<PAGE>
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED MARCH 27, 1995)
$82,959,390
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES, SERIES 1995-Q8
$ 0 CLASS S CERTIFICATES, VARIABLE RATE*
$30,000,000 CLASS A-1 CERTIFICATES, 7.250%
$26,500,000 CLASS A-2 CERTIFICATES, 7.250%
$15,816,992 CLASS A-3 CERTIFICATES, 7.250%
$ 5,534,047 CLASS M CERTIFICATES, 7.250%
$ 5,108,351 CLASS B-1 CERTIFICATES, 7.250%
*Based on the Notional Amount, as described herein.
The Series 1995-Q8 Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following ten Classes: (i) the Class S Certificates (the
"Variable Strip Certificates"), (ii) the Class P Certificates (the "Principal
Only Certificates"), (iii) the Class A-1 Certificates, Class A-2 Certificates
and Class A-3 Certificates (collectively, the "Class A Certificates," and
together with the Variable Strip Certificates and the Principal Only
Certificates, the "Senior Certificates"), (iv) the Class M Certificates, (v) the
Class B-1 Certificates, Class B-2 Certificates and Class B-3 Certificates
(collectively, the "Subordinate Certificates") and (vi) the Class R Certificates
(the "Residual Certificates"). Only the Variable Strip Certificates, the Class A
Certificates, the Class M Certificates and the Class B-1 Certificates
(collectively, the "Offered Certificates") are offered hereby.
The Certificates will, in the aggregate, evidence the entire beneficial
ownership interest in a trust fund (the "Trust Fund") consisting primarily of a
pool of certain conventional, fixed- and adjustable-rate, fully-amortizing, one-
to four-family, first lien mortgage loans (the "Mortgage Loans") to be deposited
by DLJ Mortgage Acceptance Corp. (the "Depositor") into the Trust Fund for the
benefit of the Certificateholders. The Mortgage Loans will have an aggregate
principal balance as of November 1, 1995 (the "Cut-off Date") of $85,139,184.39
and will have original terms to maturity from the due dates of their first
scheduled monthly payment of interest and principal of not more than 30 years.
All of the Mortgage Loans were originated or acquired by Quality Mortgage USA,
Inc. (the "Seller") and will have been sold by the Seller to DLJ Mortgage
Capital, Inc., an affiliate of the Depositor, prior to the date of initial
issuance of the Certificates (the "Delivery Date") and acquired by the Depositor
from such affiliate on the Delivery Date. The Mortgage Loans will be serviced by
Temple-Inland Mortgage Corporation (the "Master Servicer"). Certain
characteristics of the Mortgage Loans are described herein under "Description of
the Mortgage Pool."
The rights of the holders of the Class B-2 Certificates and the Class B-3
Certificates to receive distributions with respect to the Mortgage Loans will be
subordinate to the rights of the holders of the Class B-1 Certificates, the
Class M Certificates and the Senior Certificates, the rights of the holders of
the Class B-1 Certificates to receive distributions with respect to the Mortgage
Loans will be subordinate to the rights of the holders of the Class M
Certificates and the Senior Certificates, and the rights of the holders of the
Class M Certificates to receive distributions with respect to the Mortgage Loans
will be subordinate to the rights of the holders of the Senior Certificates, in
each case as and to the extent described herein.
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next succeeding
business day, commencing in December 1995 (each, a "Distribution Date"). As more
fully described herein, interest distributions on the Offered Certificates will
be based on the Certificate Principal Balances thereof (or on the Notional
Amount (as defined herein), in the case of the Variable Strip Certificates) and
the related Pass-Through Rates. The Pass-Through Rates on the Offered
Certificates (other than the Variable Strip Certificates) will be equal to the
rates specified above. The Pass-Through Rate on the Variable Strip Certificates
will be equal to the weighted average of the Pool Strip Rates (as defined
herein) on the Mortgage Loans, which will be approximately 3.619% per annum with
respect to the first Distribution Date.
___________ (CONTINUED ON NEXT PAGE)
THE OFFERED CERTIFICATES DO NOT REPRESENT AN INTEREST IN OR OBLIGATION OF THE
DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE TRUSTEE OR ANY OF THEIR
RESPECTIVE AFFILIATES. NEITHER THE CERTIFICATES NOR THE UNDERLYING MORTGAGE
LOANS WILL BE INSURED OR GUARANTEED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY THE DEPOSITOR, THE SELLER, THE MASTER SERVICER, THE
TRUSTEE OR ANY OF THEIR RESPECTIVE AFFILIATES.
___________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
___________
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
___________
PROSPECTIVE INVESTORS SHOULD CONSIDER THE FACTORS SET FORTH UNDER "RISK
FACTORS," WHICH BEGINS ON PAGE S-21 OF THIS PROSPECTUS SUPPLEMENT, AND SHOULD
CONSIDER THE FACTORS SET FORTH UNDER "SPECIAL CONSIDERATIONS," WHICH BEGINS ON
PAGE 14 OF THE PROSPECTUS.
___________
The Offered Certificates are being offered by the Underwriter from time to
time to the public in negotiated transactions or otherwise at varying prices to
be determined at the time of sale. Proceeds to the Depositor are expected to be
approximately $88,501,576 plus accrued interest, before deducting issuance
expenses payable by the Depositor.
The Offered Certificates are offered when, as and if delivered to and
accepted by the Underwriter, and subject to various conditions, including the
Underwriter's right to reject orders in whole or in part. It is expected that
the Variable Strip Certificates and the Class A Certificates will be delivered
in book-entry form through the Same Day Funds Settlement System of The
Depository Trust Company as further discussed herein, and that the Class M
Certificates and the Class B-1 Certificates will be delivered in registered and
certificated form at the office of Donaldson, Lufkin & Jenrette Securities
Corporation, New York, New York, on or about November 21, 1995 against payment
therefor in immediately available funds.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
The date of this Prospectus Supplement is November 20, 1995.
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Distributions of principal will be allocated among the Certificates (other
than the Variable Strip Certificates) as described herein. No principal
prepayments on the Mortgage Loans will be distributed to the holders of the
Class M Certificates or the Class B-1 Certificates prior to the Distribution
Date occurring in December 2000 and no principal prepayments on the Mortgage
Loans will be distributed to the holders of the Class M Certificates or the
Class B-1 Certificates thereafter if certain criteria relating to the extent of
available Subordination (as defined herein) and the delinquency and loss
performance of the Mortgage Loans described herein are not satisfied, unless in
either case the Class A Certificates have been retired. However, as described
herein, because holders of the Class B-3 Certificates will not be entitled to
receive any interest or principal distributions until the Class B-1 Certificates
and the Class B-2 Certificates have been retired, holders of the Class B-1
Certificates will be entitled to receive principal distributions that include
amounts otherwise distributable to the holders of the Class B-3 Certificates.
THE YIELD TO MATURITY ON THE OFFERED CERTIFICATES WILL DEPEND ON, AMONG
OTHER THINGS, THE RATE AND TIMING OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS,
REPURCHASES, DEFAULTS AND LIQUIDATIONS) ON THE MORTGAGE LOANS, WHICH MAY VARY
SIGNIFICANTLY OVER TIME. THE YIELD TO MATURITY ON THE CLASS B-1 CERTIFICATES
AND, TO A LESSER EXTENT, THE CLASS M CERTIFICATES, WILL BE EXTREMELY SENSITIVE
TO LOSSES ON THE MORTGAGE LOANS (AND THE TIMING THEREOF) TO THE EXTENT THAT SUCH
LOSSES ARE NOT COVERED BY THE CLASSES OF CERTIFICATES SUBORDINATE THERETO, AS
DESCRIBED HEREIN. THE MORTGAGE LOANS GENERALLY MAY BE PREPAID IN FULL OR IN PART
AT ANY TIME; HOWEVER, PREPAYMENT MAY SUBJECT THE MORTGAGOR TO A PREPAYMENT
CHARGE. THE YIELD TO INVESTORS ON THE OFFERED CERTIFICATES WILL BE ADVERSELY
AFFECTED BY ANY SHORTFALLS IN INTEREST COLLECTED ON THE MORTGAGE LOANS DUE TO
PREPAYMENTS, LIQUIDATIONS OR OTHERWISE TO THE EXTENT THAT SUCH SHORTFALLS ARE
NOT OTHERWISE COVERED, AS DESCRIBED HEREIN. THE YIELD TO INVESTORS ON THE
VARIABLE STRIP CERTIFICATES WILL BE EXTREMELY SENSITIVE TO THE RATE AND TIMING
OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES, DEFAULTS AND
LIQUIDATIONS) ON THE MORTGAGE LOANS, WHICH MAY VARY SIGNIFICANTLY OVER TIME. A
RAPID RATE OF PRINCIPAL PAYMENTS (INCLUDING PREPAYMENTS, REPURCHASES, DEFAULTS
AND LIQUIDATIONS) ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF INVESTORS
IN THE VARIABLE STRIP CERTIFICATES TO RECOVER THEIR INITIAL INVESTMENT. SEE
"THE SELLER-LOAN DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO
PROPERTY STATUS" AND "-REO PROPERTY LIQUIDATION EXPERIENCE" HEREIN FOR IMPORTANT
INFORMATION REGARDING THE DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND
REO PROPERTY STATUS AND LOSS EXPERIENCE OF CERTAIN MORTGAGE LOANS PREVIOUSLY
ORIGINATED OR ACQUIRED BY THE SELLER UNDER SUBSTANTIALLY THE SAME UNDERWRITING
CRITERIA PURSUANT TO WHICH THE MORTGAGE LOANS WERE ORIGINATED OR ACQUIRED. IN
ADDITION, THE YIELD TO INVESTORS ON THE VARIABLE STRIP CERTIFICATES WILL BE
SENSITIVE TO FLUCTUATIONS IN THE LEVEL OF THE INDEX (AS DEFINED HEREIN), WHICH
MAY VARY SIGNIFICANTLY OVER TIME. SEE "SUMMARY OF PROSPECTUS SUPPLEMENT-SPECIAL
PREPAYMENT CONSIDERATIONS" AND "-SPECIAL YIELD CONSIDERATIONS" HEREIN, "CERTAIN
YIELD AND PREPAYMENT CONSIDERATIONS" HEREIN AND "SPECIAL CONSIDERATIONS" AND
"YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" IN THE PROSPECTUS.
It is a condition to the issuance of the Offered Certificates that the
Variable Strip Certificates and the Class A Certificates be rated "Aaa" by
Moody's Investors Service, Inc. ("Moody's") and "AAA" by Duff & Phelps Credit
Rating Co. ("DCR"), that the Class M Certificates be rated not lower than "Aa3"
by Moody's and "AA" by DCR and that the Class B-1 Certificates be rated not
lower than "Baa3" by Moody's and "BBB" by DCR.
As described herein, a "real estate mortgage investment conduit" ("REMIC")
election will be made in connection with the Trust Fund for federal income tax
purposes. Each Class of Offered Certificates will constitute a "regular
interest" in the REMIC. See "Certain Federal Income Tax Consequences" herein and
in the Prospectus.
There is currently no secondary market for the Offered Certificates.
Donaldson, Lufkin & Jenrette Securities Corporation (the "Underwriter") intends
to make a secondary market in the Offered Certificates but has no obligation to
do so. There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue or will
provide investors with a sufficient level of liquidity. The Offered Certificates
will not be listed on any securities exchange. See "Special Considerations" in
the Prospectus.
The information set forth herein under "Summary of Prospectus
Supplement-The Mortgage Pool," "Description of the Mortgage Pool" and "The
Seller" (other than the information set forth herein under "The Seller-Loan
Delinquency, Forbearance, Foreclosure, Bankruptcy and REO Property Status" and,
to the extent provided by Lomas Mortgage USA, Inc. (as described below), the
information set forth herein under "The Seller-REO Property Liquidation
Experience") has been provided by the Seller. No representation is made by the
Depositor, the Underwriter, the Master Servicer, the Trustee or any of their
respective affiliates as to the accuracy or completeness of the information
provided by the Seller. The information set forth herein under "The Seller-Loan
Delinquency, Forbearance, Foreclosure, Bankruptcy and REO Property Status" and,
other than to the extent provided by the Seller, the information set forth
herein under "The Seller-REO Property Liquidation Experience" has been provided
by Lomas Mortgage USA, Inc, in its capacity as servicer of certain mortgage
loans originated or acquired by the Seller at or for the dates indicated
thereunder. No representation is made by the Depositor, the Underwriter, the
Master Servicer, the Seller, the Trustee or any of their respective affiliates
as to the accuracy or completeness of the information provided by Lomas Mortgage
USA, Inc.
___________
No person is authorized in connection with this offering to give any
information or to make any representation about the Depositor, the Seller, the
Master Servicer, the Trustee, the Offered Certificates or any other matter
referred to herein, other than those contained in this Prospectus Supplement or
the Prospectus. If any other information or representation is given or made,
such information or representation may not be relied upon as having been
authorized by the Depositor, the Seller, the Master Servicer or the Trustee.
This Prospectus Supplement and the Prospectus do not constitute an offer to sell
or a solicitation of an offer to buy securities other than the Offered
Certificates, or an offer to sell or a solicitation of an offer to buy
securities in any jurisdiction or to any person to whom it is unlawful to make
such offer in such jurisdiction. Neither the delivery of this Prospectus
Supplement or the Prospectus nor any sale hereunder or thereunder shall, under
any circumstances, create any implication that the information contained herein
or therein is correct as of any time subsequent to their respective dates.
___________
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 MARCH 27, 1995, OF WHICH THIS PROSPECTUS
SUPPLEMENT IS A PART AND WHICH ACCOMPANIES THIS PROSPECTUS SUPPLEMENT. THE
PROSPECTUS CONTAINS IMPORTANT INFORMATION REGARDING THIS OFFERING THAT IS NOT
CONTAINED HEREIN, AND PROSPECTIVE INVESTORS ARE URGED TO READ THE PROSPECTUS AND
THIS PROSPECTUS SUPPLEMENT IN FULL.
___________
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.
S-2
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Summary of Prospectus Supplement...........................................S-4
Risk Factors..............................................................S-21
Description of the Mortgage Pool..........................................S-22
Additional Information....................................................S-34
The Seller................................................................S-34
Description of the Certificates...........................................S-40
Certain Yield and Prepayment Considerations...............................S-56
Pooling and Servicing Agreement...........................................S-67
Certain Federal Income Tax Consequences...................................S-73
Method of Distribution....................................................S-74
Use of Proceeds...........................................................S-75
Legal Opinions............................................................S-75
Ratings...................................................................S-76
Legal Investment..........................................................S-76
ERISA Considerations......................................................S-77
PROSPECTUS
Prospectus Supplement........................................................2
Additional Information.......................................................2
Reports to Certificateholders................................................2
Incorporation of Certain Documents by Reference .............................2
Summary of Terms of the Certificates.........................................3
Special Considerations......................................................14
Description of the Certificates.............................................16
Yield, Prepayment and Maturity Considerations...............................21
The Trust Funds.............................................................25
Loan Underwriting Procedures and Standards..................................36
Servicing of Loans..........................................................43
Credit Support..............................................................53
Description of Mortgage and Other Insurance.................................57
The Pooling and Servicing Agreements........................................63
Certain Legal Aspects of Loans..............................................73
Certain Federal Income Tax Consequences.....................................85
State and Other Tax Consequences...........................................111
ERISA Considerations.......................................................111
Legal Investment...........................................................114
Legal Matters..............................................................115
The Depositor..............................................................115
Use of Proceeds............................................................115
Plan of Distribution.......................................................115
Glossary...................................................................117
S-3
<PAGE>
SUMMARY OF PROSPECTUS SUPPLEMENT
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
DETAILED INFORMATION APPEARING ELSEWHERE HEREIN AND IN THE PROSPECTUS.
CAPITALIZED TERMS USED HEREIN AND NOT OTHERWISE DEFINED HEREIN HAVE THE
MEANINGS ASSIGNED IN THE PROSPECTUS.
TITLE OF SECURITIES........... Mortgage Pass-Through Certificates, Series
1995-Q8.
DEPOSITOR....................... DLJ Mortgage Acceptance Corp. (the
"Depositor"). See "The Depositor" in the
Prospectus.
MASTER SERVICER................. Temple-Inland Mortgage Corporation ("TIMC" or
the "Master Servicer"). See "Pooling and
Servicing Agreement -The Master Servicer"
herein.
TRUSTEE......................... Bankers Trust Company (the "Trustee"). See
"Pooling and Servicing Agreement-The Trustee"
herein.
SELLER.......................... Quality Mortgage USA, Inc. (the "Seller"). See
"The Seller" herein.
CUT-OFF DATE.................... November 1, 1995.
DELIVERY DATE................... On or about November 21, 1995.
DENOMINATIONS................... The Variable Strip Certificates (as defined
herein) will be issued, maintained and
transferred on the book-entry records of the
Depository Trust Company ("DTC") and its
Participants in minimum initial Notional
Amounts (as defined herein) of $1.00 and
integral multiples of $1.00 in excess thereof.
The Class A Certificates (as defined herein)
will be issued, maintained and transferred on
the book-entry records of DTC and its
Participants in minimum denominations of $1.00
and integral multiples of $1.00 in excess
thereof. The Class M Certificates will be
issued in minimum denominations of $25,000 and
integral multiples of $1,000 in excess
thereof, and the Class B-1 Certificates will
be issued in minimum denominations of $250,000
and integral multiples of $1,000 in excess
thereof; provided, however, that one
Certificate of each such Class may be issued
evidencing the sum of an authorized
denomination thereof and the remainder of the
aggregate initial Certificate Principal
Balance of such Class.
REGISTRATION.................... The Variable Strip Certificates and the Class A
Certificates (collectively, the "DTC
Registered Certificates") will be represented
by one or more Certificates registered in the
name of Cede & Co., as nominee of DTC. No
person acquiring a beneficial interest in a
Class of DTC Registered Certificate (each, a
"Beneficial Owner") will be entitled to
receive a Certificate of such Class in
certificated form,
S-4
<PAGE>
except under the limited circumstances
described herein. For each Certificate held by
DTC, DTC will effect payments to and transfers
of the related DTC Registered Certificates
among the respective Beneficial Owners by
means of its electronic recordkeeping
services, acting through organizations that
participate in DTC. This arrangement may
result in certain delays in receipt of
distributions by Beneficial Owners and may
restrict a Beneficial Owner's ability to
pledge the Certificates beneficially owned by
it. All references in this Prospectus
Supplement to the DTC Registered Certificates
reflect the rights of Beneficial Owners of
such Certificates only as such rights may be
exercised through DTC and its participating
organizations so long as such Certificates are
held by DTC. The Class M Certificates and the
Class B-1 Certificates will be offered in
registered and certificated form. See
"Description of the Certificates-Book-Entry
Registration" in the Prospectus.
THE MORTGAGE POOL............... Based solely upon information provided by the
Seller, the Mortgage Loans will have the
characteristics described herein. The Trust
Fund (as defined herein) will consist
primarily of a pool (the "Mortgage Pool") of
conventional, fixed- and adjustable-rate,
fully-amortizing mortgage loans (the "Mortgage
Loans") with an aggregate principal balance as
of the Cut-off Date of $85,139,184.39. The
Mortgage Loans are secured by first liens on
fee simple and leasehold interests in one- to
four-family residential real properties (each,
a "Mortgaged Property") and have original
terms to maturity from the due dates of their
first scheduled monthly payment of interest
and principal (each such payment, a "Monthly
Payment") of not more than 30 years. All of
the Mortgage Loans have Monthly Payments due
on the first day of each month.
The interest rates (each, a "Mortgage Rate")
will be fixed for approximately 62.77% of the
Mortgage Loans (the "Fixed Rate Loans"), by
aggregate principal balance as of the Cut-off
Date.
The Mortgage Rates on approximately 7.99% of
the Mortgage Loans (the "Step Loans"), by
aggregate principal balance as of the Cut-off
Date, will be reset twice, approximately one
year and approximately two years after their
respective dates of origination, on the
adjustment dates applicable thereto (each such
date, an "Adjustment Date") to equal, as to
each Step Loan and the first Adjustment Date
thereof, the sum of the initial Mortgage Rate
thereof and a fixed percentage amount (the
"First Step Margin") and, as to each Step Loan
and the second Adjustment Date thereof, the
sum of the initial Mortgage
S-5
<PAGE>
Rate thereof and a greater fixed percentage
amount (the "Second Step Margin").
The Mortgage Rates on approximately 29.24% of
the Mortgage Loans (the "Adjustable Rate
Loans"), by aggregate principal balance as of
the Cut-off Date, will be subject to
adjustment commencing approximately seven
years after their respective dates of
origination, and semi-annually thereafter, on
the Adjustment Dates applicable thereto to
equal, as to each Adjustable Rate Loan and any
related Adjustment Date, the sum, rounded to
the nearest 0.125%, of the Index (as defined
below) and a fixed percentage amount (the
"Gross Margin"), subject to certain periodic
rate caps and to maximum and minimum Mortgage
Rates (as described herein) that, in the case
of such periodic rate caps, will not be
applicable on the first Adjustment Date of
such Adjustable Rate Loan. With respect to
each Adjustable Rate Loan and any related
Adjustment Date, the Index applicable to the
determination of the related Mortgage Rate
will be the average of the interbank offered
rates for six-month United States dollar
deposits in the London interbank market based
on quotations of major banks ("LIBOR"), as
published in the Western Edition of THE WALL
STREET JOURNAL and most recently available as
of the date 45 days prior to such Adjustment
Date.
All of the Mortgage Loans will be either Fixed
Rate Loans, Step Loans or Adjustable Rate
Loans, and none of the Mortgage Loans will
have provisions for balloon payments, negative
amortization or deferred interest. See
"Description of the Mortgage Pool" herein for
a further description of certain
characteristics of the Mortgage Loans.
Approximately 3.25% of the Mortgage Loans (by
aggregate principal balance as of the Cut-off
Date) were thirty days or more but less than
sixty days delinquent in their Monthly
Payments (such Mortgage Loans, "Thirty-Day
Delinquent Mortgage Loans") as of the Cut-off
Date. Approximately 0.23% of the Mortgage
Loans (by aggregate principal balance as of
the Cut-off Date) were sixty days or more but
less than ninety days delinquent in their
Monthly Payments (such Mortgage Loans,
"Sixty-Day Delinquent Mortgage Loans") as of
the Cut-off Date. Approximately 1.82% of the
Mortgage Loans (by aggregate principal balance
as of the Cut-off Date) were Thirty-Day
Delinquent Mortgage Loans as of November 15,
1995, and none of the Mortgage Loans were
Sixty-Day Delinquent Mortgage Loans as of such
date. Prospective investors in the Offered
Certificates should be aware, however, that
only approximately 77.91% of the Mortgage
Loans (by aggregate principal balance as
S-6
<PAGE>
of the Cut-off Date) had a first Monthly
Payment due on or before October 1, 1995 and
that only approximately 50.82% of the Mortgage
Loans (by aggregate principal balance as of
the Cut-off Date) had a first Monthly Payment
due on or before September 1, 1995, and
therefore, the remaining Mortgage Loans could
not have been Thirty-Day Delinquent Mortgage
Loans or Sixty-Day Delinquent Mortgage Loans
as of the Cut-off Date or November 15, 1995.
In addition to the foregoing, approximately
1.20% of the Mortgage Loans (by aggregate
principal balance as of the Cut-off Date) will
have been thirty days or more delinquent in
their Monthly Payments more than once during
the twelve months preceding the Delivery Date.
None of the other Mortgage Loans will have
been thirty days or more delinquent in its
Monthly Payments more than once during such
period. Also, none of the Mortgage Loans will
be sixty days or more delinquent in its
Monthly Payments as of the Delivery Date.
All of the Mortgage Loans were originated or
acquired under the Seller's regular lending
program, as described herein. Mortgage loans
originated or acquired under the regular
lending program are likely to experience rates
of delinquency, foreclosure, bankruptcy and
loss that are higher, and that may be
substantially higher, than those of mortgage
loans originated in a more traditional manner.
See "Risk Factors-Underwriting Standards and
Potential Delinquencies" and "Description of
the Mortgage Pool -Underwriting Standards"
herein. In addition, see "The Seller-Loan
Delinquency, Forbearance, Foreclosure,
Bankruptcy and REO Property Status" and "-REO
Property Liquidation Experience" herein for
important information regarding the
delinquency, forbearance, foreclosure,
bankruptcy and REO property status and loss
experience of certain mortgage loans
previously originated or acquired by the
Seller under substantially the same
underwriting criteria pursuant to which the
Mortgage Loans were originated or acquired.
THE OFFERED CERTIFICATES........ The Offered Certificates will be issued
pursuant to a Pooling and Servicing Agreement,
to be dated as of November 1, 1995, among the
Depositor, the Master Servicer and the Trustee
(the "Pooling and Servicing Agreement"). The
Senior Certificates in the aggregate, the
Class M Certificates and the Class B-1
Certificates will evidence initial undivided
beneficial ownership interests of
approximately 85.00%, 6.50% and 6.00%,
respectively, in a trust fund (the "Trust
Fund") consisting primarily of the Mortgage
Pool. The Offered Certificates (other than the
Variable Strip Certificates) will have the
following
S-7
<PAGE>
approximate Certificate Principal Balances as
of the Cut-off Date:
Class A-1 Certificates $30,000,000
Class A-2 Certificates $26,500,000
Class A-3 Certificates $15,816,992
Class M Certificates $ 5,534,047
Class B-1 Certificates $ 5,108,351
The Variable Strip Certificates will have no
Certificate Principal Balance and will accrue
interest on the Notional Amount (as defined
herein).
The Pass-Through Rate on each Class of Offered
Certificates (other than the Variable Strip
Certificates) for each Distribution Date will
be equal to 7.250% per annum. The
Pass-Through Rate on the Variable Strip
Certificates for each Distribution Date will
be equal to the weighted average, as
determined as of the Due Date in the month
preceding the month in which such Distribution
Date occurs, of the Pool Strip Rates (as
defined below) on the Mortgage Loans, which
will be approximately 3.619% per annum with
respect to the first Distribution Date. With
respect to each Discount Mortgage Loan (as
defined herein) and any Distribution Date, the
Pool Strip Rate will equal the then-applicable
Net Mortgage Rate thereon minus the Net
Mortgage Rate thereon as of the Cut-off Date,
and with respect to each Non-Discount Mortgage
Loan (as defined herein) and any Distribution
Date, the Pool Strip Rate will equal the
then-applicable Net Mortgage Rate thereon
minus 7.250%. The Pool Strip Rates on the
Mortgage Loans ranged from 0.000% to 9.000%
per annum as of the Cut-off Date. The "Net
Mortgage Rate" on each Mortgage Loan will
equal the Mortgage Rate thereon minus 0.500%
per annum, the annual rate at which the
related servicing fee accrues (the "Servicing
Fee Rate").
INTEREST DISTRIBUTIONS.......... Holders of each Class of Senior Certificates
offered hereby will be entitled to receive
interest distributions in an amount equal to
the Accrued Certificate Interest (as defined
herein) for such Class on each Distribution
Date (as to all Classes of such Senior
Certificates in the aggregate, the "Priority
Interest Distribution Amount"), to the extent
of the Available Distribution Amount (as
defined herein) for such Distribution Date.
Holders of the Class M Certificates will be
entitled to receive interest distributions in
an amount equal to the Accrued Certificate
Interest for such Class on each Distribution
Date, to the extent of the portion of the
Available Distribution Amount for such
Distribution Date remaining after
distributions of interest and principal to the
S-8
<PAGE>
holders of the Senior Certificates and, if the
Certificate Principal Balances of the
Subordinate Certificates (as defined herein)
have been reduced to zero, reimbursement for
certain Advances to the Master Servicer, as
described herein.
Holders of the Class B-1 Certificates will be
entitled to receive interest distributions in
an amount equal to the Accrued Certificate
Interest for such Class on each Distribution
Date, to the extent of the portion of the
Available Distribution Amount for such
Distribution Date remaining after
distributions of interest and principal to the
holders of the Senior Certificates and the
Class M Certificates and, if the Certificate
Principal Balances of the Class B-2
Certificates and the Class B-3 Certificates
have been reduced to zero, reimbursement for
certain Advances to the Master Servicer, as
described herein.
With respect to any Distribution Date, Accrued
Certificate Interest will be equal to (a) in
the case of each Class of Offered Certificates
(other than the Variable Strip Certificates),
one month's interest accrued on the
Certificate Principal Balance of the
Certificates of such Class at the related
Pass-Through Rate and (b) in the case of the
Variable Strip Certificates, one month's
interest accrued on the Notional Amount at the
related Pass-Through Rate, in each case less
any interest shortfalls not covered with
respect to such Class by Subordination (as
defined herein and allocated as described
herein), including any Prepayment Interest
Shortfall (as defined herein) for such
Distribution Date to the extent not covered by
payments by the Master Servicer as described
herein and the interest portions of any
Realized Losses (as defined herein) allocated
thereto. See "Description of the
Certificates-Interest Distributions" herein.
The notional amount (the "Notional Amount"), as
of any date of determination, will equal the
aggregate Certificate Principal Balance of the
Certificates of all Classes as of such date
(except that the initial Notional Amount will
be rounded down to the nearest dollar
increment). The Notional Amount will be equal
to $85,139,184 as of the Cut-off Date.
References herein to the Notional Amount in
respect of the Variable Strip Certificates are
used solely for certain calculations and do
not represent the right of the holders of the
Variable Strip Certificates to receive
distributions of such amount.
See "Description of the Certificates-Interest
Distributions" herein.
S-9
<PAGE>
PRINCIPAL DISTRIBUTIONS......... Holders of the Class A Certificates will be
entitled to receive on each Distribution Date,
in the manner and priorities set forth herein,
to the extent of the portion of the Available
Distribution Amount remaining after the
Priority Interest Distribution Amount and the
Principal Only Distribution Amount (as defined
below) are distributed, a distribution
allocable to principal (the "Senior Principal
Distribution Amount") that will, as more fully
described herein, include (i) the Senior
Percentage (as defined below) of scheduled
principal payments due on the Mortgage Loans
and of certain unscheduled collections of
principal on the Mortgage Loans as described
herein (other than the applicable Discount
Fractions described below of such payments and
collections in respect of the Discount
Mortgage Loans), (ii) the then-applicable
Senior Prepayment Percentage (as defined
herein) of all principal prepayments made by
the mortgagors during the related Prepayment
Period (other than the applicable Discount
Fractions of such principal prepayments in
respect of the Discount Mortgage Loans) and
(iii) in connection with a Mortgage Loan for
which a Cash Liquidation or an REO Disposition
(each as defined herein) occurred during the
related Prepayment Period and did not result
in any Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses (each as defined herein),
an amount equal to the lesser of (a) the
then-applicable Senior Percentage of the
Stated Principal Balance (as defined herein)
of such Mortgage Loan and (b) the Senior
Prepayment Percentage for such Distribution
Date multiplied by the related collections, to
the extent applied as recoveries of principal
of such Mortgage Loan (other than, in each
case, the portion of such collections payable
to the holders of the Principal Only
Certificates in respect of a Discount Mortgage
Loan).
Prior to the occurrence of the first
Distribution Date on which the Senior
Percentage is equal to 100% (the "Credit
Support Depletion Date"), holders of the
Principal Only Certificates will be entitled
to receive on each Distribution Date, in the
manner and priority set forth herein, to the
extent of the portion of the Available
Distribution Amount remaining after the
Priority Interest Distribution Amount is
distributed, a distribution allocable to
principal (the "Principal Only Distribution
Amount") that will, as more fully described
herein, include (i) the applicable Discount
Fractions of scheduled principal payments due
on the Discount Mortgage Loans and of certain
unscheduled collections of principal on the
Discount Mortgage Loans as described herein,
(ii) the applicable Discount Fractions of all
principal prepayments made by the mortgagors
in respect of the Discount Mortgage Loans
during the related Prepayment Period, (iii) in
connection with a Discount
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<PAGE>
Mortgage Loan for which a Cash Liquidation or
an REO Disposition occurred during the related
Prepayment Period and did not result in any
Excess Special Hazard Losses, Excess Fraud
Losses, Excess Bankruptcy Losses or
Extraordinary Losses, an amount equal to the
lesser of (a) the applicable Discount Fraction
of the Stated Principal Balance of such
Discount Mortgage Loan, net of the principal
portion of any related Realized Loss allocable
to the Principal Only Certificates, and (b)
the related collections, to the extent applied
as recoveries of principal of such Discount
Mortgage Loan and (iv) the lesser of the
related Eligible Shortfall Funding Amount (as
defined herein) and the aggregate of any
Principal Only Collection Shortfalls (as
defined herein) not previously distributed to
the holders of the Principal Only
Certificates. On and after the occurrence of
the Credit Support Depletion Date, holders of
the Principal Only Certificates will be
entitled to receive the applicable Discount
Fractions of the scheduled principal payments
and the unscheduled collections of principal
received or advanced in respect of the
Discount Mortgage Loans.
A "Discount Mortgage Loan" will be any Step
Loan with a Net Mortgage Rate of less than
7.250% per annum as of the Cut-off Date. With
respect to each Discount Mortgage Loan, the
"Discount Fraction" will equal a fraction,
expressed as a percentage, the numerator of
which will be 7.250% minus the Net Mortgage
Rate thereon as of the Cut-off Date and the
denominator of which will be 7.250%. The
Mortgage Loans other than the Discount
Mortgage Loans are referred to herein as the
"Non-Discount Mortgage Loans."
Holders of the Class M Certificates will be
entitled to receive on each Distribution Date,
to the extent of the portion of the Available
Distribution Amount remaining after the
Priority Interest Distribution Amount, the
Principal Only Distribution Amount and the
Senior Principal Distribution Amount are
distributed, after, if the Certificate
Principal Balances of the Subordinate
Certificates have been reduced to zero,
reimbursement is made to the Master Servicer
for certain Advances as described herein, and
after distributions of interest on such Class,
a distribution allocable to principal (subject
to reduction as described herein) that will,
as more fully described herein, include (i)
the Class M Percentage (as defined below) of
scheduled principal payments due on the
Mortgage Loans and of certain unscheduled
collections of principal on the Mortgage Loans
as described herein (other than the applicable
Discount Fractions of such payments and
collections in respect of the Discount
Mortgage Loans), (ii) the portion of all
principal prepayments that were made by the
mortgagors during the related Prepayment
Period
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<PAGE>
(other than the applicable Discount Fractions
of such principal prepayments in respect of
the Discount Mortgage Loans) and that are
allocable to the Class M Certificates, as
described herein, and (iii) such Class' PRO
RATA share, based on the Certificate
Principal Balances of the Class M Certificates
and the Subordinate Certificates, of all
amounts received in connection with a Cash
Liquidation or an REO Disposition that
occurred during the related Prepayment Period
and that did not result in any Excess Special
Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses, to
the extent applied as recoveries of principal
of the related Mortgage Loan and to the extent
not otherwise payable to the holders of the
Senior Certificates.
Holders of the Class B-1 Certificates will be
entitled to receive on each Distribution Date,
to the extent of the portion of the Available
Distribution Amount remaining after the
Priority Interest Distribution Amount, the
Principal Only Distribution Amount and the
Senior Principal Distribution Amount are
distributed, after distributions of interest
and principal to the holders of the Class M
Certificates are made, after, if the
Certificate Principal Balances of the Class
B-2 Certificates and the Class B-3
Certificates have been reduced to zero,
reimbursement is made to the Master Servicer
for certain Advances as described herein, and
after distributions of interest on such Class,
a distribution allocable to principal (subject
to reduction as described herein) that will,
as more fully described herein, include (i)
the Class B-1 Percentage (as defined below) of
scheduled principal payments due on the
Mortgage Loans and of certain unscheduled
collections of principal on the Mortgage Loans
as described herein (other than the applicable
Discount Fractions of such payments and
collections in respect of the Discount
Mortgage Loans), (ii) the portion of all
principal prepayments that were made by the
mortgagors during the related Prepayment
Period (other than the applicable Discount
Fractions of such principal prepayments in
respect of the Discount Mortgage Loans) and
that are allocable to the Class B-1
Certificates, as described herein, and (iii)
such Class' PRO RATA share, based on the
Certificate Principal Balances of the Class M
Certificates and the Subordinate Certificates,
of all amounts received in connection with a
Cash Liquidation or an REO Disposition that
occurred during the related Prepayment Period
and that did not result in any Excess Special
Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses, to
the extent applied as recoveries of principal
of the related Mortgage Loan and to the extent
not otherwise payable to the holders of the
Senior Certificates. In addition, the holders
of the Class B-1 Certificates will be
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<PAGE>
entitled to receive on each Distribution Date
a further distribution of principal equal to
the portion of the Available Distribution
Amount remaining after the distributions
described above, after reimbursement to the
Master Servicer for certain Advances as
described herein and after required
distributions of interest and principal on the
Class B-2 Certificates have been made as
described herein.
Holders of the Variable Strip Certificates will
not be entitled to receive distributions of
principal.
The Senior Percentage, the Class M Percentage
and the Class B-1 Percentage will be equal to
approximately 84.99%, 6.50% and 6.00%,
respectively, as of the Cut-off Date and, as
of the time of any subsequent determination,
will be the percentages equal to the aggregate
Certificate Principal Balances of the Class A
Certificates, the Class M Certificates and the
Class B-1 Certificates, respectively, divided
in each case by the aggregate Stated Principal
Balance of all of the Mortgage Loans (less the
applicable Discount Fractions of the Stated
Principal Balances of the Discount Mortgage
Loans) as of such time of determination. The
Senior Percentage, the Class M Percentage and
the Class B-1 Percentage will, as more fully
described herein, be recalculated after each
Distribution Date to reflect the entitlement
of the holders of the Class A Certificates,
the Class M Certificates and the Class B-1
Certificates, respectively, to subsequent
distributions allocable to principal of the
Mortgage Loans. For each Distribution Date
occurring prior to the Distribution Date in
December 2000, the Senior Prepayment
Percentage will be equal to 100% and no
principal prepayments will be distributed to
the Class M Certificates or the Class B-1
Certificates. Thereafter, during certain
periods, subject to the extent of available
Subordination and certain loss and delinquency
criteria described herein, the Senior
Prepayment Percentage may be 100% or otherwise
disproportionately large (relative to the
Senior Percentage), and the percentage of
principal prepayments distributable in respect
of the Class M Certificates and the Class B-1
Certificates may be disproportionately small
or large (relative to the related Class M
Percentage and Class B-1 Percentage,
respectively).
