risk of Higher Default Rates for Mortgage Loans with Balloon Payments. A
portion of the aggregate principal balance of the Mortgage Loans at any time may
be "balloon loans" that provide for the payment of the unamortized principal
balance of such Mortgage Loan in a single payment at maturity ("Balloon Loans").
Such Balloon Loans provide for equal monthly payments, consisting of principal
and interest, generally based on a 30-year amortization schedule, and a single
payment of the remaining balance of the Balloon Loan generally 5, 7, 10 or 15
years after origination. Amortization of a Balloon Loan based on a scheduled
period that is longer than the term of the loan results in a remaining principal
balance at maturity that is substantially larger than the regular scheduled
payments. The Depositor does not have any information regarding the default
history or prepayment history of payments on Balloon Loans. Because borrowers
of Balloon Loans are required to make substantial single payments upon maturity,
it is possible that the default risk associated with the Balloon Loans is
greater than that associated with fully-amortizing Mortgage Loans.
Security Interests and Other Aspects of the Contracts. Contracts may be
secured by a security interest in a Manufactured Home. Perfection of security
interests in the Manufactured Homes and enforcement of rights to realize upon
the value of the Manufactured Homes as collateral for the Contracts are subject
to a number of federal and state laws, including the Uniform Commercial Code as
adopted in each state and each state's certificate of title statutes. The steps
necessary to perfect the security interest in a Manufactured Home will vary from
state to state. Because of the expense and administrative inconvenience
involved, no party will be required to amend any certificates of title to change
the lienholder specified therein to the Trustee and no party will be required to
deliver any certificate of title to the Trustee or note thereon the Trustee's
interest. Consequently, in some states, in the absence of such an amendment,
the assignment to the Trustee of the security interest in the Manufactured Home
may not be effective or such security interest may not be perfected and, in the
absence of such notation or delivery to the Trustee, the assignment of the
security interest in the Manufactured Home may not be effective against
creditors of the previous owner of the related Contract or a trustee in
bankruptcy of such previous owner. In addition, numerous federal and state
consumer protection laws impose requirements on lending under conditional sales
contracts and installment loan agreements such as the Contracts, and the failure
by the lender or seller of goods to comply with such requirements could give
rise to liabilities of assignees for amounts due under such agreements and
claims by such assignees may be subject to set-off as a result of such lender's
or seller's noncompliance. These
7
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laws would apply to the Trustee as assignee of the Contracts. Each Seller of
Contracts will warrant that each Contract sold by it complies with all
requirements of law and will make certain warranties relating to the validity,
subsistence, perfection and priority of the security interest in each
Manufactured Home securing a Contract. A breach of any such warranty that
materially adversely affects any Contract would create an obligation of the
Seller to repurchase such Contract unless such breach is cured. If any related
Credit Enhancement is exhausted and recovery of amounts due on the Contracts is
dependent on repossession and resale of Manufactured Homes securing Contracts
that are in default, certain other factors may limit the ability of the Trust to
realize upon the Manufactured Homes or may limit the amount realized to less
than the amount due. See "Certain Legal Aspects of the Mortgage Assets -- The
Contracts" herein.
Limited Liquidity. There will be no market for the Securities 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
liquidity of investment or will continue for the life of the Securities of such
series. The market value of some or all of the classes of Securities will
fluctuate with changes in prevailing rates of interest. Consequently, the sale
of Securities in any market that may develop may be at a discount from the
principal amount or purchase price. Owners of Securities generally have no right
to request redemption of Securities, and the Securities are subject to
redemption only under the limited circumstances described in the related
Prospectus Supplement
Limited Assets. Owners of Securities of each series must rely upon
distributions on the related Mortgage Assets, together with the other specific
assets pledged for the benefit of such series (which assets may be subject to
release from such pledge prior to payment in full of the Securities), for the
payment of principal of, and interest on, that series of Securities. If the
assets comprising the Trust are insufficient to make payments on such
Securities, no other assets of the Depositor will be available for payment of
the deficiency. Because payments of principal will be applied to classes of
outstanding Securities of a series in the priority specified in the related
Prospectus Supplement, a deficiency may have a disproportionately greater effect
on the Securities of classes having lower priority in payment. In addition, due
to the priority of payments and the allocation of losses, defaults experienced
on the assets comprising a Trust may have a disproportionate effect on a
specified class or classes within such series.
Limitations, Reduction and Substitution of Credit Enhancement. Credit
Enhancement may 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 Financial Guaranty Insurance Policy, a Special Hazard Insurance
Policy, a bankruptcy bond, one or more Reserve Funds, other insurance,
guaranties and similar instruments and agreements, or any combination thereof.
Regardless of the Credit Enhancement provided, the amount of coverage may be
limited in amount and in most cases will be subject to periodic reduction in
accordance with a schedule or formula. Furthermore, such Credit Enhancement 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 may be permitted
to reduce, terminate or substitute all or a portion of the Credit Enhancement
for any series of Securities, if the applicable rating agencies indicate that
the then-current rating thereof will not be adversely affected.
Original Issue Discount. All the Compound Interest Securities and Stripped
Securities that are entitled only to interest distributions will be, and certain
of the other Securities may be, issued with original issue discount for federal
income tax purposes. An Owner of a Security 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 such Securities
generally will be treated as original issue discount for this purpose.
Moreover, the calculation of original issue discount on REMIC Securities (as
defined herein) is subject to uncertainties because of the lack of guidance from
the Internal Revenue Service under applicable statutory provisions. See
"Certain Federal Income Tax Consequences -- Federal Income Tax Consequences for
REMIC Securities," "-- Taxation of Regular Securities -- Variable Rate Regular
Securities," "Certain Federal Income Tax Consequences -- Federal Income Tax
Consequences for Securities as to Which No REMIC Election Is Made -- Standard
Securities," and "Certain Federal Income Tax Consequences -- Premium and
Discount" and "-- Stripped Securities" herein.
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Book Entry Registration. Because transfers and pledges of Book Entry
Securities may be effected only through book entries at a Clearing Agency
through Clearing Agency Participants, the liquidity of the secondary market for
Book Entry Securities may be reduced to the extent that some investors are
unwilling to hold Securities in book entry form in the name of Clearing Agency
Participants and the ability to pledge Book Entry Securities may be limited due
to lack of a physical certificate. Beneficial Owners of Book Entry Securities
may, in certain cases, experience delay in the receipt of payments of principal
and interest because 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 Securities 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 Securities may be impaired.
The Status of the Mortgage Assets in the Event of Bankruptcy of the Seller.
The Seller and the Depositor intend that the transfers of the Mortgage Assets
from the Seller to the Depositor, and in turn to the applicable Trust,
constitute sales rather than pledges to secure indebtedness for insolvency
purposes. If, however, the Seller were to become a debtor under the federal
bankruptcy code, it is possible that a creditor, trustee-in-bankruptcy or
receiver of the Seller may argue that the sale thereof by the 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 on the related Securities.
Junior Lien Mortgage Loans. Because Mortgage Loans secured by junior
(i.e., second, third, etc.) liens are subordinate to the rights of the
beneficiaries under the related senior deeds of trust or senior mortgages, a
decline in the residential real estate market would adversely affect the
position of the related Trust as a junior beneficiary or junior mortgagee before
having such an effect on the position of the related senior beneficiaries or
senior mortgagees. A rise in interest rates over a period of time, the general
condition of a Mortgaged Property and other factors may also have the effect of
reducing the value of the Mortgaged Property from the value at the time the
junior lien Mortgage Loan was originated and, as a result, may reduce the
likelihood that, in the event of a default by the borrower, liquidation or other
proceeds will be sufficient to satisfy the junior lien Mortgage Loan after
satisfaction of any senior liens and the payment of any liquidation expenses.
Liquidation expenses with respect to defaulted Mortgage Loans do not vary
directly with the outstanding principal balance of the Mortgage Loans at the
time of default. Therefore, assuming that a Servicer took the same steps in
realizing upon defaulted Mortgage Loans having small remaining principal
balances as in the case of defaulted Mortgage Loans having larger principal
balances, the amount realized after expenses of liquidation would be smaller as
a percentage of the outstanding principal balance of the smaller Mortgage Loans.
To the extent the average outstanding principal balances of the Mortgage Loans
in a Trust are relatively small, realizations net of liquidation expenses may
also be relatively small as a percentage of the principal amount of the Mortgage
Loans.
Reliance on Management of the Timeshare Unit. Unlike most conventional
single-family residential properties, the value of a timeshare unit is
substantially dependent on the management of the resort property in which it is
located. Management of timeshare resort properties includes operation of a
reservation system, maintenance of the physical structure, refurbishing of
individual units, maintenance and management of common areas and recreational
facilities, and facilitating the rental of individual units on behalf of
timeshare owners. In addition, timeshare units, which are purchased for
intervals of one or more specified weeks each year, are marketed as the owner's
purchase of future vacation opportunities rather than as a primary residence, a
second home or an investment. Accordingly, while Mortgagors are obligated to
make payments under their Mortgage Loan irrespective of any defect in, damage to
or change in conditions (such as poor management, faulty construction or
physical, social or environmental conditions) relating to the timeshare
properties, any such defect, damage or change in conditions could result in
delays in payment or in defaults by Mortgagors whose timeshare units are
affected.
Limitations on Interest Payments and Foreclosures. Generally, under the
terms of the Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the
"Relief Act"), or similar state legislation, a Mortgagor who enters military
service after the origination of the related Mortgage Loan (including a
Mortgagor 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 (including fees and charges) above an annual rate of
6% during the period of such
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Mortgagor's active duty status, unless a court orders otherwise upon application
of the lender. It is possible that such action could have an effect, for an
indeterminate period of time, on the ability of the related Servicer to collect
full amounts of interest on certain of the Mortgage Loans. In addition, the
Relief Act imposes limitations that would impair the ability of the related
Servicer to foreclose on an affected Mortgage Loan during the Mortgagor'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.
Limited Nature of Ratings. It is a condition to the issuance of the
Securities that each class of Securities be rated in one of the four highest
rating categories by one or more of Moody's, S&P or Fitch. See "Summary of
Prospectus -- Ratings" herein. A security rating is not a recommendation to buy,
sell or hold securities and may be subject to revision or withdrawal at any
time. No person is obligated to maintain the rating on any Certificate, and,
accordingly, there can be no assurance that the ratings assigned to any class of
Securities on the date on which such Securities are initially issued will not be
lowered or withdrawn by a Rating Agency at any time thereafter. In the event any
rating is revised or withdrawn, the liquidity of the related Securities may be
adversely affected. Issuance of any of the Securities in book-entry form may
reduce the liquidity of such Securities in the secondary trading market because
investors may be unwilling to purchase Securities for which they cannot obtain
physical securities.
Applicable Legal and Regulatory Risks. Applicable federal and state laws
generally regulate interest rates and other charges, require certain
disclosures, prohibit unfair and deceptive practices, regulate debt collection
and require licensing of the originators of the mortgage loans and contracts.
Depending on the provisions of the applicable law and the specified facts and
circumstances involved, violations of those laws, policies and principles may
limit the ability to collect all or part of the principal of or interest on the
Mortgage Loans and Contracts and may entitle the borrower to a refund of amounts
previously paid. In addition, many state and local authorities have imposed
stringent restrictions on the operations of timeshare developers, including
requirements of filing registration statements and advertising material with
state regulatory authorities regarding timeshare units being offered and
permitting the right to rescind an executed contract within specified time
periods and possibly permitting such purchasers to recover damages from such
timeshare developers. Such remedies could adversely affect the quality of
management of the related resort, in particular, the ability of the management
of the related resorts to minimize losses through remarketing efforts and/or
through the assumption programs. See "Certain Legal Aspects of the Mortgage
Assets" herein.
DESCRIPTION OF THE SECURITIES
Each Trust will be created pursuant to an Agreement entered into among the
Depositor, the Trustee, the Master Servicer, if any, and the Servicer. The
provisions of each Agreement will vary depending upon the nature of the
Securities to be issued thereunder and the nature of the related Trust.
Securities which represent beneficial interests in the Trust will be issued
pursuant to the Agreement. Securities which represent debt obligations of the
Trust will be issued pursuant to an Indenture between the Trust and the
Indenture Trustee. The following summaries and the summaries set forth under
"Administration" describe certain provisions relating to each series of
Securities. THE PROSPECTUS SUPPLEMENT FOR A SERIES OF SECURITIES WILL DESCRIBE
THE SPECIFIC PROVISIONS RELATING TO SUCH SERIES. Such summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, all the provisions of the Agreement for each series of Securities.
The Depositor will provide Owners, without charge, on written request a copy of
the Agreement for the related series. Requests should be addressed to AMRESCO
Residential Securities Corporation, 700 N. Pearl Street, Suite 2400, Dallas,
Texas 75201. The Agreement relating to a series of Securities will be filed
with the Securities and Exchange Commission within 15 days after the date of
issuance of such series of Securities (the "Delivery Date").
The Securities of a series will be entitled to payment only from the
Mortgage Assets of the Trust and any other assets pledged for the benefit of the
Securities and will not be entitled to payments in respect of the assets
included in any other trust fund established by the Depositor. The Securities
will not represent obligations of the Depositor, the Trustee, the Master
Servicer, if any, any Servicer or any affiliate thereof and will not be
guaranteed by any governmental agency. See "The Trusts" herein.
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The Mortgage Assets relating to a series of Securities, other than Title I
Loans and GNMA MBS, will not be insured or guaranteed by any governmental entity
and, to the extent that delinquent payments on or losses in respect of defaulted
Mortgage Assets, are not advanced or paid from any applicable Credit
Enhancement, such delinquencies may result in delays in the distribution of
payments on, or losses allocated to one or more classes of Securities of such
series.
GENERAL
The Securities of each series will be issued either in book entry form or
in fully registered form. The minimum original denomination of each class of
Securities will be specified in the related Prospectus Supplement. The original
"Security Principal Balance" of each Security will equal the aggregate
distributions or payments allocable to principal to which such Security is
entitled and distributions allocable to interest on each Security that is not
entitled to distributions allocable to principal will be calculated based on the
"Notional Principal Balance" of such Security. The Notional Principal Balance
of a Security 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 Securities, the Securities of each series will be transferable and
exchangeable on a "Security Register" to be maintained at the corporate trust
office or such other office or agency maintained for such purposes by the
Trustee or the Indenture Trustee. The Trustee or the Indenture Trustee will be
appointed initially as the "Security Registrar" and no service charge will be
made for any registration of transfer or exchange of Securities, 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 certain classes of Securities
may result in "prohibited transactions" within the meaning of ERISA and the
Code. See "ERISA Considerations" herein and in the related Prospectus
Supplement. Transfer of Securities 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
Depositor that the purchase of Securities 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 Servicer or the Depositor to any obligation or
liability in addition to those undertaken in the Agreement.
As to each series, one or more elections may be made to treat the related
Trust 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 Depositor or the Servicer and may
only be made if certain conditions are satisfied. See "Certain Federal Income
Tax Considerations" herein. 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 Owners of Securities 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 Securities 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 Servicer, the Trustee, an
Owner of Residual Securities 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 will be entitled to
reimbursement for any such payment.
CLASSES OF SECURITIES
Each series of Securities will be issued in one or more classes which will
evidence a beneficial ownership interest in, or a debt obligation payable from,
the Mortgage Assets of the Trust that are allocable to (i) principal of such
class of Securities and (ii) interest on such Securities. If specified in the
Prospectus Supplement, one or more classes of a series of Securities may
evidence a beneficial ownership interest in, or a debt obligation payable from,
separate groups of assets included in the related Trust.
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The Securities will have an aggregate original Security Principal Balance
equal to the aggregate unpaid principal balance of the Mortgage Assets (plus,
amounts held in a Pre-Funding Account, if any) as of the time and day prior to
creation of the Trust specified in the related Prospectus Supplement (the "Cut-
Off Date") after deducting payments of principal due before the Cut-Off Date and
will bear interest at rates which, on a weighted basis, will be equal to the
Pass-Through Rate. The Pass-Through Rate will equal the weighted average rate
of interest borne by the related Mortgage Assets, net of the aggregate servicing
fees, amounts allocated to the residual interests and any other amounts as are
specified in the Prospectus Supplement. The original Security Principal Balance
(or Notional Principal Balance) of the Securities of a series and the interest
rate on the classes of such Securities will be determined in the manner
specified in the Prospectus Supplement.
Each class of Securities 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 a schedule, (b) by reference to an
index, or (c) otherwise (each, a "Security Interest Rate"). One or more classes
of Securities may provide for interest that accrues but is not currently payable
("Compound Interest Securities"). With respect to any class of Compound
Interest Securities, any interest that has accrued but is not paid on a given
Distribution Date will be added to the aggregate Security Principal Balance of
such class of Securities on that Distribution Date.
A series of Securities may include one or more classes entitled only to
distributions or payments (i) allocable to interest, (ii) allocable to principal
(and allocable as between scheduled payments of principal and Principal
Prepayments, as defined below) or (iii) allocable to both principal (and
allocable as between scheduled payments of principal and Principal Prepayments)
and interest. A series of Securities may consist of one or more classes as to
which distributions or payments will be allocated (i) on the basis of
collections from designated portions of the Trust, (ii) in accordance with a
schedule or formula, (iii) in relation to the occurrence of events or (iv)
otherwise. The timing and amounts of such distributions or payments may vary
among classes, over time or otherwise.
A series of Securities may include one or more Classes of Scheduled
Amortization Securities and Companion Securities. "Scheduled Amortization
Securities" are Securities 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 Securities" are
Securities 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 Securities on such Distribution Date.
Because of the manner of application of payments of principal to Companion
Securities, the weighted average lives of Companion Securities of a series may
be expected to be more sensitive to the actual rate of prepayments on the
Mortgage Assets in the related Trust than will the Scheduled Amortization
Securities of such series.
One or more series of Securities may constitute series of "Special
Allocation Securities", which may include Senior Securities, Subordinated
Securities, Priority Securities and Non-Priority Securities. As specified in
the related Prospectus Supplement for a series of Special Allocation Securities,
the timing and/or priority of payments of principal and/or interest may favor
one or more classes of Securities over one or more other classes of Securities.
Such timing and/or priority may be modified or reordered upon the occurrence of
one or more specified events. Losses on Trust 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 Securities in a series may be comprised of one or more
classes of Senior Securities having a priority in right to distributions of
principal and interest over one or more classes of Subordinated Securities, as a
form of Credit Enhancement. See "Credit Enhancement -- Subordination" herein.
Typically, the Subordinated Securities will carry a rating by the rating
agencies lower than that of the Senior Securities. In addition, one or more
classes of Securities ("Priority Securities") may be entitled to a priority of
distributions of principal or interest from assets in the Trust over another
class of Securities ("Non-Priority Securities"), but only after the exhaustion
of other Credit Enhancement applicable to such series. The Priority Securities
and Non-Priority Securities nonetheless may be within the same rating category.
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DISTRIBUTIONS OF PRINCIPAL AND INTEREST
General. Distributions of principal and interest will be made to the
extent of funds available therefor, on the dates specified in the Prospectus
Supplement (each, a "Distribution Date") to the persons in whose names the
Securities are registered (the "Owners") at the close of business on the dates
specified in the Prospectus Supplement (each, a "Record Date"). With respect to
Securities other than Book Entry Securities, distributions will be made by check
or money order mailed to the person entitled thereto at the address appearing in
the Security Register or, if specified in the Prospectus Supplement, in the case
of Securities that are of a certain minimum denomination as specified in the
Prospectus Supplement, upon written request by the Owner of a Security, 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
Securities (other than Book Entry Securities) will be made only upon
presentation and surrender of the Securities at the office or agency of the
Trustee specified in the notice of such final distribution. With respect to
Book Entry Securities, such payments will be made as described below under "Book
Entry Registration".
Distributions will be made out of, and only to the extent of, funds in a
separate account established and maintained for the benefit of the Securities of
the related series (the "Security Account" with respect to such series),
including any funds transferred from any related Reserve Fund. Amounts may be
invested in the Eligible Investments specified herein and in the Prospectus
Supplement, and all income or other gain from such investments will be deposited
in the related Security Account and may be available to make payments on the
Securities of the applicable series on the next succeeding Distribution Date or
pay other amounts owed by the Trust.