See "Description of the Certificates-Principal
Distributions on the Senior Certificates" and
"-Principal Distributions on the Class M
Certificates and the Class B-1 Certificates"
herein.
ADVANCES........................ The Master Servicer is required to make
advances ("Advances") in respect of delinquent
payments of principal
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<PAGE>
and interest (net of the related Servicing
Fees) on the Mortgage Loans, subject to the
limitations described herein. The Trustee will
be obligated to make any such Advance if the
Master Servicer fails in its obligation to do
so, to the extent provided in the Pooling and
Servicing Agreement. See "Description of the
Certificates-Advances" herein.
ALLOCATION OF LOSSES;
SUBORDINATION.......... Neither the Offered Certificates nor the
Mortgage Loans are insured or guaranteed by
any governmental agency or instrumentality or
by the Depositor, the Master Servicer, the
Seller, the Trustee or any of their respective
affiliates. Subject to the limitations
described below, Realized Losses on the
Mortgage Loans will be allocated first to the
Class B-3 Certificates, then to the Class B-2
Certificates, then to the Class B-1
Certificates and then to the Class M
Certificates, in each case until the
Certificate Principal Balance thereof is
reduced to zero, and thereafter, with respect
to Realized Losses on the Discount Mortgage
Loans, to the Principal Only Certificates in
an amount equal to the related Discount
Fractions of the principal portions of such
Realized Losses, and the remainder of such
Realized Losses and the entire amount of
Realized Losses on the Non-Discount Mortgage
Loans to the Variable Strip Certificates and
the Class A Certificates on a PRO RATA basis
as described herein. The Subordination
provided to the Senior Certificates by the
Class M Certificates and the Subordinate
Certificates, the Subordination provided to
the Class M Certificates by the Subordinate
Certificates, and the Subordination provided
to the Class B-1 Certificates by the Class B-2
Certificates and the Class B-3 Certificates,
will cover Realized Losses on the Mortgage
Loans resulting from defaults on the Mortgage
Loans and from Special Hazard Losses, Fraud
Losses and Bankruptcy Losses (each as defined
herein). However, the aggregate amounts of
Realized Losses which may be allocated through
Subordination to cover Special Hazard Losses,
Fraud Losses and Bankruptcy Losses initially
are limited to $1,090,965.92, $2,554,175.53
and $100,000.00, respectively.
All of the foregoing amounts are subject to
periodic reduction as described herein. In the
event that the Certificate Principal Balances
of the Class M Certificates and the
Subordinate Certificates are reduced to zero,
all additional losses (including, without
limitation, all Special Hazard Losses, Fraud
Losses and Bankruptcy Losses) will be
allocated among the Senior Certificates as
described herein. In addition, any Excess
Special Hazard Losses, Excess Fraud Losses,
Excess Bankruptcy Losses and Extraordinary
Losses on Non-Discount Mortgage Loans will be
borne by the holders of the Variable Strip
Certificates, the Class A Certificates, the
Class M
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<PAGE>
Certificates and the Subordinate Certificates
on a PRO RATA basis as described herein.
The principal portions of such losses on
Discount Mortgage Loans will be allocated to
the Principal Only Certificates in an amount
equal to the related Discount Fractions of
such losses, and the remainder of such losses
will be borne by the holders of the other
Classes of Certificates on a PRO RATA basis
as described herein. See "Description of the
Certificates -Allocation of Losses;
Subordination" herein.
CERTIFICATES NOT
OFFERED HEREBY................ The Principal Only Certificates will have an
initial Certificate Principal Balance of
approximately $51,314 and no Pass-Through
Rate, and the holders of the Principal Only
Certificates will not be entitled to receive
distributions of interest. The Class B-2
Certificates and the Class B-3 Certificates
will have initial Certificate Principal
Balances of approximately $1,277,088 and
$851,392, respectively, will have a
Pass-Through Rate equal to 7.250% per annum
and will evidence initial undivided beneficial
ownership interests of approximately 1.50% and
1.00%, respectively, in the Trust Fund. The
Residual Certificates will have no Certificate
Principal Balance or Pass-Through Rate, and
the holders of the Residual Certificates will
not be entitled to receive distributions of
interest or principal. The Principal Only
Certificates, the Class B-2 Certificates, the
Class B-3 Certificates and the Residual
Certificates are not being offered hereby.
OPTIONAL TERMINATION............ At its option, the Master Servicer may purchase
from the Trust Fund all remaining Mortgage
Loans and other assets thereof, and thereby
effect early retirement of the Certificates,
on any Distribution Date when the aggregate
outstanding principal balance of the Mortgage
Loans is less than 5% of the aggregate
outstanding principal balance of such Mortgage
Loans as of the Cut-off Date. See "Pooling and
Servicing Agreement-Termination" herein and
"The Pooling and Servicing
Agreements-Termination" in the Prospectus.
SPECIAL PREPAYMENT
CONSIDERATIONS......... GENERAL: The rate of principal payments on
the Offered Certificates will depend on, among
other things, the rate and timing of principal
payments (including prepayments, repurchases,
defaults and liquidations) on the Mortgage
Loans. As is the case with mortgage-backed
securities generally, the Offered Certificates
are subject to substantial inherent cash-flow
uncertainties because the Mortgage Loans may
be prepaid at any time. Generally, when
prevailing interest rates increase, prepayment
rates on mortgage loans tend to decrease in
subsequent periods, resulting in a reduced
return of principal to investors at a time
when reinvestment at such higher prevailing
rates
S-15
<PAGE>
would be desirable. Conversely, when
prevailing interest rates decline, prepayment
rates on mortgage loans tend to increase in
subsequent periods, resulting in an
accelerated return of principal to investors
at a time when reinvestment at comparable
yields may not be possible. In addition,
approximately 71.08% of the Mortgage Loans (by
aggregate principal balance as of the Cut-off
Date) provide for payment of a prepayment
charge. A majority of the Mortgage Loans with
a prepayment charge provision provide for a
prepayment charge for partial prepayments and
full prepayments made within approximately
five years after the dates of origination of
such Mortgage Loans. Such prepayment charges
(which will not be distributable to the
Certificateholders) may reduce the rate of
prepayment on the Mortgage Loans.
SEQUENTIALLY PAYING CLASSES: All Classes of
Class A Certificates are subject to various
priorities for payment of principal, as
described herein. Distributions of principal
on the Classes of Class A Certificates having
an earlier priority of payment will be
affected by the rates of prepayment of the
Mortgage Loans early in the life of the
Mortgage Pool. The timing of commencement of
principal distributions and the weighted
average lives of the Classes of Class A
Certificates with a later priority of payment
will be affected by the rates of prepayment
experienced both before and after the
commencement of principal distributions on
such Classes.
VARIABLE STRIP CERTIFICATES: The Notional
Amount, and therefore the amount of interest
distributions on the Variable Strip
Certificates, will be highly sensitive to the
rate and timing of principal payments
(including prepayments, repurchases, defaults
and liquidations) on the Mortgage Loans. See
"-Special Yield Considerations" below and
"Certain Yield and Prepayment Considerations"
herein.
CLASSES WITH SUBORDINATION FEATURES: As
described herein, during certain periods all
or a disproportionately large percentage of
principal prepayments on the Mortgage Loans
will be allocated among the Senior
Certificates, and therefore, during certain
periods no principal prepayments or, relative
to the related Class M Percentage and Class
B-1 Percentage, a disproportionately small or
large percentage of such prepayments will be
distributed to the Class M Certificates and
the Class B-1 Certificates. To the extent that
no principal prepayments or a
disproportionately small percentage of such
prepayments are distributed to the Class M
Certificates or the Class B-1 Certificates,
the weighted average lives of the Class M
Certificates and the Class B-1 Certificates
will be extended and, as a relative
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<PAGE>
matter, the Subordination afforded to the
Senior Certificates by the Class M
Certificates and the Class B-1 Certificates
(together with the Class B-2 Certificates and
the Class B-3 Certificates) will be increased
(to the extent not otherwise offset by
Realized Losses). However, as described
herein, because holders of the Class B-3
Certificates will not be entitled to receive
any interest or principal distributions until
the Class B-1 Certificates and the Class B-2
Certificates have been retired, holders of the
Class B-1 Certificates will be entitled to
principal distributions that include all
amounts that would otherwise be distributable
to holders of the Class B-3 Certificates,
which will have the effect of shortening the
weighted average life of the Class B-1
Certificates.
See "Description of the Certificates-Principal
Distributions on the Senior Certificates,"
"-Principal Distributions on the Class M
Certificates and the Class B-1 Certificates"
and "Certain Yield and Prepayment
Considerations" herein, and see "Yield,
Prepayment and Maturity Considerations" in the
Prospectus.
SPECIAL YIELD CONSIDERATIONS.... GENERAL: The yield to maturity on each
Class of Offered Certificates will depend on,
among other things, the rate and timing of
principal payments (including prepayments,
repurchases, defaults and liquidations) on the
Mortgage Loans and the allocation thereof to
reduce the Certificate Principal Balance of
such Class of Certificates (or the Notional
Amount). The yield to maturity on each Class
of Offered Certificates will also depend on
other factors such as the related Pass-Through
Rate (and, in the case of the Variable Strip
Certificates, any adjustments thereto) and the
purchase price for such Certificates. The
yield to investors on any Class of Offered
Certificates will be adversely affected by any
allocation thereto of any Prepayment Interest
Shortfalls on the Mortgage Loans to the extent
not covered by payments by the Master Servicer
as described herein.
In general, if a Class of Offered Certificates
is purchased at a premium and principal
payments on the Mortgage Loans occur at a rate
faster than anticipated at the time of
purchase, the investor's actual yield to
maturity will be lower than that originally
anticipated. Conversely, if a Class of Offered
Certificates is purchased at a discount and
principal payments on the Mortgage Loans occur
at a rate slower than that assumed at the time
of purchase, the investor's actual yield to
maturity will be lower than that originally
anticipated.
VARIABLE STRIP CERTIFICATES: The yield to
investors on the Variable Strip Certificates
will be extremely sensitive to the
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<PAGE>
rate and timing of principal payments on the
Mortgage Loans (including prepayments,
repurchases, defaults and liquidations), which
may fluctuate significantly over time. A
rapid rate of principal payments on the
Mortgage Loans could result in the failure of
investors in the Variable Strip Certificates
to recover their initial investment. The yield
on the Variable Strip Certificates will also
be materially and adversely affected if the
Mortgage Loans experience a high rate of
defaults and liquidations. In addition to the
foregoing, the yield on the Variable Strip
Certificates will be materially and adversely
affected to a greater extent than the yields
on the other Classes of Offered Certificates
if the Mortgage Loans with higher Net Mortgage
Rates prepay faster than the Mortgage Loans
with lower Net Mortgage Rates, because holders
of the Variable Strip Certificates generally
will have rights to relatively larger portions
of interest payments on the Mortgage Loans
with higher Net Mortgage Rates than on the
Mortgage Loans with lower Net Mortgage Rates.
CLASSES WITH SUBORDINATION FEATURES: The
yield to maturity on the Class M Certificates
will be extremely sensitive to certain losses
on the Mortgage Loans (and the timing thereof)
to the extent such losses are not covered by
the Subordinate Certificates, because the
entire amount of such losses (rather than a
PRO RATA portion thereof) will be allocable
to the Class M Certificates, as described
herein. The yield to maturity on the Class B-1
Certificates will be extremely sensitive to
certain losses on the Mortgage Loans (and the
timing thereof) to the extent such losses are
not covered by the Class B-2 Certificates or
the Class B-3 Certificates, because the entire
amount of such losses (rather than a PRO
RATA portion thereof) will be allocable to
the Class B-1 Certificates, as described
herein.
See "Certain Yield and Prepayment
Considerations" herein and "Yield, Prepayment
and Maturity Considerations" in the
Prospectus.
CERTAIN FEDERAL INCOME TAX
CONSEQUENCES................. A real estate mortgage investment conduit
("REMIC") election will be made with respect
to the Trust Fund for federal income tax
purposes. Upon the issuance of the Offered
Certificates, Thacher Proffitt & Wood, counsel
to the Depositor, will deliver its opinion
generally to the effect that, assuming
compliance with all provisions of the Pooling
and Servicing Agreement, for federal income
tax purposes, the Trust Fund will qualify as a
REMIC within the meaning of Sections 860A
through 860G of the Internal Revenue Code of
1986 (the "Code"). For federal income tax
purposes, the Senior Certificates, the Class M
Certificates and the Subordinate Certificates
will be the
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<PAGE>
"regular interests" in the REMIC, and will be
treated as debt instruments of the REMIC, and
the Residual Certificates will be the sole
class of "residual interests" in the REMIC.
For federal income tax reporting purposes, the
Class A Certificates will not, and the
Variable Strip Certificates, the Class M
Certificates and the Class B-1 Certificates
will, be treated as having been issued with
original issue discount. The prepayment
assumption that will be used in determining
the rate of accrual of original issue
discount, market discount and premium, if any,
for federal income tax purposes will be a CPR
percentage (as defined herein equal to 18%. No
representation is made that the Mortgage Loans
will prepay at such rate or at any other rate.
If the method for computing original issue
discount described in the Prospectus results
in a negative amount for any period, a holder
of a Variable Strip Certificate or Class B-1
Certificate will be permitted to offset such
amount only against the future income, if any,
from such Certificate. See "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
For further information regarding the federal
income tax consequences of investing in the
Offered Certificates see "Certain Federal
Income Tax Consequences" herein and in the
Prospectus.
RATINGS......................... It is a condition to the issuance of the
Offered Certificates that the Variable Strip
Certificates and the Class A Certificates be
rated "Aaa" by Moody's Investors Service, Inc.
("Moody's") and "AAA" by Duff & Phelps Credit
Rating Co. ("DCR"), that the Class M
Certificates be rated not lower than "Aa3" by
Moody's and "AA" by DCR and that the Class B-1
Certificates be rated not lower than "Baa3" by
Moody's and "BBB" by DCR. 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
organization. A security rating does not
address the frequency of principal prepayments
or the corresponding effect on yield to
investors. The ratings of the Variable Strip
Certificates do not address the possibility
that the holders of such Certificates may fail
to fully recover their initial investment. See
"Certain Yield and Prepayment Considerations"
and "Ratings" herein and "Yield, Prepayment
and Maturity Considerations" in the
Prospectus.
LEGAL INVESTMENT................ The Variable Strip Certificates, the Class A
Certificates and the Class M Certificates will
constitute "mortgage related securities" for
purposes of the Secondary Mortgage Market
S-19
<PAGE>
Enhancement Act of 1984 ("SMMEA") for so long
as they are rated as described herein and, as
such, will be legal investments for certain
entities to the extent provided in SMMEA.
SMMEA, however, provides for state limitation
on the authority of such entities to invest in
"mortgage related securities," provided that
such restricting legislation was enacted on or
prior to October 3, 1991. The Class B-1
Certificates will not constitute "mortgage
related securities" for purposes of SMMEA.
The Depositor makes no representations as to
the proper characterization of any Class of
Offered Certificates for legal investment or
other purposes, or as to the ability of
particular investors to purchase any Class of
Offered Certificates under applicable legal
investment restrictions. These uncertainties
may adversely affect the liquidity of the
Offered Certificates. Accordingly, all
institutions whose investment activities are
subject to legal investment laws and
regulations, regulatory capital requirements
or review by regulatory authorities should
consult with their own legal advisors in
determining whether and to what extent any
Class of Offered Certificates, and in
particular the Class B-1 Certificates,
constitutes a legal investment or is subject
to investment, capital or other restrictions.
See "Legal Investment" and "ERISA
Considerations" herein and in the Prospectus.
S-20
<PAGE>
RISK FACTORS
In addition to the matters described elsewhere in this Prospectus
Supplement and the Prospectus, prospective investors should carefully consider
the following factors before deciding to invest in the Offered Certificates.
REPURCHASE OBLIGATIONS OF THE SELLER
No person other than the Seller is obligated with respect to the
representations and warranties respecting the Mortgage Loans and the remedies
for any breach thereof that are assigned to the Trustee for the benefit of the
Certificateholders, and the Seller has only limited assets available to perform
its repurchase obligations in respect of any breach of such representations and
warranties. Therefore, prospective investors in the Offered Certificates should
consider the possibility that the Seller will not have sufficient assets with
which to satisfy its repurchase obligations in the event that a substantial
amount of Mortgage Loans are required to be repurchased due to breaches of
representations and warranties.
UNDERWRITING STANDARDS AND POTENTIAL DELINQUENCIES
The Seller's underwriting standards are primarily intended to assess the
value of the mortgaged property and to evaluate the adequacy of such property as
collateral for the mortgage loan. While one of the Seller's primary
considerations in underwriting a mortgage loan is the value of the mortgaged
property, the Seller also considers, among other things, a mortgagor's credit
history, repayment ability and debt service-to-income ratio, as well as the type
and use of the mortgaged property.
AS A RESULT OF THE SELLER'S UNDERWRITING STANDARDS, THE MORTGAGE LOANS
ARE LIKELY TO EXPERIENCE RATES OF DELINQUENCY, FORECLOSURE, BANKRUPTCY AND LOSS
THAT ARE HIGHER, AND COULD BE SUBSTANTIALLY HIGHER, THAN THOSE EXPERIENCED BY
MORTGAGE LOANS UNDERWRITTEN IN A MORE TRADITIONAL MANNER. SEE "THE SELLER-LOAN
DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO PROPERTY STATUS" AND
"-REO PROPERTY LIQUIDATION EXPERIENCE" HEREIN FOR IMPORTANT INFORMATION
REGARDING THE DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO PROPERTY
STATUS AND LOSS EXPERIENCE OF CERTAIN MORTGAGE LOANS PREVIOUSLY ORIGINATED OR
ACQUIRED BY THE SELLER UNDER SUBSTANTIALLY THE SAME UNDERWRITING CRITERIA
PURSUANT TO WHICH THE MORTGAGE LOANS WERE ORIGINATED OR ACQUIRED.
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 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. Approximately 37.96% of the Mortgage Loans (by
aggregate principal balance as of the Cut-off Date) are secured by Mortgaged
Properties located in the State of California. Property values of residential
real estate in California have declined in recent years. If the California
residential real estate market should continue to experience a decline in
property values after the dates of origination of the Mortgage Loans, the rates
of delinquency, foreclosure, bankruptcy and loss on the Mortgage Loans may be
expected to increase, and may increase substantially, as compared to such rates
in a stable or improving real estate market. See "Description of the Mortgage
Pool-Underwriting Standards" herein.
INTERIM FUNDING
As described herein under "Description of the Mortgage Pool-General" and
"The Seller," DLJ Mortgage Capital, Inc. ("DLJMC"), an affiliate of the
Depositor and Donaldson, Lufkin & Jenrette Securities Corporation (the
"Underwriter"), has provided funding to the Seller with respect to various
mortgage loans, including the Mortgage Loans, by means of certain mortgage loan
purchase agreements and by means of a master repurchase agreement. Such
transactions were entered into with the expectation that DLJMC would recover
such funding through the proceeds of the issuance of the Certificates and
through the sale of mortgage loans in other secondary market transactions.
S-21
<PAGE>
SERVICING EXPERIENCE OF THE MASTER SERVICER
Prospective investors in the Offered Certificates should be aware that the
residential mortgage loan servicing portfolio of the Master Servicer consists
primarily of mortgage loans underwritten in a more traditional manner than the
Mortgage Loans and that the Master Servicer has had limited experience in
servicing mortgage loans originated or acquired in accordance with underwriting
standards similar to the underwriting criteria pursuant to which the Mortgage
Loans were originated or acquired. As a result, the rates of delinquency,
foreclosure and loss on the Mortgage Loans may be higher, and could be
substantially higher, than the rates of delinquency, foreclosure and loss on
mortgage loans in the Master Servicer's residential mortgage loan servicing
portfolio and on mortgage loans previously originated or acquired by the Seller
under substantially the same underwriting criteria pursuant to which the
Mortgage Loans were originated or acquired.
See, also, "Special Considerations" in the Prospectus.
DESCRIPTION OF THE MORTGAGE POOL
The information set forth in the following paragraphs has been provided by
the Seller. Neither the Depositor, the Underwriter, the Master Servicer, the
Trustee nor any of their respective affiliates have made or will make any
representation as to the accuracy or completeness of such information.
GENERAL
The Trust Fund (as defined herein) will consist primarily of a pool (the
"Mortgage Pool") of mortgage loans (the "Mortgage Loans") with an aggregate
principal balance as of the Cut-off Date of $85,139,184.39. The Mortgage Loans
will be conventional, fixed- and adjustable-rate, fully-amortizing mortgage
loans secured by first liens on fee simple and leasehold interests in one- to
four-family residential real properties (each, a "Mortgaged Property"). The
Mortgage Loans will have original terms to maturity from the due dates of their
first scheduled monthly payment of interest and principal (each such payment, a
"Monthly Payment") of not more than 30 years and will have Monthly Payments due
on the first day of each month. All of the Mortgage Loans were originated or
acquired by the Seller in accordance with the underwriting criteria under its
regular lending program, as described herein.
The Mortgage Loans will have been sold to DLJMC by Quality Mortgage USA,
Inc., in its capacity as the Seller, prior to the Delivery Date pursuant to
certain mortgage loan purchase agreements between DLJMC and the Seller (each, a
"Purchase Agreement") and will be acquired by the Depositor from DLJMC on the
Delivery Date pursuant to an Assignment Agreement between the Depositor and
DLJMC (the "Assignment Agreement"). The representations and warranties made by
the Seller in each Purchase Agreement with respect to the related Mortgage Loans
will be restated by the Seller on and as of the Delivery Date pursuant to such
Purchase Agreement. Further, insofar as it relates to the representations and
warranties of the Seller made in or pursuant to any Purchase Agreement and the
remedies provided therein or pursuant thereto for any breaches of such
representations and warranties, such Purchase Agreement will be assigned by
DLJMC to the Depositor pursuant to the Assignment Agreement and, as described
herein under "Pooling and Servicing Agreement-Assignment of Mortgage Loans," by
the Depositor to the Trustee for the benefit of the holders of the Certificates
pursuant to the Pooling and Servicing Agreement (as defined herein).
The interest rates (each, a "Mortgage Rate") will be fixed for
approximately 62.77% of the Mortgage Loans (the "Fixed Rate Loans"), by
aggregate principal balance as of the Cut-off Date . The Mortgage Rates on
approximately 7.99% of the Mortgage Loans (the "Step Loans"), by aggregate
principal balance as of the Cut-off Date, will be reset twice, approximately one
year and approximately two years after their respective dates of origination, on
the first day of the months specified in the related Mortgage Notes (each such
date, an "Adjustment Date") to equal, as to each Step Loan and the first
Adjustment Date thereof, the sum of the initial Mortgage Rate thereof and the
fixed percentage amount (the "First Step Margin") specified in the related
Mortgage Note and, as to each Step Loan and the second Adjustment Date thereof,
the sum of the initial Mortgage Rate thereof and the
S-22
<PAGE>
greater fixed percentage amount (the "Second Step Margin") specified in such
Mortgage Note. The Mortgage Rates on approximately 29.24% of the Mortgage Loans
(the "Adjustable Rate Loans"), by aggregate principal balance as of the Cut-off
Date, will be subject to adjustment commencing approximately seven years after
their respective dates of origination, and semi-annually thereafter, on the
Adjustment Dates specified in the related Mortgage Notes to equal, as to each
Adjustable Rate Loan and any related Adjustment Date, the sum, rounded to the
nearest 0.125%, of (i) the average of the interbank offered rates for six-month
United States dollar deposits in the London interbank market based on quotations
of major banks, as published in the Western Edition of THE WALL STREET JOURNAL
(the "Index") and most recently available as of the date 45 days prior to such
Adjustment Date, and (ii) the fixed percentage amount (the "Gross Margin")
specified in the related Mortgage Note (such sum, as rounded and based on the
Index as of the first day of any month, the "Fully Indexed Rate"); provided,
however, that the Mortgage Rate on any Adjustable Rate Loan will not increase or
decrease by more than 1.00% (the "Periodic Rate Cap") on any related Adjustment
Date other than the initial Adjustment Date thereof, will in no event be greater
than the initial Mortgage Rate thereof plus 6.50% (the "Maximum Rate") and will
in no event be less than the amount specified in the related Mortgage Note as
the minimum interest rate thereunder (the "Minimum Rate"). See "-The Index"
herein. Effective with the first Monthly Payment due on a Step Loan or an
Adjustable Rate Loan after any related Adjustment Date, the amount of the
Monthly Payment will be adjusted to an amount that will fully amortize the
principal balance of such Mortgage Loan over its remaining term and pay interest
at the Mortgage Rate as adjusted on such Adjustment Date.
Certain of the Fixed Rate Loans will have original terms to maturity from
the due dates of their first Monthly Payments of 15 years (the "Fifteen Year
Loans"), and the other Fixed Rate Loans will have original terms to maturity
from the due dates of their first Monthly Payments of 30 years (the "Thirty Year
Loans"). The First Step Margins and the Second Step Margins on all of the Step
Loans will be equal to 1.250% and 3.000%, respectively. The Gross Margins on
the Adjustable Rate Loans ranged from 4.25% to 7.75% as of the Cut-off Date and
had a weighted average (based on the aggregate principal balance of the
Adjustable Rate Loans as of the Cut-off Date) of approximately 5.74% as of the
Cut-off Date. The Maximum Rates and the Minimum Rates on the Adjustable Rate
Loans ranged from 15.85% to 22.25% per annum and from 9.35% to 15.75% per annum,
respectively, as of the Cut-off Date and had weighted averages (based on the
aggregate principal balance of the Adjustable Rate Loans as of the Cut-off Date)
of approximately 18.49% and 11.99% per annum, respectively, as of the Cut-off
Date. Approximately 52.15% of the Adjustable Rate Loans (by aggregate principal
balance as of the Cut-off Date) were originated with Mortgage Rates below the
Fully Indexed Rates thereon at their respective dates of origination. Due to the
application of the Periodic Rate Cap and the Maximum Rate, the Mortgage Rate on
any Adjustable Rate Loan, as adjusted on any related Adjustment Date, may be
less than the Fully Indexed Rate thereon for such date.
Approximately 3.25% of the Mortgage Loans (by aggregate principal balance
as of the Cut-off Date) were thirty days or more but less than sixty days
delinquent in their Monthly Payments (such Mortgage Loans, "Thirty-Day
Delinquent Mortgage Loans") as of the Cut-off Date. Approximately 0.23% of the
Mortgage Loans (by aggregate principal balance as of the Cut-off Date) were
sixty days or more but less than ninety days delinquent in their Monthly
Payments (such Mortgage Loans, "Sixty-Day Delinquent Mortgage Loans") as of the
Cut-off Date. Approximately 1.82% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were Thirty-Day Delinquent Mortgage Loans as of
November 15, 1995, and none of the Mortgage Loans were Sixty-Day Delinquent
Mortgage Loans as of such date. Prospective investors in the Offered
Certificates should be aware, however, that only approximately 77.91% of the
Mortgage Loans (by aggregate principal balance as of the Cut-off Date) had a
first Monthly Payment due on or before October 1, 1995 and that only
approximately 50.82% of the Mortgage Loans (by aggregate principal balance as of
the Cut-off Date) had a first Monthly Payment due on or before September 1,
1995, and therefore, the remaining Mortgage Loans could not have been Thirty-Day
Delinquent Mortgage Loans or Sixty-Day Delinquent Mortgage Loans as of the
Cut-off Date or November 15, 1995. In addition to the foregoing, approximately
1.20% of the Mortgage Loans (by aggregate principal balance as of the Cut-off
Date) will have been thirty days or more delinquent in their Monthly Payments
more than once during the twelve months preceding the Delivery Date. None of
the other Mortgage Loans will have been thirty days or more delinquent in its
Monthly Payments more than once during such period. Also, none of the Mortgage
Loans will be sixty days or more delinquent in its Monthly Payments as of the
Delivery Date.
S-23
<PAGE>
Each Mortgage Loan will contain a customary "due-on-sale" clause. Further,
approximately 71.08% of the Mortgage Loans (by aggregate principal balance as of
the Cut-off Date) provide for payment of a prepayment charge. As to each such
Mortgage Loan, the prepayment charge generally is the maximum amount permitted
under applicable state law (or, if no maximum prepayment charge is specified,
the prepayment charge generally is calculated as set forth in the following
sentence). A majority of the Mortgage Loans with a prepayment charge provision
provide for payment of a prepayment charge for partial prepayments and full
prepayments made within approximately five years of the origination of the
related Mortgage Loan, in an amount equal to six months' advance interest on the
amount of the prepayment that, when added to all other amounts prepaid during
the twelve-month period immediately preceding the date of the prepayment,
exceeds twenty percent (20%) of the original principal balance of such Mortgage
Loan. With respect to the remainder of the Mortgage Loans with a prepayment
charge provision, the prepayment charge is calculated in a different manner. The
Seller will retain the right to all prepayment charges and late payment charges
received on the Mortgage Loans and such amounts will not be available for
distribution on the Certificates.
Pursuant to its terms, each Mortgage Loan is required to be covered by a
standard hazard insurance policy in an amount equal to the lower of the original
principal loan amount or the replacement value of the improvements on the
Mortgaged Property. None of the Mortgage Loans will be covered by a primary
mortgage insurance policy. See "Description of Mortgage and Other
Insurance-Hazard Insurance on the Loans-Standard Hazard Insurance Policies" in
the Prospectus.
The Mortgage Loans will have the following approximate characteristics as
of the Cut-off Date:
<TABLE>
<CAPTION>
FIFTEEN THIRTY ADJUSTABLE ALL
YEAR LOANS YEAR LOANS STEP LOANS RATE LOANS MORTGAGE LOANS
------------- -------------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Number of Mortgage Loans ...... 169 696 88 381 1,334
Aggregate Principal Balance ... $6,302,608.32 $47,141,697.22 $6,802,939.15 $24,891,939.70 $85,139,184.39
Mortgage Rates:
Weighted Average .......... 12.306% 11.051% 10.360% 11.993% 11.364%
Range ..................... 8.990%- 8.375%- 6.375%- 9.350%- 6.375%-
16.490% 16.750% 14.250% 15.750% 16.750%
Weighted Average
Remaining Term to
Maturity (in months)......... 178 358 353 342 339
</TABLE>
The Mortgage Loans will have the following approximate characteristics as
of the Cut-off Date (expressed as a percentage of the aggregate principal
balance of the Mortgage Loans having such characteristics relative to the
aggregate principal balance of the Mortgage Loans specified, provided, that the
sum of the percentages in certain of the following paragraphs may not equal 100%
due to rounding):
Each Mortgage Loan will have been originated or acquired by the
Seller on or before October 1, 1995.
The initial Adjustment Dates for the Step Loans will occur in the
following months, with the percentages indicated on an approximate basis:
March 1996, 30.01%; April 1996, 20.58%; May 1996, 12.45%; June 1996,
11.86%; July 1996, 4.23%; August 1996, 2.95%, September 1996, 14.86; and
October 1996, 3.05%. The initial Adjustment Dates for the Adjustable Rate
Loans will occur in the following months, with the percentages indicated
on an approximate basis: November 2001, 12.02%; December 2001, 12.03%;
January 2002, 11.66%; February 2002, 12.99%; March 2002, 6.17%; April
2002, 4.90%; May 2002, 6.14%; June 2002, 4.98%; July 2002, 3.63%; August
2002, 10.40%; September 2002, 9.78% and October 2002, 5.29%.
S-24
<PAGE>
Approximately 9.22% of the Mortgage Loans had original terms to
maturity from the due dates of their first Monthly Payments of 15 years,
and approximately 90.57% of the Mortgage Loans had original terms to
maturity from the due dates of their first Monthly Payments of 30 years.
None of the Mortgage Loans had a first Monthly Payment due prior to
December 1, 1994, and the latest maturity date of any of the Mortgage
Loans is November 1, 2025.
The Mortgage Loans will each have a principal balance of not less
than $10,197.67 or more than $545,482.96. The Mortgage Loans will have an
average principal balance of approximately $63,822.48.
The weighted average Loan-to-Value Ratio at origination of the
Mortgage Loans will be approximately 64.16%, no Mortgage Loan will have a
Loan-to-Value Ratio at origination exceeding 85.00% and no Mortgage Loan
will have a combined Loan-to-Value Ratio at origination, including any
then-existing second mortgage subordinate to the lien of the Mortgage, in
excess of 90.00%.
At origination, approximately 5.56% of the Mortgage Loans were
secured by a Mortgaged Property that was subject to a then-existing lien
subordinate to that of the related Mortgage.
With respect to approximately 13.95% of the Mortgage Loans, the
proceeds were used to purchase the related Mortgaged Properties.
Approximately 15.73% of the Mortgage Loans were rate and term refinancings
and approximately 70.32% of the Mortgage Loans were equity take-out
refinancings.
No more than approximately 0.81% of the Mortgage Loans will be
secured by Mortgaged Properties located in any one zip code area.
Approximately 3.51%, 3.52%, 3.41%, 3.83%, 5.09%, 3.78%, 3.06%,
3.12%, 3.00%, 18.50%, 27.09% and 21.27% of the Mortgage Loans had their
first Monthly Payments due in December 1994, January 1995, February 1995,
March 1995, April 1995, May 1995, June 1995, July 1995, August 1995,
September 1995, October 1995 and November 1995, respectively.
Approximately 0.82% of the Mortgage Loans will have their first Monthly
Payments due in December 1995.
Approximately 82.17%, 2.45%, 4.92% and 10.46% of the Mortgage Loans
will be secured by detached one-family dwelling units, by units in
condominiums, by units in planned unit developments and by two- to
four-family dwelling units, respectively. Approximately 0.03% of the
Mortgage Loans will be secured by leasehold interests. Approximately
14.80% and 0.55% of the Mortgage Loans will be secured by investor
properties and by secondary residences, respectively, and with respect to
all of the other Mortgage Loans, the mortgagor represented in the
documents submitted by such mortgagor for the closing of the related
Mortgage Loan that the Mortgaged Property initially would be
owner-occupied as the mortgagor's primary residence.
Approximately 5.25%, 42.71%, 27.96%, 17.20% and 6.87% of the
Mortgage Loans are expected to be graded in the Seller's A+ Risk, A Risk,
B Risk, C1 Risk and C2 Risk categories, respectively. Approximately
48.05%, 1.21% and 50.74% of the Mortgage Loans were underwritten under the
Seller's Full Documentation Program, Quick Qualifier Program and Quick
Qualifier Plus Program, respectively. See "-Underwriting Standards"
below.
S-25
<PAGE>
The table below sets forth as of the Cut-off Date the number, aggregate
principal balance and percentage of the Mortgage Loans (by aggregate principal
balance of such Mortgage Loans relative to the aggregate principal balance of
all of the Mortgage Loans) having Loan-to-Value Ratios at origination in each
given range. (The sum of the amounts and the percentages in the table below may
not equal the totals due to rounding.)
LOAN-TO-VALUE RATIOS
<TABLE>
<CAPTION>
LOAN-TO-VALUE RATIOS NUMBER OF AGGREGATE PERCENTAGE OF MORTGAGE LOANS BY
AT ORIGINATION (%) MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
- - - - - - ---------------------- -------------- ----------------- -------------------------------
<S> <C> <C> <C>
60.00% or less........ 447 $24,599,438.54 28.89%
60.01%-65.00.......... 303 17,746,231.25 20.84
65.01%-70.00.......... 306 19,398,740.68 22.78
70.01%-75.00.......... 211 17,850,792.38 20.97
75.01%-80.00.......... 65 5,434,110.86 6.38
80.01%-85.00.......... 2 109,870.68 0.13
----- -------------- ------
Total............... 1,334 $85,139,184.39 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
S-26
<PAGE>
The table below sets forth as of the Cut-off Date the number, aggregate
principal balance and percentage of the Mortgage Loans (by aggregate principal
balance of such Mortgage Loans relative to the aggregate principal balance of
all of the Mortgage Loans) having the Mortgage Rates in each given range. (The
sum of the amounts and the percentages in the table below may not equal the
totals due to rounding.)
MORTGAGE RATES
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE OF MORTGAGE LOANS BY
MORTGAGE RATES (%) MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
- - - - - - ------------------------ -------------- ----------------- -------------------------------
<S> <C> <C> <C>
6.26 -6.50......... 1 $ 206,226.99 0.24%
7.01 -7.25......... 2 165,642.24 0.19
7.51 -7.75......... 1 112,919.44 0.13
8.01 -8.25......... 7 490,890.86 0.58
8.26 -8.50......... 5 476,112.07 0.56
8.51 -8.75......... 4 247,631.92 0.29
8.76 -9.00......... 26 2,175,173.33 2.55
9.01 -9.25......... 27 2,210,124.83 2.60
9.26 -9.50......... 41 4,184,574.39 4.91
9.51 -9.75......... 86 7,928,075.44 9.31
9.76 -10.00........ 70 5,709,053.94 6.71
10.01 -10.25........ 38 2,811,691.77 3.30
10.26 -10.50........ 49 3,849,452.17 4.52
10.51 -10.75........ 57 3,939,882.56 4.63
10.76 -11.00........ 62 4,505,716.36 5.29
11.01 -11.25........ 45 3,515,008.08 4.13
11.26 -11.50........ 56 3,787,524.86 4.45
11.51 -11.75........ 65 4,145,974.25 4.87
11.76 -12.00........ 73 4,019,653.96 4.72
12.01 -12.25........ 89 4,644,862.16 5.46
12.26 -12.50........ 84 4,941,348.99 5.80
12.51 -12.75........ 54 2,631,474.42 3.09
12.76 -13.00........ 74 4,716,831.04 5.54
13.01 -13.25........ 78 3,614,645.36 4.25
13.26 -13.50........ 46 2,347,984.40 2.76
13.51 -13.75........ 54 2,467,525.76 2.90
13.76 -14.00........ 37 1,804,076.35 2.12
14.01 -14.25........ 30 1,141,656.12 1.34
14.26 -14.50........ 10 381,490.08 0.45
14.51 -14.75........ 21 639,584.12 0.75
14.76 -15.00........ 12 368,447.29 0.43
15.01 -15.25........ 11 378,532.11 0.44
15.26 -15.50........ 6 181,631.67 0.21
15.51 -15.75........ 5 155,876.85 0.18
15.76 -16.00........ 4 132,192.14 0.16
16.01 -16.25........ 2 47,139.10 0.06
16.26 -16.50........ 1 46,360.09 0.05
16.51 -16.75........ 1 16,196.88 0.02
----- -------------- ------
Total............. 1,344 $85,139,184.39 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
S-27
<PAGE>
The table below sets forth as of the Cut-off Date the number, aggregate
principal balance and percentage of the Mortgage Loans (by aggregate principal
balance of such Mortgage Loans relative to the aggregate principal balance of
all of the Mortgage Loans) having Mortgaged Properties located in each given
state and in the District of Columbia. (The sum of the amounts and the
percentages in the table below may not equal the totals due to rounding.)
GEOGRAPHIC DISTRIBUTION
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE PERCENTAGE OF MORTGAGE LOANS BY
LOCATION MORTGAGE LOANS PRINCIPAL BALANCE AGGREGATE PRINCIPAL BALANCE
- - - - - - ------------------------ -------------- ----------------- -------------------------------
<S> <C> <C> <C>
Alabama............... 47 $ 2,331,527.98 2.74%
Arizona............... 21 1,194,247.63 1.40
Arkansas.............. 3 77,194.29 0.09
California............ 376 32,318,948.45 37.96
Colorado.............. 16 978,299.13 1.15
Connecticut........... 31 1,886,125.52 2.22
Florida............... 153 8,825,470.90 10.37
Georgia............... 42 2,455,232.96 2.88
Hawaii................ 12 2,077,196.38 2.44
Idaho................. 7 406,202.83 0.48
Illinois.............. 26 1,298,513.25 1.53
Indiana............... 23 1,079,106.66 1.27
Kentucky.............. 11 583,272.51 0.69
Louisiana............. 21 831,421.45 0.98
Maryland.............. 10 551,475.71 0.65
Massachusetts......... 24 1,652,751.97 1.94
Michigan.............. 37 1,683,817.99 1.98
Minnesota............. 2 60,277.13 0.07
Mississippi........... 9 383,859.09 0.45
Missouri.............. 37 1,528,785.60 1.80
Nevada................ 4 200,801.54 0.24
New Hampshire......... 2 220,152.70 0.26
New Jersey............ 1 44,954.98 0.05
New Mexico............ 3 121,318.21 0.14
North Carolina........ 24 1,001,674.55 1.18
Ohio.................. 48 2,414,382.82 2.84
Oklahoma.............. 24 1,020,311.16 1.20
Oregon................ 36 2,188,178.91 2.57
Pennsylvania.......... 43 2,697,297.76 3.17
Rhode Island.......... 4 230,454.83 0.27
South Carolina........ 22 691,072.76 0.81
Tennessee............. 31 971,684.66 1.14
Texas................. 97 5,140,929.41 6.04
Utah.................. 17 1,183,799.27 1.39
Virginia.............. 13 835,491.11 0.98
Washington............ 51 3,753,484.56 4.41
West Virginia......... 4 101,026.40 0.12
Wisconsin............. 2 118,441.33 0.14
----- -------------- ------
Total............... 1,334 $85,139,184.39 100.00%
----- -------------- ------
----- -------------- ------
</TABLE>
S-28
<PAGE>
UNDERWRITING STANDARDS
GENERAL DESCRIPTION OF THE SELLER'S REGULAR LENDING PROGRAM
The Seller's underwriting standards are primarily intended to assess the
value of the mortgaged property and to evaluate the adequacy of such property as
collateral for the mortgage loan. It is contemplated that all of the mortgage
loans originated by the Seller will also be underwritten with a view toward the
resale thereof in the secondary mortgage market. While one of the Seller's
primary considerations in underwriting a mortgage loan is the value of the
mortgaged property, the Seller also considers, among other things, a mortgagor's
credit history, repayment ability and debt service-to-income ratio, as well as
the type and use of the mortgaged property. The maximum Loan-to-Value Ratio
permitted under the Seller's regular lending program is 90% (however, DLJMC
generally will not purchase, and the Trust Fund will not include, mortgage loans
with Loan-to-Value Ratios in excess of 85%). Second lien financing of the
Mortgaged Properties may be provided by lenders other than the Seller at any
time (including at origination), in which case the combined Loan-to-Value Ratio
may exceed 85%; however, the Seller will not provide second lien financing on
any Mortgaged Property securing a Mortgage Loan included in the Trust Fund. All
of the Mortgage Loans included in the Trust Fund will be first lien mortgage
loans. All of the Mortgage Loans generally bear higher rates of interest than
mortgage loans that are originated in accordance with FNMA and FHLMC standards.
The combination of these factors is likely to result in rates of delinquency,
foreclosure, bankruptcy and loss that are higher, and that may be substantially
higher, than those experienced by mortgage loans underwritten in a more
traditional manner. See "The Seller-Loan Delinquency, Forbearance, Foreclosure,
Bankruptcy and REO Property Status" and "-REO Property Liquidation Experience"
herein for important information regarding the delinquency, forbearance,
foreclosure, bankruptcy and REO property status and loss experience of certain
mortgage loans previously originated or acquired by the Seller under
substantially the same underwriting criteria pursuant to which the Mortgage
Loans were originated or acquired.
As a result of the Seller's underwriting criteria, changes in the values
of Mortgaged Properties may have a greater effect on the delinquency,
foreclosure, bankruptcy and loss experience on the Mortgage Loans 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. Approximately 37.96% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) are secured by Mortgaged Properties located in
the State of California. Property values of residential real estate in
California have declined in recent years. If the California residential real
estate market should continue to experience a decline in property values after
the dates of origination of the Mortgage Loans, the rates of delinquency,
foreclosure, bankruptcy and loss on the Mortgage Loans may be expected to
increase substantially as compared to such rates in a stable or improving real
estate market.
Substantially all of the Seller's current single family mortgage loan
volume is originated or acquired primarily based on loan application packages
submitted through mortgage brokerage companies. Such loan application packages,
which generally contain relevant credit, property and underwriting information
on the loan request, are compiled by the applicable mortgage brokerage company
and submitted to the Seller for approval and funding. The mortgage brokerage
companies receive all or a portion of the loan origination fee charged to the
borrower at the time the loan is made. As part of its quality control
procedures, the Seller maintains a file with respect to each broker including
reports of any complaints received by the Seller with respect to such broker. No
more than approximately 3.92% of the Mortgage Loans (by aggregate principal
balance as of the Cut-off Date) were originated based on loan application
packages submitted through any single mortgage brokerage company.
Each prospective mortgagor completes an application which includes
information with respect to the applicant's liabilities, income, credit history,
employment history and personal information. The Seller requires a credit report
on each applicant from a credit reporting company. The report typically contains
information relating to such matters as credit history with local and national
merchants and lenders, installment debt payments and any record of defaults,
bankruptcies, repossessions or judgments.
One- to four-family (sometimes referred to herein as "single family")
properties that are to secure mortgage loans are appraised by qualified
independent appraisers who are approved by the Seller's internal chief
appraiser. Such appraisers inspect and appraise the subject property and verify
that such property is in acceptable condition. Following each appraisal, the
appraiser prepares a report which includes a market value analysis based on
recent
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sales of comparable homes in the area and, when deemed appropriate, replacement
cost analysis based on the current cost of constructing a similar home. All
appraisals are required to conform to the Uniform Standards of Professional
Appraisal Practice adopted by the Appraisal Standards Board of the Appraisal
Foundation and must be on forms acceptable to FNMA and FHLMC. Every independent
appraisal is reviewed by either a Seller staff appraiser who is supervised by
the Seller's chief appraiser, or by another independent appraiser approved by
the Seller's chief appraiser, to confirm the adequacy of the property as
collateral, and substantially all independent appraisals are reviewed before the
mortgage loan is made. If the value of the subject property as determined by the
Seller's review appraisal is more than either 5% or 10% (depending upon the
original appraisal value and the state in which the subject property is located)
below the original appraisal value, then the Seller's review appraisal value is
used for purposes of establishing the maximum permissible Loan-to-Value Ratio of
the mortgage loan. In all other cases, the value of the subject property as
determined by the original appraisal is used for purposes of establishing the
maximum permissible Loan-to-Value Ratio of the mortgage loan.
All of the Mortgage Loans were originated or acquired under the Seller's
regular lending program, and were underwritten by the Seller pursuant to its
"Full Documentation," "Quick Qualifier" and "Quick Qualifier Plus" residential
loan programs. Under each of these residential loan programs, the Seller reviews
the loan 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 for compliance with the
regular lending program's standards. In determining the ability of the applicant
to repay a loan, the Seller uses a rate (the "Qualifying Rate") equal to, in the
case of each fixed rate loan, the interest rate thereon, in the case of each
step loan, the initial interest rate thereon plus the first step margin and, in
the case of each adjustable rate loan having a seven-year fixed initial interest
rate period, the initial interest rate thereon. The Seller's underwriting
standards are applied in a standardized procedure which complies with applicable
federal and state laws and regulations. The Seller requires its underwriters to
be satisfied that the value of the property being financed, as indicated by an
appraisal and a review appraisal, currently supports and is anticipated to
support in the future the outstanding loan balance. In general, the maximum loan
amount for mortgage loans originated under the regular lending program is
$350,000; however, the Seller approves mortgage loans in excess of such amount
on a case-by-case basis. The single family, fixed rate loans originated or
acquired by the Seller under its regular lending program and characteristic of
the Fixed Rate Loans, for the period from October 1, 1994 through June 30, 1995,
totalled approximately $104,494,939, had a weighted average Loan-to-Value Ratio
at origination of approximately 65.02% and had an average original principal
balance of approximately $54,538. The single family step loans originated or
acquired by the Seller under its regular lending program and characteristic of
the Step Loans, for the period from February 21, 1995 (the date on which the
Seller originated the first step loans under its regular lending program)
through June 30, 1995, totalled approximately $6,868,421, had a weighted average
Loan-to-Value Ratio at origination of approximately 65.81% and had an average
original principal balance of approximately $72,299. The single family
adjustable rate loans originated or acquired by the Seller under its regular
lending program and characteristic of the Adjustable Rate Loans, for the period
from October 1, 1994 through June 30, 1995, totalled approximately $25,918,724,
had a weighted average Loan-to-Value Ratio at origination of approximately
66.60% and had an average original principal balance of approximately $62,455.
The discussion herein and the statistics set forth in the preceding three
sentences exclude mortgage loans originated under the Seller's equity lending
program, mortgage loans originated by the Seller under its REO underwriting
guidelines and certain other mortgage loans originated under the Seller's
regular lending program having characteristics that are not similar to those of
the Mortgage Loans. The Seller underwrites single-family loans with
Loan-to-Value Ratios at origination of up to 90% (however, DLJMC generally will
not purchase, and the Trust Fund will not include, mortgage loans with
Loan-to-Value Ratios in excess of 85%), depending on, among other things, a
mortgagor's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. Under each risk category of
underwriting criteria described below, the maximum combined Loan-to-Value Ratio
at origination, including any then existing second mortgages subordinate to the
Seller's first mortgage, is 100% (however, DLJMC generally will not purchase,
and the Trust Fund will not include, mortgage loans with combined Loan-to-Value
Ratios in excess of 90%).
The Seller verifies the income of each borrower (except as described
below) and a portion of the source of funds required to be deposited by the
applicant with the appropriate closing agent or into escrow under its various
residential loan programs as follows: under the Full Documentation program,
borrowers are generally required to submit two forms of verification of stable
monthly income for the last 24 months (or if the Loan-to-Value Ratio is
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less than or equal to 70%, for the last 12 months); provided that as an
alternative, bank statements for the appropriate time period alone may be
accepted as adequate verification of stable monthly income. Under the Quick
Qualifier and Quick Qualifier Plus programs, one such form of verification is
generally required for the last six months and for any period of less than six
months, respectively, except that borrowers may be qualified based upon monthly
income as stated on the mortgage loan application, without verification, if the
borrower and the mortgaged property meet certain criteria. Under all of the
foregoing programs, the Seller generally performs a telephone verification of
the borrower's employment. Verification of a portion of the source of funds (if
any) required to be deposited by the applicant with the appropriate closing
agent or into escrow is required under the Full Documentation program if the
Loan-to-Value Ratio is greater than 70%; however, no such verification is
required under the other programs.
The Seller uses the following categories and characteristics as guidelines
to grade the potential likelihood that the mortgagor will satisfy the repayment
conditions of a mortgage loan:
A+ RISK. Under the A+ Risk category, the prospective mortgagor
must have generally repaid installment or revolving debt according to its
terms. No 30-day late payments within the past 12 months are permissible
on an existing mortgage loan. Minor derogatory items are allowed as to
non-mortgage credit and a letter of explanation may be required under the
Full Documentation program. A bankruptcy filing by the prospective
mortgagor is permitted if it occurred at least two years previously,
provided, however, that if the Loan to-Value Ratio is greater than 75%,
the bankruptcy must have been dismissed or the prospective mortgagor's
debts must have been discharged for a minimum of two years. The mortgaged
property must be in at least average condition. A maximum Loan-to-Value
Ratio of 85% (or 75% for mortgage loans originated under the Quick
Qualifier and Quick Qualifier Plus programs) is permitted for a mortgage
loan on a single family owner-occupied property. A maximum Loan-to-Value
Ratio of 75% (or 65% for mortgage loans originated under the Quick
Qualifier and Quick Qualifier Plus programs) is permitted for a mortgage
loan on a single family non-owner-occupied property. If the prospective
mortgagor has owned the subject property for less than nine months, then
the maximum Loan-to-Value Ratio is based on the lesser of the documented
original acquisition cost or the current appraisal value. For refinance
mortgage loans, the prospective mortgagor may not receive more than $1,000
"cash out" at the closing directly from the mortgage loan proceeds,
exclusive of amounts used to pay off outstanding consumer debts or other
financial obligations of the prospective mortgagor concurrent with loan
funding. The restrictions set forth in the preceding two sentences apply
only if the Loan-to-Value Ratio is greater than 80% on an owner-occupied
property (or 70% on a non-owner-occupied property).
A RISK. Under the A Risk category, the prospective mortgagor must
have generally repaid installment or revolving debt according to its
terms. A maximum of two 30-day late payments, and no 60-day late payments,
within the last 12 months is acceptable on an existing mortgage loan. The
Seller generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment for the purpose of determining a
prospective mortgagor's mortgage payment history. An existing mortgage
loan is not required to be current at the time the application is
submitted. Minor derogatory items are allowed as to non-mortgage credit,
and a letter of explanation may be required under the Full Documentation
program. A bankruptcy filing by the prospective mortgagor is permitted if
it occurred at least two years previously, provided, however, that if the
Loan to-Value Ratio is greater than 75%, the bankruptcy must have been
dismissed or the prospective mortgagor's debts must have been discharged
for a minimum of two years. The mortgaged property must be in at least
average condition. A maximum Loan-to-Value Ratio of 85% (or 75% for
mortgage loans originated under the Quick Qualifier and Quick Qualifier
Plus programs) is permitted for a mortgage loan on a single family
owner-occupied property. A maximum Loan-to-Value Ratio of 75% (or 65% for
mortgage loans originated under the Quick Qualifier or Quick Qualifier
Plus programs) is permitted for a mortgage loan on a non-owner-occupied
property. A maximum Loan-to-Value Ratio of 70% is permitted for a
refinance mortgage loan on a non-owner-occupied property. If the
prospective mortgagor has owned the subject property for less than nine
months, then the maximum Loan-to-Value Ratio is based on the lesser of the
documented original acquisition cost or the current appraisal value. For
refinance mortgage loans, the prospective mortgagor may not receive more
than $1,000 "cash out" at the closing directly from the mortgage loan
proceeds, exclusive of amounts used to pay off outstanding consumer debts
or other financial obligations of the prospective mortgagor concurrent
with loan
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funding. The restrictions set forth in the preceding two sentences apply
only if the Loan-to-Value Ratio is greater than 80% on an owner-occupied
property.
B RISK. Under the B Risk category, the prospective mortgagor must
have generally repaid all installment or revolving debt according to its
terms. A maximum of four 30-day late payments and no 60-day late payments
(or, alternatively, two 30-day late payments and one 60-day late payment),
within the last 12 months is acceptable on an existing mortgage loan. The
Seller generally will consider a continuous sequence of 30-day late
payments as a single 30-day late payment for the purpose of determining a
prospective mortgagor's mortgage payment history. An existing mortgage
loan is not required to be current at the time the application is
submitted. As to non-mortgage credit, some prior defaults may have
occurred (provided, that under the Full Documentation program, any open
charge-offs or collection accounts of $500 or more must be paid at closing
if the Loan-to-Value Ratio is greater than 70%). A bankruptcy filing by
the prospective mortgagor is permitted if it occurred at least two years
previously; provided, however, that if the Loan-to-Value Ratio is greater
than 75%, the bankruptcy must have been dismissed or the prospective
mortgagor's debts must have been discharged for a minimum of two years.
The mortgaged property must be in at least average condition. A maximum
Loan-to-Value Ratio of 80% (or 75% for mortgage loans originated under the
Quick Qualifier and Quick Qualifier Plus programs) is permitted for a
mortgage loan on an owner-occupied property. A maximum Loan-to-Value Ratio
of 70% (or 65% for mortgage loans originated under the Quick Qualifier or
Quick Qualifier Plus programs) is permitted for a mortgage loan on a
non-owner-occupied property.
C1 RISK. Under the C1 Risk category, the prospective mortgagor
may have experienced significant credit problems in the past. A maximum of
six 30-day late payments, including one 60-day late payment and one 90-day
late payment, within the last 12 months is acceptable on an existing
mortgage loan. The Seller generally will consider a continuous sequence of
30-day late payments as a single 30-day late payment for the purpose of
determining a prospective mortgagor's mortgage payment history. An
existing mortgage loan is not required to be current at the time the
application is submitted. As to non-mortgage credit, significant prior
defaults may have occurred. A bankruptcy filing by the prospective
mortgagor is permitted, if it occurred at least 18 months previously. The
mortgaged property must be in adequate condition. A maximum Loan-to-Value
Ratio of 70% (or 65% for mortgage loans originated under the Quick
Qualifier Plus program) is permitted for a mortgage loan on an
owner-occupied property; provided, however, that a maximum Loan-to-Value
Ratio of 80% is permitted under the Full Documentation program if the
principal balance of the mortgage loan at origination is $50,000 or less,
and the prospective mortgagor warrants an upgrade or exception. See
"-Variations" below for a description of certain compensating factors
which the Seller may consider in granting such an upgrade or exception. A
maximum Loan-to-Value Ratio of 65% is permitted for a mortgage loan on a
non-owner-occupied property.
C2 RISK. Under the C2 Risk category, the prospective mortgagor
may have experienced significant credit problems in the past. As to
mortgage credit, the borrower may have had a history of being generally 30
to 60 days delinquent, and a maximum of two 90-day late payments within
the last 12 months is acceptable on an existing mortgage loan. An existing
mortgage loan is not required to be current at the time the application is
submitted. As to non-mortgage credit, significant prior defaults may have
occurred. A bankruptcy filing by the prospective mortgagor is permitted
but the bankruptcy must be dismissed or the prospective mortgagor's debts
must be discharged prior to or concurrent with loan funding. The mortgaged
property may exhibit some deferred maintenance. A maximum Loan-to-Value
Ratio of 65% is permitted for a mortgage loan on either an owner-occupied
property or a non-owner-occupied property.
DEBT SERVICE-TO-INCOME RATIOS. In addition to the Loan-to-Value Ratio
limitations imposed under the risk categories outlined above, the Seller also
considers each prospective mortgagor's debt service-to-income ratio based on the
Qualifying Rate (which may be less than the Fully Indexed Rate) in establishing
the maximum Loan-to-Value Ratio available for each mortgage loan application as
follows: to qualify for a maximum Loan-to-Value Ratio of up to 90%, a
prospective mortgagor's debt service-to-income ratio generally must be 45% or
less (provided, that DLJMC generally will not purchase, and the Trust Fund will
not include, mortgage loans with Loan-to-Value Ratios in excess of 85%); to
qualify for a maximum Loan-to-Value Ratio of up to 80%, a prospective
mortgagor's debt service-to-income ratio must generally be 50% or less; to
qualify for a maximum Loan-to-Value Ratio of up to 75%, a prospective
mortgagor's debt service-to-income ratio generally must be 55% or less; and to
qualify for a maximum
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Loan-to-Value Ratio of up to 70%, a prospective mortgagor's debt
service-to-income ratio must generally be 60% or less. The Seller generally will
not originate a mortgage loan if the prospective mortgagor's debt
service-to-income ratio exceeds 60%.
VARIATIONS. As described above, the Seller uses the foregoing
categories and characteristics as guidelines only. On a case-by-case basis, the
Seller may determine that the prospective mortgagor warrants a risk category
upgrade, a debt service-to-income ratio exception, a pricing exception or some
other exception to its underwriting guidelines. Such an upgrade or exception may
be allowed if the application reflects certain compensating factors, including,
among others: low loan-to-value ratio; pride of ownership; a maximum of one
30-day late payment on all mortgage loans during the last 12 months; favorable
mortgage credit history (as opposed to non-mortgage credit history); stable
employment of five or more years at the applicant's current place of employment;
and residence of five or more years at the applicant's current residence. Such
an upgrade or exception may also be allowed in a purchase transaction if the
applicant deposits a downpayment with the appropriate closing agent or into
escrow of at least 20% of the purchase price of the mortgaged property.
Accordingly, the Seller may classify in a more favorable risk category certain
mortgage loans that, in the absence of such compensating factors, would satisfy
only the criteria of a less favorable risk category.
In addition to the Seller's regular lending program, the Seller also
originates or acquires residential mortgage loans under its equity lending
program. The Seller's equity lending program employs a different set of
underwriting guidelines that place more emphasis on the value of the mortgaged
property and less emphasis on the mortgagor's credit history. Mortgage loans
originated under either the Seller's regular lending program or its equity
lending program may include mortgage loans to facilitate the sale of real estate
owned properties ("REO properties") acquired by the Seller, provided that all
guidelines under the applicable lending program are met; however, no such
mortgage loans are included in the Mortgage Pool. The Seller also originates
mortgage loans to facilitate the sale of REO properties under separate
underwriting guidelines, which are not included under either the Seller's
regular or equity lending programs and which may have Loan-to-Value Ratios of up
to 90%.
THE INDEX
With respect to each Adjustable Rate Loan and any related Adjustment Date,
the Index is the average of the interbank offered rates for six-month United
States dollar deposits in the London interbank market based on quotations of
major banks ("LIBOR"), as published in the Western Edition of THE WALL STREET
Journal. The Index applicable to each Adjustable Rate Loan on any such
Adjustment Date is the most recent Index figure available as of the date 45 days
before such Adjustment Date. Listed below are some historical average values of
LIBOR for the months indicated (as made available from Reuters and published by
Data Resources, Inc.), which values may differ from those published in the
Western Edition of THE WALL STREET JOURNAL.
Year
--------------------------------------------------
MONTH 1995 1994 1993 1992 1991 1990
- - - - - - ------ ---- ---- ---- ---- ---- ----
January................. 6.80% 3.41% 3.47% 4.23% 7.35% 8.37%
February................ 6.63 3.66 3.35 4.29 6.71 8.42
March................... 6.44 4.15 3.35 4.58 6.68 8.64
April................... 6.44 4.43 3.33 4.32 6.36 8.73
May..................... 6.13 4.99 3.32 4.12 6.21 8.63
June.................... 5.90 4.96 3.49 4.14 6.44 8.42
July.................... 5.85 5.27 3.48 3.64 6.43 8.26
August.................. 5.93 5.29 3.46 3.54 5.93 8.12
September............... 5.87 5.49 3.36 3.31 5.75 8.22
October................. 5.88 5.90 3.39 3.42 5.48 8.16
November................ 6.21 3.53 3.79 5.06 8.06
December................ 6.86 3.49 3.69 4.58 7.74
If the Index becomes unpublished or is otherwise unavailable, the Master
Servicer will select an alternative index that is based upon comparable
information.
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ADDITIONAL INFORMATION
The description in this Prospectus Supplement of the Mortgage Loans and
Mortgaged Properties is based upon the Mortgage Pool as constituted at the close
of business on the Cut-off Date, as adjusted for the scheduled principal
payments due on or before such date. Prior to the issuance of the Offered
Certificates, Mortgage Loans may be removed from the Mortgage Pool as a result
of incomplete documentation or otherwise, if the Depositor deems such removal
necessary or appropriate. A limited number of other mortgage loans may be
included in the Mortgage Pool prior to the issuance of the Offered Certificates.
A Current Report on Form 8-K will be available to purchasers of the
Offered Certificates and will be filed, together with the Pooling and Servicing
Agreement, with the Securities and Exchange Commission within fifteen days after
the initial issuance of the Offered Certificates. In the event that Mortgage
Loans are removed from or added to the Mortgage Pool as set forth in the
preceding paragraph, such removal or addition will be noted in such Current
Report on Form 8-K.
THE SELLER
The information set forth in the following paragraphs (other than the
information set forth under the caption "-Loan Delinquency, Forbearance,
Foreclosure, Bankruptcy and REO Property Status" and, to the extent provided by
Lomas Mortgage USA, Inc. ("Lomas"), as described below, the information set
forth under the caption "-REO Property Liquidation Experience") has been
provided by the Seller. Neither the Depositor, the Underwriter, the Master
Servicer, the Trustee nor any of their respective affiliates have made or will
make any representation as to the accuracy or completeness of the information
provided by the Seller. The information set forth below under the caption "-Loan
Delinquency, Forbearance, Foreclosure, Bankruptcy and REO Property Status" and,
other than to the extent provided by the Seller, the information set forth below
under the caption "-REO Property Liquidation Experience" has been provided by
Lomas, in its capacity as servicer of certain mortgage loans originated or
acquired by the Seller at or for the dates indicated thereunder. No
representation is made by the Depositor, the Underwriter, the Master Servicer,
the Seller, the Trustee or any of their respective affiliates as to the accuracy
or completeness of the information provided by Lomas.
Quality Mortgage USA, Inc. (the "Seller"), a California corporation, was
incorporated in 1984, and is approved as a non-supervised mortgagee by the U.S.
Department of Housing and Urban Development. Prior to September 1991, the Seller
did not engage in lending activities of the type involved under its present
lending programs, and was owned and operated by persons no longer connected with
the Seller. In September 1991, the Seller was acquired by CALMAC Funding, a
Nevada corporation, for the purpose of commencing operations as an originator
and seller of residential mortgage loans. The Seller began originating and
acquiring mortgage loans under its regular lending program in January 1992 and
began originating and acquiring mortgage loans under its equity lending program
in September 1992.
The initial working capital for the Seller's operations was provided by
CALMAC Funding. CALMAC Funding presently owns 51% of the voting stock of the
Seller and has the right to appoint three out of five of the Seller's directors.
Accordingly, CALMAC Funding generally has the rights of a majority shareholder
of the Seller, subject to the rights of DLJMC as described in the following
paragraph. CALMAC Funding also has a consulting agreement with the Seller to
provide certain marketing, administrative, cost containment and expense
reduction services to the Seller including, among other things, the promotion of
the Seller's present lending programs to mortgage brokerage companies. The
principal executive officers of CALMAC Funding, who are also the directors and
sole shareholders of CALMAC Funding, are the former principal executive officers
of Guardian Savings and Loan Association, a California-chartered, SAIF-insured
savings and loan association which was placed into receivership by the
Resolution Trust Corporation during 1991 ("Guardian"). In addition, one such
principal executive officer was the shareholder of Guardian's holding company.
The Office of Thrift Supervision is conducting a formal examination of Guardian
and has issued subpoenas to certain persons, including the Seller, requesting
certain information regarding the Seller's ownership structure and financial
status and condition.
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A majority of the mortgage loans originated or acquired by the Seller
under its current programs are funded by the purchase thereof under a master
repurchase agreement by DLJMC, an affiliate of the Depositor and the
Underwriter. It is contemplated that substantially all mortgage loans originated
or acquired by the Seller and approved by DLJMC will be purchased by DLJMC or an
affiliate with a view towards securitization or other resale transactions in the
secondary mortgage market. DLJMC owns 49% of the voting stock of the Seller.
Two employees of DLJMC serve as directors of the Seller, and pursuant to certain
provisions of the applicable agreements, DLJMC has the right to control certain
aspects of the management of the Seller. In addition, DLJMC maintains one or
more mortgage loan underwriters, who are employees of DLJMC, at the principal
executive offices of the Seller for the purpose of reviewing the underwriting of
all the mortgage loans originated or acquired by the Seller after the
origination or acquisition of such mortgage loans. These arrangements are
intended to permit DLJMC to restrict the Seller from selling to DLJMC any
mortgage loans other than those that DLJMC considers likely to be acceptable for
securitization or other resale transactions in the secondary mortgage market.
Under arrangements in effect as of the date hereof, certain of the first
lien mortgage loans originated or acquired by the Seller initially will be
serviced by Temple-Inland Mortgage Corporation ("TIMC"), and the other of such
first lien mortgage loans, and all of the second lien mortgage loans originated
or acquired by the Seller, initially will be serviced by the Seller. The
mortgage loans approved for purchase by DLJMC from the Seller will consist only
of first lien mortgage loans and will be purchased by DLJMC on a
servicing-released basis. After such mortgage loans are purchased by DLJMC,
such mortgage loans will continue to be serviced by TIMC or the Seller until
either the servicing for such mortgage loans is transferred as part of the sale
of such mortgage loans on a servicing-released basis or, in the case of mortgage
loans serviced by the Seller, the servicing for such mortgage loans is
transferred to TIMC. No such mortgage loans will be serviced by the Seller
after being transferred to REMIC trust funds other than for an interim servicing
period. In addition, as to any mortgage loans that are not purchased by DLJMC,
the Seller will keep or obtain from TIMC and either retain or transfer the
servicing, depending on the circumstances in each case.
As of September 30, 1994, the Seller had total assets of $210,276,119,
total liabilities of $173,282,456 and shareholders' equity of $36,993,663. For
the year ended September 30, 1994, the Seller had net income (after taxes) of
$18,246,494. As of June 30, 1995 the Seller had total assets of $359,713,909,
total liabilities of $324,828,990, and shareholders' equity of $34,884,919. For
the nine- month period ended June 30, 1995, the Seller had net income (after
taxes) of $8,120,209. On April 14, 1995, the Seller declared a dividend of
approximately $12.4 million and, on September 7, 1995, the Seller declared an
additional dividend of approximately $10.0 million. The Seller's principal
executive offices are located at 16800 Aston Street, Irvine, California 92714.
The Seller currently maintains additional loan origination offices at various
locations in the States of California, Colorado, Nevada, Texas, Washington,
Maryland, Oregon, Missouri, Indiana, Ohio, Minnesota, Pennsylvania, North
Carolina, South Carolina, Kansas, Tennessee, Oklahoma, Wisconsin, Utah,
Louisiana, Arkansas, Kentucky, Illinois, Florida, Idaho and Georgia.
No person other than the Seller is obligated with respect to the
representations and warranties respecting the Mortgage Loans and the remedies
for any breach thereof that are assigned to the Trustee for the benefit of the
Certificateholders. Moreover, as discussed above, the Seller has only limited
assets available to perform its repurchase obligations in respect of any breach
of such representations and warranties, relative to the potential amount of
repurchase liability, and the total potential amount of repurchase liability is
expected to increase over time as the Seller continues to originate, acquire and
sell mortgage loans. There can be no assurance that the Seller will continue to
generate operating earnings, or that it will be successful under its current
business plan. Therefore, prospective investors in the Offered Certificates
should consider the possibility that the Seller will not have sufficient assets
with which to satisfy its repurchase obligations in the event that a substantial
amount of Mortgage Loans are required to be repurchased due to breaches of
representations and warranties.
The Seller has experienced significant changes in the composition of its
staff and management in recent months, largely as a result of a program to cut
costs and expenses so as to remain competitive in the marketplace. In addition,
the Seller's president and a number of the Seller's other officers have resigned
from their positions. The Seller has filled all of the vacant management
positions that were not eliminated by the Seller's program to cut costs and
expenses. The Seller has also appointed one of the Seller's directors as an
interim president to serve until
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<PAGE>
a permanent successor to its former president is appointed. A number of the
officers who departed in recent months have become shareholders, directors or
officers of companies that compete with the Seller.
The Seller is currently a defendant in several pending lawsuits that
allege, among other things, violations of certain federal and state consumer
credit laws and regulations and related common law claims. The plaintiffs in
three of these lawsuits are seeking class certification but the court in each
such lawsuit has not yet reached a decision on such request. Each of these
lawsuits is in the preliminary stages of litigation. Accordingly, the Seller is
unable to predict either the outcome of any of such lawsuits or whether any
adverse outcome would have a material adverse effect on the Seller's financial
condition.
The Seller and DLJMC will retain the right to all prepayment charges and
late payment charges received on the Mortgage Loans and the Certificateholders
will have no right thereto. In addition, it is anticipated that the Seller will
be the holder of all of the Class B-3 Certificates and a Percentage Interest
equal to 99.99% in the Residual Certificates. The Seller may sell the Class B-3
Certificates or such Residual Certificates at any time, subject to certain
conditions set forth in the Pooling and Servicing Agreement.
LOAN DELINQUENCY, FORBEARANCE, FORECLOSURE, BANKRUPTCY AND REO PROPERTY STATUS
The table below summarizes, at the respective dates indicated, the
delinquency, forbearance, foreclosure, bankruptcy and REO property status with
respect to all mortgage loans originated under the Seller's regular lending
program that, in each case, were transferred to REMIC trust funds as of the
respective dates three months prior to the dates indicated. The table below is
based solely upon information provided by Lomas, as servicer of such mortgage
loans at or for the dates indicated, and does not include information with
respect to mortgage loans not purchased by DLJMC, mortgage loans purchased by
DLJMC but not transferred to REMIC trust funds, mortgage loans originated under
the Seller's equity lending program or mortgage loans originated by the Seller
under its REO underwriting guidelines. The indicated periods of delinquency are
based on the number of days past due on a contractual basis. The monthly
payments under all of such mortgage loans are due on the first day of each
calendar month. (The sum of the amounts and the percentages in the table below
may not equal the totals due to rounding.)
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<PAGE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1995 AT SEPTEMBER 30, 1994
--------------------- ---------------------
NUMBER PRINCIPAL NUMBER PRINCIPAL
OF LOANS AMOUNT OF LOANS AMOUNT
-------- ----------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Total Loans Outstanding......... 20,338 $2,058,799 14,451 $1,629,688
DELINQUENCY (1)
Period of Delinquency:
31-60 Days............... 397 $ 42,529 181 $ 21,552
61-90 Days............... 39 3,701 5 803
91-120 Days or More...... 15 1,850 - -
------ ---------- ------ ---------
Total Delinquencies............. 451 $ 48,080 186 $ 22,355
------ ---------- ------ ---------
------ ---------- ------ ---------
Delinquencies as a Percentage of
Total Loans Outstanding......... 2.22% 2.34% 1.29% 1.37%
FORBEARANCE LOANS (2) .......... 7 $865 9 $1,414
Forbearance Loans as a Percentage
of Total Loans Outstanding...... 0.03% 0.04% 0.06% 0.09%
FORECLOSURES PENDING (3) ....... 805 $92,785 296 $38,850
Foreclosures Pending as a Percentage
of Total Loans Outstanding...... 3.96% 4.51% 2.05% 2.38%
BANKRUPTCIES PENDING (4) ....... 370 $43,578 245 $31,505
Bankruptcies Pending as a Percentage
of Total Loans Outstanding...... 1.82% 2.12% 1.70% 1.93%
TOTAL DELINQUENCIES PLUS FORBEARANCE
LOANS, FORECLOSURES PENDING AND
BANKRUPTCIES PENDING............ 1,633 $185,309 736 $94,124
Total Delinquencies plus Forbearance
Loans, Foreclosures Pending and
Bankruptcies Pending as Percentage
of Total Loans Outstanding..... 8.03% 9.00% 5.09% 5.78%
REO PROPERTIES (5) ............. 345 $41,152 106 $13,095
REO Properties as a Percentage of
Total Loans Outstanding......... 1.70% 2.00% 0.73% 0.80%
</TABLE>
- - - - - - -------------------
(1) The delinquency balances, percentages and numbers set forth under this
heading exclude (a) delinquent mortgage loans that were subject to
forbearance agreements with the related mortgagors at the respective dates
indicated ("Forbearance Loans"), (b) delinquent mortgage loans that were
in foreclosure at the respective dates indicated ("Foreclosure Loans"),
(c) delinquent mortgage loans as to which the related mortgagor was in
bankruptcy proceedings at the respective dates indicated ("Bankruptcy
Loans") and (d) REO properties that have been purchased by or on behalf of
REMIC trust funds upon foreclosure of the related mortgage loans (other
than REO properties purchased by the Seller as described below under "-REO
Property Liquidation Experience." All Forbearance Loans, Foreclosure
Loans, Bankruptcy Loans and REO properties have been segregated into the
sections of the table entitled "Forbearance Loans," "Foreclosures
Pending," "Bankruptcies Pending" and "REO Properties," respectively, and
are not included in the "31-60 Days," "61-90 Days," "91-120 Days or More"
and "Total Delinquencies" sections of the table. See the section of the
table entitled "Total Delinquencies plus Forbearance Loans, Foreclosures
Pending and Bankruptcies Pending" for total delinquency balances,
percentages and numbers which include Forbearance Loans, Foreclosure Loans
and Bankruptcy Loans, and see the section of the table entitled "REO
Properties" for delinquency balances, percentages and numbers related to
REO properties that have been purchased by or on behalf of REMIC trust
funds upon foreclosure of the related mortgage loans (other than REO
properties purchased by the Seller as described below under "-REO Property
Liquidation Experience").
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<PAGE>
(2) For each of the Forbearance Loans, the servicer has entered into a written
forbearance agreement with the related mortgagor, based on the servicer's
determination that the mortgagor is temporarily unable to make the
scheduled monthly payment on such mortgage loan. Prior to entering into
each forbearance agreement, the servicer confirmed the continued
employment status of the mortgagor and found the payment history of such
mortgagor to be satisfactory. There can be no assurance that the
mortgagor will be able to make the payments as required by the forbearance
agreement, and any failure to make such payments will constitute a
delinquency. None of the Mortgage Loans included in the Mortgage Pool are
Forbearance Loans.