Distributions of Interest. Interest will accrue on the aggregate Security
Principal Balance (or, in the case of Securities entitled only to distributions
allocable to interest, the aggregate Notional Principal Balance (as defined
below)) of each class of Securities entitled to interest from the date, at the
applicable Security Interest Rate and for the periods (each, an "Interest
Accrual Period") specified in the Prospectus Supplement. The aggregate Security
Principal Balance of any class of Securities entitled to distributions of
principal will be the aggregate original Security Principal Balance of such
class of Securities, reduced by all distributions allocable to principal, and,
in the case of Compound Interest Securities, increased by all interest accrued
but not then distributable on such Compound Interest Securities. With respect
to a class of Securities 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 Securities.
To the extent funds are available therefor, interest accrued during each
Interest Accrual Period on each class of Securities entitled to interest (other
than a class of Compound Interest Securities) will be distributable on the
Distribution Dates specified in the Prospectus Supplement until the aggregate
Security Principal Balance of the Securities of such class has been distributed
in full or, in the case of Securities entitled only to distributions allocable
to interest, until the aggregate Notional Principal Balance of such Securities
is reduced to zero or for the period of time designated in the Prospectus
Supplement. Distributions of interest on each class of Compound Interest
Securities will commence only after the occurrence of the events specified in
the Prospectus Supplement and, prior to such time, the aggregate Security
Principal Balance (or Notional Principal Balance) of such class of Compound
Interest Securities, will increase on each Distribution Date by the amount of
interest that accrued on such class of Compound Interest Securities 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
Securities will thereafter accrue interest on its outstanding Security Principal
Balance (or Notional 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 Securities on
each Distribution Date will be calculated and the manner in which such amount
will be allocated among the classes of Securities entitled to distributions of
principal.
One or more classes of Securities may 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"). Any such allocation may have the
effect of accelerating the amortization of such Securities relative to the
interests evidenced by the other Securities.
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Unscheduled Distributions. The Securities of a series may 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, such unscheduled distributions will be made on the
Securities 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, it is determined, based on specified
assumptions, that the amount anticipated to be on deposit in the Security
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 such series, may be
insufficient to make required distributions on the Securities on such
Distribution Date. 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 Securities on the next
Distribution Date and will include interest at the applicable Security 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.
All distributions allocable to principal in any unscheduled distribution
will be made in the same priority and manner as distributions of principal on
the Securities would have been made on the next Distribution Date except as
otherwise stated in the related Prospectus Supplement, and, with respect to
Securities 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.
BOOK ENTRY REGISTRATION
Securities may be issued as Book Entry Securities and held in the name of a
Clearing Agency registered with the Commission or its nominee. Transfers and
pledges of Book Entry Securities may be made only through entries on the books
of the Clearing Agency in the name of Clearing Agency Participants or their
nominees. Clearing Agency Participants may also be Beneficial Owners of Book
Entry Securities.
Purchasers and other Beneficial Owners may not hold Book Entry Securities
directly but may hold, transfer or pledge their ownership interest in the
Securities only through Clearing Agency Participants. Furthermore, Beneficial
Owners will receive all payments of principal and interest with respect to the
Securities and, if applicable, may request redemption of Securities, only
through the Clearing Agency and the Clearing Agency Participants. Beneficial
Owners will not be registered Owners of Securities or be entitled to receive
definitive certificates representing their ownership interest in the Securities
except under the limited circumstances, if any, described in the related
Prospectus Supplement. See "Risk Factors -- Book Entry Registration" herein.
If Securities of a series are issued as Book Entry Securities, 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 Securities of such series, and to receive and transmit requests
for redemption with respect to such Securities. Clearing Agency Participants
with whom Beneficial Owners have accounts with respect to such Book Entry
Securities 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 Owners of Securities and will not possess physical certificates, a
method will be provided whereby Beneficial Owners may receive payments, transfer
their interests, submit redemption requests and receive the reports provided
herein.
LIST OF OWNERS OF SECURITIES
Upon written request of a specified number or percentage of interests of
Owners of Securities of record of a series of Securities for purposes of
communicating with other Owners of Securities with respect to their rights as
Owners of Securities, the Trustee will afford such Owners access during business
hours to the most recent list of Owners of Securities of that series held by the
Trustee. With respect to Book Entry Securities, the only named Owner on the
Security Register will be the Clearing Agency.
Neither the Agreement nor the Trust Indenture, if any, will not provide for
the holding of any annual or other meetings of Owners of Securities.
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THE TRUSTS
The Trust for a series of Securities will consist of: (i) the Mortgage
Assets (subject, if specified in the related Prospectus Supplement, to certain
exclusions, such as a portion of the mortgage interest rate being retained by
the Seller and not sold to the Trust) received on and after the related Cut-Off
Date; (ii) amounts, if any, deposited in a Pre-Funding Account; (iii) all
payments (subject, if specified in the Prospectus Supplement, to certain
exclusions, such as the retention by the Seller of payments due and accrued
before the related Cut-Off Date but collected after such Cut-Off Date) in
respect of such Mortgage Assets, which may be adjusted, to the extent specified
in the related Prospectus Supplement, in the case of interest payments on
Mortgage Assets, to the Pass-Through Rate; (iv) if specified in the Prospectus
Supplement, reinvestment income on such payments; (v) with respect to a Trust
that includes Mortgage Loans, or Contracts, all property acquired by foreclosure
or deed in lieu of foreclosure with respect to any such Mortgage Loan or
Contract; (vi) certain rights of the Trustee, the Depositor and the Servicer
under any insurance policies, hazard insurance or surety bonds required to be
maintained in respect of the related Mortgage Assets; and (vii) if so specified
in the Prospectus Supplement, one or more forms of Credit Enhancement.
The Securities of each series will be entitled to payment only from the
assets of the related Trust and any other assets pledged therefor and will not
be entitled to payments in respect of the assets of any other trust established
by the Depositor.
Mortgage Assets may be acquired by the Depositor from affiliated or
unaffiliated originators. The following is a brief description of the Mortgage
Assets expected to be included in the Trusts. If specific information
respecting the Mortgage Assets is not known at the time the related series of
Securities 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 Commission within 15 days after the initial issuance of such Securities. A
copy of the Agreement and, if applicable, a copy of the Indenture with respect
to each series of Securities 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 Securities, will be attached to the related Agreement
delivered to the Trustee upon delivery of such Securities.
MORTGAGE LOANS
The Mortgage Loans will be evidenced by promissory notes (the "Mortgage
Notes") secured by mortgages or deeds of trust (the "Mortgages") creating liens
on residential properties (the "Mortgaged Properties"). Such Mortgage Loans
will be within the broad classification of single family mortgage loans, defined
generally as loans on residences containing one to four dwelling units. If
specified in the Prospectus Supplement, 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, or the Mortgage Loans may be secured by junior
liens on the related mortgaged properties, including Title I Loans and other
types of home improvement retail installment contracts. The Mortgaged
Properties securing the Mortgage Loans may include investment properties and
vacation and second homes, including timeshare estates. Each Mortgage Loan will
be selected by the Depositor for inclusion in the Trust from among those
acquired by the Depositor or originated or acquired by one or more affiliated or
unaffiliated originators, including newly originated loans.
The Mortgage Loans will be "conventional" mortgage loans, that is they will
not be insured or guaranteed by any governmental agency, the principal and
interest on the Mortgage Loans included in the Trust for a series of Securities
will be payable either on the first day of each month or on different scheduled
due dates throughout each month, and the interest will be calculated either on a
simple-interest or actuarial method as described in the related Prospectus
Supplement. When a full principal amount is paid on a Mortgage Loan during a
month, the mortgagor is generally 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 Mortgage Loan so prepaid.
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The payment terms of the Mortgage Loans to be included in a Trust 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 a period of
time or under certain circumstances and 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 Mortgage 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 Mortgage Loan over its term, may be calculated on the basis of
an amortization schedule that is 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 Mortgage 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 Mortgage Loan or may decline over time,
and may be prohibited for the life of the Mortgage Loan or for certain
periods ("lockout periods"). Certain Mortgage 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 Mortgage Loans may permit prepayments without payment of
a fee unless the prepayment occurs during specified time periods. The
Mortgage 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 Servicer, or as may be required by any applicable
government program.
With respect to a series for which the related Trust includes Mortgage
Loans, the related Prospectus Supplement may specify, among other things,
information regarding the interest rates (the "Mortgage Rates"), the average
Principal Balance and the aggregate Principal Balance, the years of origination
and original principal balances and the original loan-to-value ratios. 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 before the Cut-Off Date, reduced by all principal payments,
including principal payments advanced pursuant to the related Agreement,
previously distributed with respect to such Mortgage Loan and reported as
allocable to principal.
The "loan-to-value ratio" of any Mortgage Loan will be determined by
dividing the principal amount of the Mortgage Loan by the original value
(defined below) of the related Mortgaged Property. The "principal amount" of
the Mortgage 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 mortgagee, 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 purchase money Mortgage Loan, the lesser
of (i) the value of the mortgaged property, based on an appraisal thereof, and
(ii) the selling price, and (b) otherwise the value of the mortgaged property,
based on an appraisal thereof.
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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.
CONTRACTS
Contracts included in the Trust with respect to a series of Securities will
consist of manufactured housing conditional sales contracts and installment loan
agreements or participation interests therein (collectively, "Contracts"). The
Contracts may be conventional manufactured housing contracts or contracts
insured by the FHA, including Title I Contracts, or partially guaranteed by the
VA. Each Contract is secured by a Manufactured Home. The Prospectus Supplement
will specify whether the Contracts will be fully amortizing or have a balloon
payment and whether they will bear interest at a fixed or variable rate.
The related Prospectus Supplement may specify for the Contracts contained
in the related Contract Pool, among other things, the date of origination of the
Contracts; the annual percentage rates on the Contracts; the loan-to-value
ratios; the minimum and maximum outstanding principal balance as of the Cut-Off
Date and the average outstanding principal balance; the outstanding principal
balances of the Contracts included in the Contract Pool; the original maturities
of the Contracts; and the last maturity date of any Contract.
MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" (or "MBS") may include (i) private (that is,
not guaranteed or insured by the United States or any agency or instrumentality
thereof) mortgage participations, mortgage pass-through certificates or other
mortgage-backed securities or (ii) certificates insured or guaranteed by FNMA,
FHLMC or GNMA.
The Prospectus Supplement for a series of Securities that evidence
interests in MBS will specify, to the extent available, (i) the aggregate
approximate initial and outstanding principal amount and type of the MBS to be
included in the Trust, (ii) the original and remaining term to stated maturity
of the MBS, if applicable, (iii) the pass-through or bond rate of the MBS or the
formula for determining such rates, (iv) the payment characteristics of the MBS,
(v) the MBS Issuer, MBS Servicer and MBS Trustee, as applicable, (vi) a
description of the credit support, if any, (vii) the circumstances under which
the stated underlying mortgage loans, or the MBS themselves may be purchased
prior to their maturity, (viii) the terms on which mortgage loans may be
substituted for those originally underlying the MBS, (ix) the servicing fees
payable under the MBS Agreement, (x) to the extent available to the Depositor,
information in respect of the underlying mortgage loans and (xi) the
characteristics of any cash flow agreements that relate to the MBS.
OTHER MORTGAGE SECURITIES
Other Mortgage Securities include other securities that directly or
indirectly represent an ownership interest in, or are secured by and payable
from, single-family mortgage loans on real property or mortgage-backed
securities, including residual interests in issuances of collateralized mortgage
obligations or mortgage pass-through certificates, as well as other types of
mortgage-related assets and securities that may be developed and marketed from
time to time. The Prospectus Supplement for a series of Securities will
describe any Other Mortgage Securities to be included in the Trust 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 Securities or with respect to the Mortgage
Assets in the related Trust. Credit Enhancement may be in
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the form of the subordination of one or more classes of the Securities 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. Credit Enhancement may not provide protection against all risks of
loss and may not guarantee repayment of the entire principal balance of the
Securities and interest thereon. If losses occur which exceed the amount covered
by Credit Enhancement or which are not covered by the Credit Enhancement, Owners
will bear their allocable share of losses.
Subordination. Distributions in respect of scheduled principal, interest
or any combination thereof otherwise payable to one or more classes of
Securities of a series (the "Subordinated Securities") may be paid to one or
more other classes of such series (the "Senior Securities") under the
circumstances and to the extent provided 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 Securities and thereafter by the
various classes of Senior Securities, 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 Securities or at any time, the aggregate losses in respect
of defaulted Mortgage Assets which must be borne by the Subordinated Securities
by virtue of subordination and the amount of the distributions otherwise
distributable to the Subordinated Securities that will be distributable to
Owners of Senior Securities on any Distribution Date may be limited 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 Owners of Subordinated Securities or, if applicable, were to
exceed the specified maximum amount, Owners of Senior Securities could
experience losses on the Securities.
In addition to or in lieu of the foregoing, all or any portion of
distributions otherwise payable to Subordinated Securities 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 Owners of Senior Securities 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 Depositor or the Owners of any class of Securities at the times and under
the circumstances specified in the Prospectus Supplement.
If specified in the Prospectus Supplement, various classes of Subordinate
Securities and Subordinated Securities may themselves be subordinate in their
right to receive certain distributions to other classes of Senior and
Subordinated Securities, respectively, through a cross-support mechanism or
otherwise.
As between classes of Senior Securities and as between classes of
Subordinated Securities, 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 Securities, payments with respect to Senior
Securities on account of delinquencies or losses and payments to any Reserve
Fund will be allocated as specified in the Prospectus Supplement.
Financial Guaranty Insurance Policies. If so specified in the related
Prospectus Supplement, a financial guaranty insurance policy or surety bond
("Financial Guaranty Insurance Policy") may be obtained and maintained for each
class or series of Securities. The issuer of any Financial Guaranty Insurance
Policy (a "Financial Guaranty Insurer") will be described in the related
Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, a
Financial Guaranty Insurance Policy will unconditionally and irrevocably
guarantee to holders of Securities that an amount equal to each full and
complete insured payment will be received by an agent (an "Insurance Paying
Agent") of the Trustee or Indenture Trustee on behalf of such holders, for
distribution by the Trustee to them. The "insured payment" will be defined
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in the related Prospectus Supplement, and will generally equal the full amount
of the distributions of principal and interest to which such holders are
entitled under the related Agreement or Indenture plus any other amounts
specified therein or in the related Prospectus Supplement (the "Insured
Payment").
Financial Guaranty Insurance Policies may apply only to certain specified
classes, or may apply at the Mortgage Asset level and only to specified Mortgage
Assets.
The specific terms of any Financial Guaranty Insurance Policy will be as
set forth in the related Prospectus Supplement. Financial Guaranty Insurance
Policies may have limitations including (but not limited to) limitations on the
insurer's obligation to guarantee the obligations of the Originators to
repurchase or substitute for any Mortgage Loans. Financial Guaranty Insurance
Policies will not guarantee any specified rate of prepayments and/or to provide
funds to redeem Securities on any specified date.
Subject to the terms of the related Agreement, the Financial Guaranty
Insurer may be subrogated to the rights of each holder of Securities to receive
payments under the Securities to the extent of any payment by such Financial
Guaranty Insurer under the related Financial Guaranty Insurance Policy.
Cross-Support. If specified in the related Prospectus Supplement, the
beneficial ownership of separate groups of assets included in the Trust for a
series may be evidenced by separate classes of related series of Securities. In
such case, Credit Enhancement may be provided by a cross-support feature which
may require that distributions be made with respect to Securities evidencing
beneficial ownership of one or more asset groups prior to distributions to
Subordinated Securities evidencing a beneficial ownership interest in other
asset groups within the same Trust. 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
Trusts for a separate series of Securities. If applicable, the Prospectus
Supplement will identify the Trusts 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 Trusts.
Pool Insurance. If specified in the related Prospectus Supplement, one or
more mortgage pool insurance policies (each, a "Mortgage Pool Insurance Policy")
will be obtained.
Any 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. The Trustee under the related Agreement will agree to
use its best reasonable efforts to cause to be maintained in effect any such
Mortgage Pool Insurance Policy and to supervise the filing of claims thereunder
to the issuer of such Mortgage Pool Insurance Policy (the "Pool Insurer") for
the period of time specified in the related Prospectus Supplement. A Mortgage
Pool Insurance Policy, however, is not a blanket policy against loss, because
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. The Mortgage
Pool Insurance Policies, if any, will not cover loss 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.
In general, a Mortgage Pool Insurance Policy may 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 Mortgage Loan, including
misrepresentation by the Mortgagor or persons involved in the origination
thereof or (ii) failure to construct a Mortgaged Property in accordance with
plans and specifications. If so specified in the related Prospectus Supplement,
a failure of coverage attributable to one of the foregoing events might result
in a breach of a representation and in such event might give rise to an
obligation to purchase the defaulted Mortgage Loan if the breach materially and
adversely affects the interests of the Owners and cannot be cured.
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The original amount of coverage under any Mortgage Pool Insurance Policy
will be reduced by the aggregate dollar amount of claims paid less the aggregate
of the net amounts realized by the Pool Insurer upon disposition of all
foreclosed properties. The amount of claims paid will generally include certain
expenses incurred with respect to the applicable Mortgage Loans as well as
accrued interest on delinquent Mortgage Loans to the date of payment of the
claim. See "Certain Legal Aspects of the Mortgage Assets -- Foreclosure" herein.
Accordingly, if aggregate net claims paid under any Mortgage Pool Insurance
Policy reach the original policy limit, coverage under that Mortgage Pool
Insurance Policy will be exhausted and any further losses will be borne by one
or more classes of Securities unless otherwise covered by another form of Credit
Enhancement, as specified in the Prospectus Supplement.
Since any Mortgage Pool Insurance Policy may require that the Mortgaged
Property subject to a defaulted Mortgage Loan be restored to its original
condition prior to claiming against the Pool Insurer, such policy may not
provide coverage against hazard losses. As set forth under "Servicing of
Mortgage Loans and Contracts -- Standard Hazard Insurance", the hazard policies
concerning the Mortgage Loans typically exclude from coverage physical damage
resulting from a number of causes and even when the damage is covered, may
afford recoveries which are significantly less than the full replacement cost of
such losses. Even if special hazard insurance is applicable as specified in the
Prospectus Supplement, no coverage in respect of special hazard losses will
cover all risks, and the amount of any such coverage will be limited. See
"Special Hazard Insurance" below. As a result, certain hazard risks will not be
insured against and will therefore be borne by Owners, unless otherwise covered
by another form of Credit Enhancement, as specified in the Prospectus
Supplement.
The terms of any Mortgage Pool Insurance Policy will be described in the
related Prospectus Supplement.
Special Hazard Insurance. If specified in the related Prospectus
Supplement, one or more special hazard insurance policies (each, a "Special
Hazard Insurance Policy") will be obtained.
Any such Special Hazard Insurance Policy will, subject to limitations
described below and in the Prospectus Supplement, cover (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 coinsurance clause contained in hazard insurance policies.
See "Servicing of Mortgage Loans and Contracts -- Standard 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.
Subject to the foregoing limitations, any Special Hazard Insurance Policy
generally will provide that, where there has been damage to property securing a
foreclosed Mortgage Loan (title to which has been acquired by the insured) and
to the extent such damage is not covered by the hazard insurance policy or flood
insurance policy, if any, maintained with respect to such Mortgage Loan, the
issuer of the Special Hazard Insurance Policy (the "Special Hazard Insurer")
will pay the lesser of (i) the cost of repair or replacement of such property or
(ii) upon transfer of the property to the special hazard insurer, 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 to
the date of claim settlement and certain expenses incurred with respect to such
property. If the unpaid principal balance plus accrued interest and certain
expenses is paid by the Special Hazard Insurer, the amount of further coverage
under the related Special Hazard Insurance Policy will be reduced by such amount
less any net proceeds from the sale of the property. Any amount paid as the cost
of repair or replacement of the property will also reduce coverage by such
amount. Restoration of the property with the proceeds described under (i) above
will satisfy the condition under any applicable Mortgage Pool Insurance Policy
that the property be restored before a claim under such Mortgage Pool Insurance
Policy may be validly presented with respect to the defaulted Mortgage Loan
secured by such property. The payment described under (ii) above will render
unnecessary presentation of a claim in respect of such Mortgage
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Loan under any related Mortgage Pool Insurance Policy. Therefore, so long as a
Mortgage Pool Insurance Policy remains in effect, the payment by the Special
Hazard Insurer under a Special Hazard Insurance Policy of the cost of repair or
replacement or the unpaid principal balance of the Mortgage Loan plus accrued
interest and certain expenses will not affect the total insurance proceeds but
will affect the relative amounts of coverage remaining under any related Special
Hazard Insurance Policy and any related Mortgage Pool Insurance Policy.