(3) Mortgage loans that are in foreclosure but as to which the mortgaged
property has not been liquidated at the respective dates indicated. It is
generally the policy, with respect to mortgage loans originated by the
Seller, to commence foreclosure proceedings when a mortgage loan is
between 31 and 60 days delinquent.
(4) Mortgage loans as to which the related mortgagor is in bankruptcy
proceedings at the respective dates indicated.
(5) REO properties that have been purchased by or on behalf of REMIC trust
funds upon foreclosure of the related mortgage loans, including mortgaged
properties that were purchased by the Seller after the respective dates
indicated, as described below under "-REO Property Liquidation
Experience," but not including mortgaged properties that the Seller had
already purchased as of such dates. In April 1995, the Seller indicated
that it did not intend to purchase additional mortgaged properties, and
since then, the Seller has discontinued its practice of purchasing
mortgaged properties. Consequently, the number of REO properties held by
or on behalf of REMIC trust funds from time to time is expected to
increase. See "-REO Property Liquidation Experience" below.
The above data on delinquency, forbearance, foreclosure, bankruptcy and
REO property status are calculated on the basis of the total mortgage loans
originated or acquired under the Seller's regular lending program that, in each
case, were transferred to a REMIC trust fund as of the dates three months prior
to the respective dates indicated. However, the total amount of mortgage loans
on which the above data are based includes many mortgage loans which were not,
as of the respective dates indicated, outstanding long enough to give rise to
some of the indicated periods of delinquency, to foreclosure or bankruptcy
proceedings or to forbearance or REO property status. In the absence of such
mortgage loans, the delinquency, forbearance, foreclosure, bankruptcy and REO
property percentages indicated above would be higher and could be substantially
higher. Because the Mortgage Pool will consist of a fixed group of Mortgage
Loans, the actual delinquency, forbearance, foreclosure, bankruptcy and REO
property percentages with respect to the Mortgage Pool may therefore be expected
to be higher, and may be substantially higher, than the percentages indicated
above. Prospective investors should also be aware that while the information set
forth in the table above has been compiled on the basis of reports that are
prepared as of the last day of each month, monthly remittance reports that will
be sent to investors will include delinquency and foreclosure information on the
Mortgage Loans included in the Mortgage Pool that will be based on reports
prepared as of the fifteenth day of each month (the "Monthly Remittance
Reports"), and that the delinquency and foreclosure information appearing in the
Monthly Remittance Reports may therefore be expected to be higher than would be
the case if such information were based on reports prepared as of the last day
of each month. For example, for purposes of the foregoing table, a payment due
on August 1st would be treated as 31 to 60 days delinquent only if the payment
was not received as of September 30th, while the same payment would be treated
as 31 to 60 days delinquent for purposes of the Monthly Remittance Report in
September if the payment was not received as of September 15th. In addition, the
delinquency and foreclosure information appearing in the Monthly Remittance
Reports is used in the calculation of the Senior Prepayment Percentage for the
Mortgage Pool.
Prospective investors should be aware that, prior to April 29, 1994 and
February 21, 1995, the Seller did not originate or acquire fixed rate loans or
step loans, respectively, under its regular lending program. Accordingly, the
information set forth in the table above reflects primarily the performance of
adjustable rate loans originated or acquired by the Seller under its regular
lending program and not fixed rate loans or step loans. Therefore, there can be
no assurance that the delinquency, foreclosure and bankruptcy experience with
respect to the Mortgage Loans in the Mortgage Pool will be similar to the
experience indicated in the foregoing table.
S-38
<PAGE>
REO PROPERTY LIQUIDATION EXPERIENCE
The pooling and servicing agreements relating to the REMIC trust funds to
which mortgage loans originated or acquired under the Seller's regular lending
program were transferred by the Depositor prior to October 1, 1995 (the "REMIC
Agreements") permit the Seller at its sole option to purchase any mortgaged
property acquired or about to be acquired by foreclosure by the servicer thereof
on behalf of the related trustee, provided, that if the Seller fails to purchase
any two of such mortgaged properties from a REMIC trust fund, the Seller will
forfeit such option to purchase any further mortgaged properties from such REMIC
trust fund. Until recently, the Seller had not declined to exercise the
foregoing purchase option. However, in April 1995, the Seller indicated that it
did not intend to purchase additional mortgaged properties as described above.
Since then, the Seller has discontinued its practice of purchasing mortgaged
properties pursuant to the foregoing provisions.
The tables below summarize, respectively, for the periods indicated (i)
the total number of mortgage loans originated or acquired under the Seller's
regular lending program and transferred to REMIC trust funds, and the aggregate
principal balance thereof at origination, and (ii) the combined experience of
the Seller and Lomas, as servicer of such mortgage loans at or for the dates
indicated, as of September 30, 1995 with respect to all REO properties relating
to such mortgage loans that were transferred to REMIC trust funds as of June 30,
1995. The experience of the Seller reflected in the tables below relates to the
period ending in April 1995, during which the Seller purchased mortgaged
properties as described above, and to REO properties acquired by the Seller
during such period and liquidated thereafter. The experience of Lomas reflected
in the tables below relates to the period beginning in April 1995, following the
Seller's decision to discontinue its practice of purchasing mortgaged properties
as described above, and to REO properties acquired and liquidated by the
respective REMIC trust funds after such decision. The tables below are based
solely upon information provided by the Seller and Lomas, and such tables do not
include information with respect to mortgage loans not purchased by DLJMC,
mortgage loans purchased by DLJMC but not transferred to REMIC trust funds,
mortgage loans originated or acquired under the Seller's equity lending program
or mortgage loans originated by the Seller under its REO underwriting
guidelines.
<TABLE>
<CAPTION>
JANUARY 17, 1992 THROUGH
SEPTEMBER 30, 1995 (1)
------------------------
<S> <C>
Aggregate Principal Balance at Origination....... $2,846,213,983
Total Number of Loans............................ 26,841
<CAPTION>
OCTOBER 1, 1992 THROUGH
SEPTEMBER 30, 1995 (2)
------------------------
<S> <C>
Total Number of REO Properties................... 648
Aggregate Principal Balance of REO Properties (3) $ 82,124,444
Total Number of Liquidated Properties (4)........ 346
Aggregate Principal Balance of Liquidated
Properties (3).................................. $ 48,720,651
Aggregate Net Gains/(Losses) (5)................. $(10,967,780)
Average Net Gain/(Loss) per Liquidated
Property (6).................................... (22.51)%
</TABLE>
- - - - - - -------------
(1) The Seller began originating and acquiring mortgage loans under its
regular lending program on January 17, 1992.
(2) Prior to October 1, 1992, no mortgaged property securing a mortgage loan
included in any REMIC trust fund had been acquired by foreclosure on
behalf of the trustee under the related REMIC Agreement. Accordingly,
prior to October 1, 1992, the Seller did not have any opportunity to
exercise its option to purchase any mortgaged properties acquired or about
to be acquired by foreclosure on behalf of a trustee under the provisions
of the REMIC Agreements.
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<PAGE>
(3) Aggregate of the outstanding principal balances of the related mortgage
loans at the respective dates such mortgage loans were converted to REO
property status (not including accrued interest).
(4) Total number of REO properties that were finally liquidated during the
indicated period (each, a "Liquidated Property"), including by sale with
Seller-provided financing.
(5) As to each Liquidated Property, the Net Gain/(Loss) is equal to (a) all
amounts received in connection with the liquidation of such Liquidated
Property (including the net proceeds of any Seller-provided financing),
minus (b) the unpaid principal balance, foreclosure costs, accrued
interest and all liquidation expenses related to such Liquidated Property.
(6) Aggregate Net Gains/(Losses) divided by the Aggregate Balance of
Liquidated Properties.
The above data on loss experience are calculated on the basis of the total
mortgage loans originated or acquired under the Seller's regular lending program
that were transferred to REMIC trust funds as of June 30, 1995. However, the
total amount of mortgage loans on which the above data are based includes many
mortgage loans which were not, as of June 30, 1995, outstanding long enough to
give rise to the possibility of default and final liquidation. The loss
experience with respect to the Mortgage Pool may therefore be expected to be
higher, and may be substantially higher, than indicated above.
The Seller will have no right to purchase Mortgaged Properties from the
Trust Fund as described above. Consequently, any losses incurred upon the
liquidation of defaulted Mortgage Loans will be borne by the Certificateholders
as described herein under "Description of the Certificates-Allocation of Losses;
Subordination," unless the related Mortgaged Properties are purchased by the
Master Servicer as described herein under "Description of the
Certificates-Optional Purchase of Delinquent Mortgage Loans." Further,
Seller-provided financing has been used to facilitate the sale of REO properties
from time to time. Such financing may have had the effect of minimizing losses
that might otherwise have been incurred upon the liquidation of REO properties
if financing on terms equivalent to those provided by the Seller was not
available from other sources. However, neither the Depositor, the Underwriter,
the Seller, the Master Servicer, the Trustee nor any other person will have any
obligation to purchase Mortgaged Properties from the Trust Fund as described
above or to provide financing to facilitate the sale of REO properties. THERE
can be no assurance that the loss experience for future dispositions of
Mortgaged Properties on behalf of the Trust Fund will be similar to the loss
experience indicated in the foregoing tables.
DESCRIPTION OF THE CERTIFICATES
General
The Series 1995-Q8 Mortgage Pass-Through Certificates (the "Certificates")
will consist of the following ten Classes (i) the Class S Certificates (the
"Variable Strip Certificates"), (ii) the Class P Certificates (the "Principal
Only Certificates"), (iii) the Class A-1 Certificates, Class A-2 Certificates
and Class A-3 Certificates (collectively, the "Class A Certificates," and
together with the Variable Strip Certificates and the Principal Only
Certificates, the "Senior Certificates"), (iv) the Class M Certificates, (v) the
Class B-1 Certificates, Class B-2 Certificates and Class B-3 Certificates
(collectively, the "Subordinate Certificates") and (vi) the Class R Certificates
(the "Residual Certificates"). Only the Variable Strip Certificates, the Class A
Certificates, the Class M Certificates and the Class B-1 Certificates
(collectively, the "Offered Certificates") are offered hereby.
The Certificates will, in the aggregate, evidence the entire beneficial
ownership interest in a trust fund (the "Trust Fund"). The Trust Fund will
consist of (i) the Mortgage Loans, (ii) such assets as from time to time are
identified as deposited in respect of the Mortgage Loans in the account
established by the Master Servicer for the collection of payments on the
Mortgage Loans (the "Custodial Account") and in the Excess Proceeds Account and
the Certificate Account (each as defined herein) and as belonging to the Trust
Fund, (iii) property acquired by foreclosure of such Mortgage Loans or by deed
in lieu of foreclosure, (iv) any applicable hazard insurance policies,
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<PAGE>
any other applicable insurance policies and all proceeds thereof and (v) the
representations and warranties made by the Seller with respect to the Mortgage
Loans.
Distributions on the Offered Certificates will be made on the 25th day of
each month or, if such day is not a business day, then on the next succeeding
business day (each, a "Distribution Date"), commencing in December 1995, to
Certificateholders of record on the immediately preceding Record Date. The
record date (the "Record Date") for each Distribution Date will be the close of
business on the last business day of the month immediately preceding the month
in which such Distribution Date occurs.
Distributions on the Offered Certificates will be made to each registered
holder entitled thereto, either (i) by check mailed to the address of such
Certificateholder as it appears on the books of the Trustee or (ii) at the
request, submitted to the Trustee in writing at least five business days prior
to the related Record Date, of any holder of an Offered Certificate having an
initial Certificate Principal Balance of not less than $2,500,000 (or, with
respect to a Variable Strip Certificate, an initial Notional Amount of not less
than $10,000,000), by wire transfer in immediately available funds, provided,
that the final distribution in respect of any Offered Certificate will be made
only upon presentation and surrender of such Certificate at the Corporate Trust
Office of the Trustee. See "Pooling and Servicing Agreement-The Trustee"
herein.
The Variable Strip Certificates and the Class A Certificates
(collectively, the "DTC Registered Certificates") will be issued, maintained and
transferred on the book-entry records of the Depository Trust Company ("DTC")
and its Participants. The DTC Registered Certificates will be issued in minimum
denominations (or, in the case of the Variable Strip Certificates, in initial
Notional Amounts) of $1.00 and integral multiples of $1.00 in excess thereof.
The Class M Certificates will be issued in registered and certificated form in
minimum denominations of $25,000 and integral multiples of $1,000 in excess
thereof, and the Class B-1 Certificates will be issued in registered and
certificated form in minimum denominations of $250,000 and integral multiples of
$1,000 in excess thereof, provided, however, that one Certificate of each such
Class may be issued evidencing the sum of an authorized denomination thereof and
the remainder of the aggregate initial Certificate Principal Balance of such
Class.
The DTC Registered Certificates will be represented by one or more
certificates registered in the name of the nominee of DTC. The Depositor has
been informed by DTC that DTC's nominee will be Cede & Co. ("Cede"). No person
acquiring an interest in the DTC Registered Certificates (each, a "Beneficial
Owner") will be entitled to receive a certificate representing such person's
interest (a "Definitive Certificate"), except as set forth below under
"-Book-Entry Registration of the DTC Registered Certificates-Definitive
Certificates." Unless and until Definitive Certificates are issued for the DTC
Registered Certificates under the limited circumstances described herein, all
references to actions by Certificateholders with respect to the DTC Registered
Certificates shall refer to actions taken by DTC upon instructions from its
Participants, and all references herein to distributions, notices, reports and
statements to Certificateholders with respect to the DTC Registered Certificates
shall refer to distributions, notices, reports and statements to DTC or Cede, as
the registered holder of the DTC Registered Certificates, for distribution to
Beneficial Owners by DTC in accordance with DTC procedures.
BOOK-ENTRY REGISTRATION OF THE DTC REGISTERED CERTIFICATES
GENERAL. Beneficial Owners that are not Participants or Indirect
Participants but desire to purchase, sell or otherwise transfer ownership of, or
other interests in, the related DTC Registered Certificates may do so only
through Participants and Indirect Participants. In addition, Beneficial Owners
will receive all distributions of principal of and interest on the related DTC
Registered Certificates through DTC and its Participants. Accordingly,
Beneficial Owners may experience delays in their receipt of payments. Unless and
until Definitive Certificates are issued for the related DTC Registered
Certificates, it is anticipated that the only registered Certificateholder of
such DTC Registered Certificates will be Cede, as nominee of DTC. Beneficial
Owners will not be recognized by the Trustee or the Master Servicer as
Certificateholders, as such term is used in the Pooling and Servicing Agreement,
and Beneficial Owners will be permitted to receive information furnished to
Certificateholders and to exercise the rights of Certificateholders only
indirectly through DTC, its Participants and Indirect Participants.
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<PAGE>
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC is required to make book-entry transfers of
DTC Registered Certificates among Participants and to receive and transmit
distributions of principal of and interest on such DTC Registered Certificates.
Participants and Indirect Participants with which Beneficial Owners have
accounts with respect to such DTC Registered Certificates similarly are 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 physical certificates evidencing their interests in the
DTC Registered Certificates, the Rules provide a mechanism by which Beneficial
Owners, through their Participants and Indirect Participants, will receive
distributions and will be able to transfer their interests in the DTC Registered
Certificates.
None of the Depositor, the Master Servicer or the Trustee or any of their
respective affiliates will have any liability for any actions taken by DTC or
its nominee, including, without limitation, actions for any aspect of the
records relating to or payments made on account of beneficial ownership
interests in the DTC Registered Certificates held by Cede, as nominee for DTC,
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
DEFINITIVE CERTIFICATES. Definitive Certificates will be issued to
Beneficial Owners or their nominees, respectively, rather than to DTC or its
nominee, only under the limited conditions set forth in the Prospectus under
"Description of the Certificates-Book-Entry Registration."
Upon the occurrence of an event described in the Prospectus in the last
paragraph under "Description of the Certificates-Book-Entry Registration," the
Trustee (through DTC) is required to notify Participants who have ownership of
DTC Registered Certificates as indicated on the records of DTC of the
availability of Definitive Certificates for their DTC Registered Certificates.
Upon surrender by DTC of the definitive certificates representing the DTC
Registered Certificates and upon receipt of instructions from DTC for
re-registration, the Trustee will re-issue the DTC Registered Certificates as
Definitive Certificates in the respective principal amounts owned by individual
Beneficial Owners, and thereafter the Trustee and the Master Servicer will
recognize the holders of such Definitive Certificates as Certificateholders
under the Pooling and Servicing Agreement. Such Definitive Certificates will be
issued in minimum denominations of $1,000, except that any certificate that was
represented by a DTC Registered Certificate in an amount less than $1,000
immediately prior to the issuance of a Definitive Certificate shall be issued in
a minimum denomination equal to the amount represented by such DTC Registered
Certificate.
For additional information regarding DTC and the DTC Registered
Certificates, see "Description of the Certificates-Book-Entry Registration" in
the Prospectus.
AVAILABLE DISTRIBUTION AMOUNT
The "Available Distribution Amount" for any Distribution Date will equal
(a) the sum of (i) the balance on deposit in the Custodial Account as of the
close of business on the related Determination Date, (ii) all Advances made with
respect to such Distribution Date and (iii) certain related amounts to be
deposited by the Master Servicer in the Certificate Account, reduced by (b) the
sum of (i) scheduled payments on the Mortgage Loans collected but due after the
related Due Date, (ii) reinvestment income on amounts in the Custodial Account,
(iii) all amounts reimbursable to the Master Servicer or any subservicer and
(iv) any unscheduled payments, including mortgagor prepayments on the Mortgage
Loans, Insurance Proceeds, Liquidation Proceeds and proceeds from repurchases of
the Mortgage Loans occurring in the month of such Distribution Date. With
respect to any Distribution Date, (i) the Due Date is the first day of the month
in which such Distribution Date occurs and (ii) the Determination Date is the
15th day of the month in which such Distribution Date occurs or, if such day is
not a business day, the immediately preceding business day.
INTEREST DISTRIBUTIONS
Holders of each Class of Senior Certificates offered hereby will be
entitled to receive interest distributions in an amount equal to the Accrued
Certificate Interest for such Class on each Distribution Date (as to all such
Classes of Senior Certificates in the aggregate, the "Priority Interest
Distribution Amount"), to the extent of the
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<PAGE>
Available Distribution Amount for such Distribution Date. Holders of the Class M
Certificates will be entitled to receive interest distributions in an amount
equal to the Accrued Certificate Interest for such Class on each Distribution
Date, to the extent of the portion of the Available Distribution Amount for such
Distribution Date remaining after distributions of interest and principal to the
holders of the Senior Certificates and, if the Certificate Principal Balances of
the Subordinate Certificates have been reduced to zero, reimbursement to the
Master Servicer for certain Advances as described below under "-Advances."
Holders of the Class B-1 Certificates will be entitled to receive interest
distributions in an amount equal to the Accrued Certificate Interest for such
Class on each Distribution Date, to the extent of the portion of the Available
Distribution Amount for such Distribution Date remaining after distributions of
interest and principal to the holders of the Senior Certificates and the Class M
Certificates and, if the Certificate Principal Balances of the Class B-2
Certificates and the Class B-3 Certificates have been reduced to zero,
reimbursement to the Master Servicer for certain Advances as described below
under "-Advances."
With respect to any Distribution Date, Accrued Certificate Interest will
be equal to: (a) in the case of each Class of Certificates (other than the
Variable Strip Certificates) as to which the related Certificateholders are
entitled to receive distributions of interest, one month's interest accrued on
the Certificate Principal Balance (as in effect immediately prior to such
Distribution Date) of the Certificates of such Class at the related Pass-Through
Rate and (b) in the case of the Variable Strip Certificates, one month's
interest accrued on the Notional Amount (as in effect immediately prior to such
Distribution Date) at the related Pass-Through Rate, in each case less interest
shortfalls, if any, for such Distribution Date not covered, with respect to the
Variable Strip Certificates and the Class A Certificates, by the Subordination
provided by the Class M Certificates and the Subordinate Certificates, with
respect to the Class M Certificates, by the Subordination provided by the
Subordinate Certificates and, with respect to the Class B-1 Certificates, by the
Subordination provided by the Class B-2 Certificates and the Class B-3
Certificates, including (i) any related Prepayment Interest Shortfall (as
defined below) to the extent not covered by the Master Servicer as described
below, (ii) the interest portions of Realized Losses (including Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and Extraordinary
Losses) not allocated through Subordination, (iii) the interest portion of any
Advances that were made with respect to delinquencies that were ultimately
determined to be Excess Special Hazard Losses, Excess Fraud Losses, Excess
Bankruptcy Losses or Extraordinary Losses and (iv) any other interest shortfalls
not covered by Subordination, including interest shortfalls relating to the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"),
or similar legislation or regulations, all allocated among the holders of all
Classes of Certificates in proportion to the respective amounts of Accrued
Certificate Interest for such Distribution Date on each such Class before taking
into account any such shortfall. In the case of the Class M Certificates, the
Class B-1 Certificates and each other Class of Subordinate Certificates, Accrued
Certificate Interest will be further reduced by the allocation of the interest
portion of certain losses thereto, if any, as described below under "-Allocation
of Losses; Subordination." Accrued Certificate Interest is calculated on the
basis of a 360-day year consisting of twelve 30-day months.
The Prepayment Interest Shortfall for any Distribution Date is equal to
the aggregate shortfall, if any, in collections of interest (adjusted to the
related Net Mortgage Rates described below) resulting from principal prepayments
on the Mortgage Loans received in the preceding calendar month (each, a
"Prepayment Period"). Such shortfalls will result because interest on
prepayments in full is distributed only to the date of prepayment and because no
interest is collected or distributed on prepayments in part, as such prepayments
in part are applied to reduce the outstanding principal balance of such Mortgage
Loan as of the Due Date in the month of prepayment. The Master Servicer will be
obligated to apply amounts otherwise payable to it as servicing compensation in
any month to cover any shortfalls in collections of one full month's interest at
the applicable Net Mortgage Rate resulting from principal prepayments.
In the event that the amount available for distributions of interest on
Variable Strip Certificates and the Class A Certificates on any Distribution
Date is less than the Priority Interest Distribution Amount for such
Distribution Date, the shortfall will be allocated among the holders of such
Classes of Senior Certificates in proportion to the respective amounts of
Accrued Certificate Interest for such Distribution Date on each such Class. On
any Distribution Date, with respect to a shortfall in the amount available for
distributions of interest on any Class of Certificates entitled to receive
distributions of interest, the amount of such shortfall will be distributable to
the holders of the Certificates of such Class on subsequent Distribution Dates,
to the extent of available funds after
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distributions as required herein, subject to the priorities described herein.
Any such amounts so carried forward will not bear interest.
The Pass-Through Rate on each Class of Certificates (other than the
Variable Strip Certificates) will be equal to 7.250% per annum for each
Distribution Date. The Pass-Through Rate on the Variable Strip Certificates for
each Distribution Date will be equal to the weighted average, as determined as
of the Due Date in the month preceding the month in which such Distribution Date
occurs, of the Pool Strip Rates on the Mortgage Loans (as defined below), which
will be approximately 3.619% per annum with respect to the first Distribution
Date. With respect to each Discount Mortgage Loan (as defined herein) and any
Distribution Date, the Pool Strip Rate will equal the then-applicable Net
Mortgage Rate thereon minus the Net Mortgage Rate thereon as of the Cut-off
Date, and with respect to each Non-Discount Mortgage Loan (as defined herein)
and any Distribution Date, the Pool Strip Rate will equal the then-applicable
Net Mortgage Rate thereon minus 7.250%. The Pool Strip Rates on the Mortgage
Loans ranged from 0.000% to 9.000% per annum as of the Cut-off Date. The "Net
Mortgage Rate" on each Mortgage Loan will equal the Mortgage Rate thereon minus
the Servicing Fee Rate (as defined herein), which will be equal to 0.500% per
annum.
As described herein, the Accrued Certificate Interest allocable to each
Class of Certificates entitled to receive distributions of interest is based on
the Certificate Principal Balance thereof or, in the case of the Variable Strip
Certificates, on the Notional Amount. The Certificate Principal Balance of each
such Class of Certificates (other than the Variable Strip Certificates) as of
any date of determination will equal the initial Certificate Principal Balance
thereof, reduced by the aggregate of (a) all amounts allocable to principal
previously distributed with respect to such Certificate and (b) any reductions
in the Certificate Principal Balance thereof deemed to have occurred in
connection with allocations of Realized Losses in the manner described herein,
provided, however, that (i) after the Certificate Principal Balances of the
Subordinate Certificates, have been reduced to zero, the Certificate Principal
Balance of each of the Class M Certificates will equal the Percentage Interest
(as defined in the Prospectus) evidenced thereby multiplied by the excess, if
any, of (x) the then aggregate Stated Principal Balance of all of the Mortgage
Loans over (y) the then aggregate Certificate Principal Balances of the Senior
Certificates and (ii) the Certificate Principal Balance of each Certificate of
the Class of Subordinate Certificates outstanding with the lowest payment
priority will equal the Percentage Interest evidenced thereby multiplied by the
excess, if any, of (x) the then aggregate Stated Principal Balance of all of the
Mortgage Loans over (y) the then aggregate Certificate Principal Balance of all
other Classes of Certificates then outstanding.
The Notional Amount as of any date of determination will equal the
aggregate Certificate Principal Balance of the Certificates of all Classes as of
such date (except that the initial Notional Amount will be rounded down to the
nearest dollar increment). References herein to the Notional Amount in respect
of the Variable Strip Certificates are used solely for convenience in certain
calculations and do not represent the right of the holders of the Variable Strip
Certificates to receive distributions of such amounts.
PRINCIPAL DISTRIBUTIONS ON THE SENIOR CERTIFICATES
Holders of the Class A Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after distributions of the Priority Interest Distribution
Amount and the Principal Only Distribution Amount (as defined below), a
distribution allocable to principal equal to the sum of the following amounts:
(i) the product of (a) the then-applicable Senior Percentage and
(b) the Scheduled Principal and Net Recoveries (as defined below) for such
Distribution Date (other than the applicable Discount Fractions described
below of the Scheduled Principal and Net Recoveries in respect of the
Discount Mortgage Loans);
(ii) an amount equal to the then-applicable Senior Prepayment
Percentage of all principal prepayments made by the respective mortgagors
during the related Prepayment Period (other than the applicable Discount
Fractions of such principal prepayments in respect of the Discount
Mortgage Loans);
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(iii) in connection with a Mortgage Loan for which a Cash
Liquidation or an REO Disposition (each as defined below) occurred during
the related Prepayment Period and did not result in any Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses or
Extraordinary Losses, an amount equal to the lesser of (a) the
then-applicable Senior Percentage of the Stated Principal Balance of such
Mortgage Loan and (b) the Senior Prepayment Percentage for such
Distribution Date multiplied by the related collections (including without
limitation Insurance Proceeds and Liquidation Proceeds) to the extent
applied as recoveries of principal of such Mortgage Loan (other than, in
each case, the portion of such collections payable to the holders of the
Principal Only Certificates in respect of a Discount Mortgage Loan); and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated as described in the three preceding clauses)
that remain undistributed to the extent that any such amounts are not
attributable to Realized Losses that were allocated to the Class M
Certificates or the Subordinate Certificates.
With respect to any Distribution Date, the lesser of (a) the balance of
the Available Distribution Amount remaining after the Priority Interest
Distribution Amount and the Principal Only Distribution Amount are distributed
and (b) the sum of the amounts described in clauses (i) through (iv) of the
preceding paragraph is hereinafter referred to as the "Senior Principal
Distribution Amount."
Scheduled Principal and Net Recoveries for any Distribution Date is equal
to the aggregate of the following amounts:
(1) the principal portion of all scheduled monthly payments on the
Mortgage Loans due on the related Due Date, whether or not received on or
prior to the related Determination Date, less the principal portion of
Debt Service Reductions (as defined below) which constitute Excess
Bankruptcy Losses;
(2) the principal portion of all proceeds of the repurchase of a
Mortgage Loan as required by the Pooling and Servicing Agreement during
the related Prepayment Period; and
(3) the principal portion of all Insurance Proceeds and
Liquidation Proceeds received during the related Prepayment Period minus
the aggregate amount of expenses incurred by the Master Servicer in
connection with the liquidation of the related Mortgage Loans to the
extent such expenses are not otherwise recoverable from related
Liquidation Proceeds, but only to the extent that any such amounts either
(a) were not received in connection with a Cash Liquidation or REO
Disposition, or (b) were received in connection with a Cash Liquidation or
REO Disposition which resulted in an Excess Special Hazard Loss, Excess
Bankruptcy Loss, Excess Fraud Loss or Extraordinary Loss.
Holders of the Principal Only Certificates will be entitled to receive on
each Distribution Date, to the extent of the portion of the Available
Distribution Amount remaining after the Priority Interest Distribution Amount is
distributed, a distribution allocable to principal equal to the Principal Only
Distribution Amount for such Distribution Date. With respect to any
Distribution Date prior to the occurrence of the Credit Support Depletion Date
(as defined below), the Principal Only Distribution Amount will equal the sum of
the following amounts:
(i) the applicable Discount Fractions of the Scheduled Principal
and Net Recoveries in respect of the Discount Mortgage Loans for such
Distribution Date;
(ii) the applicable Discount Fractions of all principal prepayments
made by the respective mortgagors in respect of the Discount Mortgage
Loans during the related Prepayment Period;
(iii) in connection with a Discount Mortgage Loan for which a Cash
Liquidation or an REO Disposition occurred during the related Prepayment
Period and did not result in any Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses, an amount
equal to the lesser of (a) the applicable Discount Fraction of the Stated
Principal Balance of such Discount
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Mortgage Loan, net of the principal portion of any related Realized Loss
allocable to the Principal Only Certificates, and (b) the related
collections, to the extent applied as recoveries of principal of such
Discount Mortgage Loan;
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated as described in the three preceding clauses)
that remain undistributed; and
(v) the lesser of the related Eligible Shortfall Funding Amount
(as defined below) and the aggregate of any Principal Only Collection
Shortfalls (as defined below) not previously distributed to the holders of
the Principal Only Certificates.
On and after the occurrence of the Credit Support Depletion Date, the
Principal Only Distribution Amount will equal the aggregate of the applicable
Discount Fractions of the scheduled principal payments and the unscheduled
collections of principal received or advanced in respect of the Discount
Mortgage Loans.
With respect to each Cash Liquidation and REO Disposition of a Discount
Mortgage Loan that occurred during any Prepayment Period and that did not result
in any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses or Extraordinary Losses, the "Principal Only Collection Shortfall" will
equal the excess, if any, of the amount described in clause (iii)(a) above over
the amount described in clause (iii)(b) above. With respect to any Distribution
Date, the "Eligible Shortfall Funding Amount" will equal the excess, if any, of
the Available Distribution Amount for such Distribution Date over the sum of the
Priority Interest Distribution Amount, the Senior Principal Distribution Amount,
the Principal Only Distribution Amount (determined without regard to clause (v)
of the description of such amount above) and the aggregate amount of Accrued
Certificate Interest on the Class M Certificates, the Class B-1 Certificates and
the Class B-2 Certificates for such Distribution Date. Notwithstanding anything
herein to the contrary, any distribution in respect of Principal Only Collection
Shortfalls, to the extent not covered by interest or principal otherwise
distributable in respect of the Class B-3 Certificates for the related
Distribution Date, will reduce the amount of principal distributable, first, on
the Class B-2 Certificates, then, on the Class B-1 Certificates, and then, on
the Class M Certificates, in each case to the extent of the amount of principal
otherwise distributable thereon for such Distribution Date.
A Cash Liquidation of a defaulted Mortgage Loan, other than a Mortgage
Loan as to which an REO Disposition occurred, is deemed to have occurred upon
the final receipt by or on behalf of the Master Servicer of all Insurance
Proceeds, Liquidation Proceeds and other payments or cash recoveries which the
Master Servicer reasonably and in good faith expects to be finally recoverable
with respect to such Mortgage Loan.
An REO Disposition is deemed to have occurred upon the final receipt by
the Master Servicer of all Insurance Proceeds, Liquidation Proceeds and other
payments and recoveries (including proceeds of a final sale) which the Master
Servicer reasonably and in good faith expects to be finally recoverable from the
sale or other disposition of the related REO Property.
The Stated Principal Balance of any Mortgage Loan as of any date of
determination is equal to the principal balance thereof as of the Cut-off Date,
after application of all scheduled principal payments due on or before the
Cut-off Date, whether or not received, reduced by all amounts allocable to
principal that have been distributed to Certificateholders with respect to such
Mortgage Loan on or before such date, and as further reduced to the extent that
any Realized Loss thereon has been allocated to one or more Classes of
Certificates on or before the date of determination.
A "Discount Mortgage Loan" will be any Step Loan with a Net Mortgage Rate
of less than 7.250% per annum as of the Cut-off Date. With respect to each
Discount Mortgage Loan, the "Discount Fraction" will equal a fraction, expressed
as a percentage, the numerator of which will be 7.250% minus the Net Mortgage
Rate thereon as of the Cut-off Date and the denominator of which will be 7.250%.
The Mortgage Loans other than the Discount Mortgage Loans are referred to herein
as the "Non-Discount Mortgage Loans."
The "Senior Percentage", which initially will be equal to approximately
84.99% and will in no event exceed 100%, will be adjusted for each Distribution
Date to be the percentage equal to the aggregate Certificate Principal
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Balances of the Class A Certificates immediately prior to such Distribution Date
divided by the aggregate of the Stated Principal Balances of all of the Mortgage
Loans (less the applicable Discount Fractions of the Stated Principal Balances
of the Discount Mortgage Loans) immediately prior to such Distribution Date. The
"Subordinate Percentage" as of any date of determination is equal to 100% minus
the Senior Percentage as of such date. The initial Senior Percentage is less
than the initial undivided beneficial ownership interest in the Trust Fund
evidenced by the Senior Certificates in the aggregate, because the Senior
Percentage is calculated without regard to the Certificate Principal Balance of
the Principal Only Certificates and the Discount Fractions of the Stated
Principal Balances of the Discount Mortgage Loans.
The "Senior Prepayment Percentage" for any Distribution Date occurring
prior to the Distribution Date in December 2000 will equal 100% and, for any
Distribution Date occurring in or after the Distribution Date in December 2000,
will be as follows: for any Distribution Date occurring in or after December
2000 to and including the Distribution Date in November 2001, the Senior
Percentage for such Distribution Date plus 70% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date occurring in or after December
2001 to and including the Distribution Date in November 2002, the Senior
Percentage for such Distribution Date plus 60% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date occurring in or after December
2002 to and including the Distribution Date in November 2003, the Senior
Percentage for such Distribution Date plus 40% of the Subordinate Percentage for
such Distribution Date; for any Distribution Date occurring in or after December
2003 to and including the Distribution Date in November 2004, the Senior
Percentage for such Distribution Date plus 20% of the Subordinate Percentage for
such Distribution Date; and for any Distribution Date thereafter, the Senior
Percentage for such Distribution Date (unless on any Distribution Date the
Senior Percentage exceeds the initial Senior Percentage or on any Distribution
Date occurring prior to December 2002 the Subordinate Percentage is less than
twice the initial Subordinate Percentage, in which case the Senior Prepayment
Percentage for such Distribution Date will equal 100%). Any scheduled reduction
to the Senior Prepayment Percentage described above will not be made as of any
Distribution Date unless either (a)(i) the outstanding principal balance of the
Mortgage Loans delinquent 60 days or more (including foreclosures and REO
Property) averaged over the last six months, as a percentage of the aggregate
outstanding principal balance of all Mortgage Loans averaged over the last six
months, does not exceed 2% and (ii) Realized Losses on the Mortgage Loans to
date for such Distribution Date, if occurring during the sixth, seventh, eighth,
ninth or tenth year (or any year thereafter) after November 1995, are less than
30%, 35%, 40%, 45% or 50%, respectively, of the sum of the initial Certificate
Principal Balances of the Class M Certificates and the Subordinate Certificates
or (b)(i) the aggregate outstanding principal balance of the Mortgage Loans
delinquent 60 days or more (including foreclosures and REO Property) averaged
over the last six months, as a percentage of the aggregate outstanding principal
balance of all Mortgage Loans averaged over the last six months, does not exceed
4% and (ii) Realized Losses on the Mortgage Loans to date for such Distribution
Date are less than 10% of the sum of the initial Certificate Principal Balances
of the Class M Certificates and the Subordinate Certificates. Notwithstanding
the foregoing, upon reduction of the Certificate Principal Balances of the Class
A Certificates to zero, the Senior Prepayment Percentage will be equal to 0%.
Distributions of principal on the Class A Certificates on each
Distribution Date will be made (to the extent of the portion of the Available
Distribution Amount remaining after distribution of the Priority Interest
Distribution Amount and the Principal Only Distribution Amount) as follows:
(a) prior to the occurrence of the Credit Support Depletion Date
(as defined below), the Senior Principal Distribution Amount will be
allocated as follows:
(i) first, to the Class A-1 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero;
(ii) second, to the Class A-2 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero; and
(iii) third, to the Class A-3 Certificates, until the
Certificate Principal Balance thereof has been reduced to zero.
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(b) On or after the occurrence of the Credit Support Depletion
Date, all priorities relating to distributions as described above in
respect of principal among the Class A Certificates will be disregarded
and the Senior Principal Distribution Amount will be distributed among the
Class A Certificates on a PRO RATA basis in accordance with their
respective outstanding Certificate Principal Balances.
(c) After the reduction of the Certificate Principal Balances of
the Class A Certificates to zero but prior to the occurrence of the Credit
Support Depletion Date, the Class A Certificates will be entitled to no
further distributions of principal thereon and the Available Distribution
Amount will be paid solely to the holders of the Variable Strip
Certificates, the Principal Only Certificates, the Class M Certificates
and the Subordinate Certificates, in each case as described herein.
The "Credit Support Depletion Date" will be the first Distribution Date on
which the Senior Percentage is equal to 100%.
PRINCIPAL DISTRIBUTIONS ON THE CLASS M CERTIFICATES AND THE CLASS B-1
Certificates
Holders of the Class M Certificates will be entitled to receive on each
Distribution Date, to the extent of the portion of the Available Distribution
Amount remaining after (a) the sum of the Priority Interest Distribution Amount,
the Principal Only Distribution Amount and the Senior Principal Distribution
Amount is distributed to the holders of the Senior Certificates, (b) if the
Certificate Principal Balances of the Subordinate Certificates have been reduced
to zero, reimbursement is made to the Master Servicer for certain Advances
remaining unreimbursed to the extent described below under "-Advances" and (c)
the amount of Accrued Certificate Interest required to be distributed on the
Class M Certificates on such Distribution Date is distributed to the holders of
the Class M Certificates, a distribution allocable to principal equal to the sum
of the following amounts (subject to reduction with respect to the distribution
of any Principal Only Collection Shortfalls, as described above under
"-Principal Distributions on the Senior Certificates"):
(i) the product of (a) the then-applicable Class M Percentage (as
defined below) and (b) the Scheduled Principal and Net Recoveries for such
Distribution Date (other than the applicable Discount Fractions of the
Scheduled Principal and Net Recoveries in respect of the Discount Mortgage
Loans);
(ii) the portion of all principal prepayments that were made by the
respective mortgagors during the related Prepayment Period (other than the
applicable Discount Fractions of such principal prepayments in respect of
the Discount Mortgage Loans) and that are allocable to the Class M
Certificates, as described below;
(iii) such Class's PRO RATA share, based on the Certificate
Principal Balances of the Class M Certificates and the Subordinate
Certificates then outstanding, of all amounts received in connection with
a Cash Liquidation or an REO Disposition that occurred during the related
Prepayment Period and that did not result in any Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary
Losses, to the extent applied as recoveries of principal of the related
Mortgage Loan and to the extent not otherwise payable to the holders of
the Senior Certificates; and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated as described in the three preceding clauses)
that remain undistributed to the extent that any such amounts are not
attributable to Realized Losses that were allocated to the Subordinate
Certificates.
The portion of the Available Distribution Amount remaining after (a)
distributions of interest and principal to the holders of the Senior
Certificates and the Class M Certificates, (b) if the Certificate Principal
Balances of the Class B-2 Certificates and the Class B-3 Certificates have been
reduced to zero, reimbursement is made to the Master Servicer for certain
Advances remaining unreimbursed to the extent described below under "-Advances"
and (c) the amount of Accrued Certificate Interest required to be distributed on
the Class B-1 Certificates on such Distribution Date is distributed to the
holders of the Class B-1 Certificates, will be distributed on each Distribution
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Date in the following order of priority, in each case to the extent of remaining
available funds included in the Available Distribution Amount:
(a) to the holders of the Class B-1 Certificates, in respect of
principal, the sum of the following amounts (subject to reduction with
respect to the distribution of any Principal Only Collection Shortfalls,
as described above under "-Principal Distributions on the Senior
Certificates"):
(i) the product of (a) the then-applicable Class B-1
Percentage (as defined below) and (b) the Scheduled Principal and
Net Recoveries for such Distribution Date (other than the applicable
Discount Fractions of the Scheduled Principal and Net Recoveries in
respect of the Discount Mortgage Loans);
(ii) the portion of all principal prepayments that were made
by the respective mortgagors during the related Prepayment Period
(other than the applicable Discount Fractions of such principal
prepayments in respect of the Discount Mortgage Loans) and that are
allocable to the Class B-1 Certificates, as described below;
(iii) such Class's PRO RATA share, based on the Certificate
Principal Balances of the Class M Certificates and the Subordinate
Certificates then outstanding, of all amounts received in connection
with a Cash Liquidation or an REO Disposition that occurred during
the related Prepayment Period and that did not result in any Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses
or Extraordinary Losses, to the extent applied as recoveries of
principal of the related Mortgage Loan and to the extent not
otherwise payable to the holders of the Senior Certificates; and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated as described in the three preceding
clauses) that remain undistributed to the extent that any such
amounts are not attributable to Realized Losses that were allocated
to the Class B-2 Certificates or the Class B-3 Certificates;
(b) after reimbursement is made to the Master Servicer for certain
Advances remaining unreimbursed to the extent described below under
"-Advances," to the holders of the Class B-2 Certificates, in respect of
interest, an amount equal to the Accrued Certificate Interest on such
Class on such Distribution Date;
(c) to the holders of the Class B-2 Certificates, in respect of
principal, an amount equal to the aggregate of the following amounts
(subject to reduction with respect to the distribution of any Principal
Only Collection Shortfalls, as described above under "-Principal
Distributions on the Senior Certificates"):
(i) the product of (a) the then-applicable Class B-2
Percentage (as defined below) and (b) the Scheduled Principal and
Net Recoveries for such Distribution Date (other than the applicable
Discount Fractions of the Scheduled Principal and Net Recoveries in
respect of the Discount Mortgage Loans);
(ii) the portion of all principal prepayments that were made
by the respective mortgagors during the related Prepayment Period
(other than the applicable Discount Fractions of such principal
prepayments in respect of the Discount Mortgage Loans) and that are
allocable to the Class B-2 Certificates, as described below;
(iii) such Class's PRO RATA share, based on the Certificate
Principal Balances of the Class M Certificates and the Subordinate
Certificates then outstanding, of all amounts received in connection
with a Cash Liquidation or an REO Disposition that occurred during
the related Prepayment Period and that did not result in any Excess
Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses
or Extraordinary Losses, to the extent applied as recoveries of
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principal of the related Mortgage Loan and to the extent not
otherwise payable to the holders of the Senior Certificates; and
(iv) any amounts allocable to principal for any previous
Distribution Date (calculated as described in the three preceding
clauses) that remain undistributed to the extent that any such
amounts are not attributable to Realized Losses that were allocated
to the Class B-3 Certificates; and
(d) an amount equal to the portion of the Available Distribution
Amount remaining after the foregoing distributions and after reimbursement
is made to the Master Servicer for certain Advances remaining unreimbursed
to the extent described below under "-Advances," first, to the holders of
the Class B-1 Certificates, in respect of principal, until the Certificate
Principal Balance thereof is reduced to zero, and thereafter, to the
holders of the Class B-2 Certificates and the Class B-3 Certificates as
provided in the Pooling and Servicing Agreement.
The effect of the provisions described above will be that holders of the
Class B-1 Certificates will receive on each Distribution Date all amounts
otherwise distributable to holders of the Class B-3 Certificates on such
Distribution Date, which, absent any delinquencies or losses on the Mortgage
Loans and the distribution of any Principal Only Collection Shortfalls as
described above under "-Principal Distributions on the Senior Certificates,"
would be equal to (i) the Accrued Certificate Interest on the Class B-3
Certificates for such Distribution Date and (ii) the sum of (a) the Class B-3
Percentage of the Scheduled Principal and Net Recoveries for such Distribution
Date and (b) the amount of all principal prepayments and the principal proceeds
of certain Cash Liquidations and REO Dispositions not otherwise distributed to
holders of the Senior Certificates, the Class M Certificates, the Class B-1
Certificates or the Class B-2 Certificates.
All principal prepayments not otherwise distributable to the holders of
the Class A Certificates will be allocated on a PRO RATA basis among the Class
of Certificates subordinate thereto with the highest payment priority then
outstanding and each other Class of such Certificates for which certain credit
support levels established for such Class in the Pooling and Servicing Agreement
have been satisfied. The related credit support level on any Distribution Date
would be satisfied as to any such Class of Certificates only if the sum of the
current undivided beneficial ownership interests in the Trust Fund evidenced by
such Class and each Class of Certificates, if any, having a lower payment
priority were at least equal to the sum of the initial undivided beneficial
ownership interests in the Trust Fund evidenced by such Class and each Class of
Certificates, if any, having a lower payment priority.
The "Class M Percentage," "Class B-1 Percentage," "Class B-2 Percentage"
and "Class B-3 Percentage," which initially will be equal to approximately
6.50%, 6.00%, 1.50% and 1.00%, respectively, and will in no event exceed 100%,
will each be adjusted for each Distribution Date to be the percentage equal to
the Certificate Principal Balance of the related Class of Certificates
immediately prior to such Distribution Date divided by the aggregate of the
Stated Principal Balances of all of the Mortgage Loans (less the applicable
Discount Fractions of the Stated Principal Balances of the Discount Mortgage
Loans) immediately prior to such Distribution Date. The initial Class M
Percentage, Class B-1 Percentage, Class B-2 Percentage and Class B-3 Percentage
are greater than the initial undivided beneficial ownership interests in the
Trust Fund evidenced by the Certificates of the related Classes. because such
percentages are calculated without regard to the Discount Fractions of the
Stated Principal Balances of the Discount Mortgage Loans.
As described above under "-Principal Distributions on the Senior
Certificates," the Senior Prepayment Percentage will be 100% during the first
five years after the Delivery Date (unless the Certificate Principal Balances of
the Class A Certificates are reduced to zero before the end of such period), and
will thereafter equal 100% whenever the Senior Percentage exceeds the initial
Senior Percentage and, also, for any Distribution Date prior to December 2002 on
which the Subordinate Percentage is less than twice the initial Subordinate
Percentage. Furthermore, as set forth herein, the Senior Prepayment Percentage
will exceed the Senior Percentage during the sixth through ninth years following
the Delivery Date, and scheduled reductions to the Senior Prepayment Percentage
are subject to postponement based on the loss and delinquency experience of the
Mortgage Loans. Accordingly, the Class M Certificates and the Class B-1
Certificates will not be entitled to any prepayments for at
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least the first five years after the Delivery Date (unless the Certificate
Principal Balances of the Class A Certificates have been reduced to zero before
the end of such period) and may receive no prepayments or a disproportionately
small or large portion of prepayments (relative to the Class M Percentage and
Class B-1 Percentage, respectively) during certain periods thereafter. See
"-Principal Distributions on the Senior Certificates" above.
EXAMPLE OF DISTRIBUTIONS
The following chart sets forth an example of distributions on the
Certificates for the first month of the Trust Fund's existence.
November 1............Cut-off Date. The initial principal balance of the
Mortgage Pool will be the aggregate
outstanding principal balance of the
Mortgage Loans as of November 1, 1995,
after deducting any principal payments
due on or before such date. Any
principal and interest payments due on
or before November 1 will not be part
of the Mortgage Pool.
November 1 through
November 30.......Prepayment Period. Partial principal prepayments and
prepayments in full with interest
thereon to the date of such prepayment
in full, received at any time during
this period will be deposited into the
Custodial Account for distribution to
Certificateholders on December 26.
November 30...........Record Date. Distributions on December 26 will be
made to Certificateholders of record at
the close of business on the last
business day of the month immediately
preceding the month of distribution.
November 2 through
December 15........Collection Period. Payments due during the related Due
Period (November 2 through December 1)
from mortgagors will be deposited in
the Custodial Account as received, and
will include scheduled principal
payments plus interest on the November
balances.
December 15.........Determination Date. On the second business day following
the Determination Date, the amounts of
principal and interest that will be
distributed on December 26 will be
determined by the Trustee.
December 22.........Certificate Account
Deposit Date. On the business day
immediately preceding the Distribution
Date, the Master Servicer will remit to
the Trustee the amount of principal and
interest to be distributed to the
Certificateholders on such Distribution
Date from amounts on deposit in the
Custodial Account, together with any
Advances required to be made by the
Master Servicer for such Distribution
Date.
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December 26..........Distribution Date. On December 26, the Trustee will
distribute or cause to be distributed
to the Certificateholders the amounts
determined as of the second business
day following the Determination Date.
If a Monthly Payment due during the
related Due Period is received from a
mortgagor after December 15 and an
Advance has been made with respect to
such late payment from the Custodial
Account, such late payment will be
deposited into the Custodial Account as
reimbursement therefor. If the Master
Servicer has made an Advance with
respect to such late payment from its
own funds, the Master Servicer will
reimburse itself to the extent
permitted by the Pooling and Servicing
Agreement by withdrawing from the
Custodial Account the amount relating
to such Advance. If no such Advance has
been made with respect to such late
payment, the proceeds of such late
payment will be distributed to the
Certificateholders on the Distribution
Date occurring in January.
Succeeding months follow the same pattern, except for the Cut-off Date and
except that the Distribution Date will be the 25th day of the month (or, if such
day is not a business day, the business day immediately following such day).
ALLOCATION OF LOSSES; SUBORDINATION
Any Realized Losses, other than losses of a type generally covered by a
special hazard insurance policy as described in the Prospectus under
"Description of Mortgage and other Insurance-Hazard Insurance on the Loans" (any
such loss, a "Special Hazard Loss") to the extent in excess of the Special
Hazard Amount ("Excess Special Hazard Losses"), losses incurred on defaulted
Mortgage Loans as to which there was fraud in the origination of such Mortgage
Loans (any such loss, a "Fraud Loss") to the extent in excess of the Fraud Loss
Amount ("Excess Fraud Losses"), losses attributable to certain actions which may
be taken by a bankruptcy court in connection with a Mortgage Loan, including a
reduction by a bankruptcy court of the principal balance or the Mortgage Rate on
a Mortgage Loan or an extension of its maturity (any such loss, a "Bankruptcy
Loss") to the extent in excess of the Bankruptcy Loss Amount ("Excess Bankruptcy
Losses"), and losses occasioned by war, civil insurrection, certain governmental
actions, nuclear reaction and certain other risks ("Extraordinary Losses"), will
be allocated as follows: first, to the Class B-3 Certificates, then to the Class
B-2 Certificates, then to the Class B-1 Certificates, and then to the Class M
Certificates, in each case until the Certificate Principal Balance thereof is
reduced to zero, and thereafter, with respect to Realized Losses on the Discount
Mortgage Loans, to the Principal Only Certificates in an amount equal to the
related Discount Fractions of the principal portions of such Realized Losses,
and the remainder of such Realized Losses and the entire amount of Realized
Losses on the Non-Discount Mortgage Loans to the Variable Strip Certificates and
the Class A Certificates on a PRO RATA basis as described below. Any
allocation of a Realized Loss (other than a Debt Service Reduction) to an
Offered Certificate will generally be made by reducing the Certificate Principal
Balance thereof, in the case of the principal portion of such Realized Loss, and
the Accrued Certificate Interest thereon, in the case of the interest portion of
such Realized Loss, by the amount so allocated as of the Distribution Date
occurring in the month following the calendar month in which such Realized Loss
was incurred. As used herein, "Debt Service Reductions" means reductions in the
amount of monthly payments due to certain bankruptcy proceedings, but does not
include any permanent forgiveness of principal. In addition to the foregoing
allocations of Realized Losses, the Accrued Certificate Interest on certain
Classes of Offered Certificates is subject to reduction due to shortfalls in
collections of interest as described above under "-Interest Distributions."
Allocations of the principal portion of Debt Service Reductions to the Class M
Certificates or the Subordinate Certificates will result from the priority of
distributions of the Available Distribution Amount as described herein. As used
herein, "Subordination" refers to the provisions discussed above for the
sequential
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allocation of Realized Losses (other than Excess Special Hazard Losses, Excess
Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses) in respect of
the Mortgage Loans among the various Classes of Certificates, as well as all
provisions effecting such allocations including the priorities for distribution
of cash flows in the amounts described herein.
Any Excess Special Hazard Losses, Excess Fraud Losses, Excess Bankruptcy
Losses, Extraordinary Losses or other losses of a type not covered by
Subordination on Non-Discount Mortgage Loans will be allocated on a PRO RATA
basis among the Variable Strip Certificates, the Class A Certificates, the Class
M Certificates and the Subordinate Certificates. The principal portions of such
losses on Discount Mortgage Loans will be allocated to the Principal Only
Certificates in an amount equal to the related Discount Fractions of such
losses, and the remainder of such losses will be allocated among the other
Classes of Certificates on a PRO RATA basis as described below. An allocation
of a Realized Loss on a "PRO RATA basis" among two or more Classes of
Certificates means an allocation to each such Class of Certificates on the basis
of their then-outstanding Certificate Principal Balances, in the case of the
principal portion of a Realized Loss, or based on the Accrued Certificate
Interest thereon in the case of an interest portion of a Realized Loss.
Losses of principal on the Mortgage Loans that are not covered by
Subordination will be allocated to the Principal Only Certificates only to the
extent they occur on Discount Mortgage Loans and only to the extent of the
related Discount Fractions of such losses. Such allocation of losses of
principal on the Discount Mortgage Loans may result in such losses being
allocated in amounts that are greater or less than would have been the case had
such losses been allocated in proportion to the Certificate Principal Balance of
the Principal Only Certificates. Thus, the Variable Strip Certificates and the
Class A Certificates will bear the entire amount of losses that are not covered
by Subordination other than the amount allocable to the Principal Only
Certificates, which losses will be allocated among such Classes of Certificates
on a PRO RATA basis.
With respect to any defaulted Mortgage Loan that is finally liquidated,
through foreclosure sale, disposition of the related Mortgaged Property if
acquired on behalf of the Certificateholders by deed in lieu of foreclosure, or
otherwise, the amount of loss realized, if any, will equal the portion of the
Stated Principal Balance remaining, if any, plus interest thereon through the
last day of the month in which such Mortgage Loan was finally liquidated, after
application of all amounts recovered (net of amounts reimbursable to the Master
Servicer or any subservicer for Advances and expenses, including attorneys'
fees) towards interest and principal owing on the Mortgage Loan. Such amount of
loss realized and any Special Hazard Losses, Fraud Losses, Bankruptcy Losses and
Extraordinary Losses are referred to herein as "Realized Losses."
The Trustee will establish and maintain one or more separate accounts
(collectively, the "Excess Proceeds Account") in which the Master Servicer will
deposit or cause to be deposited on a daily basis, or as and when received from
subservicers, the excess, if any, of all amounts recovered on any Mortgage Loan
as to which an REO Disposition occurs (net of amounts reimbursable to the Master
Servicer or any subservicer for Advances and expenses, including attorneys'
fees) over the Stated Principal Balance of such Mortgage Loan plus interest
thereon through the last day of the month in which such REO Disposition occurs
(the "Excess Proceeds"). The Certificateholders will be entitled to receive on
each Distribution Date, in addition to the distributions of interest and
principal described above, a distribution of Excess Proceeds (including any
interest or other income earned thereon) in an amount equal to the lesser of (a)
the amount on deposit in the Excess Proceeds Account as of the related
Determination Date and (b) the aggregate of all Realized Losses allocated among
the Certificates on any Distribution Date and not covered by any subsequent
distribution. Such distribution will be allocated in the following order of
priority: first, to the holders of the Variable Strip Certificates and the
Class A Certificates on a PRO RATA basis, to the extent of the interest
portions of Realized Losses allocated to such Classes of Certificates on any
Distribution Date and not covered by any subsequent distribution, and second, to
the holders of the Principal Only Certificates and the Class A Certificates on a
PRO RATA basis, to the extent of the principal portions of Realized Losses
allocated to such Classes of Certificates on any Distribution Date and not
covered by any subsequent distribution, and then third, to the holders of the
Class M Certificates, fourth, to the holders of the Class B-1 Certificates,
fifth, to the holders of the Class B-2 Certificates, and sixth, to the holders
of the Class B-3 Certificates, in each case to the extent of Realized Losses
allocated to such Class of Certificates on any Distribution Date and not covered
by any subsequent distribution, and then seventh, to the holders of the Class R
Certificates. If the
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amount on deposit in the Excess Proceeds Account exceeds an amount calculated
periodically pursuant to the terms of the Pooling and Servicing Agreement or is
in excess of zero upon the termination of the Trust Fund, the excess amount will
be distributed to the holders of the Class R Certificates in accordance with the
terms of the Pooling and Servicing Agreement. The distribution of Excess
Proceeds will not have the effect of reducing the Certificate Principal Balance
of or Accrued Certificate Interest on any Class of Certificates to which such
distribution is allocated. The amount on deposit in the Excess Proceeds Account
initially will be equal to zero and is not expected to be substantial at any
time when the Certificates are outstanding. Therefore, prospective investors in
the Offered Certificates should not rely on the Excess Proceeds Account to
provide significant protection against Realized Losses on the Mortgage Loans.
Further, prospective investors in the Offered Certificates should not rely on
the distribution of Excess Proceeds to provide a return on the Offered
Certificates in addition to the interest and principal to which the holders of
the Offered Certificates are entitled. The Excess Proceeds Account will be an
interest-bearing account of the type described in the Prospectus under
"Servicing of Loans-Deposits to and Withdrawals from the Collection Account" and
may be invested in Eligible Investments (as defined in the Prospectus) for the
benefit of and at the risk of the Certificateholders. Any interest or other
income earned on amounts in the Excess Proceeds Account will be held therein
until distributed as described above.
The application of the Senior Prepayment Percentage (when it exceeds the
Senior Percentage) as described herein to determine the Senior Principal
Distribution Amount will accelerate the amortization of the Class A Certificates
relative to the actual amortization of the Mortgage Loans. The Principal Only
Certificates will not receive more than the Discount Fraction of any unscheduled
payment or collection relating to a Discount Mortgage Loan. Accordingly, to the
extent that the Class A Certificates are amortized faster than the Mortgage
Loans, in the absence of offsetting Realized Losses allocated to the Class M
Certificates or the Subordinate Certificates, the undivided beneficial ownership
interest in the Trust Fund evidenced by the Class A Certificates will be
decreased (with a corresponding increase in the undivided beneficial ownership
interest in the Trust Fund evidenced by the Class M Certificates and the
Subordinate Certificates in the aggregate), thereby increasing, as a relative
matter, the Subordination afforded the Senior Certificates by the Class M
Certificates and the Subordinate Certificates.
The priority of payments (including principal prepayments) to the Class M
Certificates as described herein also may have the effect, during certain
periods and in the absence of losses, of decreasing the percentage interest
evidenced by the Class M Certificates, thereby increasing, relative to its
Certificate Principal Balance, the Subordination afforded to the Class M
Certificates by the Subordinate Certificates.
The aggregate amount of Realized Losses which may be allocated through
Subordination in connection with Special Hazard Losses (the "Special Hazard
Amount") will initially be equal to $1,090,965.92. As of any date of
determination following the Cut-off Date, the Special Hazard Amount will equal
the initial amount thereof less the sum of (a) any amounts allocated through
Subordination in respect of Special Hazard Losses and (b) the Adjustment Amount.
On each anniversary of November 1, 1995, the Adjustment Amount will be equal to
the amount, if any, by which the Special Hazard Amount, without giving effect to
the deduction of the Adjustment Amount for such anniversary, exceeds the greater
of (i) 1.0% (or, if greater than 1.0%, the highest percentage of Mortgage Loans,
by principal balance, in any California zip code area) times the aggregate
principal balance of all of the Mortgage Loans on such anniversary and (ii)
twice the principal balance of the single Mortgage Loan having the largest
principal balance.
The aggregate amount of Realized Losses which may be allocated through
Subordination in connection with Fraud Losses (the "Fraud Loss Amount") will
initially be equal to $2,554,175.53. As of any date of determination after the
Cut-off Date, the Fraud Loss Amount will equal (x) prior to November 1, 1996 an
amount equal to 3.00% of the aggregate principal balance of all of the Mortgage
Loans as of the Cut-off Date minus the aggregate amount allocated through
Subordination with respect to Fraud Losses up to such date of determination, (y)
from November 1, 1996 through October 31, 1997 an amount equal to (1) the lesser
of (a) the Fraud Loss Amount as of November 1, 1996 and (b) 2.00% of the
aggregate principal balance of all of the Mortgage Loans as of November 1, 1996
minus (2) the aggregate amount allocated through Subordination with respect to
Fraud Losses since November 1, 1996 up to such date of determination, and (z)
from November 1, 1997 through October 31, 2000, an amount equal to (1) the
lesser of (a) the Fraud Loss Amount as of the most recent November 1st and (b)
1.00% of the aggregate principal balance of all of the Mortgage Loans as of the
most recent November 1st minus (2) the aggregate amount allocated through
Subordination with respect to Fraud Losses since the most recent
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<PAGE>
November 1st up to such date of determination. On and after November 1, 2000,
the Fraud Loss Amount will be zero.
The aggregate amount of Realized Losses which may be allocated through
Subordination in connection with Bankruptcy Losses (the "Bankruptcy Amount")
will initially be equal to $100,000.00. As of any date of determination prior
to November 1, 1996, the Bankruptcy Amount will equal the initial amount thereof
less the sum of any amounts allocated through Subordination for such losses up
to such date of determination. As of any date of determination on or after
November 1, 1996, the Bankruptcy Amount will equal the excess, if any, of (1)
the lesser of (a) the Bankruptcy Amount as of the business day next preceding
the most recent November 1st and (b) an amount calculated pursuant to the terms
of the Pooling and Servicing Agreement, which amount as calculated will provide
for a reduction in the Bankruptcy Amount, over (2) the aggregate amount of
Bankruptcy Losses allocated through Subordination since such anniversary. The
Bankruptcy Amount and the related formulas referred to above may be reduced or
modified upon written confirmation from each Rating Agency that such reduction
or modification will not adversely affect the then-current ratings assigned to
the Offered Certificates by such Rating Agency. Such a reduction or modification
may adversely affect the coverage provided by the Subordination with respect to
Bankruptcy Losses.
OPTIONAL PURCHASE OF DELINQUENT MORTGAGE LOANS
The Master Servicer will have the right to purchase from the Trust Fund
any Mortgage Loan that is 90 days or more delinquent (I.E., any Mortgage Loan
on which the related mortgagor has failed to make four consecutive monthly
payments) if the Master Servicer determines that such Mortgage Loan otherwise
would become subject to foreclosure or related proceedings. The purchase price
for any such Mortgage Loan will equal the outstanding principal balance of such
Mortgage Loan plus accrued and unpaid interest thereon (adjusted to the related
Net Mortgage Rate) to the first day of the month in which the amount of such
purchase price will be distributed to the Certificateholders. The Master
Servicer will be obligated to deposit into the Custodial Account the purchase
price for any Mortgage Loan purchased by it as described above.
ADVANCES
Prior to each Distribution Date, the Master Servicer is required to make
Advances (out of its own funds or funds held in the Custodial Account for future
distribution or withdrawal) with respect to any payments of principal and
interest (net of the related Servicing Fees) that were due on the Mortgage Loans
on the immediately preceding Due Date and delinquent as of the close of business
on the related Determination Date.
Such Advances are required to be made only to the extent they are deemed
by the Master Servicer to be recoverable from related late collections,
Insurance Proceeds, Liquidation Proceeds or amounts otherwise payable to the
holders of the Subordinate Certificates or, after the Certificate Principal
Balances of the Subordinate Certificates have been reduced to zero, amounts
otherwise payable to the holders of the Class M Certificates. The purpose of
making such Advances is to maintain a regular cash flow to the
Certificateholders, rather than to guarantee or insure against losses. The
Master Servicer will not be required to make any Advances with respect to
reductions in the amount of the monthly payments on the Mortgage Loans due to
Debt Service Reductions or the application of the Relief Act or similar
legislation or regulations. Any failure by the Master Servicer to make an
Advance as required under the Pooling and Servicing Agreement will constitute an
Event of Default thereunder, in which case the Trustee, as successor Master
Servicer, will be obligated to make any such Advance, in accordance with the
terms of the Pooling and Servicing Agreement.
All Advances will be reimbursable to the Master Servicer on a first
priority basis from either (a) late collections, Insurance Proceeds and
Liquidation Proceeds from the Mortgage Loan as to which such unreimbursed
Advance was made or (b) as to any Advance that remains unreimbursed in whole or
in part following the final liquidation of the related Mortgage Loan, (i) if the
Class B-1 Certificates, the Class B-2 Certificates and the Class B-3
Certificates are outstanding, from amounts otherwise distributable on the Class
B-3 Certificates, (ii) if the Class B-1 Certificates and Class B-2 Certificates
are outstanding but the Certificate Principal Balance of the Class B-3
Certificates has been reduced to zero, from amounts otherwise distributable on
the Class B-2 Certificates,
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(iii) if the Class B-1 Certificates are outstanding but the Certificate
Principal Balances of the Class B-2 Certificates and the Class B-3 Certificates
have been reduced to zero, from amounts otherwise distributable on the Class B-1
Certificates and (iv) if the Class M Certificates are outstanding but the
Certificate Principal Balances of the Subordinate Certificates have been reduced
to zero, from amounts otherwise distributable on the Class M Certificates,
provided, however, that any such Advances that were made with respect to
delinquencies which ultimately were determined to be Excess Special Hazard
Losses, Excess Fraud Losses, Excess Bankruptcy Losses or Extraordinary Losses
are reimbursable to the Master Servicer out of any funds in the Custodial
Account prior to distributions on any of the Certificates and the amount of such
losses will be allocated as described herein. In addition, if the Certificate
Principal Balances of the Class M Certificates and the Subordinate Certificates
have been reduced to zero, any Advances previously made which are deemed by the
Master Servicer to be nonrecoverable from related late collections, Insurance
Proceeds and Liquidation Proceeds may be reimbursed to the Master Servicer out
of any funds in the Custodial Account prior to distributions on the
Certificates. The effect of these provisions on the Class B-1 Certificates is
that, with respect to any Advance that remains unreimbursed following the final
liquidation of the related Mortgage Loan, the entire amount of the reimbursement
for such Advance will be borne by the holders of the Class B-1 Certificates
(except as described above), to the extent of the amounts otherwise
distributable to such holders after distributions on the Class B-2 Certificates
or, after the Certificate Principal Balance of the Class B-2 Certificates and
the Class B-3 Certificates have been reduced to zero, to the extent of all
amounts otherwise distributable to such holders. The effect of these provisions
on the Class M Certificates is that, after the Certificate Principal Balances of
the Subordinate Certificates have been reduced to zero, with respect to any
Advance which remains unreimbursed following the final liquidation of the
related Mortgage Loan, the entire amount of the reimbursement for such Advance
will be borne by the holders of the Class M Certificates (except as described
above), to the extent of the amounts otherwise distributable to such holders.
CERTAIN YIELD AND PREPAYMENT CONSIDERATIONS
GENERAL
The effective yield to the holders of the Offered Certificates will be
lower than the yield otherwise produced by the related Pass-Through Rates and
purchase prices because monthly distributions will not be payable to such
holders until the 25th day (or the immediately following business day if such
25th day is not a business day) of the month following the month in which
interest accrues on the Mortgage Loans (without any additional distribution of
interest or earnings thereon in respect of such delay).
The yield to maturity and the aggregate amount of distributions on the
Offered Certificates will be affected by, among other things, the rate and
timing of principal payments on the Mortgage Loans and the amount and timing of
mortgagor defaults resulting in Realized Losses. Such yield may be adversely
affected by a higher or lower than anticipated rate of principal payments on the
Mortgage Loans. The rate of principal payments on such Mortgage Loans will in
turn be affected by the amortization schedules of the Mortgage Loans, the rate
and timing of prepayments thereon by the mortgagors, liquidations of defaulted
Mortgage Loans and repurchases of Mortgage Loans due to certain breaches of
representations. The timing of changes in the rate of prepayments, liquidations
and repurchases of the Mortgage Loans may, and the timing of Realized Losses
will, significantly affect the yield to an investor, even if the average rate of
principal payments experienced over time is consistent with an investor's
expectation. After the Certificate Principal Balances of the Class B-2
Certificates and the Class B-3 Certificates have been reduced to zero, the yield
to maturity on the Class B-1 Certificates will be extremely sensitive to losses
on the Mortgage Loans (and the timing thereof) because the entire amount
(subject to the limits described herein with respect to certain types of losses
as described herein) of such losses (rather than a PRO RATA portion thereof)
will be allocable to the Class B-1 Certificates. After the Certificate Principal
Balances of the Subordinate Certificates have been reduced to zero, the yield to
maturity on the Class M Certificates will be extremely sensitive to losses on
the Mortgage Loans (and the timing thereof) because the entire amount (subject
to the limits described herein with respect to certain types of losses) of such
losses (rather than a PRO RATA portion thereof) will be allocable to the Class
M Certificates. Furthermore, because principal distributions are paid to certain
Classes of Offered Certificates before other Classes, holders of Classes having
a later priority of payment bear a greater risk of loss than holders
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of Classes having an earlier priority of payment. Certain loss scenarios could
lead to the failure of the holders of the Class M Certificates and the Class B-1
Certificates to recover fully their initial investments. Because the rate and
timing of principal payments on the Mortgage Loans will depend on future events
and on a variety of factors (as described more fully herein and in the
Prospectus under "Yield, Prepayment and Maturity Considerations"), no assurance
can be given as to such rate or the timing of principal prepayments on the
Offered Certificates.
The Mortgage Loans may be prepaid by the mortgagors at any time; however,
in certain circumstances, the Mortgage Loans will be subject to a prepayment
charge for prepayments. See "Description of the Mortgage Pool" herein. The
Mortgage Loans generally contain due-on-sale clauses. Prepayments, liquidations
and repurchases of the Mortgage Loans will result in distributions to holders of
the Certificates of principal amounts which would otherwise be distributed over
the remaining terms of the Mortgage Loans. Factors affecting prepayment
(including defaults and liquidations) of mortgage loans include changes in
mortgagors' housing needs, job transfers, unemployment, mortgagors' net equity
in the mortgaged properties, changes in the value of the mortgaged properties,
mortgage market interest rates and servicing decisions. As described under
"Description of the Mortgage Pool" herein, the Mortgage Pool consists of Fixed
Rate Loans, Step Loans and Adjustable Rate Loans. If prevailing mortgage rates
fell significantly below the Mortgage Rates on the Fixed Rate Loans, the
Mortgage Rates expected to result after the final Adjustment Dates for the Step
Loans or the Mortgage Rates on the Adjustable Rate Loans during the seven-year
fixed initial interest rate periods thereof, the rate of prepayments (including
from refinancings) on such Mortgage Loans would be expected to increase.
Conversely, if prevailing Mortgage Rates rose significantly above such Mortgage
Rates, the rate of prepayments on such Mortgage Loans would be expected to
decrease. After the initial Adjustment Dates of the Adjustable Rate Loans, the
Mortgage Rates thereon adjust periodically in response to the Index as most
recently available as of the date 45 days prior to the related Adjustment Dates.
Furthermore, the first distribution on the Certificates after a periodic
adjustment to scheduled monthly payments on the Adjustable Rate Loans will be
distributed to Certificateholders on the Distribution Date in the third month
following the month in which the related Index was published. The Index may not
rise or fall consistently with mortgage rates generally. Therefore, the Index
may be higher than mortgage rates generally, resulting in prepayments when the
Mortgage Rates on the Mortgage Loans are increasing.
The Class A Certificates are subject to various priorities for payment of
principal, as described herein. Distributions of principal on the Classes of
Class A Certificates having an earlier priority of payment will be affected by
the rates of prepayment of the Mortgage Loans early in the life of the Mortgage
Pool. The timing of commencement of principal distributions and the weighted
average lives of the Classes of Class A Certificates with a later priority of
payment will be affected by the rates of prepayment experienced both before and
after the commencement of principal distributions on such Classes. Furthermore,
as described under "Description of the Certificates-Principal Distributions on
the Senior Certificates" herein, during certain periods all or a
disproportionately large percentage of principal prepayments on the Mortgage
Loans will be allocated among the Senior Certificates and, during certain
periods, no principal prepayments or (relative to the Class M Percentage and the
Class B-1 Percentage) a disproportionately small or large portion of principal
prepayments on the Mortgage Loans will be allocated to the Class M Certificates
and the Class B-1 Certificates. The allocation of all or a disproportionately
large percentage of principal prepayments to the Senior Certificates will cause
the Certificate Principal Balances of the Class M Certificates and the Class B-1
Certificates to decline more slowly than would be the case if the Class M
Certificates and the Class B-1 Certificates received their proportionate share
of principal prepayments. However, as described under "Description of the
Certificates-Principal Distributions on the Class M Certificates and the Class
B-1 Certificates" herein, holders of the Class B-1 Certificates will be entitled
to principal distributions that include certain amounts otherwise distributable
to the holders of the Class B-3 Certificates, which will cause the weighted
average life of the Class B-1 Certificates to be shorter than would otherwise be
the case. In addition, to the extent that all or a disproportionately large
percentage of principal prepayments are allocated to the Senior Certificates
during any period as described herein, the Senior Percentage upon which future
allocations of prepayments to the Class A Certificates would thereafter be based
would, assuming a high level of prepayments but a low level of losses on the
Mortgage Loans, be significantly decreased, with the result that principal
payments, including principal prepayments subsequent to such periods, would be
allocated to the holders of the Class M Certificates and the Class B-1
Certificates in greater percentages than the initial Class M Percentage and the
initial Class B-1 Percentage.
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Because it is impossible to accurately predict the timing and dollar
amount of principal prepayments on the Mortgage Loans, if any, that will be
made, as well as the percentage according to which those prepayments will be
allocated among Classes of Certificates at any particular point in time,
investors in the Offered Certificates, and particularly investors in the Class M
Certificates and the Class B-1 Certificates, may find it difficult to analyze
the effect of principal prepayments on the yield and average life of the various
Classes of Certificates.
The Pass-Through Rates on the Class A Certificates, the Class M
Certificates and the Class B-1 Certificates are fixed and will not change in
response to changes in market interest rates. The Pass-Through Rate on the
Variable Strip Certificates is based on the weighted average of the Pool Strip
Rates on the Mortgage Loans, which will not change in respect of the Fixed Rate
Loans and will not change in respect of the Step Loans after the final
Adjustment Dates for the Step Loans. Accordingly, if market interest rates or
market yield for securities similar to the Offered Certificates were to rise,
the market value of the Offered Certificates may decline.