The terms of any Special Hazard Insurance Policy will be described in the
related Prospectus Supplement.
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
Assets" herein. If so provided in the related Prospectus Supplement, the
Depositor 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 and
will not be restored.
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, cash, U.S.
Treasury securities, instruments evidencing ownership of principal or interest
payments thereon, letters of credit, surety bonds, demand notes, certificates of
deposit or a combination thereof in the aggregate amount specified in the
Prospectus Supplement will be deposited by the Depositor 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
investments 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, to pay the expenses of the Trust or for such other purposes
specified in the Prospectus Supplement. Whether or not the Depositor has any
obligation to make such a deposit, certain amounts to which the Owners of
Subordinated Securities, 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 Eligible
Investments. If a letter of credit is deposited with the Trustee, such letter
of credit will be irrevocable. Any instrument deposited therein will name the
Trustee as a beneficiary and will be issued by an entity acceptable to each
rating agency that rates the Securities. 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 with respect to
the Securities for the purposes, in the manner and at the times specified in the
Prospectus Supplement.
Other Insurance, Guaranties and Similar Instruments or Agreements. If
specified in the Prospectus Supplement, the related Trust may also include
insurance, guaranties, surety bonds, letters of credit, guaranteed investment
contracts or similar arrangements for the purpose of (i) maintaining timely
payments or providing additional protection against losses on the assets
included in such Trust, (ii) paying administrative expenses, (iii)
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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 Securities or (v) for such other
purpose as is specified in such Prospectus Supplement. Such arrangements may
include agreements under which Owners 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
Servicers or the Seller to advance delinquent installments in respect of the
Mortgage loans. See "Servicing of Mortgage Loans and Contracts -- Advances"
herein.
SERVICING OF MORTGAGE LOANS AND CONTRACTS
With respect to each series of Securities, the related Mortgage Loans and
Contracts will be serviced by a sole servicer or by a master servicer with
various sub-servicers pursuant to, or as provided for in, the Agreement. The
Prospectus Supplement for each series will specify the servicer and the master
servicer, if any, for such series.
The Depositor will require adequate servicing experience, where
appropriate, and financial stability, generally including a net worth
requirement (to be specified in the Agreement) 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 (the
"Mortgagors") and remittance of such collections to the Trustee, maintenance of
applicable standard hazard insurance or primary mortgage insurance policies,
attempting to cure delinquencies, supervising foreclosures, management of
Mortgaged Properties under certain circumstances, and maintaining accounting
records relating to the Mortgage Loans and Contracts, as applicable, and, if
specified in the related Prospectus Supplement, 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 or
Contract. Each Servicer will also be obligated to make advances in respect of
delinquent installments on Mortgage Loans and Contracts, as applicable, as
described more fully under " -- Payments on Mortgage Loans" and " -- Advances"
below and in respect of certain taxes and insurance premiums not paid on a
timely basis by Mortgagors.
Each Servicer will be entitled to a monthly servicing fee as specified in
the related Prospectus Supplement. Each Servicer will also generally be entitled
to collect and retain, as part of its servicing compensation, late payment
charges and assumption underwriting fees. Each Servicer 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
pursuant to the Agreement. See " -- Advances" and " -- Servicing Compensation
and Payment of Expenses" below.
Each Servicer will be required to service each Mortgage Loan and Contract,
as applicable, pursuant to the terms of the Agreement for the entire term of
such Mortgage Loan and Contract, as applicable, unless such Agreement is earlier
terminated. Upon termination, a replacement for the Servicer will be appointed.
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 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 the
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
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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 Securities.
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 day of each month
specified in the related Prospectus Supplement (the "Remittance Date"), each
Servicer of the Mortgage Loans will remit to the Trustee or Indenture Trustee,
if applicable, 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 Agreement and as
specified in the related Prospectus Supplement, 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 may also be
required to advance its own funds as described below.
ADVANCES
With respect to a delinquent Mortgage Loan or Contract, the related
Servicer may be obligated (but only to the extent set forth in the related
Prospectus Supplement) 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 due date and
which are delinquent as of the close of business on the business day preceding
the Remittance Date ("Monthly Advance"). Generally, such advances will be
required to be made by the Servicer unless the Servicer determines that such
advances ultimately would not be recoverable 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 generally will continue
through the month following the month of final liquidation of such Mortgage Loan
or Contract. Any Servicer funds thus advanced will be reimbursable to such
Servicer out of recoveries on the Mortgage Loans or Contracts with respect to
which such amounts were advanced. Each Servicer will also be obligated to make
advances with respect to 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 or Contracts. Each
Servicer's right of reimbursement for any advance will be prior to the rights of
the Trust to receive any related Insurance Proceeds or Liquidation Proceeds.
Failure by a Servicer to make a required Monthly Advance will be grounds for
termination under the related Agreement.
COLLECTION AND OTHER SERVICING PROCEDURES
Each Servicer will service the Mortgage Loans and Contracts pursuant to
guidelines established in the related Agreement.
Mortgage Loans. The Servicer will be responsible for making reasonable
efforts to collect all payments called for under the Mortgage Loans. The
Servicer will be obligated to follow such normal practices and procedures as it
deems necessary or advisable to realize upon a defaulted Mortgage Loan. In this
regard, the Servicer may (directly or through a local assignee) sell the
property at a foreclosure or trustee's sale, negotiate with the Mortgagor for a
deed in lieu of foreclosure or, in the event a deficiency judgment is available
against the Mortgagor or other person (see "Certain Legal Aspects of the
Mortgage Assets -- Foreclosure -- Anti-Deficiency Legislation and Other
Limitations on Lenders" for a description of the limited availability of
deficiency judgments), foreclose against such property and proceed for the
deficiency against the appropriate person. The amount of the ultimate net
recovery (including the proceeds of any Mortgage Pool Insurance Policy or other
applicable Credit Enhancement), after reimbursement to the Servicer of its
expenses incurred in connection with the liquidation of any such defaulted
Mortgage Loan and prior unreimbursed advances of principal and interest with
respect thereto will be deposited in the Security Account when realized and will
be distributed to Owners on the next Distribution Date following the month of
receipt.
With respect to Cooperative Loans, any prospective purchaser will generally
have to obtain the approval of the board of directors of the relevant
Cooperative before purchasing the shares and acquiring rights under the related
proprietary lease or occupancy agreement. See "Certain Legal Aspects of the
Mortgage Assets" herein.
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This approval is usually based on the purchaser's income and net worth and
numerous other factors. Although the Cooperative's approval is unlikely to be
unreasonably withheld or delayed, the necessity of acquiring such approval could
limit the number of potential purchasers for those shares and otherwise limit
the Trust's ability to sell and realize the value of those shares.
In general, a "tenant-stockholder" (as defined in Code Section 216(b) (2))
of a corporation that qualifies as a "cooperative housing corporation" within
the meaning of Code Section 216(b)(1) is allowed a deduction for amounts paid or
accrued within his taxable year to the corporation representing his
proportionate share of certain interest expenses and certain real estate taxes
allowable as a deduction under Code Section 216(a) to the corporation under Code
Sections 163 and 164. In order for a corporation to qualify under Code Section
216(b)(1) for its taxable year in which such items are allowable as a deduction
to the corporation, such Section requires, among other things, that at least 80%
of the gross income of the corporation be derived from its tenant-stockholders.
By virtue of this requirement, the status of a corporation for purposes of Code
Section 216(b)(1) must be determined on a year-to-year basis. Consequently,
there can be no assurance that Cooperatives relating to the Cooperative Loans
will qualify under such Section for any particular year. In the event that such
a Cooperative fails to qualify for one or more years, the value of the
collateral securing any related Cooperative Loans could be significantly
impaired because no deduction would be allowable to its tenant-stockholders
under Code Section 216(a) with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies as a cooperative housing corporation, however, the likelihood
that such a failure would be permitted to continue over a period of years
appears remote.
The Servicer will expend its own funds to restore property securing a
Mortgage Loan which has sustained uninsured damage only if it determines that
such restoration will increase the proceeds to the Trust of liquidation of the
Mortgage Loan after the reimbursement to the Servicer of its expenses.
If a Mortgaged Property has been or is about to be conveyed by the
Mortgagor, the Servicer will be obligated (to the extent it has knowledge of
such conveyance) to accelerate the maturity of the Mortgage Loan, unless it
reasonably believes it is unable to enforce that Mortgage Loan's "due-on-sale"
clause under the applicable law. If it reasonably believes it may be restricted
by law, for any reason, from enforcing such a "due-on-sale" clause, the Servicer
may 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
becomes liable under the Mortgage Note, provided such person satisfies the
criteria required to maintain the coverage provided by applicable insurance
policies (unless otherwise restricted by applicable law). Any fee collected by
the Servicer for entering into an assumption agreement will be retained by the
Servicer as additional servicing compensation. For a description of
circumstances in which the Servicer may be unable to enforce "due-on-sale"
clauses, see "Certain Legal Aspects of the Mortgage Assets -- Foreclosure --
Enforceability of Certain Provisions" herein. In connection with any such
assumption, the Mortgage Rate borne by the related Mortgage Note may not be
decreased.
If specified in the related Prospectus Supplement, the Servicer will
maintain with one or more depository institutions one or more accounts into
which it will deposit all payments of taxes, insurance premiums, assessments or
comparable items received for the account of the Mortgagors. Withdrawals from
such account or accounts may be made only to effect payment of taxes, insurance
premiums, assessments or comparable items, to reimburse the Servicer out of
related collections for any cost incurred in paying taxes, insurance premiums
and assessments or otherwise preserving or protecting the value of the
Mortgages, to refund to mortgagors any amounts determined to be overages and to
pay interest to Mortgagors on balances in such account or accounts to the extent
required by law.
So long as it acts as servicer of the Mortgage Loans, the Servicer will be
required to maintain certain insurance covering errors and omissions in the
performance of its obligations as servicer and certain fidelity bond coverage
ensuring against losses through wrongdoing of its officers, employees and
agents.
Contracts. Pursuant to the Agreement, the Servicer, either directly or
through sub-servicers subject to general supervision by the Servicer, will
perform diligently all services and duties required to be performed under the
Agreement, in the same manner as performed by prudent lending institutions of
manufactured housing installment sales contracts of the same type as the
Contracts in those jurisdictions where the related Manufactured
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Homes are located. The duties to be performed by the Servicer will include
collection and remittance of principal and interest payments, collection of
insurance claims and, if necessary, repossession.
Each Agreement will provide that when any Manufactured Home securing a
Contract is about to be conveyed by the borrower, the Servicer (to the extent it
has knowledge of such prospective conveyance and prior to the time of the
consummation of such conveyance) may exercise its rights to accelerate the
maturity of such Contract under the applicable "due-on-sale" clause, if any,
unless the Servicer reasonably believes it is unable to enforce such "due-on-
sale" clause under applicable law. In such case the Servicer is authorized to
take or enter into an assumption agreement from or with the person to whom such
Manufactured Home has been or is about to be conveyed, pursuant to which such
person becomes liable under the Contract, provided such person satisfies the
criteria required to maintain the coverage provided by applicable insurance
policies (unless otherwise restricted by applicable law). Where authorized by
the Contract, the annual percentage rate may be increased, upon assumption, to
the then-prevailing market rate but will not be decreased.
Under each Agreement the Servicer will repossess or otherwise comparably
convert the ownership of properties securing such of the related Contracts as
come into and continue in default and as to which no satisfactory arrangements
can be made for collection of delinquent payments. In connection with such
repossession or other conversion, the Servicer will follow such practices and
procedures as it deems necessary or advisable and as shall be normal and usual
in its general servicing activities. The Servicer, however, will not be
required to expend its own funds in connection with any repossession or towards
the restoration of any property unless it determines (i) that such restoration
or repossession will increase the proceeds of liquidation of the related
Contract to the Trust after reimbursement to itself for such expenses and (ii)
that such expenses will be recoverable to it either through Liquidation Proceeds
or through Insurance Proceeds.
PRIMARY MORTGAGE INSURANCE
Mortgage Loans that the Depositor acquires will generally not have primary
mortgage insurance. If obtained, 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.
STANDARD HAZARD INSURANCE
Mortgage Loans. The Servicer will be required to cause to be maintained
for each Mortgage Loan a standard hazard insurance policy. The coverage of such
policy is required to be in an amount not less than the maximum insurable value
of the improvements securing such Mortgage Loan from time to time or the
principal balance owing on such Mortgage Loan from time to time, whichever is
less. In all events, such coverage shall be in an amount sufficient to ensure
avoidance of the applicability of the co-insurance provisions 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.
Each Agreement may 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 improvements on the property by fire,
lightning, explosion, smoke, wind-storm and hail, riot, strike and civil
commotion, subject to the conditions and exclusions particularized in each
policy. Although the policies relating to the Mortgage Loans will be
underwritten by different insurers and, therefore, will not contain identical
terms and conditions, the basic terms thereof are dictated by state law. Such
policies typically do not cover any physical damage resulting from the
following: war, revolution, governmental actions, floods and other water-related
causes, earth movement (including earthquakes, landslides and mud flow), nuclear
reactions, wet or dry rot, vermin, rodents, insects or 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. If
the Mortgage Property securing a Mortgage Loan is located in a federally
designated flood area, flood insurance will be required to be maintained in such
amounts as would be required by FNMA in connection with its mortgage loan
purchase program. The
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Depositor may also purchase special hazard insurance against certain of the
uninsured risks described above. See "Credit Enhancement -- Special Hazard
Insurance".
Since the amount of hazard insurance the Servicer is required to cause to
be maintained on the improvements securing the Mortgage Loans declines as the
principal balances owing thereon decrease, if the Mortgage Properties securing
the Mortgage Loans appreciate in value over time, the effect of coinsurance in
the event of partial loss may be that hazard insurance proceeds will be
insufficient to restore fully the damaged property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained on the cooperative dwelling relating to any Cooperative
Loan. Generally, the Cooperative itself is responsible for maintenance of
hazard insurance for the property owned by the Cooperative and the tenant-
stockholders of that Cooperative do not maintain individual hazard insurance
policies. To the extent, however, that a Cooperative and the related borrower
on a Cooperative Loan do not maintain such insurance or do not maintain adequate
coverage or any insurance proceeds are not applied to the restoration of damaged
property, any damage to such borrower's cooperative dwelling or such
Cooperative's building could significantly reduce the value of the collateral
securing such Cooperative Loan to the extent not covered by other credit
support.
Contracts. The Servicer will generally be required to cause to be
maintained with respect to each Contract one or more hazard insurance policies
which provide, at a minimum, the same coverage as a standard form fire and
extended coverage insurance policy that is customary for manufactured housing,
issued by a company authorized to issue such policies in the state in which the
Manufactured Home is located and in an amount which is not less than the maximum
insurable value of such Manufactured Home or the principal balance due from the
borrower on the related Contract, whichever is less. When a Manufactured Home's
location was, at the time of origination of the related Contract, within a
federally designated special flood hazard area, the Servicer also shall cause
such flood insurance to be maintained, which coverage shall be at least equal to
the minimum amount specified in the preceding sentence or such lesser amount as
may be available under the federal flood insurance program.
The Servicer may maintain, in lieu of causing individual hazard insurance
policies to be maintained with respect to each Manufactured Home, and shall
maintain, to the extent that the related Contract does not require the borrower
to maintain a hazard insurance policy with respect to the related Manufactured
Home, one or more blanket insurance policies covering losses on the borrowers'
interests in the Contracts resulting from the absence or insufficiency of
individual hazard insurance policies.
The Servicer, to the extent practicable, will cause the borrowers to pay
all taxes and similar governmental charges when and as due. To the extent that
nonpayment of any taxes or charges would result in the creation of a lien upon
any Manufactured Home having a priority equal or senior to the lien of the
related Contract, the Servicer will pay any such delinquent tax or charge.
If the Servicer repossesses a Manufactured Home on behalf of the Trustee,
the Servicer will either (i) maintain at its expense hazard insurance with
respect to such Manufactured Home or (ii) indemnify the Trustee against any
damage to such Manufactured Home prior to resale or other disposition.
TITLE INSURANCE POLICIES
The Agreements will generally 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 customary exceptions generally accepted
in the mortgage banking industry.
CLAIMS UNDER PRIMARY MORTGAGE INSURANCE POLICIES AND STANDARD HAZARD INSURANCE
POLICIES; OTHER REALIZATION UPON DEFAULTED LOAN
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
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applied to the restoration or repair of the related Mortgaged Property or to the
reimbursement of Advances by the Servicer) will be remitted to the Trustee.
If any Mortgaged 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 may be required to expend its
own finds to restore the damaged property to the extent specified in the related
Prospectus Supplement, but 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 will
nevertheless be obligated to attempt to realize upon the defaulted Mortgage
Loan. Foreclosure proceedings will be conducted by the Servicer in accordance
with the Agreement. 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 of such difference plus the aggregate of expenses
which are incurred by the Servicer in connection with such proceedings and are
reimbursable under the Agreement. In such case there will be a reduction in the
value of the Mortgage Loans and Trust may be unable to recover the full amount
of principal and interest due 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. Any amounts remaining in the Security Account after such
foreclosure or liquidation and attributable to such Mortgage Loan will be
distributed to Owners of the Securities.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
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, Servicer may be permitted
to retain all assumption underwriting fees and late payment charges, to the
extent collected from Mortgagors.
As set forth above, each Servicer will be entitled to reimbursement for
certain expenses incurred by it in connection with the liquidation of defaulted
Mortgage Loans and Contracts and in connection with advancing delinquent
payments. No loss will be suffered on the Securities by reason of such expenses
to the extent claims for such expenses are paid directly under any applicable
Mortgage Pool Insurance Policy, a primary mortgage insurance policy, the special
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, primary mortgage insurance policies, the Special Hazard
Insurance Policy or another form of Credit Enhancement, or claims are either not
made or paid under such policies or Credit Enhancement, or if coverage
thereunder has ceased, such a loss will occur to the extent that the proceeds
from the liquidation of a defaulted Mortgage Loan or Contract, after
reimbursement of the Servicer's expenses, are less than the Principal Balance of
such defaulted Mortgage Loan or Contract.
MASTER SERVICER
A Master Servicer may be specified in the related Prospectus Supplement for
the related series of Securities. Customary servicing functions with respect to
Mortgage Loans constituting the Mortgage Pool will be provided by the Servicer
directly or through one or more Sub-Servicers subject to supervision by the
Master Servicer. If the Master Servicer is not directly servicing the Mortgage
Loans, then the Master Servicer will (i) administer and supervise the
performance by the Servicer of its servicing responsibilities under the
Agreement with the Master Servicer, (ii) maintain a current data base with the
payment histories of each Mortgagor, (iii) review monthly servicing reports and
data relating to the Mortgage Pool for discrepancies and errors and (iv) act as
back-up
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Servicer during the term of the transaction unless the Servicer is terminated or
resigns in such case the Master Servicer shall assume the obligations of the
Servicer.
The Master Servicer will be a party to the Agreement for any series for
which Mortgage Loans comprise the assets of a Trust. The Master Servicer will
be required to satisfy the standard established for the qualification of the
Master Servicer in the related Agreement. The Master Servicer will be
compensated for the performance of its services and duties under each Agreement
as specified in the related Prospectus Supplement.
ADMINISTRATION
The following summary describes certain provisions which will be common to
each Agreement. The summary does not purport to be complete and is subject to,
and qualified in its entirety by reference to, the provisions of a particular
Agreement. Material terms of a specific Agreement will be further described in
the related Prospectus Supplement.
ASSIGNMENT OF MORTGAGE ASSETS
Assignment of the Mortgage Loans. At the time of issuance, the Depositor
will assign the Mortgage Loans to the Trustee, together with all principal and
interest adjusted to the Remittance Rate, subject to exclusions specified in the
Prospectus Supplement, due on or with respect to such Mortgage Loans on or after
the Cut-Off Date. The Trustee, if applicable, and the Indenture Trustee will,
concurrently with such assignment, execute, countersign and deliver the
Securities to the Depositor in exchange for the Mortgage Loans. Each Mortgage
Loan will be identified in a schedule appearing as an exhibit to the Agreement.
Such schedule may include information as to the Principal Balance of each
Mortgage Loan as of the Cut-Off Date, as well as information respecting the
Mortgage Rate, the scheduled monthly payment of principal and interest as of the
Cut-Off Date and the maturity date of each Mortgage Note.
In addition, as to each Mortgage Loan, the Depositor will deliver the
Mortgage Note and Mortgage, any assumption and modification agreement, an
assignment of the Mortgage in recordable form (but only recorded if so specified
in the related Prospectus Supplement), evidence of title insurance, if obtained,
and, if applicable, the certificate of private mortgage insurance. In instances
where recorded documents cannot be delivered due to delays in connection with
recording, the Depositor may deliver copies thereof and deliver the original
recorded documents promptly upon receipt.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered the related original Cooperative promissory
note, 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 Depositor will
file in the appropriate office an assignment of each Cooperative Loan.
Each Seller generally will represent and warrant to the Depositor with
respect to the Mortgage Loans sold by it, among other things, that (i) the
information set forth in the schedule of Mortgage Loans attached thereto is
correct in all material respects, (ii) a lender's title insurance policy or
binder for each Mortgage Loan subject to the Agreement was issued on the date of
origination thereof and each such policy or binder assurance is valid and
remains in full force and effect or a legal opinion concerning title or title
search was obtained or conducted in connection with the origination of the
Mortgage Loan, (iii) at the Delivery Date, the Seller has good title to the
Mortgage Loans and the Mortgage Loans are free of offsets, defenses or
counterclaims; (iv) at the Delivery Date, each Mortgage is a valid lien on the
property securing the Mortgage Note (subject only to (a) the lien of current
real property taxes and assessments, (b) covenants, conditions, and
restrictions, rights of way, easements and other matters of public record as of
the date of the recording of such Mortgage, such exceptions appearing of record
being acceptable to mortgage lending institutions generally in the area wherein
the property subject to the Mortgage is located or specifically reflected in the
appraisal obtained by the Depositor and (c) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by such Mortgage) and such
property is free of material damage and is in good repair or, with respect to a
junior lien Mortgage Loan, that such Mortgage is a valid junior lien Mortgage,
as the case may be and specifying the percentage of the Mortgage Loan Pool
comprised of junior lien Mortgage Loans; (v) at the Delivery Date, no
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Mortgage Loan is 31 or more days delinquent (with such exceptions as may be
specified in the Prospectus Supplement) and there are no delinquent tax or
assessment liens against the property covered by the related Mortgage; (vi) at
the Delivery Date, the portion of each Mortgage Loan, if any, which in the
circumstances set forth below under "Servicing of Mortgage Loans and Contracts
- -- Primary Mortgage Insurance" should be insured with a private mortgage insurer
is so insured; and (vii) each Mortgage Loan at the time it was made complied in
all material respects with applicable state and federal laws, including, with
out limitation, usury, equal credit opportunity and disclosure laws. The
Depositor's rights against the Seller in the event of a breach of its
representations will be assigned to the Trustee, and, if applicable, the
Indenture Trustee for the benefit of the Securities of such series.
Assignment of Contracts. The Depositor will cause the Contracts to be
assigned to the Trustee, and, if applicable, to the Indenture Trustee, together
with principal and interest due on or with respect to the Contracts on and after
the Cut-Off Date. Each Contract will be identified in a schedule ("Contract
Loan Schedule") appearing as an exhibit to the related Agreement. Such Contract
Loan Schedule may specify, with respect to each Contract, among other things:
the original principal balance and the outstanding Principal Balance as of the
Cut-Off Date; the interest rate; the current scheduled payment of principal and
interest; and the maturity date.
In addition, with respect to each Contract, the Depositor will deliver or
cause to be delivered to the Trustee, and if applicable, to the Indenture
Trustee, the original Contract and copies of documents and instruments related
to each Contract and the security interest in the Manufactured Home securing
each Contract. To give notice of the right, title and interest of the Trust,
and, if applicable, the Indenture Trustee, to the Contracts, the Depositor will
cause appropriate UCC-1 financing statements to be filed identifying the secured
party and identifying all Contracts as collateral. The Contracts will not be
stamped or otherwise marked to reflect their assignment by the Depositor.
Therefore, if a subsequent purchaser were able to take physical possession of
the Contracts without notice of such assignment, the interest of the Trust, and,
if applicable, the Indenture Trustee in the Contracts could be defeated. See
"Certain Legal Aspects of the Mortgage Assets" herein.
The Depositor or the related Seller, as the case may be, may provide
limited representations and warranties concerning the Contracts. Such
representations and warranties may include: (i) that the information contained
in the Contract Loan Schedule provides an accurate listing of the Contracts and
that the information respecting such Contracts set forth in such Contract Loan
Schedule is true and correct in all material respects at the date or dates
respecting which such information is furnished; (ii) that, immediately prior to
the conveyance of the Contracts, the Depositor had good title to and was sole
owner of each such Contract; and (iii) that there has been no other sale by it
of such Contract and that the Contract is not subject to any lien, charge,
security interest or other encumbrance.
Assignment of Mortgage-Backed Securities and Other Mortgage Securities.
With respect to each series, the Depositor will cause any Mortgage-Backed
Securities and Other Mortgage Securities included in the related Trust to be
registered in the name of the Trustee or, if applicable, the Indenture Trustee
(directly or through a participant in a depository). The Trustee or, if
applicable, the Indenture Trustee (or its custodian) will have possession of any
certificated Mortgage-Backed Securities and Other Mortgage Securities but will
not be in possession of or be assignee of record of any underlying assets for a
Mortgage-Backed Security or Other Mortgage Security. Each 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 Depositor will represent and warrant,
among other things, the information contained in such schedule is true and
correct and that immediately prior to the transfer of the related securities,
the Depositor had good title to, and was the sole owner of, each such security.
Repurchase or Substitution of Mortgage Loans and Contracts. The Trustee
and, if applicable, the Indenture Trustee will review the documents delivered to
it with respect to the Mortgage Loans and Contracts included in the related
Trust. If any document is not delivered or is found to be defective in any
material respect and the Depositor or the related Seller, if so required, cannot
deliver such document or cure such defect within the period specified in the
related Prospectus Supplement after notice thereof (which will be required to be
given within the period
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specified in the related Prospectus Supplement), and if any other party
obligated to deliver such document or cure such defect has not done so and has
not substituted or repurchased the affected Mortgage Loan or Contract, then the
Depositor will cause the Seller, not later than the first date designated for
the deposit of payments into the Security Account (a "Deposit Date") which is
more than a specified number of days after such period, (i) if so provided in
the Prospectus Supplement to remove the affected Mortgage Loan or Contract from
the Trust and substitute one or more other Mortgage Loans or Contracts therefor
or (ii) repurchase the Mortgage Loan or Contract from the Trustee for a price
equal to 100% of its Principal Balance plus one month's interest thereon at the
applicable Remittance Rate. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedy available for a material
defect in a document relating to a Mortgage Loan or Contract.
The Depositor is required to do or cause the Seller to do either of the
following (i) cure any breach of any representation or warranty that materially
and adversely affects the interests of the Owners in a Mortgage Loan (each, a
"Defective Mortgage Loan") or Contract within the period specified in the
related Prospectus Supplement of its discovery by the Depositor or its receipt
of notice thereof from the Trustee, (ii) repurchase such Defective Mortgage Loan
or Contract not later than the first Deposit Date which is more than a specified
number of days after such period for a price equal to 100% of its Principal
Balance plus one month's interest thereon at the applicable Remittance Rate or
(iii) if so specified in the Prospectus Supplement, remove the affected Mortgage
Loan or Contract from the Trust and substitute one or more other mortgage loans
or contracts therefor. This repurchase and, if applicable, substitution
obligation will generally constitute the sole remedies available to the Trustee
for any such breach.
If the related Prospectus Supplement so provides, the Depositor or a
designated affiliate may be obligated to repurchase or substitute Mortgage Loans
or Contracts as described above, whether or not the Depositor obtains such an
agreement from the Seller which sold such Mortgage Loans or Contracts.
If a REMIC election is to be made with respect to all or a portion of a
Trust, there may be federal income tax limitations on the right to substitute
Mortgage Loans or Contracts.
EVIDENCE AS TO COMPLIANCE
The 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 on
and 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
Depositor'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 or in accordance with other
standards specified in the Agreement (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 (i) such exceptions as such
firm shall believe to be immaterial and (ii) such other exceptions as shall be
set forth in such statement.
THE TRUSTEE
Any commercial bank or trust company serving as Trustee may have normal
banking relationships with the Depositor. In addition, the Depositor 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 relating to a
particular series of Securities. 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 Securities or of any Mortgage Asset or related document,
and will not be accountable for the use or application by the Depositor of any
funds paid to the Depositor in respect of the Securities or the related assets,
or amounts deposited
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in the Security Account or deposited into the Distribution 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 Depositor 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 any,
as are set forth in the Agreement. Following any resignation or removal of the
Trustee, the Depositor 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 SECURITY ACCOUNT
The Agreement will require that the Security Account be either (i)
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 rating
acceptable to each rating agency that was requested to rate the Securities or
(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. The collateral eligible to secure amounts in
the Security Account is limited to United States government securities and other
investments acceptable to the rating agencies rating such series of Securities,
and may include one or more Securities of a series ("Eligible Investments"). If
so specified in the related Prospectus Supplement, a Security Account may be
maintained as an interest bearing account, or the funds held therein may be
invested pending each succeeding Payment Date in Eligible Investments. If so
specified in the related Prospectus Supplement, the Servicer or its designee
will be entitled to receive any such interest or other income earned on funds in
the Security Account as additional compensation. The Servicer will deposit in
the Security Account from amounts previously deposited by it into the Servicer's
Custodial Account on the related Remittance Date the following payments and
collections received or made by it on and after the Cut-Off Date (including
scheduled payments of principal and interest due on and after the Cut-Off Date
but received before the Cut-Off Date):
(a) all Mortgagor payments on account of principal, including
Principal Prepayments and, if specified in the related Prospectus
Supplement, prepayment penalties:
(b) all Mortgagor payments on account of interest, adjusted to the
Remittance Rate;
(c) all Liquidation Proceeds net of certain amounts reimbursed to
the Servicer or other person entitled thereto, as described above;
(d) 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 the Servicer or other
person entitled thereto, as described above;
(e) all condemnation awards or settlements which are not released
to the Mortgagor in accordance with normal servicing procedures;
(f) any Advances made as described under "Servicing of Mortgage
Loans and Contracts -- Advances" herein and certain other amounts required
under the Agreement to be deposited in the Security Account;
(g) all proceeds of any Mortgage Loan or Contract or property
acquired in respect thereof repurchased by the Depositor, the Seller or
otherwise as described above or under "Termination" below;
(h) all amounts, if any, required to be deposited in the Security
Account from any Credit Enhancement for the related series; and
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(i) all other amounts required to be deposited in the Security
Account pursuant to the related Agreement.
REPORTS
Concurrently with each distribution on the Securities, there will be mailed
to Owners 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 Security Principal Balance of each class of the
Securities after giving effect to distributions on such Distribution Date;
(iv) the aggregate Security Principal Balance of any class of
Compound Interest Securities 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 any class
of Securities that was distributed to other classes of Securities;
(vi) if any class of Securities has priority in the right to receive
Principal Prepayments, the amount of Principal Prepayments in respect of
the related Mortgage Assets;
(vii) the aggregate Principal Balance and number of Mortgage Loans
and Contracts which were delinquent as to a total of two installments of
principal and interest; and
(viii) the aggregate Principal Balances of Mortgage Loans and
Contracts which (a) were delinquent 30-59 days, 60-89 days, and 90 days or
more, or other delinquency categories of similar nature and (b) were in
foreclosure.
Customary information deemed necessary for Owners to prepare their tax
returns will be furnished annually (in the case of Book Entry Securities, the
above described statement and such annual information will be sent to the
Clearing Agency, which will provide such reports to the Clearing Agency
Participants in accordance with its procedures).
FORWARD COMMITMENTS; PRE-FUNDING
The Trustee of a Trust may enter into a Pre-Funding Agreement for the
transfer of additional Mortgage Loans and Contracts to such Trust following the
date on which such Trust is established and the related Securities are issued.
The Trustee of a Trust may enter into Pre-Funding Agreements to permit the
acquisition of additional Mortgage Loans that could not be delivered by the
Depositor or have not formally completed the origination process, in each case
prior to the Delivery Date. Any Pre-Funding Agreement will require that any
Mortgage Loans so transferred to a Trust conform to the requirements specified
in such Pre-Funding Agreement. If a Pre-Funding Agreement is to be utilized,
the related Trustee will be required to deposit in the Purchase Account all or a
portion of the proceeds received by the Trustee in connection with the sale of
one or more classes of Securities of the related series; the additional Mortgage
Loans will be transferred to the related Trust in exchange for money released
from the related Pre-Funding Account. Each Pre-Funding Agreement will set a
specified period during which any such transfers must occur. The Pre-Funding
Agreement or the related Agreement will require that, if all moneys originally
deposited to such Pre-Funding Account are not so used by the end of such
specified period, then any remaining moneys will be applied as a mandatory
prepayment of the related class or classes of Securities as
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specified in the related Prospectus Supplement. The specified period for the
acquisition by a Trust of additional Mortgage Loans is not expected to exceed
three months from the date such Trust is established.
SERVICER EVENTS OF DEFAULT
"Events of Default" under the Agreement will consist of (i) any failure by
the Servicer to duly observe or perform in any material respect any other of its
covenants or agreements in the Agreement materially affecting the rights of
Owners which continues unremedied for a specified number of days after the
giving of written notice of such failure to the Depositor by the Trustee or to
the Servicer and the Trustee by the Owners of Securities evidencing interests in
the Trust aggregating not less than 25% of the affected class of Securities; and
(ii) certain events of insolvency, readjustment of debt, marshaling of assets
and liabilities or similar proceedings and certain actions by the Servicer
indicating its insolvency, reorganization or inability to pay its obligations.
RIGHTS UPON SERVICER EVENT OF DEFAULT
As long as an Event of Default under the Agreement remains unremedied by
the Servicer, the Trustee or Owners of Securities evidencing an ownership
interest in the Trust may terminate all the rights and obligations of the
Servicer under the Agreement, whereupon the Trustee or Master Servicer, if any,
or a new Servicer appointed pursuant to the Agreement, will succeed to all the
responsibilities, duties and liabilities of the Servicer under the Agreement and
will be entitled to similar compensation arrangements. Following such
termination, the Depositor shall appoint any established mortgage loan servicer
satisfying the qualification standards established in the Agreement to act as
successor to the Servicer under the Agreement. If no such successor shall have
been appointed within a specified number of days following such termination,
then either the Depositor or the Trustee may petition a court of competent
jurisdiction for the appointment of a successor Servicer. Pending the
appointment of a successor Servicer, the Trustee or the Master Servicer, if any,
shall act as Servicer.
The Owners of Securities evidencing an ownership interest in the Trust will
not have any right under the Agreement to institute any proceeding with respect
to the Agreement, unless they previously have given to the Trustee written
notice of default and unless the Owners of the percentage of such Securities
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 a specified
number of days has neglected or refused to institute any such proceedings.
Nevertheless, the Trustee is under no obligation to exercise any of the trusts
or powers vested in it by the 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 Owners,
unless such Owners have offered to the Trustee reasonable security or indemnity
against the costs, expenses and liabilities which may be incurred therein or
thereby.
AMENDMENT
An Agreement generally may be amended by the Depositor, the Servicer and
the Trustee, without the consent of the Owners of the Securities evidencing an
ownership interest in the Trust, to cure any ambiguity, to correct or supplement
any provision therein which may be defective or inconsistent with any other
provision therein, to take any action necessary to maintain REMIC status of any
Trust as to which a REMIC election has been made or to add any other provisions
with respect to matters or questions arising under the Agreement which are not
materially inconsistent with the provisions of the Agreement; provided that such
action will not, as evidenced by an opinion of counsel satisfactory to the
Trustee, adversely affect in any material respect the interests of any Owners of
such Securities. An Agreement may also be amended by the Depositor, the
Servicer, and the Trustee with the consent of the Owners of Securities
evidencing an ownership interest in the Trust aggregating not less than a
majority of the aggregate Security Principal Balance of such Securities 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
such Owners; 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 such Security without the consent of the Owner of such Security, (ii)
adversely affect in any material respect the interests of the Owners of any
class of such Securities in any manner other than as described in (i) without
the consent of the Owners of Securities of such class evidencing not less than a
majority
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of the interests of such class or (iii) reduce the aforesaid percentage of
Securities of any such class required to consent to any such amendment without
the consent of the Owners of all such Securities of such class then outstanding.
Any other amendment provisions inconsistent with the foregoing shall be
specified in the related Prospectus Supplement.
TERMINATION
The obligations of the Depositor, the Servicer, and the Trustee created by
the Agreement will terminate upon the payment as required by the Agreement of
all amounts held by the Servicer or in the Security Account and required to be
paid to them pursuant to the Agreement after the later of (i) the maturity or
other liquidation of the last Mortgage Asset subject thereto or the disposition
of all property acquired upon foreclosure of any such Mortgage Loan or Contract
or (ii) the repurchase by the Depositor from the Trust of all the outstanding
Securities or all remaining assets in the Trust. The Agreement will establish
the repurchase price for the assets in the Trust and the allocation of such
purchase price among the classes of Securities. The exercise of such right will
effect early retirement of the Securities of that series, but the Depositor's
right so to repurchase will be subject to the conditions described in the
related Prospectus Supplement. If a REMIC election is to be made with respect
to all or a portion of a Trust, there may be additional conditions to the
termination of such Trust which will be described in the related Prospectus
Supplement. In no event, however, will the Trust 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 Owner, and the final distribution will be made only upon surrender and
cancellation of the Securities at an office or agency of the Trustee specified
in such notice of termination.
USE OF PROCEEDS
Substantially all the net proceeds to be received from the sale of each
series of Securities 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 Securities and to pay other expenses.
THE DEPOSITOR
The Depositor will have no ongoing servicing obligations or
responsibilities with respect to any Mortgage Assets or Contracts. The
Depositor does not have, nor is it expected in the future to have, any
significant net worth.
The Depositor anticipates that it will acquire Mortgage Assets in the open
market or in privately negotiated transactions, which may be through or from an
affiliate. The Depositor will not receive any fees or other commissions in
connection with its acquisition of Mortgage Assets or its sale of such Mortgage
Assets to the Trust.
Neither the Depositor nor any of its affiliates will insure or guarantee
the Securities of any series.
CERTAIN LEGAL ASPECTS OF THE MORTGAGE ASSETS
The following discussion contains summaries of certain legal aspects of
mortgage loans and manufactured housing contracts 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 and Contracts is situated.
The summaries are qualified in their entirety be reference to the applicable
federal and state laws governing the Mortgage Loans and Contracts.
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 liens for real estate taxes and
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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. 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 and,
in some cases, the directions of the beneficiary.
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 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.
Timeshare Units. Because timeshare interests are considered to be
interests in real property, the manner and method of obtaining and enforcing a
security interest in a timeshare estate is similar to the methods used in other
real property lending transactions. The timeshare units comprising Mortgage
Loans are either mortgages or deeds of trust or other instruments under
applicable state law creating a first lien on the timeshare estate securing the
related Mortgage Note, depending upon the prevailing practice in the state in
which the timeshare estate is located. A mortgage creates a lien upon the
timeshare estate, which lien is generally not prior to liens 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.
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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 lienholders. 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 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 paying real estate taxes,
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.
When the junior mortgagee or beneficiary under a junior deed of trust cures
the default and state law allows it to reinstate or redeem by paying the full
amount of the senior mortgage or deed of trust, then in those states the amount
paid so to cure or redeem generally becomes a part of the indebtedness secured
by the junior mortgage or deed of trust. See "Junior Liens; Rights of Senior
Mortgagors or Beneficiaries" below.
A sale conducted in accordance with the terms of the power of sale
contained in a mortgage or deed of trust is generally presumed to be conducted
regularly and fairly, and a conveyance of the real property by the trustee
confers, in most states, legal title to the real property to the purchaser, free
of all junior mortgages or deeds of trust and free of all other liens and claims
subordinate to the mortgage or deed of trust under which the sale is made (with
the exception of certain governmental liens). The purchaser's title is,
however, subject to all senior liens, encumbrances and mortgages and may be
subject to mechanic's and materialman's liens in some states. Thus, if the
mortgage or deed of trust being foreclosed is a junior mortgage or deed of
trust, the sheriff or trustee will convey title to the purchaser of the real
property, subject to any existing first mortgage or deed of trust and any other
prior liens and claims. The foreclosure of a junior mortgage or deed of trust,
generally, will have an effect on the first mortgage or deed of trust, if the
senior mortgage or deed of trust grants to the senior mortgagee or beneficiary
the right to accelerate its indebtedness under a "due-on-sale" clause or "due on
further encumbrance" clause contained in the senior mortgage or deed of trust.