The rate of defaults on the Mortgage Loans will also affect the rate and
timing of principal payments on the Mortgage Loans. In general, defaults on
mortgage loans are expected to occur with greater frequency in their early
years. Increases in the monthly payments on the Step Loans and the Adjustable
Rate Loans to amounts in excess of the monthly payments required at their
respective dates of origination may result in a default rate higher than that on
level payment mortgage loans. Substantial increases in the amount of the
monthly payments on each Step Loan will occur after the Adjustment Dates,
thereof, because the related Mortgage Rate will increase on such Adjustment
Dates. With respect to each Adjustable Rate Loan, a substantial increase in the
amount of the monthly payments could occur after the initial Adjustment Date
thereof, because the Periodic Rate Cap thereon will not limit increases in the
related Mortgage Rate on such date. The repayment of such Mortgage Loans will
be dependent on the ability of the related mortgagors to make larger monthly
payments as a result of increases in the related Mortgage Rates. The rate of
default on Mortgage Loans which are refinance mortgage loans or which were not
originated under the Full Documentation program may be higher than for other
types of Mortgage Loans. As a result of the underwriting standards for the
Seller's regular lending program, the Mortgage Loans are likely to experience
rates of delinquency, foreclosure, bankruptcy and loss that are higher, and that
may be substantially higher, than those experienced by mortgage loans
underwritten in a more traditional manner. See "The Seller-Loan Delinquency,
Forbearance, Foreclosure, Bankruptcy and REO Property Status" and "-REO Property
Liquidation Experience" above for important information regarding the
delinquency, forbearance, foreclosure, bankruptcy and REO property status and
loss experience of certain mortgage loans previously originated by the Seller
under the regular lending program. In addition, because of such underwriting
criteria and their likely effect on the delinquency, foreclosure, bankruptcy and
loss experience of the Mortgage Loans, the Mortgage Loans will be serviced in a
manner intended to result in a faster exercise of remedies, including
foreclosure, in the event Mortgage Loan delinquencies and defaults occur, than
would be the case if the Mortgage Loans were serviced in a more conventional
manner. Furthermore, the rate and timing of prepayments, defaults and
liquidations on the Mortgage Loans will be affected by the general economic
condition of the region of the country in which the related Mortgaged Properties
are located. The risk of delinquencies and loss is greater and prepayments are
less likely in regions where a weak or deteriorating economy exists, as may be
evidenced by, among other factors, increasing unemployment or falling property
values. See "Yield, Prepayment and Maturity Considerations" in the Prospectus.
As described under "Description of the Certificates-Allocation of Losses;
Subordination" and "Description of the Certificates-Advances," amounts otherwise
distributable to holders of the Class B-1 Certificates will be made available to
protect the holders of the Senior Certificates and the Class M Certificates
against interruptions in distributions due to certain mortgagor delinquencies,
and amounts otherwise distributable to holders of the Class M Certificates will
be made available to protect the holders of the Senior Certificates against
interruptions in distributions due to certain mortgagor delinquencies, in each
case to the extent not covered by Advances. Such delinquencies will affect the
yield to investors in the Class B-1 Certificates to the extent not covered by
the Class B-2 Certificates and the Class B-3 Certificates, and such
delinquencies will affect the yield to investors in the Class M Certificates to
the extent not covered by the Subordinate Certificates. Even if subsequently
cured, such delinquencies may affect the timing of the receipt of distributions
by the holders of Class B-1 Certificates or the
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<PAGE>
Class M Certificates, as the case may be, because the entire amount (rather than
a PRO RATA portion) thereof would be borne by such Class of Certificates.
Furthermore, the Principal Only Certificates will share in the principal
portions of Realized Losses on the Mortgage Loans only to the extent they are
incurred with respect to Discount Mortgage Loans and only to the extent of the
related Discount Fractions thereof. Thus, after the Class M Certificates and
the Subordinate Certificates are retired, or in the case of Excess Special
Hazard Losses, Excess Fraud Losses, Excess Bankruptcy Losses and Extraordinary
Losses, the Class A Certificates may be affected to a greater extent by losses
on Non-Discount Mortgage Loans than by losses on Discount Mortgage Loans. In
addition, a higher than expected rate of delinquencies or losses will also
affect the rate of principal payments on the Class M Certificates and the Class
B-1 Certificates if it delays the scheduled reduction of the Senior Prepayment
Percentage or affects the allocation of prepayments among the Class M
Certificates and the Subordinate Certificates.
When a principal prepayment in full is made on a Mortgage Loan, the
mortgagor is charged interest only for the period from the Due Date of the
immediately preceding monthly payment up to the date of such prepayment, instead
of for a full month. Partial principal prepayments are applied as of the first
day of the month of receipt, with a resulting reduction in interest payable for
the month during which the partial prepayment is made. Full or partial
prepayments (or other liquidations) received in any calendar month will be
distributed to Certificateholders on the Distribution Date in the month
following the month of receipt. With respect to such full or partial prepayments
(or other liquidations), the Master Servicer is obligated to fund shortfalls in
collection of one full month's interest (adjusted to the related Net Mortgage
Rate) but only to the extent of the servicing compensation otherwise payable to
the Master Servicer. Accordingly, to the extent any such shortfall in interest
collections exceeds the amount that the Master Servicer is obligated to fund,
the effect of any such principal prepayment will be to reduce the aggregate
amount of interest that is available for distribution to the Certificateholders,
and will be allocated among the Certificates in proportion to the interest
otherwise distributable or accrued thereon.
In addition, the yield to maturity of the Offered Certificates will depend
on the prices paid by the holders of the Offered Certificates and the related
Pass-Through Rates. The extent to which the yield to maturity of an Offered
Certificate is sensitive to prepayments will depend upon the degree to which it
is purchased at a discount or premium. For additional considerations relating to
the yield on the Certificates, see "Yield, Prepayment and Maturity
Considerations" in the Prospectus.
WEIGHTED AVERAGE LIFE: Weighted average life refers to the average
amount of time that will elapse from the date of issuance of a security to the
date of distribution to the investor of each dollar distributed in reduction of
principal of such security (assuming no losses). The weighted average life of
the Offered Certificates will be influenced by, among other things, the rate at
which principal of the Mortgage Loans is paid, which may be in the form of
scheduled amortization, prepayments or liquidations.
Prepayments on mortgage loans are commonly measured relative to a
prepayment standard or model. The model used in this Prospectus Supplement
represents an assumed constant prepayment rate ("CPR") each month relative to
the then outstanding principal balance of a pool of mortgage loans for the life
of such mortgage loans. CPR does not purport to be either an historical
description of the prepayment experience of any pool of mortgage loans or a
prediction of the anticipated rate of prepayment of any mortgage loans,
including the Mortgage Loans to be included in the Trust Fund.
The tables set forth below have been prepared on the basis of certain
assumptions, as described below, regarding the weighted average characteristics
of the Mortgage Loans that are expected to be included in the Trust Fund, as
described under "Description of the Mortgage Pool" herein, and the performance
thereof. The tables assume, among other things, that: (i) all of the Mortgage
Loans have identical payment provisions, (ii) the distributions in respect of
the Certificates are received in cash on the 25th day of each month commencing
in
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<PAGE>
December 1995, (iii) the Mortgage Loans are divided into five groups with the
following aggregate initial characteristics:
<TABLE>
<CAPTION>
ORIGINAL TERM REMAINING TERM
TO MATURITY TO MATURITY
GROUP NUMBER PRINCIPAL BALANCE MORTGAGE RATE POOL STRIP RATE (IN MONTHS) (IN MONTHS)
- - - - - - ------------ ----------------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
1 $ 47,141,697.22 11.0510% 3.3010% 360 357
2 $ 6,302,608.32 12.3060% 4.5560% 180 178
3 $ 6,318,150.48 10.6190% 2.8690% 358 352
4 $ 484,788.67 6.9826% 0.0000% 360 357
5 $ 24,891,939.70 11.9930% 4.2430% 349 342
</TABLE>
(iv) the Mortgage Rate and Pool Strip Rate of the Mortgage Loans in the third
group are equal to the amounts indicated above from the first Due Date through
the sixth Due Date, then increase to 11.869% and 4.119% per annum, respectively,
for the seventh Due Date through the eighteenth Due Date and thereafter remain
constant at 13.619% and 5.869% per annum, respectively, (v) the Mortgage Rate
and Pool Strip Rate of the Mortgage Loans in the fourth group are equal to the
amounts indicated above from the first Due Date through the ninth Due Date, then
increase to 8.2326% and 1.250% per annum, respectively, for the tenth Due Date
through the twenty-first Due Date and thereafter remain constant at 9.9826% and
3.00% per annum, respectively, (vi) the Mortgage Rate and Pool Strip Rate of the
Mortgage Loans in the fifth group are equal to the amounts indicated above from
the first Due Date through the seventy-seventh Due Date and thereafter remain
constant at 11.9930% and 4.243% per annum, respectively, based on an Index equal
to 5.75%, a Gross Margin equal to 5.74% and a Minimum Rate equal to 11.993%,
(vii) each Mortgage Loan has a Servicing Fee Rate equal to 0.500% per annum,
(viii) all of the Mortgage Loans prepay at the specified constant CPR
percentages, (ix) no defaults or delinquencies in the payment by mortgagors of
principal of and interest on the Mortgage Loans are experienced, (x) the Master
Servicer does not exercise its option to repurchase all of the Mortgage Loans as
described under the caption "Pooling and Servicing Agreement-Termination," (xi)
prepayments representing payment in full of individual Mortgage Loans are
received on the last day of each month and include 30 days interest thereon,
commencing in November 1995, (xii) the scheduled monthly payment for each
Mortgage Loan is received on the first day of each month commencing in December
1995 and has been calculated based on its outstanding balance, interest rate and
remaining term to stated maturity such that the Mortgage Loan will amortize in
amounts sufficient to repay the remaining balance of such Mortgage Loan by its
stated maturity, (xiii) the Certificates are purchased on November 21, 1995 and
(xiv) the number of days between the date the Offered Certificates are purchased
and the first Distribution Date is 34 days (such assumptions, collectively, the
"Structuring Assumptions").
The actual characteristics and performance of the Mortgage Loans will
differ from the assumptions used in constructing the tables set forth below,
which are hypothetical in nature and are provided only to give a general sense
of how the principal cash flows might behave under varying prepayment scenarios.
For example, it is very unlikely that the Mortgage Loans will prepay at a
constant CPR level until maturity or that all of the Mortgage Loans will prepay
at the same CPR level. Moreover, the diverse remaining terms to maturity of the
Mortgage Loans could produce slower or faster principal distributions than
indicated in the tables at the various CPR percentages specified, even if the
various weighted average remaining terms to maturity of the Mortgage Loans are
as assumed. Any difference between such assumptions and the actual
characteristics and performance of the Mortgage Loans, or actual prepayment or
loss experience, will affect the percentages of initial Certificate Principal
Balances outstanding over time and the weighted average lives of the Classes of
Offered Certificates.
Subject to the foregoing discussion and assumptions, the tables below
indicate the weighted average life of each Class of Offered Certificates (other
than the Variable Strip Certificates) and set forth the percentages of the
initial Certificate Principal Balance of each such Class of Offered Certificates
that would be outstanding after each of the Distribution Dates shown at various
CPR percentages.
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<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING CPR PERCENTAGES
CLASS A-1 CERTIFICATES
-------------------------------
DISTRIBUTION DATE 0% 12% 15% 18% 20% 25%
- - - - - - ----------------- ---- ---- ---- ---- ---- ----
Initial Percentage....................... 100% 100% 100% 100% 100% 100%
November 25, 1996........................ 99 65 56 48 42 28
November 25, 1997........................ 97 34 19 5 0 0
November 25, 1998........................ 95 7 0 0 0 0
November 25, 1999........................ 93 0 0 0 0 0
November 25, 2000........................ 91 0 0 0 0 0
November 25, 2001........................ 88 0 0 0 0 0
November 25, 2002........................ 85 0 0 0 0 0
November 25, 2003........................ 82 0 0 0 0 0
November 25, 2004........................ 78 0 0 0 0 0
November 25, 2005........................ 74 0 0 0 0 0
November 25, 2006........................ 70 0 0 0 0 0
November 25, 2007........................ 65 0 0 0 0 0
November 25, 2008........................ 59 0 0 0 0 0
November 25, 2009........................ 52 0 0 0 0 0
November 25, 2010........................ 45 0 0 0 0 0
November 25, 2011........................ 40 0 0 0 0 0
November 25, 2012........................ 34 0 0 0 0 0
November 25, 2013........................ 27 0 0 0 0 0
November 25, 2014........................ 19 0 0 0 0 0
November 25, 2015........................ 11 0 0 0 0 0
November 25, 2016........................ 1 0 0 0 0 0
November 25, 2017 and thereafter......... 0 0 0 0 0 0
Weighted Average Life in Years*..........13.6 1.6 1.3 1.0 0.9 0.7
- - - - - - -----------
* The weighted average life of a Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
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<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING CPR PERCENTAGES
CLASS A-2 CERTIFICATES
-------------------------------
DISTRIBUTION DATE 0% 12% 15% 18% 20% 25%
- - - - - - ----------------- ---- ---- ---- ---- ---- ----
Initial Percentage....................... 100% 100% 100% 100% 100% 100%
November 25, 1996........................ 100 100 100 100 100 100
November 25, 1997........................ 100 100 100 100 96 71
November 25, 1998........................ 100 100 86 67 54 26
November 25, 1999........................ 100 81 56 35 21 0
November 25, 2000........................ 100 57 31 8 0 0
November 25, 2001........................ 100 37 12 0 0 0
November 25, 2002........................ 100 21 0 0 0 0
November 25, 2003........................ 100 9 0 0 0 0
November 25, 2004........................ 100 0 0 0 0 0
November 25, 2005........................ 100 0 0 0 0 0
November 25, 2006........................ 100 0 0 0 0 0
November 25, 2007........................ 100 0 0 0 0 0
November 25, 2008........................ 100 0 0 0 0 0
November 25, 2009........................ 100 0 0 0 0 0
November 25, 2010........................ 100 0 0 0 0 0
November 25, 2011........................ 100 0 0 0 0 0
November 25, 2012........................ 100 0 0 0 0 0
November 25, 2013........................ 100 0 0 0 0 0
November 25, 2014........................ 100 0 0 0 0 0
November 25, 2015........................ 100 0 0 0 0 0
November 25, 2016........................ 100 0 0 0 0 0
November 25, 2017........................ 89 0 0 0 0 0
November 25, 2018........................ 75 0 0 0 0 0
November 25, 2019........................ 60 0 0 0 0 0
November 25, 2020........................ 42 0 0 0 0 0
November 25, 2021........................ 23 0 0 0 0 0
November 25, 2022........................ 1 0 0 0 0 0
November 25, 2023 and thereafter......... 0 0 0 0 0 0
Weighted Average Life in Years*..........24.5 5.6 4.4 3.6 3.2 2.5
- - - - - - -----------
* The weighted average life of a Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
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<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING CPR PERCENTAGES
CLASS A-3 CERTIFICATES
-------------------------------
DISTRIBUTION DATE 0% 12% 15% 18% 20% 25%
- - - - - - ----------------- ---- ---- ---- ---- ---- ----
Initial Percentage....................... 100% 100% 100% 100% 100% 100%
November 25, 1996........................ 100 100 100 100 100 100
November 25, 1997........................ 100 100 100 100 100 100
November 25, 1998........................ 100 100 100 100 100 100
November 25, 1999........................ 100 100 100 100 100 87
November 25, 2000........................ 100 100 100 100 92 45
November 25, 2001........................ 100 100 100 83 62 21
November 25, 2002........................ 100 100 94 60 41 5
November 25, 2003........................ 100 100 75 44 28 0
November 25, 2004........................ 100 98 61 34 20 0
November 25, 2005........................ 100 84 51 27 15 0
November 25, 2006........................ 100 73 42 22 12 0
November 25, 2007........................ 100 62 35 17 9 0
November 25, 2008........................ 100 53 29 14 7 0
November 25, 2009........................ 100 45 24 11 6 0
November 25, 2010........................ 100 39 20 9 4 0
November 25, 2011........................ 100 33 16 7 3 0
November 25, 2012........................ 100 28 13 5 3 0
November 25, 2013........................ 100 24 11 4 2 0
November 25, 2014........................ 100 20 9 3 2 0
November 25, 2015........................ 100 17 7 3 1 0
November 25, 2016........................ 100 14 6 2 1 0
November 25, 2017........................ 100 11 4 2 1 0
November 25, 2018........................ 100 9 3 1 0 0
November 25, 2019........................ 100 7 3 1 0 0
November 25, 2020........................ 100 5 2 1 0 0
November 25, 2021........................ 100 4 1 0 0 0
November 25, 2022........................ 100 2 1 0 0 0
November 25, 2023........................ 60 1 0 0 0 0
November 25, 2024........................ 23 0 0 0 0 0
November 25, 2025 and thereafter......... 0 0 0 0 0 0
Weighted Average Life in Years*.......... 28.3 14.8 11.6 9.1 7.7 5.1
- - - - - - -----------
* The weighted average life of a Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
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<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING CPR PERCENTAGES
CLASS M CERTIFICATES
-------------------------------
DISTRIBUTION DATE 0% 12% 15% 18% 20% 25%
- - - - - - ----------------- ---- ---- ---- ---- ---- ----
Initial Percentage....................... 100% 100% 100% 100% 100% 100%
November 25, 1996........................ 99 99 99 99 99 99
November 25, 1997........................ 99 99 99 99 99 99
November 25, 1998........................ 98 98 98 98 98 98
November 25, 1999........................ 97 97 97 97 97 97
November 25, 2000........................ 96 96 96 96 96 96
November 25, 2001........................ 95 93 91 90 89 87
November 25, 2002........................ 94 88 84 82 80 77
November 25, 2003........................ 93 80 75 72 69 62
November 25, 2004........................ 91 71 65 60 57 46
November 25, 2005........................ 89 61 54 48 45 34
November 25, 2006........................ 87 53 45 39 35 25
November 25, 2007........................ 85 45 37 31 27 18
November 25, 2008........................ 83 39 31 25 21 13
November 25, 2009........................ 80 33 25 20 16 10
November 25, 2010........................ 77 28 21 16 13 7
November 25, 2011........................ 75 24 17 12 10 5
November 25, 2012........................ 73 20 14 10 8 4
November 25, 2013........................ 70 17 11 8 6 3
November 25, 2014........................ 66 14 9 6 4 2
November 25, 2015........................ 63 12 7 5 3 1
November 25, 2016........................ 59 10 6 4 3 1
November 25, 2017........................ 54 8 5 3 2 1
November 25, 2018........................ 49 6 4 2 1 0
November 25, 2019........................ 44 5 3 1 1 0
November 25, 2020........................ 37 4 2 1 1 0
November 25, 2021........................ 30 3 1 1 0 0
November 25, 2022........................ 22 2 1 0 0 0
November 25, 2023........................ 13 1 0 0 0 0
November 25, 2024........................ 5 0 0 0 0 0
November 25, 2025 and thereafter......... 0 0 0 0 0 0
Weighted Average Life in Years*.......... 20.8 12.6 11.5 10.8 10.4 9.4
- - - - - - -----------
* The weighted average life of a Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
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<PAGE>
PERCENTAGE OF INITIAL CERTIFICATE PRINCIPAL BALANCE
OUTSTANDING AT THE FOLLOWING CPR PERCENTAGES
CLASS B-1 CERTIFICATES
-------------------------------
DISTRIBUTION DATE 0% 12% 15% 18% 20% 25%
- - - - - - ----------------- ---- ---- ---- ---- ---- ----
Initial Percentage....................... 100% 100% 100% 100% 100% 100%
November 25, 1996........................ 98 98 98 98 98 98
November 25, 1997........................ 96 96 96 96 96 96
November 25, 1998........................ 94 94 94 94 94 94
November 25, 1999........................ 91 91 91 91 91 91
November 25, 2000........................ 88 88 88 88 88 88
November 25, 2001........................ 85 83 80 79 78 76
November 25, 2002........................ 82 75 70 68 66 62
November 25, 2003........................ 78 64 58 54 51 42
November 25, 2004........................ 74 51 44 38 35 21
November 25, 2005........................ 70 37 29 22 18 5
November 25, 2006........................ 65 25 16 8 4 0
November 25, 2007........................ 60 13 4 0 0 0
November 25, 2008........................ 54 3 0 0 0 0
November 25, 2009........................ 48 0 0 0 0 0
November 25, 2010........................ 41 0 0 0 0 0
November 25, 2011........................ 35 0 0 0 0 0
November 25, 2012........................ 28 0 0 0 0 0
November 25, 2013........................ 20 0 0 0 0 0
November 25, 2014........................ 12 0 0 0 0 0
November 25, 2015........................ 3 0 0 0 0 0
November 25, 2016 and thereafter......... 0 0 0 0 0 0
Weighted Average Life in Years*.......... 12.8 8.7 8.2 7.9 7.7 7.3
- - - - - - ------------
* The weighted average life of a Certificate is determined by (i)
multiplying the amount of each distribution in reduction of the
Certificate Principal Balance by the number of years from the date of
issuance of the Certificate to the related Distribution Date, (ii) adding
the results and (iii) dividing the sum by the initial Certificate
Principal Balance of the Certificate.
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<PAGE>
VARIABLE STRIP CERTIFICATE YIELD CONSIDERATIONS
THE YIELD TO MATURITY ON THE VARIABLE STRIP CERTIFICATES WILL BE HIGHLY
SENSITIVE TO THE PREPAYMENT, REPURCHASE AND DEFAULT EXPERIENCE ON THE
MORTGAGE LOANS. INVESTORS SHOULD CAREFULLY CONSIDER THE ASSOCIATED RISKS,
INCLUDING THE RISK THAT A RAPID RATE OF PRINCIPAL PREPAYMENTS, DEFAULTS OR
REPURCHASES ON THE MORTGAGE LOANS COULD RESULT IN THE FAILURE OF INVESTORS IN
THE VARIABLE STRIP CERTIFICATES TO FULLY RECOVER THEIR INITIAL INVESTMENT.
The table below indicates the approximate pre-tax yields to maturity
(on a corporate bond equivalent basis (CBE)) on the Variable Strip
Certificates for the specified CPR percentages and assumed purchase prices
based on the Structuring Assumptions and on the further assumption that the
purchase price of the Variable Strip Certificates is equal to the sum of (a)
the assumed purchase price, as specified below, multiplied by the initial
Notional Amount and (b) 20 days of accrued interest.
PRE-TAX YIELD TO MATURITY (CBE) OF THE VARIABLE STRIP CERTIFICATES
CPR PERCENTAGES
------------------------------------------
ASSUMED PURCHASE PRICE 12% 15% 18% 20% 25%
---------------------- ---- ---- ---- ---- ----
8.75000% .............. 30.2% 26.4% 22.5% 19.9% 13.2%
9.00000% .............. 29.0% 25.2% 21.3% 18.7% 12.0%
9.25000% .............. 27.8% 24.0% 20.1% 17.5% 10.9%
The yields set forth in the preceding table were calculated by
determining the monthly discount rates which, when applied to the related
streams of cash flows assumed to be paid on the Variable Strip Certificates,
would cause the discounted present values of such assumed streams of cash
flows to equal the assumed purchase prices of the Variable Strip
Certificates, and by converting such monthly discount rates to corporate bond
equivalent rates. Such calculations do not take into account the effect of
variations that may occur in the interest rates at which investors may be
able to reinvest funds received by them as distributions on the Variable
Strip Certificates and consequently do not purport to reflect the return on
any investment in the Variable Strip Certificates when such reinvestment
rates are considered.
The Mortgage Loans will not have all of the characteristics assumed
above and in the Structuring Assumptions. There can be no assurance that the
Mortgage Loans will prepay at any of the constant rates shown in the table or
at any other particular rate, that the pre-tax yield on the Variable Strip
Certificates will correspond to any of the pre-tax yields shown herein or
that the aggregate purchase price paid for the Variable Strip Certificates
will be equal to any of the assumed purchase prices indicated above. Because
the rate of distributions of principal of the Certificates will be related to
the actual amortization (including prepayments) of the Mortgage Loans, which
may include Mortgage Loans that have remaining terms to stated maturity
shorter or longer than those assumed and interest rates higher or lower than
those assumed, the pre-tax yields on the Variable Strip Certificates will
differ from those set forth above, even if all of the Mortgage Loans prepay
at the indicated CPR percentages. It is unlikely that any Mortgage Loan will
prepay at a constant rate to maturity or that all the Mortgage Loans will
prepay at the same rate. The foregoing table assumes that all of the Mortgage
Loans prepay at the same constant rate. In fact, mortgage loans bearing
different (or the same) mortgage rates may prepay at different rates.
Accordingly, investors should calculate expected yields based on their own
assumptions and should not rely on the yields specified above.
As indicated above, the timing of changes in the rate of prepayments
may significantly affect the actual yield to investors, even if the average
rate of principal prepayments is consistent with the expectations of
investors. In general, the earlier the payment of principal of the Mortgage
Loans the greater the effect on an investor's yield to maturity. As a result,
the effect on an investor's yield of principal prepayments occurring at a
rate higher (or lower) than the rate anticipated by the investor during the
period immediately following the issuance of the Variable
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<PAGE>
Strip Certificates will not be offset by a subsequent like reduction (or
increase) in the rate of principal prepayments. Investors must make their own
decisions as to the appropriate prepayment assumptions to be used in deciding
whether to purchase any of the Variable Strip Certificates.
Investors in the Variable Strip Certificates should be aware that the
yields in the table above were calculated assuming no changes in the Mortgage
Rates on the Mortgage Loans other than as described in the Structuring
Assumptions. However, as described under "Description of the Mortgage Pool"
herein, portions of the Mortgage Pool will consist of Step Loans and
Adjustable Rate Loans, respectively. The Mortgage Rate on each Step Loan
will be reset twice, approximately one year and approximately two years after
its date of origination, and the Mortgage Rate on each Adjustable Rate Loan
will be subject to adjustment commencing approximately seven years after its
date of origination, and semi-annually thereafter, based on the Index (which
may vary significantly over time). Further, to extent that a change in the
level of the Index results in an increase or decrease in the Mortgage Rates
on any of the Adjustable Rate Loans, such change will result in a like
increase or decrease in the Pool Strip Rates on such Adjustable Rate Loans.
Because the Pass-Through Rate on the Variable Strip Certificates is based on
the weighted average of the Pool Strip Rates on the Mortgage Loans, the yield
to investors on the Variable Strip Certificates will be sensitive to changes
in the level of the Index and might be reduced as a result of decreases in
the level of the Index.
In addition to the foregoing, holders of the Variable Strip
Certificates generally will have rights to relatively larger portions of
interest payments on the Mortgage Loans with higher Net Mortgage Rates than
on Mortgage Loans with lower Net Mortgage Rates. Thus, the yield on the
Variable Strip Certificates will be materially and adversely affected to a
greater extent than the yield on the other Classes of Offered Certificates if
the Mortgage Loans with higher Net Mortgage Rates prepay faster than the
Mortgage Loans with lower Net Mortgage Rates. Because the Mortgage Loans
with higher Net Mortgage Rates generally have higher Mortgage Rates, such
Mortgage Loans generally are more likely to be prepaid under most
circumstances than are Mortgage Loans with lower Net Mortgage Rates.
POOLING AND SERVICING AGREEMENT
GENERAL
The Certificates will be issued pursuant to a Pooling and Servicing
Agreement (the "Pooling and Servicing Agreement"), dated as of November 1, 1995,
among the Depositor, the Master Servicer, and Bankers Trust Company, as Trustee.
Reference is made to the Prospectus for important information in addition to
that set forth herein regarding the terms and conditions of the Pooling and
Servicing Agreement and the Offered Certificates. The Offered Certificates will
be transferable and exchangeable at the corporate trust office of the Trustee,
which will serve as Certificate Registrar and Paying Agent. The Depositor will
provide a prospective or actual Certificateholder without charge, on written
request, a copy (without exhibits) of the Pooling and Servicing Agreement.
Requests should be addressed to N. Dante LaRocca, Donaldson, Lufkin & Jenrette
Securities Corporation, 140 Broadway, New York, New York 10005.
The Master Servicer has the right to resign from the obligations and
duties imposed on it under the Pooling and Servicing Agreement upon the
appointment of a successor servicer and delivery to the Trustee of a letter
from each Rating Agency that such resignation and appointment will not, in
and of itself, result in a downgrading of the Certificates. The Master
Servicer may not assign its obligations and duties under the Pooling and
Servicing Agreement.
ASSIGNMENT OF MORTGAGE LOANS
The Mortgage Loans will be assigned by the Depositor to the Trustee
pursuant to the terms of the Pooling and Servicing Agreement, together with
all principal and interest due on the Mortgage Loans after the Cut-off Date.
The Trustee will, concurrently with such assignment, authenticate and deliver
the Certificates. Each Mortgage Loan will be identified in a schedule
appearing as an exhibit to the Pooling and Servicing Agreement which will
specify
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<PAGE>
with respect to each Mortgage Loan, among other things, the original principal
balance, the principal balance as of the close of business on the Cut-off Date,
the Monthly Payment, the maturity date and the Mortgage Rate.
As to each Mortgage Loan, the following documents are required to be
delivered to the Trustee in accordance with the Pooling and Servicing
Agreement: (i) the related original Mortgage Note endorsed without recourse
to the Trustee, (ii) the original Mortgage with evidence of recording
indicated thereon (or, if such original recorded Mortgage has not yet been
returned by the recording office, a copy thereof certified by the Seller to
be a true and complete copy of such Mortgage sent for recording), (iii) an
original recorded assignment of the Mortgage to the Trustee (or if such
original recorded assignment has not yet been returned by the recording
office, a copy thereof certified by the Seller to be a true and complete copy
of such assignment sent for recording), (iv) the policies of title insurance
issued with respect to each Mortgage Loan and (v) the originals of any
assumption, modification, extension or guaranty agreements. The assignments
to the Trustee in connection with each Mortgage Loan are required to be
submitted for recording promptly after the Delivery Date. The Trustee will
review each Mortgage File within 90 days of the Delivery Date, and if any
such document is found to be defective in any material respect and the Seller
does not cure such defect within 60 days of notice thereof from the Trustee,
the Seller will be obligated to purchase the related Mortgage Loan from the
Trust Fund within 90 days of such notice.
Pursuant to the terms of the Pooling and Servicing Agreement, the
Depositor will assign to the Trustee for the benefit of the holders of the
Certificates all of its right, title and interest in and to each Purchase
Agreement insofar as it relates to the representations and warranties made by
the Seller in respect of the related Mortgage Loans and the remedies provided
for breach of such representations and warranties. The representations and
warranties made by the Seller with respect to the Mortgage Loans differ but
are similar in nature to the representations and warranties summarized in the
Prospectus under the caption "Loan Underwriting Procedures and Standards
- - - - - - -Representations and Warranties." Upon discovery by the Trustee of a breach
of any representation, warranty or covenant which materially and adversely
affects the interests of the Certificateholders in a Mortgage Loan, the
Trustee will promptly notify the Seller and the Master Servicer. The Seller
will have 90 days from its discovery or its receipt of such notice to cure
such breach or repurchase the Mortgage Loan. The Seller will not have any
right to substitute another mortgage loan for a Mortgage Loan as to which
such a breach has occurred. See "The Seller" above.
Neither the Depositor, the Master Servicer, the Trustee nor any of
their respective affiliates will make any representations or warranties with
respect to the Mortgage Loans, or have any obligation to purchase a Mortgage
Loan if the Seller defaults on its obligation to repurchase a Mortgage Loan
either in connection with a breach of a representation and warranty or in
connection with a defective document as described above, and no assurance can
be given that the Seller will carry out such obligations with respect to
Mortgage Loans. Although the Subordination described herein will not be
available to support the Seller's obligation to repurchase any Mortgage Loan,
to the extent any such Mortgage Loan is not repurchased by the Seller and
losses occur on such Mortgage Loans, Subordination with respect to such
Mortgage Loans will be available to the extent provided herein. To the extent
that the Subordination is so utilized, such Subordination will be depleted
more quickly than if such Mortgage Loans had been repurchased by the Seller.
THE MASTER SERVICER
Temple-Inland Mortgage Corporation ("TIMC"), a Nevada corporation, will
serve as the Master Servicer under the Pooling and Servicing Agreement. TIMC
is a full service mortgage banking company and is a FNMA- and FHLMC-approved
seller/servicer. TIMC originates mortgage loans through a network of retail
and wholesale branches, and the mortgage loans it originates are generally
sold in the secondary market on a servicing-retained basis. In addition,
TIMC services loans in all fifty states and in the District of Columbia, and
its servicing portfolio includes a full range of mortgage products serviced
for a variety of mortgage loan and mortgage-backed security investors.
TIMC's principal executive offices are located at 1300 Mo-Pac Expressway
South, Austin, Texas 78746, and its telephone number is (512) 434-8000.
TIMC is a wholly-owned subsidiary of Guaranty Federal Bank, F.S.B.
("GFB"), a Dallas, Texas-based financial institution. GFB is a wholly-owned
subsidiary of Temple-Inland Financial Services ("TIFS"), a financial services
holding company that is wholly-owned by Temple-Inland Inc. ("T-I"). T-I is a
Texas-based, holding
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company with interests primarily in paper, packaging, building products and
financial services. T-I's stock is publicly traded on the New York Stock
Exchange and the Pacific Stock Exchange.
The following table sets forth certain information concerning the
delinquency experience (including bankruptcies) and foreclosures in progress
on one- to four-family residential mortgage loans included in TIMC's
servicing portfolio at the end of the indicated periods. The indicated
periods of delinquency are based on the number of days past due on a
contractual basis. No mortgage loan is considered delinquent for these
purposes until it is one month past due on a contractual basis.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1992 AT DECEMBER 31, 1993 AT DECEMBER 31, 1994 AT JUNE 30, 1995
----------------------- --------------------- ------------------------ -----------------------
BY NUMBER PERCENT BY BY NUMBER PERCENT BY BY NUMBER PERCENT BY BY NUMBER PERCENT BY
OF NUMBER OF NUMBER OF NUMBER OF NUMBER
LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS LOANS OF LOANS
--------- ---------- --------- ---------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Residential
Portfolio...... 142,912 N/A 144,497 N/A 149,393 N/A 166,417 N/A
Period of Delinquency:
31-60 days..... 1,134 0.79% 1,103 0.76% 1,145 0.76% 1,111 0.67%
61-90 days(1) 1,494 1.04 941 0.65 1,425 0.95 491 0.30
91 days or more(2) - - - - - - 1,073 0.64
Foreclosures in
Progress....... 494 0.34 267 0.18 404 0.27 319 0.19
--------- ---------- --------- ---------- ---------- --------- --------- -----------
Total Delinquent
Loans.......... 3,122 2.18% 2,311 1.59% 2,974 1.99% 2,994 1.80%
--------- ---------- --------- ---------- ---------- --------- --------- -----------
--------- ---------- --------- ---------- ---------- --------- --------- -----------
Bankruptcy Loans. 696 0.49% 669 0.46% 612 0.41% 621 0.37%
</TABLE>
- - - - - - ------------------------------------
(1) Includes mortgage loans 61 to 90 days and 91 days or more delinquent at
December 31, 1992, December 31, 1993 and December 31, 1994.
(2) TIMC did not keep separate records of mortgage loans 91 days or more
delinquent prior to January 1, 1995.
The aggregate principal balances of the one- to four-family residential
mortgage loans included in TIMC's servicing portfolio at the close of
business on December 31, 1992, December 31, 1993, December 31, 1994 and June
30, 1995 were approximately $8.0 billion, $9.0 billion, $10.1 billion and
$12.3 billion, respectively.
The following table sets forth certain information concerning the
foreclosure experience on one- to four-family residential mortgage loans
included in TIMC's servicing portfolio at or for the indicated periods.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED SIX MONTHS ENDED
DECEMBER 31, 1992 DECEMBER 31, 1993 DECEMBER 31, 1994 JUNE 30, 1995
----------------- ----------------- ----------------- ----------------
BY NUMBER BY NUMBER BY NUMBER BY NUMBER
OF OF OF OF
LOANS LOANS LOANS LOANS
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Foreclosed Loans 1,238 788 786 401
Foreclosed Ratio 0.87% 0.55% 0.53% 0.24%
</TABLE>
There can be no assurance that the delinquency experience of the
Mortgage Loans comprising the Mortgage Pool will correspond to the
delinquency experience of TIMC's mortgage portfolio set forth in the
foregoing tables. The statistics shown above represent the delinquency
experience for TIMC's residential mortgage servicing portfolio only for the
periods presented, whereas the aggregate delinquency experience on the
Mortgage Loans comprising
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the Mortgage Pool will depend on the results obtained over the life of the
Mortgage Pool. Moreover, TIMC's residential mortgage servicing portfolio
includes mortgage loans with a variety of payment and other characteristics
(including geographic location) which are not necessarily representative of
the payment and other characteristics of the Mortgage Loans comprising the
Mortgage Pool. PROSPECTIVE INVESTORS IN THE OFFERED CERTIFICATES
PARTICULARLY SHOULD BE AWARE THAT TIMC'S SERVICING PORTFOLIO, ON WHICH THE
FOREGOING TABLES ARE BASED, DOES NOT INCLUDE ANY MORTGAGE LOANS HAVING
UNDERWRITING STANDARDS SIMILAR TO THOSE APPLICABLE TO THE MORTGAGE LOANS AND
CONSISTS PRIMARILY OF MORTGAGE LOANS UNDERWRITTEN IN A TRADITIONAL MANNER.
TIMC HAS HAD LIMITED EXPERIENCE IN SERVICING MORTGAGE LOANS ORIGINATED OR
ACQUIRED IN ACCORDANCE WITH UNDERWRITING STANDARDS SIMILAR TO THE
UNDERWRITING CRITERIA PURSUANT TO WHICH THE MORTGAGE LOANS WERE ORIGINATED OR
ACQUIRED.
It also should be noted that if the residential real estate market
should experience a decline in property values, the actual rates of
delinquency and foreclosure could be higher than those previously experienced
by TIMC. In addition, adverse economic conditions may affect the timely
payment by mortgagors of scheduled payments of principal and interest on the
Mortgage Loans and, accordingly, the actual rates of delinquency, bankruptcy
and foreclosure with respect to the Mortgage Pool. See "The Seller-Loan
Delinquency, Forbearance, Foreclosure, Bankruptcy and REO Property Status"
and "-REO Property Liquidation Experience" herein for important information
regarding the delinquency, forbearance, foreclosure, bankruptcy and REO
property status and loss experience of mortgage loans previously originated
by the Seller under substantially the same underwriting criteria pursuant to
which the Mortgage Loans were originated or acquired.