See "Anti-Deficiency Legislation and Other Limitations on Lenders" below.
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The proceeds received by the sheriff or trustee from the sale are applied
pursuant to the terms of the deed of trust, which may require application first
to the costs, fees and expenses of sale and then in satisfaction of the
indebtedness secured by the mortgage or deed of trust under which the sale was
conducted. In some states, any surplus money remaining may be available to
satisfy claims of the holders of junior mortgages or deeds of trust and other
junior liens and claims in order of their priority, whether or not the mortgagor
or trustor is in default, while in some states, any surplus money remaining may
be payable directly to the mortgagor or trustor. Any balance remaining is
generally payable to the mortgagor or trustor. Following the sale, in some
states the mortgagee or beneficiary following a foreclosure of a mortgage or
deed of trust may not obtain a deficiency judgment against the mortgagor or
trustor. A junior lienholder whose rights in the property are terminated by the
foreclosure by a senior lienholder will not share in the proceeds from the
subsequent disposition of the property.
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 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.
Junior Liens; Rights of Senior Mortgagees or Beneficiaries. Certain of the
Mortgage Loans, including Title I Loans, may be secured by mortgages or deeds of
trust providing for junior (i.e., second, third, etc.) liens on the
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related Mortgaged Properties which are junior to the other mortgages or deeds of
trust held by other lenders or institutional investors. The rights of the
beneficiary under a junior deed of trust or as mortgagee under a junior mortgage
are subordinate to those of the mortgagee or beneficiary under the senior
mortgage or deed of trust, including the prior rights of the senior mortgagee or
beneficiary to receive hazard insurance and condemnation proceeds and to cause
the property securing the Mortgage Loans to be sold upon default of the
mortgagor or trustor. As discussed more fully below, a junior mortgagee or
beneficiary in some states may satisfy a defaulted senior loan in full and in
some states may cure such default and bring the senior loan current, in either
event adding the amounts expended to the balance due on the junior loan. In most
states, absent a provision in the senior mortgage or deed of trust, no notice of
default is required to be given to a junior mortgagee or beneficiary.
The forms of the mortgage or deed of trust used by most institutional
lenders generally confer on the mortgagee or beneficiary the right both to
receive all proceeds collected under any hazard insurance policy and all awards
made in connection with any condemnation proceedings, and to apply such proceeds
and awards to any indebtedness secured by the mortgage or deed of trust, in such
order as the mortgagee or beneficiary may determine. Thus, in the event
improvements on the property are damaged or destroyed by fire or other casualty,
or in the event the property is taken by condemnation, the mortgagee or
beneficiary under the underlying first mortgage or deed of trust may have the
prior right to collect any insurance proceeds payable under a hazard insurance
policy and any award of damages in connection with the condemnation and to apply
the same to the indebtedness secured by the first mortgage or deed of trust. In
those situations, proceeds in excess of the amount of first mortgage
indebtedness generally may be applied to the indebtedness of a junior mortgage
or trust deed.
Other provisions typically found in the form of the mortgagee or deed of
trust generally used by most institutional lenders obligate the mortgagor or
trustor to pay before delinquency all taxes and assessments on the property and,
when due, all encumbrances, charges and liens on the property which appear prior
to the mortgage or deed of trust, to provide and maintain fire insurance on the
property, to maintain and repair the property and not to commit or permit any
waste thereof, and to appear in and defend any action or proceeding purporting
to affect the property or the rights of the mortgagee or beneficiary under the
mortgage or deed of trust. Upon a failure of the mortgagor or trustor to
perform any of these obligations, the mortgagee or beneficiary typically is
given the right under the mortgage or deed of trust to perform the obligation
itself at its election, with the mortgagor or trustor agreeing to reimburse the
mortgagee or beneficiary for any sums expended by the mortgagee or beneficiary
on behalf of the trustor. All sums so expended by the mortgagee or beneficiary
generally become part of the indebtedness secured by the mortgage or deed of
trust.
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 following
foreclosure. 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.
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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
facts of the reorganization case, that effected the curing of a mortgage loan
default by paying arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a mortgage loan secured by property of the debtor may be modified.
These courts have suggested that such 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. Federal bankruptcy law and limited case law indicate that the foregoing
modifications could not be applied to the terms of a loan secured by property
that is the principal residence of the debtor.
The Code 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.
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. Germain Act by the
Federal Home Loan Bank Board as succeeded by the Office of Thrift Supervision
(the "OTS"), also prohibit the imposition of a prepayment penalty upon the
acceleration of a loan pursuant to a due-on-sale clause. Any inability of the
Depositor 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.
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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 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 falling 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 statutory-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 Servicer) will be retained by the Servicer as additional
servicing compensation.
Adjustable Rate Loans. The laws of certain states may provide that
mortgage notes relating to adjustable rate loans are not negotiable instruments
under the UCC. In such event, the Trustee will not be deemed to be a "holder in
due course," within the meaning of the UCC 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 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) to
homeowners. In the event that title to a Mortgaged Property securing a Mortgage
Loan in a Trust was acquired by the Trust and cleanup costs were incurred in
respect of the Mortgaged Property, the Trust might realize a loss if such costs
were required to be paid by the Trust.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT
Generally, under the terms of the Soldiers' and Sailors' Civil Relief Act,
a borrower who enters military service after the origination of a Mortgage Loan
or Contract by such borrower (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
law could have an effect, for an indeterminate period of time, on the ability of
the Servicer 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 Servicer 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.
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Any shortfalls in interest collections resulting from application of the
Relief Act could adversely affect Securities.
THE CONTRACTS
General. As a result of the Depositor's assignment of the Contracts, the
Owners will succeed collectively to all the rights (including the right to
receive payment on the Contracts) and will assume certain obligations of the
Depositor. Each Contract evidences both (a) the obligation of the obligor to
repay the loan evidenced thereby, and (b) the grant of a security interest in
the Manufactured Home to secure repayment of such lois. Certain aspects of both
features of the Contracts are described more fully below.
The Contracts generally are "chattel paper" as defined in the UCC in effect
in the states which the Manufactured Homes initially were registered. Pursuant
to the UCC, the sale of chattel paper is treated in a manner similar to
perfection of a security interest in chattel paper. Under the Agreement, the
Depositor will transfer physical possession of the Contracts to the Trustee or,
if applicable, the Indenture Trustee or its custodians. In addition, the
Depositor will make an appropriate filing of a UCC-1 financing statement in the
appropriate states to give notice of the Trustee's ownership of the Contracts
and, if applicable, the Indenture Trustee's security interest. The Contracts
will not be stamped or marked otherwise to reflect their assignment by the
Depositor. Therefore, if a subsequent purchaser were able to take physical
possession of the Contracts without notice of such assignment the Trustee's and,
if applicable, the Indenture Trustee's and, if applicable, the Indenture
Trustee's interest in Contracts could be defeated.
Security Interests in the Manufactured Homes. The Manufactured Homes
securing the Contracts may be located in all 50 states. Security interests in
manufactured homes may be perfected either by notation of the secured party's
lien on the certificate of title or by delivery of the required documents and
payment of a fee to the state motor vehicle authority, depending on state law.
In some nontitle states, perfection pursuant to the provisions of the UCC is
required. The Depositor may effect such notation or delivery of the required
documents and fees, and obtain possession of the certificate of title, as
appropriate under the laws of the state in which any manufactured home securing
a manufactured housing conditional sales contract is registered. In the event
the Depositor fails, due to clerical errors, to effect such notation or
delivery, or files the security interest under the wrong law (for example, under
a motor vehicle title statute rather than under the UCC, in a few states), the
Trustee may not have a first priority security interest in the Manufactured Home
securing a Contract. As manufactured homes have become larger and often have
been attached to their sites without any apparent intention to move them, courts
in many states have held that manufactured homes, under certain circumstances,
may become subject to real estate title and recording laws. As a result, a
security interest in a manufactured home could be rendered subordinate to the
interests of other parties claiming an interest in the home under applicable
state real estate law. In order to perfect a security interest in a
manufactured home under real estate law, the holder of the security interest
must file either a "fixture filing" under the provisions of the UCC or a real
estate mortgage under the real estate laws of the state where the home is
located. These filings must be made in the real state records office of the
county where the home is located. So long as the borrower does not violate this
agreement, a security interest in the Manufactured Home will be governed by the
certificate of title laws or the UCC, and the notation of the security interest
on the certificate of title or the filing of a UCC financing statement will be
effective to maintain the priority of the security interest in the Manufactured
Home. If, however, a Manufactured Home is permanently attached to this site,
other parties could obtain an interest in the Manufactured Home which is prior
to the security interest transferred to the Trustee. With respect to a series
of Securities and as described in the related Prospectus Supplement, the
Depositor may be required to perfect a security interest in the Manufactured
Home under applicable real estate laws. If such real estate filings are not
required and if any of the foregoing events were to occur, the only recourse
would be to pursue the Trust's rights to require repurchase for breach of
warranties.
The Depositor will assign its security interest in the Manufactured Homes.
Neither the Depositor nor the Trustee or, if applicable, Indenture Trustee will
amend the certificates of title to identify a new secured party. Accordingly,
the Depositor or the Seller will continue to be named as the secured party on
the certificates of title relating to the Manufactured Homes. In most states,
such assignment is an effective conveyance of such security interest without
amendment of any lien noted on the related certificate of title and the new
secured party succeeds to the rights of the secured party. However, in some
states there exists a risk that, in the absence of an amendment
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to the certificate of title, such assignment of the security interest might not
be held effective against creditors of the Depositor or the Seller.
In the absence of fraud, forgery or permanent affixation of the
Manufactured Home to its site by the Manufactured Home owner, or administrative
error by state recording officials, the notation of the lien on the certificate
of title or delivery of the required documents and fees will be sufficient to
protect against the rights of subsequent purchasers of a Manufactured Home or
subsequent lenders who take a security interest in the Manufactured Home. If
there are any Manufactured Homes as to which the security interest is not
perfected, such security interest would be subordinate to, among others,
subsequent purchasers for value of Manufactured Homes and holders of perfected
security interests. There also exists a risk in not identifying a new secured
party on the certificate of title that, through fraud or negligence, the
security interest could be released.
Enforcement of Security Interests in Manufactured Homes. The Servicer, to
the extent required by the related Agreement, may take action to enforce the
security interest with respect to Contracts in default by repossession and
resale of the Manufactured Homes securing such Contracts in default. So long as
the Manufactured Home has not become subject to the real estate law, a creditor
can repossess a Manufactured Home securing a Contract by voluntary surrender, by
"self-help" repossession that is "peaceful" (i.e., without breach of the peace)
or in the absence of voluntary surrender and the ability to repossess without
breach of the peace, by judicial process. The holder of a Contract must give
the debtor a number of days' notice, which varies from 10 to 30 days depending
on the state, prior to commencement of any repossession. The UCC and consumer
protection laws in most states place restrictions on repossession sales,
including requiring prior notice to the debtor and commercial reasonableness in
effecting such a sale. The law in most states also requires that the debtor be
given notice of any sale prior to resale of the unit so that the debtor may
redeem at or before such resale. In the event of such repossession and resale
of a Manufactured Home, the Trustee would be entitled to be paid out of the sale
proceeds before such proceeds could be applied to the payment of the claims of
unsecured creditors or the holders of subsequently perfected security interests
or, thereafter, to the debtor.
If the owner of a Manufactured Home moves it to a state other than the
state in which such Manufactured Home initially is registered, under the laws of
most states the perfected security interest in the Manufactured Home would
continue for four months after such relocation and thereafter only if and after
the owner registers the Manufactured Home in such state. If the owner were to
relocate a Manufactured Home to another state and not re-register the
Manufactured Home in such state, and if steps are not taken to re-perfect the
security interest in such state, the security interest would cease to be
perfected. A majority of states generally requires surrender of a certificate
of title to re-register a Manufactured Home; accordingly, the Trustee or, if
applicable, the Indenture Trustee, must surrender possession if it holds the
certificate of title to such Manufactured Home or, in the case of Manufactured
Homes registered in states which provide for notation of lien, notice of
surrender would be given if the security interest in the Manufactured Home is
noted on the certificate of title. Accordingly, the there would be an
opportunity to re-perfect the security interest in the Manufactured Home in the
state of relocation. In states which do not require a certificate of title for
registration of a Manufactured Home, re-registration could defeat perfection.
In the ordinary course of servicing the manufactured housing conditional sales
contracts, the Servicer will be required to take steps to effect such re-
perfection upon receipt of notice of re-registration or information from the
obligor as to relocation. Similarly, when an obligor under a manufactured
housing conditional sales contract sells a Manufactured Home, possession of the
certificate of title must be surrendered or notice will be received as a result
of the lien noted thereon and accordingly there will be an opportunity to
require satisfaction of the related manufactured housing conditional sales
contract before release of the lien. Under each Agreement the Servicer is
obligated to take such steps, at the Servicer's expense, as are necessary to
maintain perfection of security interests in the Manufactured Homes.
Under the laws of most states, liens for repairs performed on a
Manufactured Home take priority even over a perfected security interest. The
Depositor will represent in the Agreement that it has no knowledge of any such
liens with respect to any Manufactured Home securing payment on any Contract.
Nevertheless, such liens could arise at any time during the term of a Contract.
No notice will be given in the event such a lien arises.
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Under the laws applicable in most states, a creditor is entitled to obtain
a deficiency judgment from a debtor for any deficiency on repossession and
resale of the Manufactured Home securing such debtor's loan. However, some
states impose prohibitions or limitations on deficiency judgments.
Certain other statutory provisions, including federal and state bankruptcy
and insolvency laws and general equitable principles, may limit or delay the
ability of a lender to repossess and resell collateral or enforce a deficiency
judgment.
Consumer Protection Laws. The so-called "Holder-in-Due-Course" rule of the
Federal Trade Commission is intended to defeat the ability of the transferor of
a consumer credit contract which is the seller of goods which gave rise to the
transaction (and certain related lenders and assignees) to transfer such
contract free of notice of claims by the debtor thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the debtor could assert against the seller of goods. Liability under this
rule is limited to amounts paid under a Contract; however, the obligor also may
be able to assert the rule to set off remaining amounts due as a defense against
a claim brought against such obligor. Numerous other federal and state consumer
protection laws impose requirements applicable to the origination of and lending
pursuant to the Contracts, including the Truth-in-Lending Act, the Federal Trade
Commission Act, the Fair Credit Billing Act, the Fair Credit Reporting Act, the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act and the
Uniform Consumer Credit Code. In the case of some of these laws, the failure to
comply with their provisions may affect the enforceability of the related
Contract.
Transfers of Manufactured Homes; Enforceability of "Due-on-Sale" Clauses.
The Contracts, in general, prohibit the sale or transfer of the related
Manufactured Homes without consent and permit the acceleration of the maturity
of the Contracts upon any such sale or transfer for which consent has not been
granted. In certain cases, the transfer may be made by a delinquent obligor in
order to avoid a repossession proceeding with respect to a Manufactured Home.
In the case of a transfer of a Manufactured Home after which the Servicer
desires to accelerate the maturity of the related Contract, the Servicer's
ability to do so will depend on the enforceability under state law of the "due-
on-sale" clause. The Garn-St. Germain Act preempts, subject to certain
exceptions and conditions, state laws prohibiting enforcement of "due-on-sale"
clauses applicable to the Manufactured Homes. Consequently, in some states the
Servicer may be prohibited from enforcing a "due-on-sale" clause in respect of
certain Manufactured Homes.
THE TITLE I PROGRAM
Certain of the Mortgage Loans or Contracts contained in a Trust may be
loans insured under the FHA Title I credit insurance program created pursuant to
Sections 1 and 2(a) of the National Housing Act of 1934 (the "Title I Program").
Under the Title I Program, the FHA is authorized and empowered to insure
qualified lending institutions against losses on eligible loans. The Title I
Program operates as a coinsurance program in which the FHA insures up to 90% of
certain losses incurred on an individual insured loan, including the unpaid
principal balance of the loan, but only to the extent of the insurance coverage
available in the lender's FHA insurance coverage reserve account. The owner of
the loan bears the uninsured loss on each loan.
The types of Title I loans, legal requirements, payment terms, underwriting
standards, eligibility requirements, insurance coverage and claims proceeds
related thereto shall be set forth in the related Prospectus Supplement.
LEGAL INVESTMENT MATTERS
Unless otherwise set forth in the related Prospectus Supplement, Securities
of any series will constitute "mortgage related securities" for purposes of the
Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are
rated by a Rating Agency in one of its two highest categories and, as such, will
be 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
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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 of 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.
Under SMMEA, if a State enacted legislation prior to October 4, 1991,
specifically limiting the legal investment authority of any such entities with
respect to "mortgage related securities," the Securities will constitute legal
investments for entities subject to such legislation only to the extent provided
in such legislation. Certain States have enacted legislation which overrides
the preemption provisions of SMMEA.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings bank may invest in, sell or otherwise deal with mortgage-related
securities without limitations as to the percentage of their assets represented
thereby; federal credit unions may invest in mortgage-related securities, and
national banks may purchase mortgage-related securities for their own account
without regard to the limitations generally applicable to investment securities
set forth in 12 U.S.C. 24 (Seventh), subject in each case to such regulations as
the applicable federal regulatory authority may prescribe.
The Federal Financial Institution Examination Counsel has adopted the
"Supervisory Policy Statement on Securities Activities" (the "Policy
Statement"), applicable to all depository institutions, setting forth guidelines
for and significant restrictions on investments in "high-risk mortgage
securities." The Policy Statement has been adopted by the Federal Reserve
Board, the Office of the Comptroller of the Currency, the FDIC and the OTS with
an effective date of February 10, 1992, as revised April 15, 1994. The Policy
Statement generally indicates that a mortgage derivative product will be deemed
to be high risk if it exhibits greater price volatility than a standard fixed
rate thirty-year mortgage security. According to the Policy Statement, prior to
purchase, a depository institution will be required to determine whether a
mortgage derivative product that it is considering acquiring is high-risk, and
if so that the proposed acquisition would reduce the institution's overall
interest rate risk. Reliance on analysis and documentation obtained from a
securities dealer or other outside party without internal analysis by the
institution would be unacceptable. There can be no assurance as to which
classes of the Securities of any series will be treated as high-risk under the
Policy Statement. In addition, the National Credit Union Administration has
issued regulations governing federal credit union investments which prohibit
investment in certain specified types of securities, which may include certain
classes of Securities. Similar policy statement have been issued by regulators
having jurisdiction over other types of depository institutions.
There may be other restrictions on the ability of certain investors either
to purchase certain classes of Securities or to purchase any class of Securities
representing more than a specified percentage of the investors' assets. The
Depositor will make no representations as to the proper characterization of any
class of Securities for legal investment or other purposes, or as to the ability
of particular investors to purchase any class of Securities under applicable
legal investment restrictions. These uncertainties may adversely affect the
liquidity of any class of Securities. Accordingly, all investors whose
investment activities are subject to legal investment laws and regulations,
regulatory capital requirements or review by regulatory authorities should
consult with their own legal advisors in determining whether and to what extent
the Securities of any class constitute a legal investment under SMMEA or are
subject to investment, capital or other restrictions, and whether SMMEA has been
overridden in any jurisdiction applicable to such investor.
ERISA CONSIDERATIONS
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
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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.
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
Securities, but the Depositor cannot predict in advance whether such exceptions
apply due to the factual nature of the conditions to be met. Accordingly,
because the Mortgage Loans and Contracts may be deemed Plan assets of each Plan
that purchases Securities, an investment in the Securities 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 Exemption 83-1 ("PTE 83-1") exempts from ERISA's
prohibited transaction rules certain transactions relating to the operation of
residential mortgage investment trusts and the purchase, sale and holding of
"mortgage pool pass-through certificates" in the initial issuance of such
certificates. PTE 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 PTE.
PTE 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 Owners 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 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.
Although the Trustee and, if applicable, the Indenture Trustee for any
series of Securities will be unaffiliated with the Depositor, 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's
assets or the characteristics of one or more classes of the related series of
Securities may not be included within the scope of PTE 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
Securities.
Several underwriters of mortgage-backed securities have applied for and
obtained ERISA prohibited transactions exemptions which are in some respects
broader than PTE 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 Securities,
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 Securities must make its
own determination as to whether the general and the specific conditions of PTE
83-1 have been satisfied or as to the availability of any other prohibited
transaction exemptions
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Each Plan fiduciary should also determine whether, under the general fiduciary
standards of investment prudence and diversification, an investment in the
Securities 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 Securities 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.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is based upon the opinion of Arter & Hadden, special counsel
to the Depositor, with respect to the material federal income tax consequences
of the purchase, ownership and disposition of Securities and is based upon the
advice of Arter & Hadden, special counsel to the Depositor. 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
applicable provisions of the Code, as well as final regulations concerning
REMICs (the "REMIC Regulations") promulgated on December 23, 1992, and final
regulations under Sections 1271 through 1273 and 1275 of the Code concerning
debt instruments promulgated on January 27, 1994 (the "OID Regulations"). The
Depositor intends to rely on the OID Regulations for all Securities offered
pursuant to this Prospectus; however, investors should be aware that the OID
Regulations do not adequately address certain issues relevant to prepayable
securities, such as the Securities. 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 Securities. The
Prospectus Supplement for each series of Securities will discuss any special tax
consideration applicable to any class of Securities of such series, and the
discussion below is qualified by any such discussion in the related Prospectus
Supplement.
For purposes of this opinion, where the applicable Prospectus Supplement
provides for a fixed retained yield with respect to the Mortgage Assets
underlying a series of Securities, references to the Mortgage Assets will be
deemed to refer to that portion of the Mortgage Assets held by the Trust which
does not include the fixed retained yield.
FEDERAL INCOME TAX CONSEQUENCES FOR REMIC SECURITIES
General. With respect to a particular series of Securities, an election
may be made to treat the Trust 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 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, Securities of a series as to which one or more REMIC elections are
made are referred to as "REMIC Securities" and will consist of one or more
classes of "Regular Securities" and one class of "Residual Securities" in the
case of each REMIC Pool. Qualification as a REMIC requires ongoing compliance
with certain conditions. With respect to each series of REMIC Securities, Arter
& Hadden, special counsel to the Depositor, has advised the Depositor that in
their opinion, assuming (i) the making of an appropriate election, (ii)
compliance with the Agreement and (iii) compliance with any changes in the law,
including any amendments to the Code or applicable Treasury regulations
thereunder, each REMIC Pool will qualify as a REMIC and that, if a Trust
qualifies as a REMIC, the tax consequences to the Owners will be as described
below. In such case, the Regular Securities 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
Securities will be considered to be "residual interests" in the REMIC Pool. The
Prospectus Supplement for each series of Securities will indicate whether one or
more REMIC elections with respect to the related Trust will be made, in which
event references to "REMIC" or "REMIC Pool" herein shall be deemed to refer to
each such REMIC Pool.
Status of REMIC Securities. REMIC Securities 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 Securities held by a domestic building and loan association will
constitute "a regular or residual interest in a REMIC" within the meaning of
Code Section 7701(a) (19)(C) (xi) in the same proportion that the assets of the
REMIC Pool would
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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 Securities 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 Securities 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. If at
all times 95% or more of the assets of the REMIC Pool constitute qualifying
assets for Thrift Institutions and REITs, the REMIC Securities will be treated
entirely as qualifying assets for such entities. Moreover, the 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 Assets that are reinvested pending
distribution to holders of REMIC Securities, 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 Assets 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 Assets, 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 Securities held by a regulated investment company will not
constitute "government securities" within the meaning of Code Section
851(b)(4)(A)(i). REMIC Securities held by certain financial institutions will
constitute an "evidence of indebtedness" within the meaning of Code Section
582(c)(i). REMIC Securities representing interests in obligations secured by
manufactured housing treated as single family residences under Code Section
25(e)(10) will be considered interests in "qualified mortgages" as defined in
Code Section 860E(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 Delivery
Date (which for purposes of this discussion is the date of issuance of the REMIC
Securities) and at all times thereafter, may consist of assets other than
"qualified mortgages" and "permitted investments." The 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 Pool 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 Securities as to Which No
REMIC Election Is Made." In that case, no entity-level tax would be imposed on
the REMIC Pool. Alternatively, the Regular Securities 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 (income from the
Mortgage Assets less interest and original issue discount expense allocable to
the Regular Securities 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 Securities 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 disqualification of the REMIC
Pool would occur absent regulatory relief. Investors should be aware, however,
that the Conference Committee Report to the Tax Reform Act of 1986 (the "1986
Act") 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.
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TAXATION OF REGULAR SECURITIES
General. Payments received by holders of Regular Securities 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 Security will be treated as
ordinary income to a holder of the Regular Security (the "Regular
Securityholder") as they accrue, and principal payments on a Regular Security
will be treated as a return of capital to the extent of the Regular
Securityholder's basis in the Regular Security allocable thereto. Regular
Securityholders must use the accrual method of accounting with regard to Regular
Securities, regardless of the method of accounting otherwise used by such
Regular Securityholders.
Original Issue Discount. Regular Securities may be issued with "original
issue discount" within the meaning of Code Section 1273(a). Holders of any
class of Regular Securities 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
attributable to such income. While the Depositor anticipates that the amount of
original issue discount required to be included in a Regular Securityholder's
income in any taxable year will be computed as described below, there can be no
assurance that the rules described below will be applied to the Regular
Securities in the manner described.
Each Regular Security (except to the extent described below with respect to
a Regular Security 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 Securityholder or by random lot (a "Retail
Class Security")) will be treated as a single installment obligation for
purposes of determining the original issue discount includible in a Regular
Securityholder's income. The total amount of original issue discount on a
Regular Security is the excess of the "stated redemption price at maturity" of
the Regular Security over its "issue price." The issue price of a Regular
Security is the first price at which a substantial amount of Regular Securities
of that class are first sold to the public. The Depositor will determine
original issue discount by including the amount paid by an initial Regular
Securityholder for accrued interest that relates to a period prior to the issue
date of the Regular Security in the issue price of a Regular Security 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
Security always includes the original principal amount of the Regular Security,
but generally will not include distributions of stated interest if such interest
distributions constitute "qualified stated interest." Qualified stated interest
generally means stated interest that is unconditionally payable in cash or in
property (other than debt instruments of the issuer) at least annually at (i) a
single fixed rate, (ii) one or more qualified floating rates (as described
below), (iii) a fixed rate followed by one or more qualified floating rates,
(iv) a single objective rate (as described below) or (v) a fixed rate and an
objective rate that is a qualified inverse floating rate. The OID Regulations
state that interest payments are unconditionally payable only if a late payment
or nonpayment is expected to be penalized or reasonable remedies exist to compel
payment. Certain debt securities may provide for default remedies in the event
of late payment or nonpayment of interest. The interest on such debt securities
will be unconditionally payable and constitute qualified stated interest, not
OID. However, absent clarification of the OID Regulations, where debt
securities do not provide for default remedies, the interest payments will be
included in the debt security's stated redemption price at maturity and taxed as
OID. 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 Securities 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
Securities 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 Security 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 Security technically do not constitute qualified
stated interest. 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 Security was outstanding) is treated as made at a fixed rate if
the value of the rate on which the
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payment is based is adjusted in a reasonable manner to take into account the
length of the interval. Regular Securityholders should consult their own tax
advisors to determine the issue price and stated redemption price at maturity of
a Regular Security.
Under a de minimis rule, original issue discount on a Regular Security 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 Security multiplied by
the weighted average maturity of the Regular Security. For this purpose, the
weighted maturity of the Regular Security 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 Security and the denominator of
which is the stated redemption price at maturity of the Regular Security.
Although currently unclear, it appears that the schedule of such distributions
should be determined in accordance with the assumed rate of prepayment of the
Mortgage Assets and the anticipated reinvestment rate, if any, relating to the
Regular Securities (the "Prepayment Assumption"). The Prepayment Assumption with
respect to a series of Regular Securities will be set forth in the related
Prospectus Supplement. The holder of a debt instrument includes any de minimis
original issue discount in income pro rata as stated principal payments are
received.
Of the total amount of original issue discount on a Regular Security, the
Regular Securityholder 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 Security accrued during an accrual period for each day
on which he holds the Regular Security, including the date of purchase but
excluding the date of disposition. Although not free from doubt, the Depositor
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 Security, 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 Security. For a
Regular Security, original issue discount is to be calculated initially based on
a schedule of maturity dates that takes into account the level of prepayments
and an anticipated reinvestment rate that are most likely to occur, which is
expected to be based on the Prepayment Assumption. 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 Security as of the end of that accrual period that are included in the
Regular Security's stated redemption price at maturity and (b) the distributions
made on the Regular Security during the accrual period that are included in the
Regular Security's stated redemption price at maturity over (ii) the adjusted
issue price of the Regular Security 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
Security at the issue date, (ii) events (including actual prepayments) that have
occurred prior to the end of the accrual period and (iii) the Prepayment
Assumption. For these purposes, the adjusted issue price of a Regular Security
at the beginning of any accrual period equals the issue price of the Regular
Security, increased by the aggregate amount of original issue discount with
respect to the Regular Security that accrued in all prior accrual periods and
reduced by the amount of distributions included in the Regular Security's stated
redemption price at maturity that were made on the Regular Security in such
prior period. 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.
Under the method described above, the daily portions of original issue
discount required to be included in income by a Regular Securityholder generally
will increase to take into account prepayments on the Regular Securities as a
result of prepayments on the Mortgage Assets 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. In the event of a
change in circumstances that does not result in a substantially contemporaneous
pro rata prepayment, the yield and maturity of the Regular Securities are
redetermined by treating the Regular Securities as reissued on the date of the
change for an amount equal to the adjusted issue price of the Regular
Securities. To the extent specified in the applicable Prospectus Supplement, an
increase in prepayments on the Mortgage Assets with respect to a series of
Regular Securities can result in both a change in the priority of principal
payments with respect to certain classes of Regular Securities and either an
increase or decrease in the daily portions of original issue discount with
respect to such Regular Securities.
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A purchaser of a Regular Security at a price greater than the issue price
also will be required to include in gross income the daily portions of the
original issue discount on the Regular Security. With respect to such a
purchaser, 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,
by which the price paid by such purchaser for the Regular Security exceeds the
sum of the 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 Security who purchased the Regular Security at its issue price, less 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 Security
(computed in accordance with the rules set forth above) for all days after the
date of purchase and ending on the date on which the remaining principal amount
of such Regular Security is expected to be reduced to zero under the Prepayment
Assumption.
A Securityholder 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 this election is made, the holder is treated as satisfying the requirements
for making the elections with respect to amortization of premium and current
inclusion of market discount, each as described under "Premium" and "Market
Discount" below.
Variable Rate Regular Securities. Regular Securities may provide for
interest based on a variable rate. The OID Regulations provide special rules for
variable rate instruments that meet three requirements. First, the
noncontingent principal payments may not exceed the instrument's issue price by
more than a specified amount equal to the lesser of (i) .015 multiplied by the
product of the total noncontingent payments and the weighted average maturity or
(ii) 15% of the total 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 followed by one
or more qualified floating rates, (iii) a single objective rate or (iv) a single
fixed rate and a single objective rate that is a qualified inverse floating
rate. Third, the instrument must provide that each qualified floating rate or
objective rate in effect during an accrual period 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 Security). 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. Generally, neither (i) a multiple of a qualified floating rate in excess
of a fixed multiple that is greater than zero but not more than 1.35 (and
increased or decreased by a fixed rate) nor (ii) a cap or floor that is likely
to cause the interest rate on a Regular Security to be significantly less or
more than the overall expected return on the Regular Security is considered a
qualified floating rate. An objective rate is a rate based on changes in the
price of actively traded property or an index of such prices or is a rate based
on (including multiples of) one or more qualified floating rates. An objective
rate is a qualified inverse floating rate if the rate is equal to a fixed rate
minus a qualified floating rate and variations in such rate can reasonably be
expected to reflect inversely contemporaneous variations in the cost of newly
borrowed funds. A rate will not be an objective rate if it is reasonably
expected that the average rate during the first half of the instrument's term
will be significantly more or less than the average rate in the final term. An
objective rate must be determined according to a single formula that is fixed
throughout the term of the Regular Security and that is based on objective
financial or economic information; however, an objective rate does not include a
rate based on information that is in the control of the issuer or that is unique
to the circumstances of a related party. Stated interest on a variable rate
debt instrument is qualified stated interest if the interest is unconditionally
payable in cash or property at least annually.
In general, the determination of original issue discount and qualified
stated interest on a variable rate debt instrument is made by converting the
debt instrument into a fixed rate debt instrument and then applying the general
original issue discount rules described above to the instrument. If a variable
rate debt instrument provides for stated interest at a single qualified floating
rate or objective rate, all stated interest is qualified stated interest and the
amount of original issue discount, if any, is determined by assuming the
variable rate is a fixed rate equal to (a) in the case of a qualified floating
or inverse floating rate, the value, as of the issue date, of the qualified
floating inverse floating rate or (b) in the case of an objective rate (other
than a qualified inverse floating rate), a fixed rate that reflects the yield
that is reasonably expected for the debt instrument. For all other variable
rate debt instruments, the amount of interest and original issue discount
accruals are determined using the following steps.
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First, a fixed rate substitute for each variable rate under the debt instrument
is determined. In general, the fixed rate substitute is a fixed rate equal to
the rate of the applicable type of variable rate as of the issue date. Second,
an equivalent fixed rate debt instrument is constructed using the fixed rate
substitute(s) in lieu of the variable rates and keeping all other terms
identical. Third, the amount of qualified stated interest and original issue
discount with respect to the equivalent fixed rate debt instrument are
determined under the rules for fixed rate debt instruments. Finally, appropriate
adjustments for actual variable rates are made during the term by increasing or
decreasing the qualified stated interest to reflect the amount actually paid
during the applicable accrual period as compared to the interest assumed to be
accrued or paid under the equivalent fixed rate debt instrument. If there is no
qualified stated interest under the equivalent fixed rate debt instrument, the
adjustment is made to the original issue discount for the period.
The application of the OID Regulations to variable rate debt instruments is
limited and may not apply to some Regular Securities having variable rates. In
that event, the provisions of regulations issued on June 11, 1996, applicable to
instruments having contingent payments, may apply to those Regular Securities.
The application of these provisions to instruments such as variable rate Regular
Securities is subject to varying interpretations. Prospective purchasers of
variable rate Regular Securities are advised to consult their tax advisors
concerning the tax treatment of such Regular Securities.
Market Discount. A purchaser of a Regular Security 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 Security (i) is exceeded by the stated
redemption price at maturity of the Regular Security or (ii) in the case of a
Regular Security having original issue discount, is exceed by the sum of the
issue price of such Regular Security plus any original issue discount that would
have previously accrued thereon if held by an original Regular Securityholder
(who purchased the Regular Security at its issue price), in either case less any
prior distributions included in the stated redemption price at maturity of such
Regular Security. 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 Security 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
Conference Committee Report to the 1986 Act 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 Security
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 Security 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 required to
defer deduction of a portion of the excess of the interest paid or accrued on
indebtedness incurred to purchase or carry a Regular Security 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 Security 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 Security is disposed of. As
an alternative to the inclusion of market discount in income on the foregoing
basis, the Regular Securityholder may elect to include market discount in income
currently as it accrues in all market discount instruments acquired by such
Regular Securityholder 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 Code
Section 1278(b) to include market discount in income currently, (2) electing
under rules of Code Section 1276(b) 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
Code Section 1278(b).
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By analogy to the OID Regulations, market discount with respect to a
Regular Security 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
Security multiplied by the weighted average maturity of the Regular Security
(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 Security 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 Securityholder holds such Regular Security as a
"capital asset" within the meaning of Code Section 1221, the Regular
Securityholder 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 Securities. This election, once made, applies to all
obligations held by the taxpayer at the beginning of the first taxable year to
which such section applies and to all taxable debt obligations thereafter
acquired and is binding on such taxpayer in all subsequent years. The
Conference Committee Report to the 1986 Act 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 Securities. On June 22, 1996, the
IRS published proposed regulations (the "Proposed Premium Regulations") covering
the amortization of bond premiums. The Proposed Premium Regulations describe
the constant yield method for amortizing premium and provide that the Regular
Security holder may offset the premium against corresponding interest income
only as that income is taken into account under the Regular Securityholder's
method of accounting. For instruments that may be called or prepaid prior to
maturity, a Regular Securityholder will be deemed to exercise its option and an
issuer will be deemed to exercise its redemption right in a manner that
maximizes the Regular Securityholder's yield. The Proposed Premium Regulations
are proposed to be effective for debt instruments acquired on or after 60 days
after final regulations are issued. A Regular Securityholder may elect to
amortize bond premium under the Proposed Premium Regulations for the taxable
year containing the effective date, with the election applying to all the
Regular Security holders' debt instruments held on the first day of the taxable
year. The Proposed Premium Regulations are subject to further administrative
action before becoming effective, if at all, and may be modified before their
becoming effective. Purchasers who pay a premium for their Regular Securities
should consult their tax advisors regarding the election to amortize premium and
the method to be employed.
Sale or Exchange of Regular Securities. If a Regular Securityholder sells
or exchanges a Regular Security, the Regular Securityholder will recognize gain
or loss equal to the difference, if any, between the amount received and his
adjusted basis in the Regular Security. The adjusted basis of a Regular
Security generally will equal the cost of the Regular Security 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 Security and reduced by
amounts included in the stated redemption price at maturity of the Regular
Security that were previously received by the seller and by any amortized
premium.
Except as described above with respect to market discount, and except as
provided in this paragraph, any gain or loss on the sale or exchange of a
Regular Security realized by an investor who holds the Regular Security as a
capital asset will be capital gain or loss and will be long-term or short-term
depending on whether the Regular Security has been held for the long-term
capital gain holding period (currently more than one year). Gain from the
disposition of a Regular Security that might otherwise be capital gain will be
treated as ordinary income to the extent that such gain does not exceed the
excess, if any, of (i) the amount that would have been includible in the gross
income of the holder if his yield on such Regular Security were 110% of the
applicable Federal rate under Code Section 1274(d) as of the date of purchase
over (ii) the amount of income actually includible in the gross income of such
holder with respect to the Regular Security. In addition, gain or loss
recognized from the sale of a Regular Security by certain banks or thrift
institutions will be treated as ordinary income or loss pursuant to Code Section
582(c). The maximum tax rate for individuals on the excess of net long-term
capital gain over net short-term capital loss is 28%.
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TAXATION OF RESIDUAL SECURITIES
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 Securities ("Residual
Securityholders") and will not be taxed separately to the REMIC Pool. The daily
portions of REMIC taxable income or net loss of a Residual Securityholder 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 Securityholders in proportion to their
respective holdings of Residual Securities 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 Assets, plus income on reinvestment of cashflows and reserve
assets, minus deductions, including interest and original issue discount expense
on the Regular Securities, servicing fees on the Mortgage Assets and other
administrative expenses of the REMIC Pool, amortization of premium, if any, with
respect to the Mortgage Assets, and any tax imposed on the REMIC's income from
foreclosure property. The requirement that Residual Securityholders report
their pro rata share of taxable income or net loss of the REMIC Pool will
continue until there are no Securities of any class of the related series
outstanding.
The taxable income recognized by a Residual Securityholder 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 Assets, on the
one hand, and the timing of deductions for interest (including original issue
discount) on the Regular Securities, on the other hand. Because of the way
REMIC taxable income is calculated, a Residual Securityholder 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 in taxable
income, but which could lower the yield to Residual Securityholders due to the
lower present value of such future loss or reduction. For example, if an
interest in the Mortgage Assets is acquired by the REMIC Pool at a discount, and
one or more of such Mortgage Assets is prepaid, the Residual Securityholder 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 Securities and (ii)
the discount income on the Mortgage Loan which is includible in the REMIC's
taxable income may exceed the discount deduction allowed to the REMIC upon such
distributions on the Regular Securities. When there is more than one class of
Regular Securities that distribute principal sequentially, this mismatching of
income and deductions is particularly likely to occur in the early years
following issuance of the Regular Securities when distributions in reduction of
principal are being made in respect of earlier maturing classes of Securities 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
Securities 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 Securities, may increase over time as distributions in reduction of
principal are made on the lower yielding classes of Regular Securities, where
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 Securityholders 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 Securities, may have a significant adverse effect upon the Residual
Securityholders after-tax rate of return. In addition, a Residual
Securityholder's taxable income during certain periods may exceed the income
reflected by such Securityholder 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 Securities.