SERVICING AND OTHER COMPENSATION AND PAYMENT OF EXPENSES
The servicing fee (the "Servicing Fee") for each Mortgage Loan is
payable out of the interest payments on such Mortgage Loan. The Servicing Fee
in respect of each Mortgage Loan will be payable at a rate (the "Servicing
Fee Rate") equal to 0.500% per annum on the outstanding principal balance of
each Mortgage Loan. The Servicing Fees consist of (a) servicing compensation
payable to the Master Servicer in respect of its master servicing activities,
(b) subservicing and other related compensation payable to any subservicer
(including such compensation paid to the Master Servicer as the direct
servicer of a Mortgage Loan for which there is no subservicer) and (c) the
fees payable to the Trustee. The Master Servicer is entitled to retain as
additional servicing compensation any assumption and reconveyance fees, to
the extent collected from mortgagors, and any interest or other income earned
on funds held in the Custodial Account or the Certificate Account. It is not
anticipated that the Master Servicer will enter into any subservicing
arrangements with respect to the Mortgage Loans other than as described below
under "-The Interim Subservicers." However, the Master Servicer intends to
enter into an arrangement with a newly-formed affiliate of DLJMC under which
such affiliate will assist the Master Servicer in collection and loss
mitigation activities with respect to those Mortgage Loans that become
delinquent. The Master Servicer will pay the fees charged by such affiliate
in connection therewith. The Master Servicer is obligated to pay certain
ongoing expenses associated with the Trust Fund and incurred by the Master
Servicer in connection with its responsibilities under the Pooling and
Servicing Agreement. See "Servicing of Loans-Servicing Compensation and
Payment of Expenses" in the Prospectus for information regarding other
possible compensation to the Master Servicer and subservicers and for
information regarding expenses payable by the Master Servicer.
THE INTERIM SUBSERVICERS
Immediately prior to the date of initial issuance of the Certificates
(the "Delivery Date"), all of the servicing rights and obligations with
respect to the Mortgage Loans were owned by DLJMC, and the servicing
functions with respect to the Mortgage Loans were performed by Lomas Mortgage
USA, Inc. ("Lomas") and Quality Mortgage USA, Inc. ("Quality," and together
with Lomas, the "Interim Subservicers"). Approximately 75.26% and 24.74% of
the Mortgage Loans (by aggregate principal balance as of the Cut-off Date)
will be subserviced by Lomas and Quality, respectively, as of the Delivery
Date. Effective on the Delivery Date, DLJMC will transfer and assign
ownership of all such servicing rights and obligations to the Master Servicer
and the Master Servicer will become responsible for the proper performance of
all servicing functions with respect to the Mortgage Loans in accordance with
the Pooling and Servicing Agreement. However, the servicing functions with
respect to the Mortgage Loans will continue to be performed for the Master
Servicer by the Interim Subservicers, as
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subservicers, during an interim period (the "Interim Servicing Period"),
which is scheduled to expire on November 29, 1995.
VOTING RIGHTS
Certain actions specified in the Prospectus that may be taken by
holders of Certificates evidencing a specified percentage of all undivided
interests in the Trust Fund may be taken by holders of Certificates entitled
in the aggregate to such percentage of the Voting Rights. 97% of all Voting
Rights will be allocated among all holders of the Certificates (other than
the Variable Strip Certificates and the Residual Certificates) in proportion
to their then outstanding Certificate Principal Balances, and 2% and 1% of
all Voting Rights will be allocated among the holders of the Variable Strip
Certificates and the Residual Certificates, respectively, in proportion to
the Percentage Interests (as defined in the Prospectus) evidenced by their
respective Certificates. The Pooling and Servicing Agreement will be subject
to amendment without the consent of the holders of the Residual Certificates
in certain circumstances.
EVENTS OF DEFAULT AND TERMINATION EVENT
Events of default ("Events of Default") under the Pooling and Servicing
Agreement will consist of (i) any failure by the Master Servicer to
distribute or cause to be distributed to Certificateholders any required
payment which continues unremedied for five days after the giving of written
notice of such failure to the Master Servicer by the Trustee or the
Depositor, or to the Master Servicer, the Depositor and the Trustee by the
holders of Certificates evidencing not less than 25% of the Voting Rights;
(ii) any failure by the Master Servicer duly to observe or perform in any
material respect any of its other covenants or agreements in the Pooling and
Servicing Agreement which continues unremedied for thirty days after the
giving of written notice of such failure to the Master Servicer by the
Trustee or the Depositor, or to the Master Servicer, the Depositor and the
Trustee by the holders of Certificates evidencing not less than 25% of the
Voting Rights; (iii) certain events of insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain
actions by or on behalf of the Master Servicer indicating its insolvency or
inability to pay its obligations; and (iv) any failure of the Master Servicer
to make any Advance as required which is not remedied one business day prior
to the related Distribution Date.
A termination event ("Termination Event") under the Pooling and
Servicing Agreement will consist of a determination by the Trustee on the
Determination Date in December of any year, commencing in December 1996 and
ending in December 2005, that (a) if such Determination Date occurs in or
before December 2000, the Total Expected Losses (as defined below) on such
Determination Date is greater than 50% of the Initial Loss Coverage Amount
(as defined below) and (b) if such Determination Date occurs after December
2000 and in or before December 2005, the Total Expected Losses on such
Determination Date is greater than 75% of the Initial Loss Coverage Amount.
On any Determination Date, "Total Expected Losses" will equal the sum
of (a) all Realized Losses previously allocated through Subordination and (b)
all Prospective Losses (as defined below) as of such Determination Date.
"Prospective Losses," as of any Determination Date, will be an amount equal
to the sum of (i) the product of (x) the aggregate Stated Principal Balance
of the Mortgage Loans that are 31 days to 60 days delinquent, (y) 25% and (z)
the Loss Severity Percentage (as defined below), (ii) the product of (x) the
aggregate Stated Principal Balance of the Mortgage Loans that are 61 days to
90 days delinquent, (y) 50% and (z) the Loss Severity Percentage and (iii)
the product of (x) the aggregate Stated Principal Balance of the Mortgage
Loans that are 91 days or more delinquent plus the aggregate Stated Principal
Balance of all REO Properties, if any, and (y) the Loss Severity Percentage.
For purposes of calculating Prospective Losses, Mortgage Loans in foreclosure
will be categorized based on their respective number of days of delinquency.
The "Initial Loss Coverage Amount" will equal the aggregate initial
Certificate Principal Balance of the Class M Certificates and the Subordinate
Certificates, and the "Loss Severity Percentage" will be equal to 43%.
RIGHTS UPON EVENT OF DEFAULT OR TERMINATION EVENT
So long as an Event of Default under the Pooling and Servicing
Agreement as described in clauses (i), (ii) and (iii) of the third preceding
paragraph remains unremedied, the Depositor or the Trustee may, and at the
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direction of holders of Certificates evidencing not less than 51% of the
Voting Rights shall, by notice in writing to the Master Servicer terminate
all of the rights and obligations of the Master Servicer under the Pooling
and Servicing Agreement and in and to the Trust Fund. If an Event of Default
under the Pooling and Servicing Agreement as described in clause (iv) of the
third preceding paragraph shall occur, the Trustee will, by notice to the
Master Servicer and the Depositor, terminate all of the rights and
obligations of the Master Servicer under the Pooling and Servicing Agreement
and in and to the Trust Fund; provided, however, that if the Trustee
determines that the failure by the Master Servicer to make any required
Advance was due to circumstances beyond its control and the required Advance
was otherwise made, the Trustee shall not terminate the Master Servicer. If a
Termination Event under the Pooling and Servicing Agreement as described in
the second preceding paragraph shall occur, the Trustee will give notice of
such Termination Event to the Master Servicer and the Certificateholders
within 5 days and, upon the direction of holders of Certificates entitled to
at least 51% of the Voting Rights received within 90 days of such notice, the
Trustee shall, by notice to the Master Servicer and the Depositor, terminate
all of the rights and obligations of the Master Servicer under the Pooling
and Servicing Agreement and in and to the Trust Fund. Upon receipt by the
Master Servicer of any such written notice, all authority and power of the
Master Servicer under the Pooling and Servicing Agreement will pass to and be
vested in the Trustee, and the Trustee will be authorized and empowered to
execute and deliver, on behalf of the Master Servicer, as attorney-in-fact,
or otherwise, any and all documents and other instruments, and to do or
accomplish all other acts or things necessary or appropriate to effect the
purposes of such termination. Upon receipt by the Master Servicer of notice
of termination, the Trustee will succeed to all the responsibilities, duties
and liabilities of the Master Servicer under the Pooling and Servicing
Agreement and will be entitled to similar compensation arrangements. In the
event that the Trustee is unwilling, it may, or if it is unable or if the
holders of Certificates evidencing not less than 51% of the Voting Rights
request in writing, it shall, appoint or petition a court of competent
jurisdiction for the appointment of a mortgage loan servicing institution,
with a net worth of at least $10,000,000 to act as successor to the Master
Servicer under the Pooling and Servicing Agreement. Pending such appointment,
the Trustee is obligated to act in such capacity. The Trustee and such
successor may agree upon the servicing compensation to be paid, which in no
event may be greater than the compensation to the Master Servicer under the
Pooling and Servicing Agreement. In addition, holders of Certificates
evidencing at least 66% of the Voting Rights of Certificates affected by an
Event of Default may waive such Event of Default; provided, however, that (a)
an Event of Default with respect to the Master Servicer's obligation to make
Advances may be waived only by all of the holders of Certificates affected by
such Event of Default and (b) no such waiver is permitted that would
materially adversely affect any non-consenting Certificateholder. See "The
Pooling and Servicing Agreements-Rights Upon Event of Default" in the
Prospectus.
LIMITATION ON RESIGNATION OF THE MASTER SERVICER
The Master Servicer may resign from its obligations and duties under
the Pooling and Servicing Agreement only if such resignation, and the
appointment of a successor, will not result in a downgrading of the ratings
assigned to any Class of Certificates, or upon a determination that its
duties under the Pooling and Servicing Agreement are no longer permissible
under applicable law. No such resignation will become effective until the
Trustee or a successor servicer has assumed the Master Servicer's
responsibilities, liabilities, obligations and duties under the Pooling and
Servicing Agreement. Any proposed successor Master Servicer must be an
established mortgage loan servicing institution, must be reasonably
acceptable to the Trustee, must be acceptable to each Rating Agency for
purposes of maintaining its then-current ratings of the Certificates and must
comply with any further requirements of a successor Master Servicer under the
Pooling and Servicing Agreement.
TERMINATION
The obligations created by the Pooling and Servicing Agreement will
terminate upon payment to the Certificateholders of all amounts held in the
Certificate Account and the Excess Proceeds Account required to be paid to
the Certificateholders pursuant to such Pooling and Servicing Agreement,
following the earlier of (i) the final payment or other liquidation of the
last Mortgage Loan remaining in the Trust Fund or the disposition of all
property acquired upon foreclosure of any such Mortgage Loan and (ii) the
repurchase of all of the assets of the Trust Fund by the Master Servicer when
the aggregate principal balance of the Mortgage Loans equals 5% or less of
the aggregate principal balance as of the Cut-off Date, pursuant to a
provision of the Agreement giving the Master Servicer the right to do so.
Written notice of termination of the Pooling and Servicing Agreement will be
given to
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each Certificateholder, and the final distribution will be made only upon
surrender and cancellation of the Certificates at an office or agency
appointed by the Trustee which will be specified in the notice of termination.
Any such repurchase of Mortgage Loans and property acquired in respect
of the Mortgage Loans shall be made at a price equal to the sum of (a) 100%
of the unpaid principal balance of each outstanding Mortgage Loan (net of
unreimbursed advances attributable to principal) as of the day of such
repurchase plus accrued interest thereon at the Net Mortgage Rate to the
first day of the month of such repurchase, plus (b) the appraised value of
any property acquired in respect of any defaulted Mortgage Loan (but not more
than the unpaid principal balance of that Mortgage Loan together with accrued
interest at the applicable Net Mortgage Rate to the first day of the month of
such purchase) less the good faith estimate of the Master Servicer of
liquidation expenses to be incurred in connection with its disposal thereof.
The exercise of the right to purchase the assets of the Trust Fund as set
forth in clause (ii) of the preceding paragraph will effect early retirement
of the Certificates.
THE TRUSTEE
Bankers Trust Company will be the Trustee under the Pooling and
Servicing Agreement. The Depositor and the Seller may maintain other banking
relationships in the ordinary course of business with the Trustee. Offered
Certificates may be surrendered at the Corporate Trust Office of the Trustee
located at 4 Albany Street, Second Floor, New York, New York 10006, or at
such other addresses as the Trustee may designate from time to time by notice
to the Certificateholders, the Depositor and the Master Servicer.
The Trustee is eligible to serve as such under the Pooling and
Servicing Agreement only if it is a corporation or banking association
organized and doing business under the laws of the United States or any state
thereof, authorized under such laws to exercise corporate trust powers and
subject to supervision or examination by federal or state authority and has
combined capital and surplus of at least $50,000,000.
The Trustee may, upon written notice to the Master Servicer, the
Depositor and all Certificateholders, resign at any time, in which event the
Master Servicer will be obligated to appoint a successor Trustee. If no
successor Trustee has been appointed and has accepted appointment within 60
days after giving such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for appointment of a successor
Trustee. Any such successor Trustee must be approved by each Rating Agency.
The Trustee may also be removed at any time (i) by the Master Servicer, if
the Trustee ceases to be eligible to continue as such as described above or
if the Trustee becomes insolvent or (ii) by holders of Certificates
evidencing at least 51% of the Voting Rights. Any removal or resignation of
the Trustee and appointment of a successor Trustee as described above will
not become effective until acceptance of appointment by the successor Trustee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Upon the issuance of the Offered Certificates, Thacher Proffitt & Wood,
counsel to the Depositor, will deliver its opinion generally to the effect
that, assuming compliance with all provisions of the Pooling and Servicing
Agreement, for federal income tax purposes, the Trust Fund will qualify as a
REMIC under the Internal Revenue Code (the "Code"). For federal income tax
purposes, the Senior Certificates, the Class M Certificates and the
Subordinate Certificates will constitute the "regular interests" in the
REMIC, and will be treated as debt instruments of the REMIC, and the Class R
Certificates will be the sole class of "residual interests" in the REMIC. See
"Certain Federal Income Tax Consequences" in the Prospectus.
For federal income tax reporting purposes, the Class A Certificates
will not, and the Variable Strip Certificates, the Class M Certificates and
the Class B-1 Certificates will, be treated as having been issued with
original issue discount, with all stated interest on the Class M Certificates
and the Class B-1 Certificates treated as original issue discount. The
prepayment assumption that will be used in determining the rate of accrual of
original issue discount, market discount and amortizable premium, if any, for
federal income tax purposes will be that subsequent to the date of any
determination the Mortgage Loans will prepay at a CPR percentage equal to
18%. No representation is made that the Mortgage Loans will prepay at that
rate or at any other rate. See "Certain Federal
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Income Tax Consequences-REMICs-Taxation of Owners of REMIC Regular
Certificates-Original Issue Discount," "-Market Discount" and "-Premium" in
the Prospectus.
If the method for computing original issue discount described in the
Prospectus results in a negative amount for any period with respect to a
Certificate issued with original issue discount, in particular the Variable
Strip Certificates, the amount of original issue discount allocable to such
period will be zero and the holder of such a Certificate will be permitted to
offset such negative amount only against future original issue discount, if
any, attributable to such Certificate. Although uncertain, a
Certificateholder may be permitted to deduct a loss to the extent that his or
her respective remaining basis in such Certificate exceeds the maximum amount
of future payments to which such Certificateholder is entitled, assuming no
further prepayments of the Mortgage Loans. Although the matter is not free
from doubt, any such loss might be treated as a capital loss.
The regulations issued under Sections 1271 to 1275 of the Code (the
"OID Regulations") appear to permit in some circumstances the holder of a
debt instrument to recognize original issue discount under a method that
differs from that used by the issuer. Accordingly, it is possible that the
holder of an Offered Certificate may be able to select a method for
recognizing original issue discount that differs from that used by the Trust
Fund in preparing reports to the Certificateholders and the Internal Revenue
Service. Prospective purchasers of the Offered Certificates are advised to
consult their tax advisors concerning the tax treatment of such Certificates
in this regard.
Certain Classes of Certificates may be treated as having been issued
with a premium. Certificateholders may elect to amortize such premium under a
constant yield method in which case such amortizable premium will generally
be allocated among the interest payments on such Certificates and will be
applied as an offset against such interest payments. See "Certain Federal
Income Tax Consequences-REMICs-Taxation of Owners of REMIC Regular
Certificates-Premium" in the Prospectus.
The Offered Certificates will be treated as "qualifying real property
loans" under Section 593(d) of the Code, assets described in Section
7701(a)(19)(c) of the Code and "real estate assets" under Section
856(c)(5)(a) of the Code generally in the same proportion that the assets of
the Trust Fund would be so treated. In addition, interest on the Offered
Certificates will be treated as "interest on obligations secured by mortgages
on real property" under Section 856(c)(3)(b) of the Code generally to the
extent that such Offered Certificates are treated as "real estate assets"
under Section 856(c)(5)(a) of the Code. Moreover, the Offered Certificates
will be "qualified mortgages" within the meaning of Section 860G(a)(3) of the
Code. See "Certain Federal Income Tax Consequences -REMICs-Characterization
of Investment in REMIC Certificates" in the Prospectus.
To the extent permitted by then-applicable law, any "prohibited
transactions tax," "contributions tax," tax on "net income from foreclosure
property" or state or local income or franchise tax that may be imposed on
the Trust Fund will be borne by the Master Servicer or Trustee in either case
out of its own funds, provided that the Master Servicer or the Trustee, as
the case may be, has sufficient assets to do so, and provided further that
such tax arises out of a breach of the Master Servicer's or the Trustee's
obligations, as the case may be, under the Pooling and Servicing Agreement
and in respect of compliance with then applicable law. Any such tax not borne
by the Master Servicer or the Trustee will be payable out of the Trust Fund,
which may reduce the amounts otherwise payable to holders of the Offered
Certificates, to the extent any such tax exceeds amounts otherwise payable to
holders of the Class B-2 Certificates and the Class B-3 Certificates. See
"Certain Federal Income Tax Consequences-REMICs-Prohibited Transactions Tax
and Other Taxes" in the Prospectus.
For further information regarding the federal income tax consequences
of investing in the Offered Certificates, see "Certain Federal Income Tax
Consequences-REMICs-Taxation of Owners of REMIC Regular Certificates" in the
Prospectus.
METHOD OF DISTRIBUTION
Subject to the terms and conditions set forth in the underwriting
agreement (the "Underwriting Agreement") between the Depositor and Donaldson,
Lufkin & Jenrette Securities Corporation (the "Underwriter"), an affiliate
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of the Depositor, the Depositor has agreed to sell to the Underwriter, and
the Underwriter has agreed to purchase from the Depositor, the Offered
Certificates.
The Underwriting Agreement provides that the obligation of the
Underwriter to pay for and accept delivery of the Offered Certificates is
subject to, among other things, the receipt of certain legal opinions and to
the conditions, among others, that no stop order suspending the effectiveness
of the Depositor's Registration Statement shall be in effect, and that no
proceedings for such purpose shall be pending before or threatened by the
Securities and Exchange Commission.
The distribution of the Offered Certificates by the Underwriter will be
effected from time to time in one or more negotiated transactions, or
otherwise, at varying prices to be determined, in each case, at the time of
sale. The proceeds to the Depositor from the sale of the Offered Certificates
will be approximately $88,501,576 plus accrued interest at the weighted
average of the Net Mortgage Rates as of the Cut-off Date but before deducting
expenses payable by the Depositor. The Underwriter may effect such
transactions by selling its Certificates to or through dealers, and such
dealers may receive compensation in the form of underwriting discounts,
concessions or commissions from the Underwriter for whom they act as agent.
In connection with the sale of the Offered Certificates, the Underwriter may
be deemed to have received compensation from the Depositor in the form of an
underwriting discount. The Underwriter and any dealers that participate with
the Underwriter in the distribution of the Offered Certificates may be deemed
to be underwriters and any profit on the resale of the Offered Certificates
positioned by them may be deemed to be underwriting discounts and commissions
under the Securities Act of 1933.
The Underwriting Agreement provides that the Depositor will indemnify
the Underwriter, and under limited circumstances the Underwriter will
indemnify the Depositor, against certain civil liabilities under the
Securities Act of 1933, or contribute to payments required to be made in
respect thereof.
See "The Seller" for certain information regarding the relationship
between certain affiliates of the Underwriter and the Seller.
There can be no assurance that a secondary market for the Offered
Certificates will develop or, if it does develop, that it will continue or
will provide investors with a sufficient level of liquidity. The primary
source of information available to investors concerning the Offered
Certificates will be the monthly statements discussed in the Prospectus under
"The Pooling and Servicing Agreements-Reports to Certificateholders," which
will include information as to the outstanding principal balance of the
Offered Certificates and the status of the applicable form of credit
enhancement. There can be no assurance that any additional information
regarding the Offered Certificates will be available through any other
source. In addition, the Depositor is not aware of any source through which
price information about the Offered Certificates will be generally available
on an ongoing basis. The limited nature of such information regarding the
Offered Certificates may adversely affect the liquidity of the Offered
Certificates, even if a secondary market for the Offered Certificates becomes
available.
USE OF PROCEEDS
The Depositor will apply the net proceeds from the sale of the Offered
Certificates against the purchase price of the Mortgage Loans.
LEGAL OPINIONS
Certain legal matters relating to the Certificates will be passed upon
for the Depositor and for the Underwriter by Thacher Proffitt & Wood, New
York, New York.
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RATINGS
It is a condition to the issuance of the Certificates that the Variable
Strip Certificates and the Class A Certificates be rated "Aaa" by Moody's
Investors Service, Inc. ("Moody's") and "AAA" by Duff & Phelps Credit Rating
Co. ("DCR"), that the Class M Certificates be rated not lower than "Aa3" by
Moody's and "AA" by DCR and that the Class B-1 Certificates be rated not
lower than "Baa3" by Moody's and "BBB" by DCR.
The ratings assigned by Moody's to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all
distributions on the underlying mortgage loans to which such
certificateholders are entitled. Ratings by Moody's address the structural,
legal and issuer-related aspects associated with the certificates, including
the nature and quality of the underlying mortgage loans. Such ratings do not
represent any assessment of the likelihood of principal prepayments by
mortgagors or of the degree by which such prepayments might differ from those
originally anticipated. With respect to the Variable Strip Certificates, the
ratings address only the likelihood of receipt by the holders of the Variable
Strip Certificates of distributions thereon in the amounts calculated as
described herein and does not address the possibility that such
Certificateholders might suffer a lower than anticipated yield or the
possibility that investors in the Variable Strip Certificates may fail to
fully recoup their initial investment.
The ratings assigned by DCR to mortgage pass-through certificates
address the likelihood of the receipt by certificateholders of all
distributions to which they are entitled under the transaction structure.
DCR's ratings reflect its analysis of the riskiness of the mortgage loans and
its analysis of the structure of the transaction as set forth in the
operative documents. DCR's ratings do not address the effect on the
certificates' yield attributable to prepayments or recoveries on the
underlying mortgages. Further, in the case of the Variable Strip
Certificates, the rating does not address whether investors will recoup their
initial investment.
The Depositor has not requested ratings on the Offered Certificates by
any rating agency other than Moody's and DCR. However, there can be no
assurance as to whether any other rating agency will rate the Offered
Certificates, or, if it does, what ratings would be assigned by such other
rating agency. Ratings on the Offered Certificates by another rating agency,
if assigned at all, may be lower than the ratings assigned to the Offered
Certificates by Moody's and DCR.
A securities rating is not a recommendation to buy, sell or hold
securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. Each securities rating should be evaluated
independently of similar ratings on different securities.
LEGAL INVESTMENT
The Variable Strip Certificates, the Class A Certificates and the Class
M Certificates will constitute "mortgage related securities" for purposes of
the Secondary Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as
they are rated in at least the second highest rating category by Moody's or
DCR and, as such, are legal investments for certain entities to the extent
provided in SMMEA. SMMEA provided that states could override its provisions
on legal investment and restrict or condition investment in mortgage related
securities by taking statutory action on or prior to October 3, 1991. Certain
states have enacted legislation which overrides the preemption provisions of
SMMEA. The Class B-1 Certificates will not constitute "mortgage related
securities" for purposes of SMMEA.
The Federal Financial Institutions Examination Council issued a
supervisory policy statement (the "Policy Statement") applicable to all
depository institutions (to the extent adopted by the respective federal
regulators) setting forth guidelines for and significant restrictions on
investments in "high-risk mortgage securities." The Policy Statement has been
adopted by the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Comptroller of the Currency, the Office of
Thrift Supervision and, in part, by the National Credit Union Administration
(the "NCUA"). In addition, the NCUA has issued regulations governing federal
credit union investments which prohibit investment in certain specified types
of securities. The NCUA has
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indicated that its regulations will take precedence over the Policy
Statement. Similar policy statements and regulations have been issued by
other regulators having jurisdiction over depository institutions. The
Depositor makes no representations regarding the application of the Policy
Statement, or of such similar statements and regulations, to any Class of
Offered Certificates or the treatment of the Offered Certificates thereunder.
The Depositor makes no representations as to the proper
characterization of any Class of Offered Certificates for legal investment or
other purposes, or as to the ability of particular investors to purchase any
Class of Offered Certificates under applicable legal investment restrictions.
These uncertainties may adversely affect the liquidity of the Offered
Certificates. Accordingly, all institutions whose investment activities are
subject to legal investment laws and regulations, regulatory capital
requirements or review by regulatory authorities should consult with their
own legal advisors in determining whether and to what extent any Class of the
Offered Certificates, and in particular the Class B-1 Certificates,
constitutes a legal investment or is subject to investment, capital or other
restrictions.
See "Legal Investment" in the Prospectus.
ERISA CONSIDERATIONS
The U.S. Department of Labor has granted to the Underwriter an
individual exemption (Prohibited Transaction Exemption 90-83) which generally
exempts from the application of certain of the prohibited transaction
provisions of Section 406 of the Employee Retirement Income Security Act of
1974, as amended ("ERISA") and the excise taxes imposed by Section 4975(a)
and (b) of the Code and 502(i) of ERISA, transactions relating to the
purchase, sale and holding by employee benefit plans and other persons
subject to ERISA and the Code ("Plans") of pass-through certificates
underwritten by the Underwriter, provided that certain conditions are
satisfied. In addition, other exemptions may possibly apply to a Plan's
investment in Certificates. Because the Class M Certificates and the Class
B-1 Certificates will not qualify for the foregoing prohibited transaction
exemption (or any similar exemption that might be available), transfers of
such Certificates to any Plan as described above, to a trustee or other
Person acting on behalf of any Plan, or to any other person who is using
"plan assets" of any Plan to effect such acquisition (including any insurance
company using funds in its general or separate accounts that may constitute
"plan assets"), will not be registered unless the transferee provides an
opinion of counsel satisfactory to the Master Servicer, the Depositor and the
Trustee that the purchase of any such Certificate is permissible under
applicable law and will not subject the Master Servicer, the Depositor or the
Trustee to any obligation in addition to those undertaken in the Pooling and
Servicing Agreement. In the case of any transfer of the foregoing
Certificates to an insurance company, in lieu of such opinion of counsel, the
transferee may provide a certification substantially to the effect that the
source of the funds used to purchase such Certificates is an "insurance
company general account" (as such term is defined in the Prohibited
Transaction Class Exemption 95-60 ("PTCE 95-60") issued by the United States
Department of Labor) and that there is no Plan with respect to which the
amount of such general account's reserves and liabilities for contracts held
by or on behalf of such Plan and all other Plans maintained by the same
employer (or any "affiliate" thereof, as defined in PTCE 95-60), or by the
same employee organization, exceed 10% of the total of all reserves and
liabilities of such general account (as determined under PTCE 95-60) as of
the date of acquisition of such Certificates. See "ERISA Considerations" in
the Prospectus.
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PROSPECTUS
MARCH 27, 1995
DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
MORTGAGE PASS-THROUGH CERTIFICATES
(ISSUABLE IN SERIES)
This Prospectus relates to Mortgage Pass-Through Certificates (the
"Certificates") which may be sold from time to time under this Prospectus and
related Prospectus Supplement in one or more series (each a "Series") by DLJ
Mortgage Acceptance Corp. (the "Depositor"). Capitalized terms not otherwise
defined herein have the meanings specified in the Glossary attached hereto.
Each Certificate of a Series will evidence a beneficial ownership interest
in assets deposited into a trust (a "Trust Fund") by the Depositor pursuant to a
Pooling and Servicing Agreement executed by the Depositor, the Trustee and the
Master Servicer for such Series specified in the related Prospectus Supplement.
The Trust Fund will consist of Mortgage Assets, which may include Mortgage Loans
or participation interests therein, Manufactured Home Loans or participation
interests therein, Agency Securities, Private Mortgage-Backed Securities or any
combination of the foregoing and other assets, including any insurance policies,
reserve funds or other credit supports specified in the related Prospectus
Supplement. Manufactured Home Loans and the Mortgage Loans in the Trust Fund for
a Series will have been originated by various financial institutions and other
entities engaged generally in the business of originating and/or servicing
housing loans. Some of the Mortgage Loans or Manufactured Home Loans may have
been originated by the Depositor or any of its affiliates. The Mortgage Loans
and the Manufactured Home Loans may include (without limitation) fixed rate or
adjustable rate Conventional Loans, FHA Loans or VA Loans and may provide for
graduated equity, graduated payment, "buy-down" or other payment features, and
may call for payments from the obligors other than monthly, as specified in the
related Prospectus Supplement, Mortgage Loans underlying or comprising the
Mortgage Assets will be secured by property consisting of single family
(one-to-four family) attached or detached residential housing or multifamily
residential rental properties or cooperatively owned properties consisting of
five or more attached or detached dwelling units. Mortgage Loans that are
Cooperative Loans will be secured by assignments of shares and a proprietary
lease or occupancy agreement on a cooperative apartment. Manufactured Home Loans
underlying or comprising the Mortgage Assets will be secured by property
consisting of a Manufactured Home. See "THE TRUST FUNDS" herein. Manufactured
Home Loans and the Mortgage Loans (or participation interests therein) will be
serviced by various servicers under the supervision of the Master Servicer or by
the Master Servicer directly as specified in the related Prospectus Supplement.
The Master Servicer's and any Servicer's obligations will be limited to its
contractual, supervisory and/or servicing obligations and such other obligations
as are specified in the related Prospectus Supplement. See "SERVICING OF LOANS"
herein.
Each Series of Certificates will consist of one or more Classes, and any
Class may include subclasses. If a Series includes multiple Classes, such
Classes may vary with respect to the amount, percentage and timing of
distributions of principal, interest or both and one or more Classes may be
subordinated to other Classes with respect to distributions of principal,
interest or both as described herein and in the related Prospectus Supplement.
If so specified in the related Prospectus Supplement, the Mortgage Assets held
under the Pooling and Servicing Agreement may be divided into one or more Asset
Groups and the Certificates of each separate Class will evidence beneficial
ownership of each corresponding Asset Group. See "DESCRIPTION OF THE
CERTIFICATES" herein.
Distribution of principal and interest of the Certificates of each Series
will be made on each Distribution Date for a Series. The rate of reduction of
the aggregate principal balance of each Class of a Series will depend
principally upon the rate of payment (including prepayments) with respect to the
Loans comprising or underlying the Mortgage Assets. A rate of prepayment lower
or higher than anticipated may affect yield on Certificates of a Series in the
manner described herein and in the related Prospectus Supplement. Under certain
limited circumstances described herein and in the related Prospectus Supplement,
the Mortgage Assets may be purchased by the entity specified in the related
Prospectus Supplement and the related Trust Fund terminated prior to the
maturity of the Mortgage Assets or the Final Scheduled Distribution Date of the
Certificates of the related Series. If so specified in the related Prospectus
Supplement, Certificates of a Series may be subject to special distributions in
reduction of principal balance under certain circumstances. See "DESCRIPTION OF
THE CERTIFICATES" and "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
The Certificates evidence an interest in the related Trust Fund only, and
are not guaranteed by any governmental agency, or by the Depositor, the Trustee,
the Master Servicer, or by any of their respective affiliates or, unless
otherwise specified in the related Prospectus Supplement, by any other person or
entity. The Depositor's only obligations with respect to any Series will be
pursuant to certain representations and warranties set forth in the related
Pooling and Servicing Agreement as described herein or in the related Prospectus
Supplement. See "THE POOLING AND SERVICING AGREEMENTS" herein.
If specified in the related Prospectus Supplement, an election may be made
to treat the Trust Fund for a Series as a "Real Estate Mortgage Investment
Conduit" (a "REMIC") for federal income tax purposes. See "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" herein.
Certificates of a Series offered hereby and by the related Prospectus
Supplement may be made through one or more different methods, including
offerings through Donaldson, Lufkin & Jenrette Securities Corporation, an
affiliate of the Depositor, as more fully described herein and in the related
Prospectus Supplement. See "PLAN OF DISTRIBUTION" herein.
The Certificates are offered when, as and if delivered to and accepted by
the Underwriters subject to prior sale, withdrawal or modification of the offer
without notice, the approval of counsel and other conditions. Retain this
Prospectus for future reference. This Prospectus may not be used to consummate
sales of the securities offered hereby unless accompanied by a Prospectus
Supplement.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
<PAGE>
PROSPECTUS SUPPLEMENT
The Prospectus Supplement relating to each Series of Certificates will,
among other things, set forth with respect to such Series: (a) the aggregate
initial principal balances, the Pass-Through Rate or Certificate Rate (or method
for determining it in the case of Floating Interest Certificates) and authorized
denominations of each Class of such Series; (b) certain information concerning
the Trust Fund for such Series, including the principal amount, type and
characteristics of Mortgage Assets included in the Trust Fund on the date of
issue, and, if applicable, the amount of Reserve Funds, if any, for such Series;
(c) where Private Mortgage-Backed Securities are included in the Trust Fund,
information concerning the PMBS Issuer, the PMBS Trustee, the PMBS Servicer, if
any, under which Special Distributions of principal may be made or a Trust Fund
terminated prior to the Final Scheduled Distribution Date; (e) the Final
Scheduled Distribution Date of each Class of a Multiple Class Series; (f) the
method used to calculate the aggregate amount of principal to be distributed
with respect to the Certificates of such Series on each Distribution Date; (g)
the order of the application of principal distributions to the respective
Classes and the allocation of principal to be so applied; (h) the extent of
subordination of each Class of Subordinate Certificates, if any; (i) the
identity of each Class of Compound Interest Certificates, Floating Interest
Certificates, Principal Weighted Certificates, Interest Weighted Certificates,
Subordinate Certificates and Reduced Volatility Certificates ("RV Certificates")
included in such Series, if any; (j) the principal amount of each Class of a
Multiple Class Series that would be outstanding on specified Distribution Dates,
if the Loans underlying or comprising the Mortgage Assets for such Series were
prepaid at various assumed rates; (k) the Distribution Dates for the respective
Classes; (l) the Assumed Reinvestment Rate (if applicable); (m) the percentage
of Excess Cash Flow to be applied to distributions in reduction of principal
balance of Certificates of a Multiple Class Series; (n) additional information
with respect to any pool insurance policy, special hazard insurance policy,
bankruptcy bond or repurchase bond or other credit support, if any, relating to
the Series or the Mortgage Assets; and (o) the plan of distribution for such
Series.
ADDITIONAL INFORMATION
The Depositor has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement under the Securities Act of 1933, as
amended, with respect to the Certificates. This Prospectus, which forms a part
of the Registration Statement, omits certain information contained in such
Registration Statement pursuant to the Rules and Regulations of the Commission.
The Registration Statement and the exhibits thereto can be inspected and copied
at the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain of its Regional Offices
located as follows: Chicago Regional Office, Suite 1400, Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60661; and New York Regional
Office, 75 Park Place, New York, New York 10007. Copies of such material can
also be obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
REPORTS TO CERTIFICATEHOLDERS
Periodic and annual reports concerning the related Trust Fund are required
under the Pooling and Servicing Agreement to be forwarded to Certificateholders.
Unless otherwise specified in the related Prospectus Supplement, such
reports will not be examined and reported on by an independent public
accountant. See "THE POOLING AND SERVICING AGREEMENTS--Reports to
Certificateholders" herein.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
All documents subsequently filed by the Depositor on behalf of the Trust
Fund referred to in the accompanying Prospectus Supplement with the Commission
pursuant to Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934, as amended (the "Exchange Act"), after the date of such Prospectus
Supplement and prior to the termination of any offering of the Certificates
issued by such Trust Fund shall be deemed to be incorporated by reference in
this Prospectus and to be a part of this Prospectus from the date of the filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein (or in the accompanying Prospectus Supplement) or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference modifies or replaces such statement. Any such statement so modified or
superseded shall not be deemed, except as modified or superseded, to constitute
a part of this Prospectus.
The Depositor on behalf of any Trust Fund will provide without charge to
each person to whom this Prospectus is delivered, on the written or oral request
of such person, a copy of any or all of the documents referred to above that
have been or may be incorporated by reference in this Prospectus (not including
exhibits to the information that is incorporated by reference unless such
exhibits are specifically incorporated by reference into the information that
this Prospectus incorporates). Such requests should be directed to: DLJ Mortgage
Acceptance Corp., 140 Broadway, New York, New York 10005, Attention: N. Dante
LaRocca.
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<PAGE>
SUMMARY OF TERMS OF THE CERTIFICATES
The following is qualified in its entirety by reference to the detailed
information appearing elsewhere in this Prospectus and in the Prospectus
Supplement with respect to the Series offered thereby and to the terms and
provisions of the related Pooling and Servicing Agreement (the "Pooling and
Servicing Agreement") executed by the Depositor, the master servicer (the
"Master Servicer") and the trustee (the "Trustee") as specified in the related
Prospectus Supplement. All capitalized terms not otherwise defined in this
Prospectus or the related Prospectus Supplement for a Series have the respective
meanings assigned to them in the "GLOSSARY."
SECURITIES OFFERED
The Mortgage Pass-Through Certificates (the "Certificates") are issuable
from time to time in separate Series pursuant to separate Pooling and Servicing
Agreements. Each Certificate of a Series will evidence a beneficial ownership
interest in the Trust Fund for such Series, or in an Asset Group specified in
the related Prospectus Supplement. The Certificates will be issuable in fully
registered form in the authorized minimum denominations and multiples thereof
specified in the related Prospectus Supplement. If so specified in the related
Prospectus Supplement, the Certificates or certain classes of such Certificates
offered thereby may be available in book-entry form only.