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Basis and Losses. The amount of any net loss of the REMIC Pool that may be
taken into account by the Residual Securityholder is limited to the adjusted
basis of the Residual Security as of the close of the quarter (or time of
disposition of the Residual Security if earlier), determined without taking into
account the net loss for the quarter. The initial adjusted basis of a purchaser
of a Residual Security is the amount paid for such Residual Security. Such
adjusted basis will be increased by the amount of taxable income of the REMIC
Pool reportable by the Residual Securityholder and decreased by the amount of
loss of the REMIC Pool reportable by the Residual Securityholder. 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 Securityholder as to whom
such loss was disallowed and may be used by such Residual Securityholder only to
offset any income generated by the same REMIC Pool. Residual Securityholders
should consult their tax advisors about other limitations on the deductibility
of net losses that may apply to them.
A Residual Securityholder will not be permitted to amortize directly the
cost of its Residual Security as an offset to its share of the taxable income of
the related REMIC Pool. 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 Securities over their life.
However, in view of the possible acceleration of the income of Residual
Securityholders 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 Securities.
If a Residual Security 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 REMIC Regulations do
not address whether residual interests could have a negative basis and a
negative issue price. The Depositor does not intend to treat a class of
Residual Securities 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 Residual
Securityholder (other than an original holder) in the Residual Security is
greater than the corresponding portion of the REMIC Pool's basis in the Mortgage
Assets, the Residual Securityholder 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 REMIC Regulations do not so provide. See "Treatment of Certain
Items of REMIC Income and Expense -- Market Discount" below regarding the basis
of Mortgage Assets to the REMIC Pool and "Sale or Exchange of Residual
Securities" below regarding possible treatment of a loss upon termination of the
REMIC Pool as a capital loss.
Mark to Market Rules
Prospective purchasers of a Residual Security should be aware that on
December 24, 1996, the Internal Revenue Service issued final regulations (the
"Mark to Market Regulations") relating to the requirement that a securities
dealer mark to market securities held for sale to customers. This mark-to-
market requirement applies to all securities of a dealer, except to the extent
that the dealer has specifically identified a security as held for investment.
The Mark to Market Regulations provide that for purposes of this mark-to-market
requirement, a Residual Security acquired after January 4, 1995, is not treated
as a security and thus may not be marked to market.
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 Securities as described above under "Taxation of
Regular Securities -- Original Issue Discount" and "Variable Rate Regular
Securities," without regard to the de minimis rule described therein.
Market Discount. The REMIC Pool will have market discount income in
respect of Mortgage Assets if, in general, the basis of the REMIC Pool in such
Mortgage Assets is exceeded by their unpaid principal balances. The REMIC Pool's
basis in such Mortgage Assets is generally the fair market value of the Mortgage
Assets
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immediately after the transfer thereof to the REMIC Pool. The 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 Assets 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 Securities --
Market Discount." The rules of Code Section 1276 concerning market discount
income will not, however, apply in the case of Mortgage Assets originated on or
prior to July 18, 1984, if any. With respect to such Mortgage Assets market
discount is generally includible in REMIC taxable income or ordinary gross
income pro rata as principal payments are received. Under another
interpretation of the Code and relevant legislative history, market discount on
such Mortgage Assets might be required to be recognized currently by the REMIC,
in the same manner that market discount would be recognized with respect to
Mortgage Assets originated after July 18, 1984. Under that method, a REMIC
would tend to recognize market discount more rapidly than it would otherwise.
In either case, the deduction of a portion of the interest expense on the
Regular Securities allocable to such discount may be deferred until such
discount is included in income, and any gain on the sale or exchange thereof
will be treated as ordinary income to the extent of the deferred interest
deductible at that time.
Premium. Generally, if the basis of the REMIC Pool in the Mortgage Assets
exceeds the unpaid principal balances thereof, the REMIC Pool will be considered
to have acquired such Mortgage Assets at a premium equal to the amount of such
excess. As stated above, the REMIC Pool's basis in the Mortgage Assets is the
fair market value of the Mortgage Assets, 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 Securities -- Premium," a person that holds
Mortgage Assets as a capital asset under Code Section 1221 may elect under Code
Section 171 to amortize premium on Mortgage Assets 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 Assets, rather than as a
separate deduction item. Because substantially all the mortgagors with respect
to the Mortgage Assets are expected to be individuals, Code Section 171 will not
be available. Premium on Mortgage Assets 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 Security (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 Securityholder, (ii) will be treated as "unrelated business taxable
income" within the meaning of Code Section 512 if the Residual Securityholder 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 Securityholder that is a
foreign investor, as further discussed in "Taxation of Certain Foreign Investors
- -- Residual Securities" below. Members of an affiliated group are treated as one
corporation for purposes of applying the limitation on offset of excess
inclusion income. The Small Business Protection Act of 1996 (the "1996 Act")
eliminated a special rule that permitted thrift institutions to use net
operating losses and other allowable deductions to offset their excess inclusion
income from Residual Securities with significant value for taxable years
beginning after December 31, 1995 (subject to exceptions for certain
certificates held continuously since November 1, 1995). The 1996 Act also
provides new rules affecting the determination of alternative minimal taxable
income ("AMTI") of a Residual Securityholder. First, AMTI is calculated without
regard to the special rule that taxable income cannot be less than excess
inclusion income for the year. Second, AMTI cannot be less than excess inclusion
income for the year. Finally, any AMTI net operating loss deduction is computed
without regard to excess inclusion income. These new rules are effective for
tax years ending beginning after December 31, 1986, unless a Residual Security
holder elects to have the rules apply only to tax years after August 20, 1996.
Except as discussed in the following paragraph, with respect to excess
inclusions from Residual Securities without "significant value," for any
Residual Securityholder, the excess inclusion for any calendar quarter is the
excess, if any, of (i) the income of such Residual Securityholder for that
calendar quarter from its Residual Security over (ii) the sum of the "daily
accruals" (as defined below) for all days during the calendar quarter on which
the
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Residual Securityholder holds such Residual Security. For this purpose, the
daily accruals with respect to a Residual Security 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 Security at the
beginning of the calendar quarter and 120 percent of the "Federal long-term
rate" in effect at the time the Residual Security is issued. For this purposes
the "adjusted issue price" of a Residual Security at the beginning of any
calendar quarter equals the issue price of the Residual Security (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 Security 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 Security will be treated as an excess inclusion if the
Residual Securities in the aggregate are considered not to have "significant
value." The Treasury Department has not yet provided regulations in this respect
and the REMIC Regulations did not adopt this rule. The exception from the
excess inclusion rules applicable to thrift institutions does not apply,
however, if the Residual Securities do not have significant value. Under the
REMIC Regulations, the Residual Securities will have significant value if: (i)
the aggregate of the issue prices of the Residual Securities is at least two
percent of the aggregate issue prices of all Regular Securities and Residual
Securities in the REMIC and (ii) the anticipated weighted average life of the
Residual Securities 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 recognized or permitted clean up calls or any
required qualified liquidation. Although not entirely clear, the REMIC
Regulations indicate that the significant value determination is made only on
the Startup Day. The anticipated weighted average life of a Residual Security
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 portions thereof) from the Startup Day, adding these sums and dividing by
the total principal expected to be paid on such Residual Security based on the
relevant prepayment assumption and expected reinvestment income. The
anticipated weighted average life of a Residual Security 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
Security 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 interest in the REMIC.
Under Treasury regulations to be promulgated, a portion of the dividends
paid by a REIT which owns a Residual Security are to be designated as excess
inclusions in an amount corresponding to the Residual Security'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 Security will be subject to the limitations
on excess inclusions described above. The REMIC Regulations do not provide
guidance on this issue.
TAX-RELATED RESTRICTIONS ON TRANSFER OF RESIDUAL SECURITIES
Disqualified Organizations. If legal title or beneficial interest in a
Residual Security 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 Security for periods after the transfer and (ii) the highest marginal
federal corporate income tax rate. The REMIC Regulations provide that the
anticipated excess inclusion 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 Security and whose term
ended on the close of the last quarter in which excess inclusion was expected to
accrue with respect to the Residual Security. Such a tax generally would be
imposed on the transferor of the Residual Security, 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.
A transferor of a Residual Security would in no event, however, 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
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Security and the transferor pays income tax at the highest corporate
rate on the excess inclusion for the period the Residual Security 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 Security 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 Security, the Pass-
Through Entity does not have actual knowledge that such affidavit is false.
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
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 Securities will provide that
neither legal title nor beneficial interest in a Residual Security may be
transferred or registered unless (i) the proposed transferee provides to the
Depositor and the Trustee an affidavit to the effect that such transferee is not
a Disqualified Organization, is not purchasing such Residual Securities 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 Depositor 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 Security with respect to a series will have
a legend referring to such restrictions on transfer, and each Residual
Securityholder 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 Depositor or the Trustee may charge a fee for computing and
providing such information.
Noneconomic Residual Interests. Under the REMIC Regulations certain
transfers of Residual Securities are disregarded, in which case the transferor
continues to be treated as the owner of the Residual Securities and thus
continues 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 Securityholder (other than a
Residual Securityholder 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 federal 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
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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
transferor would be unwilling or unable to pay taxes due on its share of the
taxable income of the REMIC. Under the 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 transferor 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 of a Residual Security 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 Interest, it may incur
tax liabilities in excess of any cash flows generated by the Residual Security,
and (iv) intends to pay any and all taxes associated with holding the Residual
Security as they become due. The transferor must have no reason to believe that
such statement is untrue.
Foreign Investors. The REMIC Regulations provide that the transfer of a
Residual Security 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 Security 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 Security 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 Securities may provide
that a Residual Security 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 SECURITY
Upon the sale or exchange of a Residual Security, the Residual
Securityholder 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
Securities -- Basis and Losses") of such Residual Securityholder in such
Residual Security at the time of the sale or exchange. In addition to reporting
the taxable income of the REMIC Pool, a Residual Securityholder 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 Security. It is
possible that the termination of the REMIC Pool may be treated as a sale or
exchange of a Residual Securityholder's Residual Security, in which case, if the
Residual Securityholder has an adjusted basis in his Residual Security remaining
when his interest in the REMIC Pool terminates, and if he holds such Residual
Security 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 Conference Committee Report to the 1986 Act provides that, except as
provided in Treasury regulations yet to be issued, the wash sale rules of Code
Section 1091 will apply to disposition of Residual Securities. Consequently,
losses on dispositions of Residual Securities will be disallowed where the
seller of the Residual Security, during the period beginning six months before
the sale or disposition of the Residual Security and ending six months after
such sale or disposition, acquires (or enters into any other transaction that
results in
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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 Security.
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 Residual
Securityholders, 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 Securities 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
Securities is outstanding). The 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. The REMIC Regulations
also provide that the modification of mortgage loans underlying Mortgage-Backed
Securities will not be treated as a modification of the Mortgage-Backed
Securities, provided that the trust including the 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
Securityholder, (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 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, the REMIC Pool will recognize no gain
or loss on the sale of its assets, provided that the REMIC Pool credits or
distributes in liquidation all the sale proceeds plus its cash (other than
amounts retained to meet claims against the REMIC Pool) to holders of Regular
Securities and Residual Securityholders 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. The
Trustee will be
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required to sign the REMIC Pool's returns. Treasury regulations provide that,
except where there is a single Residual Securityholder 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. The Depositor or other designated Residual
Securityholders will be obligated to act as "tax matters person," as defined in
applicable Treasury regulations, with respect to the REMIC Pool. If the Code or
applicable Treasury regulations do not permit the Depositor to act as tax
matters person in its capacity as agent of the Residual Securityholders, the
Residual Securityholder chosen by the Residual Securityholders 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 Security 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 Securities for the
entire calendar year. Otherwise, each holder of a Residual Security is required
to treat items on its return consistently with their treatment on the REMIC
Pool's return, unless the holder of a Residual Security either files a statement
identifying the inconsistency or establishes that the inconsistency resulted
from incorrect information received from the REMIC Pool. The Service 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 $100,000, adjusted yearly for inflation
($50,000, 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 Securities 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 Securities 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 Securities, as well as holders of
Residual Securities, where such Regular Securities 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 Securityholder's income, determined on a daily basis, bears to the income
of all holders of Regular Securities and Residual Securities with respect to a
REMIC Pool. As a result, individuals, estates or trusts holding REMIC
Securities (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 Securities 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
Securities.
TAXATION OF CERTAIN FOREIGN INVESTORS
Regular Securities. Interest, including original issue discount,
distributable to Regular Securityholders 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 shareholder" 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 Sections 1441 or 1442, with
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an appropriate statement, signed under penalties of perjury, identifying the
beneficial owner and stating, among other things, that the beneficial owner of
the Regular Security 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 Security 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
Security. The term "Non-U.S. Person" means any person who is not a U.S. Person.
Residual Securities. The Conference Committee Report to the 1986 Act
indicates that amounts paid to Residual Securityholders 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 Securityholders qualify as "portfolio interest," subject to the
conditions described in "Regular Securities" above, but only to the extent that
(i) the Mortgage Assets 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 Security relates, consists of obligations issued
in "registered form" within the meaning of Code Section 163(f)(1). Generally,
Mortgage Assets will not be, but regular interests in another REMIC Pool will
be, considered obligations issued in registered form. Furthermore, a Residual
Securityholder 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 Securities --
Limitations on Offset or Exemption of REMIC Income; Excess Inclusions." If the
amounts paid to Residual Securityholders 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 Security 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 Securities -- 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 Securities.
On April 22, 1996, the IRS issued proposed regulations which, if adopted in
final form, could have an affect on the United States taxation of foreign
investors owning Regular Securities or Residual Securities. The proposed
regulations would apply to payments after December 31, 1997. Investors who are
Non-U.S. Persons should consult their tax advisors regarding the specific tax
consequences to them of owning Residual Securities.
BACKUP WITHHOLDING
Distributions made on the Regular Securities, and proceeds from the sale of
the Regular Securities 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 Securityholder
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 Security, or such Securityholder is
otherwise an exempt recipient under applicable provisions of the Code. Any
amounts to be withheld from distribution on the Regular Securities would be
refunded by the Internal Revenue Service or allowed as a credit against the
Regular Securityholder'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 Securities or beneficial owners who own Regular Securities through a
broker or middleman as nominee. All brokers, nominees and all other non-exempt
holders of record of Regular Securities (including
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corporations, non-calendar year taxpayers, securities or commodities dealers,
real estate investment trusts, investment companies, common trust funds, thrift
institutions and charitable trusts) may request such information for any
calendar quarter by telephone or in writing by contacting the person designated
in Internal Revenue Service Publication 938 with respect to a particular series
of Regular Securities. 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 Securities must be
furnished for calendar years beginning after 1990.
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 Securityholder 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
Securityholders, furnished annually, if applicable, to holders of Regular
Securities, 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 Securityholders, furnished annually to
holders of Regular Securities, 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 "Federal Income Tax Consequences for
REMIC Securities," above."
FEDERAL INCOME TAX CONSEQUENCES FOR SECURITIES AS TO WHICH NO REMIC ELECTION IS
MADE
Arter & Hadden, special counsel to the Depositor, is of the opinion that if
a Trust does not elect REMIC status and is not treated as a partnership, the
tax consequences to the Owners will be as discussed below.
STANDARD SECURITIES
General. If no election is made to treat a Trust (or a segregated pool of
assets therein) with respect to a series of Securities as a REMIC, the Trust may
be classified as a grantor trust under subparagraph E, Part 1 of subchapter J of
the Code and not as a partnership or association taxable as a corporation. Where
there is no fixed retained yield with respect to the Mortgage Assets underlying
the Securities of a series, and where such Securities are not designated as Debt
Securities, as described below under "Debt Securities," Stripped Securities, as
described below under "Stripped Securities" or as Partnership Interests
described under "Taxation of Securities Classified as Partnership Interests,"
the holder of each such "Standard Security" 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 represented by his Security and will be considered the
beneficial owner of a pro rata undivided interest in each of the Mortgage
Assets, subject to the discussion below under "Recharacterization of Servicing
Fees." Accordingly, the holder of a Security (a "Securityholder") 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 Assets, original issue
discount (if any), prepayment fees, assumption fees, and late payment charges
received by or on behalf of the Trust, in accordance with such Securityholder's
method of accounting. A Securityholder generally will be able to deduct its
share of servicing fees and all administrative and other expenses of the Trust
in accordance with his method of accounting, provided that such amounts are
reasonable compensation for services rendered to that Trust. Securityholders
who are individuals, estates or trusts, however, 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, 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 $100,000, adjusted
yearly for inflation ($50,000, 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 may have aggregate taxable income in excess of the aggregate amount of
cash received on such Securities with respect to interest at the pass-through
rate on such Securities or discount thereon. 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
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to significant additional tax liability. Moreover, where there is fixed retained
yield with respect to the Mortgage Assets underlying a series of Securities 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
Securities" and "Premium and Discount -- Recharacterization of Servicing Fees,"
respectively.
Tax Status. Subject to the discussion below, Arter & Hadden, special
counsel to the Depositor, is of the opinion that:
(i). A Standard Security 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 Assets represented by that
Security is of the type described in such section.
(ii). A Standard Security 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 592(d)(1), provided that
the real property securing the Mortgage Assets represented by that Security
is of the type described in such section.
(iii). A Standard Security 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 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).
(iv). A Standard Security 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 consist of "qualified
mortgages" within the meaning of Code Section 860G(a)(3).
An issue arises as to whether buy-down Mortgage Assets may be characterized
in their entirety under the Code provisions cited in the immediately preceding
paragraph. Code Section 593(d)(l)(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 Assets as "qualifying real
property loans" under Code Section 593(d)(i) 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, Securityholders are urged to
consult their own tax advisors concerning the effects of such arrangements on
the characterization of such Securityholder's investment for federal income tax
purposes.
PREMIUM AND DISCOUNT
Securityholders 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 Securities or thereafter.
Premium. The treatment of premium incurred upon the purchase of a Security
will be determined generally as described above under " -- Taxation of Regular
Securities -- 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 Securityholder's interest
in those Mortgage Assets 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 l, 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 currently deductible under
applicable Code provisions or are not for services provided by the lender. It
is generally not anticipated that adjustable rate Mortgage Assets 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.
Code Section 1272 provides, however, 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 Assets
acquired by a Securityholder are purchased at a price equal to the then unpaid
principal amount of such Mortgage Assets, no original issue discount
attributable to the difference between the issue price and the original
principal amount of such Mortgage Assets (i.e., points) will be includible by
such holder.
Market Discount. Securityholders 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 Assets will be determined and
will be reported as ordinary income generally in the manner described above
under " -- Taxation of Regular Securities -- 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 Securities, 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 Assets 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 Assets 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 excess servicing fees would be viewed as retaining an
ownership interest in a portion of the interest payments on the Mortgage Assets.
Under the rules of Code Section 1286, the separation of the right to receive
some of or all 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 Assets as "stripped coupons" and "stripped bonds."
While Securityholders 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 Assets 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
Securityholder, except that the income reported by a cash method holder may be
slightly accelerated. See "Stripped Securities" below for a further description
of the federal income tax treatment of stripped bonds and stripped coupons.
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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 Securityholders to
purchase an undivided interest in the Mortgage Assets. In such event, the
present value of such additional payments might be included in the
Securityholder's basis in such undivided interests for purposes of determining
whether the Security was acquired at a discount, at par, or at a premium. Under
this alternative, Securityholders 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. Securityholders 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 Securities. Upon sale or exchange of a Security, a
Securityholder will recognize gain or loss equal to the difference between the
amount realized on the sale and its aggregate adjusted basis in the Mortgage
Assets and other assets represented by the Security. In general, the aggregate
adjusted basis will equal the Securityholder's cost for the Security, increased
by the amount of any income previously reported with respect to the Security and
decreased by the amount of any losses previously reported with respect to the
Security and the amount of any distributions received thereon. Except as
provided above with respect to market discount on any Mortgage Assets, 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
Security was held as a capital asset.
STRIPPED SECURITIES
General. Pursuant to Code Section 1286, the separation of ownership of the
right to receive some of or all the principal payments on an obligation from
ownership of the right to receive some of or all 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, Securities that are subject to those rules will be referred to as
"Stripped Securities." The Securities will be subject to those rules if (i) the
Depositor 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 Assets, (ii) the
Depositor, any of its affiliates or a servicer is treated as having an ownership
interest in the Mortgage Assets to the extent it is paid (or retains) servicing
compensation in an amount greater than reasonable consideration for servicing
the Mortgage Assets (see "Standard Securities -- Recharacterization of the
Servicing Fees" above) and (iii) a class of Securities 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 Assets.
In general, a holder of a Stripped Security (a "Stripped Securityholder")
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 Security'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 Securities -- Recharacterization of Servicing Fees." For this
purpose the servicing fees will be allocated to the Stripped Securities in
proportion to the respective offering price of each class (or subclass) of
Stripped Securities. The holder of a Stripped Security generally will be
entitled to a deduction each year in respect of the servicing fees, as described
above under " -- Federal Income Tax Consequences for Securities as to Which No
REMIC Election is Made -- Standard Securities -- General," subject to the
limitation described therein.
Code Section 1286 treats a stripped bond or a stripped coupon generally as
a new obligation 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 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. 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 Securities arguably should be made in one of the ways
described below, 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
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Trustee will make and report all computations described below using this
aggregate approach, unless substantial legal authority requires otherwise.
Furthermore, the regulations under Code Section 1286 support the treatment
of a Stripped Security 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 Security 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 Security would be
treated as stated interest under the original issue discount rules. Further,
the regulations provide that the purchaser of such a Stripped Security 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 Strip
Security 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 Assets. Any such market discount would be reportable as described
above under "Federal Income Tax Consequences for REMIC Securities -- Taxation of
Regular Securities -- Market Discount," without regard to the de minimis rule
therein.
Status of Stripped Securities. No specific legal authority exists as to
whether the character of the Stripped Securities, for federal income tax
purposes, will be the same as that of the Mortgage Assets. Stripped Securities
owned by applicable holders should be considered to represent "qualifying real
property loans" within the meaning or 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 Securities should be
considered to represent "interest on obligations secured by mortgages on real
property" within the meaning or Code Section 856(c)(3)(B), provided that in each
case the Mortgage Assets and interest on such Mortgage Assets qualify for such
treatment. The application of such Code provisions to buy-down Mortgage Assets
is uncertain. See " -- Federal Income Tax Consequences for Securities as to
Which No REMIC Election is Made" and " -- Standard Securities -- Tax Status"
above.
Original Issue Discount. Except as described above under " -- General,"
each Stripped Security 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 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 Security 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. The amount of original issue discount required
to be included in the income of a Stripped Securityholder in any taxable year
should be computed generally as described above under "Federal Income Tax
Consequences for REMIC Securities -- Taxation of Regular Securities -- Original
Issue Discount" and " -- Variable Rate Regular Securities." With the apparent
exception of a Stripped Security issued with de minimis original issue discount,
as described above under " -- General," however, the issue price of a Stripped
Security 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 Security to such Stripped Securityholder, presumably
under the Prepayment Assumption, other than amounts treated as qualified stated
interest.
If the Mortgage Assets prepay at a rate either faster or slower than that
under the Prepayment Assumption, a Stripped Securityholder'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 Securityholder's Stripped Security. While the
matter is not free from doubt, the holder of a Stripped Security should be
entitled in the year that it
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becomes certain (assuming no further prepayments) that the holder will not
recover a portion of its adjusted basis in such Stripped Security to recognize
an ordinary loss equal to such portion of unrecoverable basis.
As an alternative to the method described above, the fact that some of or
all the interest payments with respect to the Stripped Securities will not be
made if the Mortgage Assets are prepaid could lead to the interpretation that
such interest payments are "contingent" within the meaning of the proposed
regulations issued under Code Section 1274 that address the treatment of
contingent payments. If the rules of those proposed regulations apply, treatment
of a Stripped Security under such rules depends on whether the aggregate amount
of principal payments, if any, to be made on the Stripped Security is less than
or greater than its issue price. If the aggregate principal payments are greater
than or equal to the issue price, the principal payments would be treated as a
separate installment obligation issued at a price equal to the purchase price
for the Stripped Security. In such case, original issue discount would be
calculated and accrued under the method described above without consideration of
the interest payments with respect to the Stripped Security. Such payments of
interest would be includible in the Stripped Securityholder's gross income in
the taxable year in which the amounts become fixed. If the aggregate amount of
principal payments to be made on the Stripped Security is less than its issue
price, each payment of principal would be treated as a return of basis. Each
payment of interest would be treated as includible in gross income to the extent
of the applicable Federal rate under Code Section 1274(d), as applied to the
adjusted basis of the Stripped Security, while amounts received in excess of the
applicable Federal rate, as applied to the adjusted basis of the Stripped
Security, would be characterized as a return of basis until the total amount of
interest payments treated as a return of basis equaled the excess of the
purchase price over the aggregate stated principal payments. Any additional
interest payments thereafter would be treated as ordinary income. While not free
from doubt, uncertainty as to the payment of interest arising as a result of the
possibility of prepayment of the Mortgage Assets should not cause the rules
under the proposed contingent payment regulations to apply to interest with
respect to the Stripped Securities.
Sale or Exchange of Stripped Securities. Sale or exchange of a Stripped
Security prior to its maturity will result in gain or loss equal to the
difference, if any, between the amount received and the Stripped
Securityholder's adjusted basis in such Stripped Security, as described above
under "Federal Income Tax Consequences for REMIC Securities -- Taxation of
Regular Securities -- Sale or Exchange of Regular Securities." To the extent
that a subsequent purchaser's purchase price is exceeded by the remaining
payments on the Stripped Securities, 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 Securityholder other than by original Stripped Securityholder 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 Securities. Where an investor
purchases more than one class of Stripped Securities, it is currently unclear
whether for federal income tax purposes such classes of Stripped Securities
should be treated separately or aggregated for purposes of the rules described
above.
Because of these possible varying characterizations of Stripped Securities
and the resultant differing treatment of income recognition, Stripped
Securityholders are urged to consult their own tax advisors regarding the proper
treatment of Stripped Securities for federal income tax purposes.
REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The Trustee will furnish, within a reasonable time after the end of each
calendar year, to each Securityholder or Stripped Securityholder 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 Securityholders to
prepare their federal income tax returns. Such information will include the
amount of original issue discount accrued on Securities held by persons other
than Securityholders 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
Securityholder, other than an original Securityholder. The Trustee will also
file such original issue discount information with the Internal Revenue Service.
If a Securityholder fails to supply an accurate taxpayer identification number
or if the Secretary of the Treasury determines that a Securityholder has not
reported all interest and dividend income required to be shown on his federal
income tax return, 31% backup
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withholding may be required in respect of any reportable payments, as described
above under " -- Backup Withholding."
TAXATION OF CERTAIN FOREIGN INVESTORS
To the extent that a Security evidences ownership in Mortgage Assets 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, which
apply 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 or market discount recognized by the Securityholder on
the sale or exchange of such a Security 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 Assets 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
"-- Taxation of Certain Foreign Investors -- Regular Securities."
Securityholders should be aware that the IRS issued proposed Regulations on
April 22, 1996, which, if adopted in final form, could affect the United States
taxation of foreign investors owning Securities. The proposed regulations would
apply to payments after December 31, 1997. Investors who are Non-U.S. Persons
should consult their own tax advisors regarding the specific tax consequences to
them of owning Securities.
DEBT SECURITIES
General. Certain Securities ("Debt Securities") may be issued either as (i)
non-recourse debt of the Depositor secured by the related Mortgage Assets, in
which case the related Trust will constitute only a security device which
constitutes a collateral arrangement for the issuance of secured debt and not an
entity for federal income tax purposes or (ii) debt of a partnership, in which
case the related Trust will constitute a partnership for federal income tax
purposes. With respect to such Debt Securities, Arter & Hadden, special counsel
to the Depositor, is of the opinion that (unless otherwise limited in the
related Prospectus Supplement) the Debt Securities will be characterized as debt
issued by, and not equity in, the Trust for federal income tax purposes.
Original Issue Discount. It is likely that the Debt Securities will be
treated as having been issued with "original issue discount" within the meaning
of Code Section 1273(a) because interest payments on the Debt Securities may, in
the event of certain shortfalls, be deferred for periods exceeding one year. As
a result, interest payments may not be considered "qualified stated interest"
payments.
In general, a holder of a Debt Security having original issue discount must
include original issue discount in ordinary income as it accrues in advance of
receipt of the cash attributable to the discount, regardless of the method of
accounting otherwise used. The amount of original issue discount on a Debt
Security will be computed generally as described under "-- Federal Income Tax
Consequences for REMIC Certificates" and "Taxation of Regular Certificates --
Original Issue Discount" and "-- Variable Rate Regular Certificates." The
Depositor intends to report any information required with respect to the Debt
Securities based on the OID Regulations.
Market Discount. A purchaser of a Debt Security may be subject to the
market discount rules of Code Sections 1276 through 1278. In general, "market
discount" is the amount by which the stated redemption price at maturity (or, in
the case of a Debt Security issued with original issue discount, the adjusted
issue price) of the Debt Security exceeds the purchaser's basis in a Debt
Security. The holder of a Debt Security that has market discount generally will
be required to include accrued market discount in ordinary income to the extent
payments includible in the stated redemption price at maturity of such Debt
Security are received. The amount of market discount on a Debt Security will be
computed generally as described under "Federal Income Tax Consequences for REMIC
Certificates" and "-- Taxation of Regular Certificates -- Market Discount."
Premium. A Debt Security purchased at a cost greater than its currently
outstanding stated redemption price at maturity is considered to be purchased at
a premium. A holder of a Debt Security who holds a Debt Security
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as a "capital asset" within the meaning of Code Section 1221 may elect under
Code Section 171 to amortize the premium under the constant interest method.
That election will apply to all premium obligations that the holder of a Debt
Security acquires on or after the first day of the taxable year for which the
election is made, unless the IRS permits the revocation of the election. In
addition, it appears that the same rules that apply to the accrual of market
discount on installment obligations are intended to apply in amortizing premium
on installment obligations such as the Debt Securities. The treatment of
premium incurred upon the purchase of a Debt Security will be determined
generally as described above under "Taxation of Regular Securities-Premium".
Sale or Exchange of Debt Securities. If a holder of a Debt Security sells
or exchanges a Debt Security, the holder of a Debt Security will recognize gain
or loss equal to the difference, if any, between the amount received and the
holder of a Debt Security's adjusted basis in the Debt Security. The adjusted
basis in the Debt Security generally will equal its initial cost, increased by
any original issue discount or market discount previously included in the
seller's gross income with respect to the Debt Security and reduced by the
payments previously received on the Debt Security, other than payments of
qualified stated interest, and by any amortized premium.
In general, except as described above with respect to market discount, and
except for certain financial institutions subject to Code Section 582(c), any
gain or loss on the sale or exchange of a Debt Security recognized by an
investor who holds the Debt Security as a capital asset (within the meaning of
Code Section 1221), will be capital gain or loss and will be long-term or short-
term depending on whether the Debt Security has been held for more than one
year. For corporate taxpayers, there is no preferential rate afforded to long-
term capital gains. For individual taxpayers, all net capital gains are
currently subject to a maximum nominal rate of tax of 28%. However, Congress is
currently considering proposed tax legislation which would reduce the tax rate
on long-term capital gains.
TAXATION OF SECURITIES CLASSIFIED AS PARTNERSHIP INTERESTS
Certain Trusts may be treated as partnerships for Federal income tax
purposes. In such event, the Trusts may issue Securities characterized as
"Partnership Interests" as discussed in the related Prospectus Supplement which
will also cover any material federal income tax consequences applicable to the
Owners. With respect to such series of Partnership Interests, Arter & Hadden,
special counsel to the Depositor, is of the opinion that (unless otherwise
limited in the related Prospectus Supplement) the Trust will be characterized as
a partnership and not an association taxable as a corporation for federal income
tax purposes.
PLAN OF DISTRIBUTION
Securities 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 Securities,
including the public offering or purchase price of each class of Securities of
such series being offered thereby or the method by which such price will be
determined and the net proceeds to the Depositor from the sale of each such
class. Such Securities 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 Securities 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 Securities, Underwriters may receive
compensation from the Depositor or from purchasers of the Securities in the form
of discounts, concessions or commissions. Underwriters and dealers participating
in the distribution of the Securities may be deemed to be underwriters in
connection with such Securities, and any discounts or commissions received by
them from the Depositor and any profit on the resale of Securities by them may
be deemed to be underwriting discounts and commissions under the Securities Act
of 1933, as amended. The Prospects Supplement will describe any such
compensation paid by the Depositor.
It is anticipated that the underwriting agreement pertaining to the sale of
any series of Securities will provide that the obligations of the Underwriters
will be subject to certain conditions precedent, that the Underwriters
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will be obligated to purchase all such Securities if any are purchased and that
the Depositor will indemnify the Underwriters against certain civil liabilities,
including liabilities under the Securities Act of 1933, as amended.
RATINGS
Each class of Securities of a Series will be rated at their initial
issuance in one of the four highest categories by at least one Rating Agency.
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. No person is obligated to maintain the rating on any Security, and,
accordingly, there can be no assurance that the ratings assigned to a Security
upon initial issuance will not be lowered or withdrawn by a Rating Agency at any
time thereafter. In general, ratings address credit risk and do not represent
any assessment of the likelihood or rate of principal prepayments.
LEGAL MATTERS
Certain legal matters relating to the validity of the issuance of the
Securities will be passed upon for the Depositor by Arter & Hadden, Washington,
D.C. and by Keith Blackwell, General Counsel for the Depositor. Certain legal
matters relating to insolvency issues and certain federal income tax matters
concerning the Securities will be passed upon for the Depositor by Arter &
Hadden.
FINANCIAL INFORMATION
A Trust will be formed with respect to each series of Securities. No Trust
will have any assets or obligations prior to the issuance of the related series
of Securities. No Trust will engage in any activities other than those described
herein or in the Prospectus Supplement. Accordingly, no financial statement with
respect to any Trust is included in this Prospectus or will be included in the
Prospectus Supplement.
The Depositor has determined that its financial statements are not material
to the offering made hereby.
A Prospectus Supplement and the related Form 8-K (which will be
incorporated by reference to the Registration Statement) may contain financial
statements of the related Credit Enhancer, if any.
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APPENDIX A
INDEX TO LOCATION OF PRINCIPAL DEFINED TERMS
<TABLE>
<CAPTION>
PAGE PAGE
<S> <C> <C> <C>
l986 Act...............................47 Pass-Through Entity....................56
Agreement...............................1 Pass-Through Rate.......................3
Applicable Accounting Standards........30 Plans..................................44
Balloon Loans...........................7 Pool Insurer...........................19
Beneficial Owners.......................4 Prepayment Assumption..................48
BIF....................................31 Pre-Funding Account.....................3
Book Entry Certificates.................4 Pre-Funding Agreement...................3
Certificate Account....................13 Principal Balance......................16
Certificate Interest Rate..............12 Principal Prepayments..................13
Certificate Principal Balance..........11 Priority Certificates..................12
Certificate Register...................11 PTE 83-l...............................44
Certificate Registrar..................11 Rating Agency...........................5
Certificateholder......................62 REIT...................................46
Certificates............................1 REMIC...................................5
Clearing Agency.........................4 REMIC Certificates.....................46
Clearing Agency Participants............4 REMIC Pool.............................46
Code....................................5 REMIC Regulations......................45
Companion Certificates.................12 Record Date............................13
Compound Interest Certificates.........12 Regular Certificateholder..............47
Contract Loan Schedule.................28 Regular Certificates...................46
Contracts..............................17 Relief Act..............................9
Cooperative Loans......................15 Remittance Date........................22
Cooperatives............................1 Remittance Rate........................22
Credit Enhancement......................4 Reserve Fund...........................21
Custodial Account......................22 Residual Certificateholders............52
Cut-Off Date...........................12 Residual Certificates..................46
Debt Securities........................67 Retail Class Certificate...............47
Defective Mortgage Loan................29 S&P.....................................5
Delivery Date..........................10 SAIF...................................31
Deposit Date...........................29 Scheduled Amortization Certificates....12
Depositor...............................1 Seller..................................1
Disqualified Organization..............56 Senior Certificates....................18
Distribution Date......................12 Servicer................................1
DOL....................................44 Special Allocation Certificates........12
Eligible Investments...................31 Special Hazard Insurance Policy........20
ERISA...................................5 Special Hazard Insurer.................20
Events of Default......................32 Standard Certificate...................61
FDIC...................................22 Stripped Certificateholder.............64
FHA.....................................2 Stripped Certificates..................64
Fitch...................................5 Subordinated Certificates..............18
Garn-St. Germain Act...................39 Thrift Institution.....................46
GNMA....................................2 Title I Program........................43
Insurance Proceeds.....................22 TMP....................................47
Interest Accrual Period................13 Trust...................................1
Liquidation Proceeds...................22 Trustee.................................1
Loan-to-Value Ratio....................16 U.S. Person............................57
Master Servicer.........................1 UCC....................................37
MBS.....................................2 Underwriters...........................68
Monthly Advance........................23 VA......................................2
Moody's.................................5
Mortgage Assets.........................1
Mortgage Loans..........................1
Mortgage Notes.........................15
Mortgage Pool Insurance Policy.........19
Mortgage Rates.........................16
Mortgaged Properties...................15
Mortgages..............................15
Mortgage-Backed Securities..............2
Mortgagors.............................22
NCUA...................................22
Non-Priority Certificates..............12
Non-U.S Person.........................60
Noneconomic Residual Interest..........57
Nonrecoverable Advance.................23
Notional Principal Balance.............13
OID Regulations........................45
Original Value.........................16
OTS....................................39
Owners.................................12
Partnership Interests..................68
</TABLE>
A-1
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NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
DEPOSITOR OR BY THE UNDERWRITERS. THIS PROSPECTUS SUPPLEMENT AND THE
PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION IN WHICH THE
PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
INFORMATION HEREIN (INCLUDING INFORMATION INCORPORATED BY REFERENCE HEREIN) OR
THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE OF THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
Summary of Terms..................................................... S-1
Risk Factors......................................................... S-23
The Portfolio of Mortgage Loans...................................... S-26
Use of Proceeds...................................................... S-32
The Depositor........................................................ S-32
The Mortgage Loan Pool............................................... S-32
Prepayment and Yield Considerations.................................. S-47
The Originators...................................................... S-54
Formation of the Trust and Trust Property............................ S-54
Additional Information............................................... S-54
Description of the Offered Certificates.............................. S-55
Nonoffered Certificates.............................................. S-61
Credit Enhancement................................................... S-62
The Pooling and Servicing Agreement.................................. S-66
Certain Federal Income Tax Consequences.............................. S-74
ERISA Considerations................................................. S-75
Ratings.............................................................. S-77
Legal Investment Matters............................................. S-77
Underwriting......................................................... S-78
Certain Legal Matters................................................ S-80
Global Clearance, Settlement and Tax Documentation Procedures........ Annex I
Index to Location of Principal Defined Terms......................... Appendix A
PROSPECTUS
Summary of Prospectus................................................ 1
Risk Factors......................................................... 7
Description of the Securities........................................ 10
The Trusts........................................................... 15
Credit Enhancement................................................... 17
Servicing of the Mortgage Loans and Contracts........................ 22
Administration....................................................... 28
Use of Proceeds...................................................... 34
The Depositor........................................................ 34
Certain Legal Aspects of the Mortgage Assets......................... 34
Legal Investment Matters............................................. 43
ERISA Considerations................................................. 44
Certain Federal Income Tax Consequences.............................. 46
Plan of Distribution................................................. 69
Ratings.............................................................. 70
Legal Matters........................................................ 70
Financial Information................................................ 70
Index to Location of Principal Defined Terms......................... A-1
</TABLE>
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AMRESCO Residential Securities Corporation
Mortgage Loan Trust 1998-3
$724,411,000
Mortgage Loan Pass-Through Certificates, Series 1998-3
---------------
$429,657,000 Class A-7 Certificates
$143,000,000 Class A-8 Certificates
$55,650,000 Class M-1A Certificates
$48,470,000 Class M-2A Certificates
$41,290,000 Class B-1A Certificates
$6,344,000 Class B-1F Certificates
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PROSPECTUS SUPPLEMENT
---------------
Morgan Stanley Dean Witter
AMRESCO Securities, Inc.
Bear, Stearns & Co. Inc.
Credit Suisse First Boston
Deutsche Bank Securities
Prudential Securities Incorporated
SEPTEMBER 15, 1998
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