The Certificates of a Series will evidence interests in the related Trust
Fund only and will not be guaranteed by any governmental agency, by the
Depositor, the Trustee, the Master Servicer or by any of their respective
affiliates, or unless otherwise specified in the related Prospectus Supplement,
by any other person or entity. See "SPECIAL CONSIDERATIONS" and "CREDIT SUPPORT"
herein.
Each series of Certificates will consist of one or more Classes. If a Series
consists of multiple Classes, the respective Classes may differ with respect to
the amount, percentage and timing of distributions of principal, interest or
both. Additionally, one or more Classes may consist of Subordinate Certificates
which are subordinated to other Classes of Certificates with respect to the
right to receive distributions of principal, interest, or both under the
circumstances and in such amounts as described herein and in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, any Class of Certificates of a Series will be offered hereby and by
such Prospectus Supplement only if rated by at least one Rating Agency in one of
its two highest rating categories. See "DESCRIPTION OF THE
CERTIFICATES--General," "CREDIT SUPPORT--Subordinated Certificates" and "SPECIAL
CONSIDERATIONS" herein.
DEPOSITOR
DLJ Mortgage Acceptance Corp., a Delaware corporation (the "Depositor"), is
a limited purpose corporation organized primarily for the purpose of investing
in the Mortgage Assets for each Trust Fund. The principal executive offices of
the Depositor are located at 140 Broadway, New York, New York and its telephone
number is (212) 504-3000. All of the outstanding capital stock of the Depositor
is owned by Donaldson, Lufkin & Jenrette, Inc. The Depositor's only obligations
with respect to the Certificates will be pursuant to certain representations and
warranties described herein under "THE POOLING AND SERVICING AGREEMENTS."
Neither the Depositor, its parent nor any affiliate of the Depositor will
guarantee the Certificates or the assets included in the Trust Fund for a
Series. See "SPECIAL CONSIDERATIONS" and "THE DEPOSITOR."
TRUSTEE
The Trustee with respect to a Series will be specified in the related
Prospectus Supplement. See "THE POOLING AND SERVICING AGREEMENTS" herein for a
description of the Trustee's rights and obligations.
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INTEREST DISTRIBUTIONS
Interest Distributions on the Certificates of a Series will be made from
amounts available therefor in the related Certificate Account on each
Distribution Date at the applicable Pass-Through Rate or Certificate Rate
specified in (or, with respect to Floating Interest Certificates, determined in
the manner set forth in) the related Prospectus Supplement. The Pass-Through
Rate on Certificates of a Series may be variable and change with changes in the
mortgage rate or pass-through rates of the Mortgage Assets included in the
related Trust Fund and/or as prepayments occur with respect to such Mortgage
Assets.
Principal Weighted Certificates may not be entitled to receive any interest
distributions or may be entitled to receive only nominal interest distributions.
Compound Interest Certificates will not receive distributions of interest
but interest accruing with respect to the principal balance of such compound
Interest Certificates will be added to such principal balance on each
Distribution Date until the Accrual Termination Date. Following the Accrual
Termination Date, interest distributions with respect to such Compound Interest
Certificates will be made on the basis of their Compound Value.
A Multiple Class Series may include one or more Classes of Floating Interest
Certificates. With respect to any such Class of Floating Interest Certificates,
the related Prospectus Supplement will set forth: (a) the initial Floating Rate
(or manner of determining the initial Floating Rate); (b) the method by which
the Floating Rate will be determined from time to time; (c) the periodic
intervals at which such determination will be made; and (d) the Maximum Floating
Rate and the Minimum Floating Rate, if any. See "DESCRIPTION OF THE
CERTIFICATES" and "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
PRINCIPAL DISTRIBUTIONS (INCLUDING PREPAYMENTS)
Principal distributions on the Certificates of a Series will be made from
amounts available therefor in the related Certificate Account on each
Distribution Date in an aggregate amount determined as specified in the related
Prospectus Supplement. Principal distributions will be allocated among the
respective Classes of a Series in the manner and in the priority set forth in
the related Prospectus Supplement.
Interest Weighted Certificates may not be entitled to any principal
distributions or may be entitled to receive only nominal principal
distributions.
To the extent specified in the related Prospectus Supplement, Certificates
of a Multiple Class Series having other than monthly Distribution Dates may, if
so specified in the related Prospectus Supplement, be subject to Special
Distributions of principal if, as a result of principal prepayments with respect
to the housing loans comprising or underlying the Mortgage Assets in the related
Trust Fund, low reinvestment yields or both, it is determined (based on
assumptions specified in the related Pooling and Servicing Agreement) that the
amount of cash anticipated to be available in the Certificate Account for such
Series on the next Distribution Date may be less than the scheduled
distributions to be made on such Distribution Date. See "DESCRIPTION OF THE
CERTIFICATES" and "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date for each Class of a Series is the date
after which no Certificates of such Class will remain outstanding, assuming
timely payments or distributions are made on the Mortgage Assets in the related
Trust Fund in accordance with their terms. The Final Scheduled Distribution Date
of a Class may equal the maturity date of the Mortgage Asset in the related
Trust Fund which has the latest stated maturity or will be determined as
described herein and in the related Prospectus Supplement.
The actual maturity date of the Certificates of a Series will depend
primarily upon the level of prepayments with respect to the housing loans
comprising or underlying the Mortgage Assets in the related Trust Fund. The
actual maturity of any Certificate is likely to occur earlier and may occur
substantially earlier
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than its Final Scheduled Distribution Date as a result of the application of
prepayments to the reduction of the principal balances of the Certificates. The
rate of prepayments on the housing loans comprising or underlying Mortgage
Assets in the Trust Fund for a Series will depend on a variety of factors,
including certain characteristics of such housing loans and the prevailing level
of interest rates from time to time, as well as on a variety of economic,
demographic, tax, legal, social and other factors. No assurance can be given as
to the actual prepayment experience with respect to a Series. See "SPECIAL
CONSIDERATIONS" and "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS" herein.
OPTIONAL TERMINATIONS
If so specified in the related Prospectus Supplement, the Depositor, the
Master Servicer, or such other entity that is specified in the related
Prospectus Supplement, may, at its option, cause an early termination of the
related Trust Fund by repurchasing all of the Mortgage Assets remaining in the
Trust Fund on or after a specified date, or on or after such time as the
aggregate unpaid principal balance of the Mortgage Assets is less than the
percentage specified in the related Prospectus Supplement. See "DESCRIPTION OF
THE CERTIFICATES--Optional Termination."
THE TRUST FUND
The Trust Fund for a Series will consist of Private Mortgage-Backed
Securities, Agency Securities, Mortgage Loans or participation interests
therein, Manufactured Home Loans or participation interests therein, or any
combination of the foregoing (the "Mortgage Assets"), together with certain
accounts, reserve funds, insurance policies and related agreements specified in
the related Prospectus Supplement. (Mortgage Loans and Manufactured Home Loans
are referred to herein as "Loans'.) If so specified in the related Prospectus
Supplement, the Mortgage Assets may be divided into Asset Groups and the
Certificates of separate Classes will evidence beneficial interests of a
corresponding Asset Group. The Trust Fund for a Series will also include the
Collection Account, the Certificate Account, and may include certain policies of
insurance relating to the Mortgage Assets, and various credit supports, all as
specified in the related Prospectus. See "THE TRUST FUNDS--Collection Account
and Certificate Account" and "CREDIT SUPPORT" and "DESCRIPTION OF MORTGAGE AND
OTHER INSURANCE" herein.
A. MORTGAGE ASSETS
The Mortgage Assets for a Series of Certificates may consist of any
combination of the following to the extent and as specified in the related
Prospectus Supplement:
(1) PRIVATE MORTGAGE-BACKED SECURITIES
Private Mortgage-Backed Securities may include (a) mortgage participations
or pass-through certificates representing beneficial interests in certain Loans,
(b) collateralized mortgage obligations secured by such Loans or (c)
pass-through certificates representing beneficial interests in Agency
Securities. Although individual Loans underlying a Private Mortgage-Backed
Security may be insured or guaranteed by the United States or an agency or
instrumentality thereof, they need not be, and the Private Mortgage-Backed
Securities themselves will not be so insured or guaranteed. See "THE TRUST
FUNDS--Private Mortgage-Backed Securities." Unless otherwise specified in the
Prospectus Supplement relating to a Series of Certificates, payments on the
Private Mortgage-Backed Securities will be distributed directly to the Trustee
as registered owner of such Private Mortgage-Backed Securities. See "THE TRUST
FUNDS--Private Mortgage-Backed Securities" herein.
The related Prospectus Supplement for a Series will specify (i) the
aggregate approximate principal amount and type of any Private Mortgage-Backed
Securities to be included in the Trust Fund for such Series; (ii) certain
characteristics of the Loans which comprise the underlying assets for the
Private Mortgage-Backed Securities including (A) the payment features of such
Loans (i.e., whether they are fixed rate or adjustable rate and whether they
provide for fixed level payments, negative amortization, or other payment
features), (B) the approximate aggregate principal amount, if known, of the
underlying Loans which are
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insured or guaranteed by a governmental entity, (C) the servicing fee or range
of servicing fees with respect to the Loans, and (D) the minimum and maximum
stated maturities of the Loans at origination; (iii) the maximum original
term-to-stated maturity of the Private Mortgage-Backed Securities; (iv) the
weighted average term-to-stated maturity of the Private Mortgage-Backed
Securities; (v) the pass-through or certificate rate or ranges thereof for the
Private Mortgage-Backed Securities; (vi) the weighted average pass-through or
certificate rate of the Private Mortgage-Backed Securities; (vii) the Issuer of
the Private Mortgage-Backed Securities (the "PMBS Issuer"), the Servicer of the
Private Mortgage-Backed Securities (the "PMBS Servicer") and the trustee of the
Private Mortgage-Backed Securities (the "PMBS Trustee"); (viii) certain
characteristics of credit support, if any, such as reserve funds, insurance
policies, letters of credit or guarantees, relating to the Loans underlying the
Private Mortgage-Backed Securities, or to such Private Mortgage-Backed
Securities themselves; (ix) the terms on which underlying Loans for such Private
Mortgage-Backed Securities may, or are required to, be repurchased prior to
stated maturity; and (x) the terms on which substitute Loans may be delivered to
replace those initially deposited with the PMBS Trustee. See "THE TRUST FUNDS"
herein.
(2) AGENCY SECURITIES
Mortgage Assets for a series may consist, in whole or part, of certain
assets (the "Agency Securities") of GNMA Certificates, FNMA Certificates, FHLMC
Certificates or a combination thereof. Any GNMA Certificates included in a Trust
Fund will be guaranteed as to full and timely payment of principal and interest
by GNMA, which guaranty is backed by the full faith and credit of the United
States. Any FHLMC Certificates included in the Trust Fund will be guaranteed as
to the timely payment of interest and ultimate collection (and if so specified
in the related Prospectus Supplement timely payment of principal) by FHLMC. Any
FNMA Certificates included in a Trust Fund will be guaranteed as to timely
payment of scheduled payments of principal and interest by FNMA. No FNMA or
FHLMC Certificates will be backed, directly or indirectly, by the full faith and
credit of the United States.
Each Agency Security will evidence an interest in a pool of mortgage loans
and/or cooperative loans, and/or in principal distributions and interest
distributions thereon. The Prospectus Supplement for each Series will specify
the aggregate approximate principal balance of GNMA, FNMA and FHLMC Certificates
included in a Trust Fund and will describe the principal characteristics of the
underlying mortgage loans or cooperative loans and any insurance, guaranty or
other credit support applicable to such loans, the Agency Securities or both. In
addition, the related Prospectus Supplement will describe the terms upon which
distributions will be made to the Trustee as holder of the Agency Securities.
The Agency Securities included in any Trust Fund will be registered in the name
of the Trustee or its nominee or in the case of book-entry Agency Securities in
the name of a financial intermediary with a Federal Reserve Bank or a clearing
corporation and will be held by the Trustee only for the benefit of the related
Series of Certificates.
CERTIFICATE ACCOUNT
All distributions on any Mortgage Certificates, and all payments (including
prepayments, liquidation proceeds and insurance proceeds) received from the
Servicer on any Mortgage Loans, included in the Pool for a Series will be
remitted to an account (the "Certificate Account"), and, together with any
amounts available pursuant to the terms of any applicable credit support and any
other amounts described in the related Supplement, will be available for
distribution on the Certificates of such Series as described in the related
Supplement. Such Certificate Account shall be an Eligible Account or Accounts
established and maintained by the Servicer for the benefit of the holders of a
Series of Certificates.
EARLY TERMINATION OF POOLS
The Servicer or, for a Series of REMIC Certificates, the holders of the
Residual Certificates of such Series or the REMIC Administrator may have the
option to repurchase the Mortgage Loans and/or Mortgage Certificates included in
the related Pool and thereby terminate the related Pooling Agreement. Any such
option will be exercisable at the times and upon satisfaction of the conditions
specified in the related Supplement.
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SUBSTITUTION OF MORTGAGE LOANS AND/OR MORTGAGE CERTIFICATES
Substitution of Mortgage Loans and/or Mortgage Certificates will be
permitted for a period specified in the related Supplement following notice of
breaches of representations and warranties with respect to any original Mortgage
Loan or notice that the documentation with respect to any Mortgage Loan is
determined by the Trustee to be incomplete. Other circumstances under which
substitutions may be permitted will be described in the related Supplement.
(3) MORTGAGE LOANS
Mortgage Assets for a Series may consist, in whole or in part, of Mortgage
Loans or participation interests therein. Participation interests in Mortgage
Loans will be purchased pursuant to participation agreements. See "THE TRUST
FUNDS--General" herein. Payments on Mortgage Loans will be collected by the
Master Servicer (or by a Servicer), as specified in the related Prospectus
Supplement, and such payments (net of servicing fees and certain other amounts)
will be available to make distributions on the Certificates of that Series. See
"SERVICING OF LOANS" herein. Mortgage Loans may, as specified in the related
Prospectus Supplement, include Conventional Loans, FHA Loans or VA Loans and may
have various payment characteristics and may include growing equity mortgage
loans ("GEM Loans"), graduated payment mortgage loans ("GPM Loans"), buy-down
mortgage loans ("Buy-Down Loans"), bi-weekly payment loans ("Bi-Weekly Loans")
or Loans having balloon or other special payment features. The Mortgage Loans
may have fixed or adjustable interest rates (Mortgage Loans having such
adjustable rates hereinafter sometimes referred to herein as "Adjustable Rate
Mortgages," or "ARMs"). ARMs will, as described in the related Prospectus
Supplement, permit or require periodic changes in the mortgage rate, and in the
scheduled payments of principal and interest due from the obligor on the related
mortgage note. The Mortgage Loans may include Mortgage Loans secured by
mortgages, deeds of trust or other security instruments creating a first lien on
related Mortgaged Properties. The Mortgage Loans may include Cooperative Loans
secured by an assignment by the borrower (the "tenant-stockholder") of a
security interest in shares issued by a private, non-profit, cooperative housing
association (a "Cooperative") and related proprietary lease or occupancy
agreement on a cooperative dwelling (the "Cooperative Dwelling"). The Mortgage
Loans may also include Condominium Loans secured by a Mortgage on the
Condominium Unit, together with such Condominium Unit's appurtenant interest in
the common elements. The Mortgaged Properties may consist of one-to four-family
attached or detached residential housing (including shares in a Cooperative and
the related proprietary lease or occupancy agreement) ("Single Family Property")
or multifamily residential rental property or cooperatively owned multifamily
property consisting of five or more dwelling units ("Multifamily Property").
Single Family Property may be owner occupied and may include vacation or second
homes or may consist in whole or in part of non-owner occupied investment
properties, as specified in the related Prospectus Supplement.
To the extent described herein or in the related Prospectus Supplement, all
Mortgaged Property will be covered by standard hazard insurance policies (which
may be a blanket policy) insuring against losses due to various causes,
including fire, lightning and windstorm. Mortgaged Property located in a
federally designated special hazard flood zone will be required to be covered by
flood insurance. With respect to a Cooperative Dwelling, the Cooperative is
responsible for maintaining standard hazard insurance on the real property owned
by the Cooperative, and standard hazard insurance on the Cooperative Dwelling
securing a Mortgage Loan will not generally be required. With respect to a
Condominium Unit, the Condominium Association is responsible for maintaining
standard hazard insurance insuring the entire Condominium Building (including
each individual Condominium Unit) and separate hazard insurance on the
Condominium Unit securing a Mortgage Loan will not generally be required.
Mortgage Loans that are Conventional Loans secured by Single Family Property
will be required to be covered by primary mortgage insurance policies to the
extent described herein or in the related Prospectus Supplement. See
"DESCRIPTION OF MORTGAGE AND OTHER INSURANCE" herein.
The related Prospectus Supplement will describe the principal
characteristics of the Mortgage Loans included in the Trust Fund, including,
without limitation, (a) the aggregate outstanding principal balance of the
Mortgage Loans as of the related Cut-off Date, (b) the geographical distribution
of the Mortgaged
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Properties by state or other specified geographical area, (c) the weighted
average original and remaining scheduled term-to-stated maturity of the Mortgage
Loans, (d) the relative percentages (by aggregate outstanding principal balance)
of Mortgage Loans that have fixed interest rates or are ARMs, Buy-Down Loans,
GEM Loans, Bi-Weekly Loans, GPM Loans or Mortgage Loans having other special
payment characteristics, (e) the relative percentages of Mortgage Loans secured
by Cooperative Dwellings, (f) the relative percentages of Mortgage Loans that
are secured by Mortgaged Properties which are owner-occupied or are investment
properties or vacation and second homes, (g) the range of Loan-to-Value Ratios
for the Mortgage Loans, (h) the weighted average outstanding principal balance
of the Mortgage Loans as of the Cut-off Date, and (i) any primary or pool
insurance policies, guarantees or other credit support for such Mortgage Loans.
Unless otherwise specified in the related Prospectus Supplement, each Mortgage
Loan will have a 10-to-40 year term at origination and a Loan-to-Value Ratio at
origination not exceeding 95%. Unless otherwise described in the related
Prospectus Supplement, each Mortgage Loan that is a Conventional Loan secured by
a Single Family Property having a Loan-to-Value Ratio exceeding 80% will be
required to be covered by a primary mortgage insurance policy as described
herein or in the related Prospectus Supplement.
Mortgage Loans that constitute Mortgage Assets will be purchased by the
Depositor in the open market or in privately negotiated transactions, including
transactions with entities affiliated with the Depositor or with the Master
Servicer.
(4) MANUFACTURED HOME LOANS
Mortgage Assets may consist, in whole or in part, of manufactured housing
conditional sales contracts and installment loan agreements with respect to
Manufactured Homes (the "Manufactured Home Loans") or participation interests
therein. Unless otherwise stated in the Prospectus Supplement, participation
interests in Manufactured Home Loans will be purchased pursuant to a
participation agreement. See "THE TRUST FUNDS--General."
Each Manufactured Home Loan will be secured by a new or used Manufactured
Home. Manufactured Home Loans may be a Conventional Loan, FHA Loan or VA Loan.
Unless otherwise specified in the related Prospectus Supplement, Manufactured
Home Loans that are Conventional Loans will not be covered by primary mortgage
insurance policies. Each Manufactured Home which secures a Manufactured Home
Loan will be covered by a standard hazard insurance policy (which may be a
blanket policy) to the extent described therein or in the related Prospectus
Supplement insuring against hazard losses due to various causes, including fire,
lightning and windstorm. A Manufactured Home located in a federally designated
special hazard flood zone will be required to be covered by flood insurance. See
"DESCRIPTION OF MORTGAGE AND OTHER INSURANCE" herein.
Unless otherwise specified in a related Prospectus Supplement, each
Manufactured Home Loan will have a 3-to-25 year term at origination and a
Loan-to-Value Ratio at origination not in excess of 95%.
The Prospectus Supplement for each Series will describe the principal
characteristics of the Manufactured Home Loans included in the Trust Fund for
the related Series, including, without limitation, the (a) aggregate outstanding
principal balance of the Manufactured Home Loans, as of the related Cut-off
Date; (b) weighted average interest rate on the Manufactured Home Loans; (c)
weighted average term-to-maturity at origination; (d) weighted average remaining
scheduled term-to-maturity as of the Cut-off Date and the range of
terms-to-maturity; (e) respective percentages of Manufactured Home Loans
relating to new versus used Manufactured Homes; (f) average outstanding
principal balance of the Manufactured Home Loans as of the Cut-off Date; (g)
range of Loan-to-Value Ratios of the Manufactured Home Loans; (h) hazard
insurance required to be maintained with respect to each Manufactured Home; (i)
amounts, if any, and terms of any form of credit support to be provided with
respect to all or any Manufactured Home Loan; and (j) geographical distribution
of the Manufactured Homes by state or other specified geographic region.
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The Manufactured Home Loans which constitute Mortgage Assets will be
purchased by the Depositor in the open market or in privately negotiated
transactions, including transactions with entities affiliated with the
Depositor. None of the Manufactured Home Loans will have been originated by the
Depositor or any of its affiliates.
B. COLLECTION ACCOUNT AND CERTIFICATE ACCOUNT
Payments or distributions with respect to the Mortgage Assets for a Series
will initially be remitted for deposit in a Collection Account maintained by the
Master Servicer and then transferred to a Certificate Account to be established
with or in the name of the Trustee for such Series. The amounts remitted may be
net of servicing fees, Retained Interests and other amounts specified in the
related Prospectus Supplement. Amounts so deposited will be used to make
distributions on the Certificates of such Series on the applicable Distribution
Date. See "THE TRUST FUNDS--Collection Account and Certificate Account."
C. DETERMINATION OF ASSET VALUE
With respect to a Series of Certificates as to which the Distribution Dates
are less frequent than monthly, each Mortgage Asset will be assigned an Asset
Value. The aggregate of the Asset Values of the Mortgage Assets included in the
Trust Fund for a Multiple Class Series will equal not less than the initial
aggregate principal balances of the Certificates of such Series. The related
Prospectus Supplement for a Multiple Class Series will summarize the method or
methods and related assumptions used to determine Asset Value for the Mortgage
Assets for the related Multiple Class Series. See "DESCRIPTION OF THE
CERTIFICATES--Valuation of Trust Assets."
D. GUARANTEED INVESTMENT CONTRACTS AND OTHER AGREEMENTS
The Depositor may obtain and deliver to the Trustee guaranteed investment
contracts or reinvestment agreements ("Guaranteed Investment Contracts")
pursuant to which moneys held in one or more of the funds and accounts
established for such Series will be invested at a specified rate which, if so
specified in the related Prospectus Supplement, may constitute the "Assumed
Reinvestment Rate" for the Series. With respect to any Multiple Class Series
which includes a Class of Floating Interest Certificates, the Depositor may
obtain and deliver to the Trustee an interest rate swap contract, interest rate
cap agreement or similar contract issued by a bank, insurance company, savings
bank or savings and loan association to provide limited protection against
interest rate risks. The principal terms of any such Guaranteed Investment
Contract or such other agreement, including, without limitation, provisions
relating to the timing, manner and amount of payments thereunder and provisions
relating to the termination thereof, together with information relating to the
issuer thereof, will be described in the related Prospectus Supplement.
CREDIT SUPPORT
Credit support in the form of reserve funds, subordination, insurance
policies, letters of credit or other types of credit support may be provided
with respect to the Mortgage Assets or with respect to one or more Classes of
Certificates of a Series. If the Mortgage Assets are divided into separate Asset
Groups, the beneficial ownership of which is evidenced by a separate Class or
Classes of a Series, credit support may be provided by a cross-support feature
which requires that distributions be made with respect to Certificates
evidencing beneficial ownership of one Asset Group prior to distributions to
Subordinate Certificates evidencing a beneficial ownership interest in another
Asset Group within the Trust Fund.
The type, characteristics and amount of credit support will be determined
based on the characteristics of the Loans underlying or comprising the Mortgage
Assets and other factors and will be established on the basis of requirements of
each Rating Agency rating the Certificates of such Series. The protection
against losses provided by such credit support will be limited. See "CREDIT
SUPPORT" and "SPECIAL CONSIDERATIONS" herein.
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A. SUBORDINATE CERTIFICATES; SUBORDINATION RESERVE FUND
A Series of Certificates may include one or more Classes of Subordinate
Certificates. The rights of Holders of such Subordinate Certificates to receive
distributions on any Distribution Date will be subordinate in right and priority
to the rights of Holders of Senior Certificates of the Series, but only to the
extent described in the related Prospectus Supplement. If so specified in the
related Prospectus Supplement, subordination may apply only in the event of
certain types of losses not covered by other credit support, such as hazard
losses not covered by the standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower due to application of provisions of the
Bankruptcy Code, or losses resulting from the denial of insurance coverage due
to fraud or misrepresentation in connection with the origination of a Loan.
Unless otherwise specified in the related Prospectus Supplement, such
subordination will be in lieu of providing insurance policies or other credit
support with respect to losses arising from such events.
A Subordination Reserve Fund may be established at the level specified in
the related Prospectus Supplement. The related Prospectus Supplement will also
set forth information concerning the amount of subordination of a Class or
Classes of Subordinate Certificates in a series, the circumstances in which such
subordination will be applicable, the manner, if any, in which the amount of
subordination will decrease over time, the manner of funding the related
Subordination Reserve Fund, if any, and the conditions under which amounts in
any Subordination Reserve Fund will be used to make distributions to Holders of
Senior Certificates or be released from the related Trust Fund. If cash flows
otherwise distributable to Holders of Subordinate Certificates evidencing a
beneficial ownership interest in an Asset Group will be used as credit support
for Senior Certificates evidencing a beneficial ownership interest in another
Asset Group within the Trust Fund, the related Prospectus Supplement will
specify the manner and conditions for applying such a cross-support feature. See
"CREDIT SUPPORT--Subordinate Certificates; Subordination Reserve Fund."
B. INSURANCE
If so specified in the related Prospectus Supplement, certain insurance
policies in addition to any primary mortgage insurance policies or standard
hazard insurance policies described above under "Mortgage Assets" will be
required to be maintained with respect to the Loans included in the Trust Fund
for a Series. Such insurance policies may include, but are not limited to, (i) a
pool insurance policy insuring against losses due to defaults or delinquencies
in payment, (ii) a special hazard insurance policy insuring against losses which
are not covered by the standard hazard insurance policies, (iii) bankruptcy
bonds or insurance policies insuring losses due to bankruptcy of a borrower and
application of certain provisions of the Bankruptcy Code and (iv) repurchase
bonds insuring the repurchase of Loans by the originator of such Loan in the
event of the loss of other insurance coverage due to certain misrepresentations
in the origination or sale of any such Loans or in other circumstances specified
in the related Prospectus Supplement. See "CREDIT SUPPORT" and "DESCRIPTION OF
MORTGAGE AND OTHER INSURANCE" herein. The Prospectus Supplement for a Series
will provide information concerning any such insurance policies, including (a)
the types of coverage provided by each, (b) the amount of such coverage, (c)
conditions to payment under each and (d) certain information relating to the
issuers of such insurance policies. To the extent described in the related
Prospectus Supplement, certain insurance policies to be maintained with respect
to the Loans may be terminated, reduced or replaced following the occurrence of
certain events affecting the authority of creditworthiness of the insurer.
Additionally, such insurance policies may be terminated, reduced or replaced by
the Master Servicer, provided that no rating assigned to Certificates of the
related Series offered hereby and by the related Prospectus Supplement is
adversely affected.
C. LETTER OF CREDIT
If so specified in the related Prospectus Supplement, credit support may be
provided by one or more letters of credit. A letter of credit may provide
limited protection against certain losses in addition to or in lieu of other
credit support, such as losses resulting from delinquent payments on the Loans
in the Trust Fund, losses from risks not covered by standard hazard insurance
policies, losses due to bankruptcy of a borrower and application of certain
provisions of the Bankruptcy Code, and losses due to denial of insurance
coverage due to misrepresentations made in connection with the origination or
sale of a Loan. The issuer of
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the letter of credit (the "L/C Bank") will be obligated to honor demands with
respect to such letter of credit, to the extent of the amount available
thereunder, to provide funds under the circumstances and subject to such
conditions as are specified in the related Prospectus Supplement. The liability
of the L/C Bank under its letter of credit will be reduced by the amount of
unreimbursed payments thereunder.
The maximum liability of an L/C Bank under its letter of credit will be an
amount equal to a percentage specified in the related Prospectus Supplement of
the initial aggregate outstanding principal balance of the Loans in the Trust
Fund or one or more Classes of Certificates of the related Series (the "L/C
Percentage"). The maximum amount available at any time to be paid under a letter
of credit will be determined in the manner specified therein and in the related
Prospectus Supplement.
D. CERTIFICATE GUARANTEE INSURANCE
If so specified in the related Prospectus Supplement, credit support for a
Series may be provided by an insurance policy (the "Certificate Guarantee
Insurance") issued by one or more insurance companies. Such Certificate
Guarantee Insurance may guarantee timely distributions of interest and full
distributions of principal on the basis of a schedule of principal distributions
set forth in or determined in the manner specified in the related Prospectus
Supplement.
E. RESERVE FUNDS
The Depositor may deposit in one or more reserve funds (collectively, the
"Reserve Funds") for any Series cash, Eligible Reserve Fund Investments, demand
notes or a combination thereof in the aggregate amount, if any, specified in the
related Prospectus Supplement. Any Reserve Funds for a Series may also be funded
over time through application of a specified amount of cash flow, to the extent
described in the related Prospectus Supplement. Such a Reserve Fund may be
established to increase the likelihood of the timely distributions on the
Certificates of such Series or to reduce the likelihood of a Special
Distribution with respect to any Multiple Class Series. Reserve Funds may be
established to provide protection against certain losses in addition to or in
lieu of other credit support, including, without limitation, as losses resulting
from delinquent payments on Loans, losses from risks not covered by standard
hazard insurance policies, losses due to bankruptcy of a borrower and
application of certain provisions of the Bankruptcy Code, and losses due to
denial of insurance coverage due to misrepresentations made in connection with
the origination of a Loan. Amounts on deposit in the Reserve Funds for a Series,
together with (unless otherwise specified in the related Prospectus Supplement)
the reinvestment income thereon, will be applied for the purposes, in the manner
and to the extent provided by the related Prospectus Supplement.
On each Distribution Date for a Series, all amounts on deposit in any
Reserve Funds for the Series in excess of the amounts required to be maintained
therein by the related Pooling and Servicing Agreement and specified in the
related Prospectus Supplement may be released from the Reserve Funds and will
not be available for future distributions on the Certificates of such Series.
Additional information concerning any Reserve Funds, including whether the
Reserve Fund is a part of the Trust Fund, the circumstances under which moneys
therein will be applied to make distributions to Certificateholders, the
required balance to be maintained in such Reserve Funds, the manner in which
such required balance will decrease over time and the manner of funding the
Reserve Fund will be set forth in the related Prospectus Supplement. See "CREDIT
SUPPORT--Reserve Funds."
SERVICING OF LOANS
The Master Servicer identified in the related Prospectus Supplement will
service the Loans directly or administer and supervise the performance by
Servicers of their duties and responsibilities under separate servicing
agreements (the "Servicing Agreements") entered into between the Master Servicer
and such Servicers. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer and each Servicer must be approved by either
FNMA or FHLMC as a seller/servicer of Mortgage Loans and, in the case of FHA
Loans, approved by HUD as an FHA mortgagee. Each Servicer will be obligated
under its
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Servicing Agreement to perform customary servicing functions. Advances with
respect to delinquent payments of principal or interest on a Loan will be made
by the Master Servicer or the Servicers only to the extent described in the
related Prospectus Supplement. Such advances will be intended to provide
liquidity only and, unless otherwise specified in the related Prospectus
Supplement, will be reimbursable to the Master Servicer or the Servicer, as the
case may be, from scheduled payments of principal and interest, late
collections, or from the proceeds of liquidation of the related Loans, from
other recoveries relating to such Loans (including any insurance proceeds or
payments from other credit supports). Unless otherwise specified in the related
Prospectus Supplement, the Master Servicer or the Servicers will be obligated to
repurchase Mortgage Loans for which insurance coverage has been denied on the
grounds of fraud or misrepresentation only to the extent specified in the
related Prospectus Supplement. If so specified in the related Prospectus
Supplement, the Depositor may (i) obtain and assign to the Trustee an agreement
with an independent standby servicer acceptable to each Rating Agency rating
such Certificates, which will provide that such standby servicer will assume a
Servicer's or the Master Servicer's obligations in the event of a default by the
Servicer or Master Servicer or (ii) obtain a performance bond acceptable to each
Rating Agency rating such Certificates that will guarantee certain of the
Servicer's or Master Servicer's obligations. See "SERVICING OF LOANS."
FEDERAL INCOME TAX CONSIDERATIONS
If an election is made for treatment as a REMIC under the Internal Revenue
Code of 1986 (the "Code"), one or more Classes of Certificates will be treated
as REMIC "Regular Interests." The Holder of such a Regular Interest will be
treated as holding a debt obligation for federal income tax purposes and will be
required to report stated interest income on the accrual method.
Compound Interest Certificates will be, and certain other Classes of
Certificates constituting Regular Interests may be, issued with original issue
discount that is not de minimis. In such cases, the Certificateholder will be
required to include the original issue discount in gross income as it accrues,
which inclusion may occur prior to the receipt of cash attributable to such
income. If a Regular Interest Certificate is issued at a premium, the holder
thereof will be entitled to make an election to amortize such premium on a
constant yield method as an offset to interest income on such Certificate (and
not as a separate deduction item). Certificates constituting Regular Interests
will represent "qualifying real property loans" for mutual savings banks and
domestic building and loan associations, "loans secured by an interest in real
property" for domestic building and loan associations and "real estate assets"
for real estate investment trusts to the extent that the underlying Loans
qualify for such treatment.
In the case of a REMIC election, a Class of Certificates may be treated as
REMIC "Residual Interests." Certificates classified as REMIC Residual Interests
will generally be treated as representing "qualifying real property loans" for
mutual savings banks and domestic building and loan associations, "loans secured
by an interest in real property" for domestic building and loan associations and
"real estate assets" for real estate investment trusts to the same extent as
REMIC Regular Interests.
The holder of a REMIC Residual Interest Certificate must include in income
its pro rata share of the REMIC's taxable income. Accordingly, in certain
circumstances, the holder of a REMIC Residual Interest might (i) have REMIC
taxable income or tax liability attributable to REMIC taxable income for a
particular period or periods in excess of cash distributions for such period or
periods or (ii) have an after-tax return on its investment that is less than the
after-tax return on comparable debt instruments or stripped bonds. In addition,
a portion (or, in some cases, all) of the income from a REMIC Residual Interest:
(i) except, in certain circumstances, with respect to a holder classified as a
thrift institution under the Code, may not be subject to offset by losses from
other activities, (ii) for a holder that is subject to tax under the Code on
unrelated business taxable income, may be treated as unrelated business taxable
income and (iii) for a foreign holder, may not qualify for exemption from
withholding under any treaty. Further, individual trust or estate holders are
subject to limitations on the deductibility of expenses of the REMIC.
If no REMIC election is made, the Trust Fund will be treated as a grantor
trust and will not be classified as an association taxable as a corporation for
federal income tax purposes. The treatment of a particular
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Series of Certificates will depend on the characteristics of such Series of
Certificates. The holders of Certificates will either be treated as owners of
undivided pro rata interests in the underlying Loans ("Pass-Through
Certificates"), or as owners of stripped bonds or stripped coupons ("Stripped
Certificates") under the Code. All income with respect to a Stripped Certificate
will be accounted for as original issue discount and, unless otherwise specified
in the related Prospectus Supplement, will be reported by the Trustee on an
accrual basis, which may be prior to the receipt of cash associated with such
income.
The holder of a Pass-Through Certificate must include in income its
allocable share of all interest and other income of the Trust and may, subject
to certain limitations for individual trust or estate Certificateholders, deduct
its allocable share of all expenses of the Trust. Pass-Through Certificates will
be considered to represent "qualifying real property loans" for mutual savings
banks and domestic building and loan associations, "loans secured by an interest
in real property" for domestic building and loan associations and "real estate
assets" for real estate investment trusts to the extent that the Loans qualify
for such treatment. Although there is no direct authority and the matter is not
free from doubt, Stripped Certificates should also qualify for such treatment to
the extent that the underlying loans qualify for such treatment. See "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS."
ERISA CONSIDERATIONS
A fiduciary of any employee benefit plan subject to the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), or the Code should carefully
review with its own legal advisors whether the purchase or holding of
Certificates could give rise to a transaction prohibited or otherwise
impermissible under ERISA or the Code. See "ERISA CONSIDERATIONS."
LEGAL INVESTMENT
Unless otherwise specified in the related Prospectus Supplement,
Certificates of each Series offered by this Prospectus and such Prospectus
Supplement will constitute "mortgage related securities" under the Secondary
Mortgage Market Enhancement Act of 1984 ("SMMEA") so long as they are rated by
at least one Rating Agency in one of its two highest categories and, as such,
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. See "LEGAL INVESTMENT."
USE OF PROCEEDS
The Depositor will use the net proceeds from the sale of each Series for one
or more of the following purposes: (i) to purchase the related Mortgage Assets,
(ii) to repay indebtedness which has been incurred to obtain funds to acquire
such Mortgage Assets, (iii) to establish any reserve funds described in the
related Prospectus Supplement and (iv) to pay costs of structuring, guaranteeing
and issuing such Certificates. If so specified in the related Prospectus
Supplement, the purchase of the Mortgage Assets for a Series may be effected by
an exchange of Certificates with the Depositor of such Mortgage Assets. See "USE
OF PROCEEDS."
RATINGS
Unless otherwise specified in the related Prospectus Supplement, it will be
a requirement for issuance of any Series that the Certificates offered by this
Prospectus and such Prospectus Supplement be rated by at least one Rating Agency
in one of its two highest applicable rating categories. The rating or ratings
applicable to Certificates of each Series offered hereby and by the related
Prospectus Supplement will be as set forth in the related Prospectus Supplement.
A securities rating should be evaluated independently of similar ratings on
different types of securities. A security rating does not address the effect
that the rate of prepayments on Loans comprising or underlying the Mortgage
Assets may have on the yield to investors in the Certificates. See "SPECIAL
CONSIDERATIONS."
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SPECIAL CONSIDERATIONS
Investors should consider, among other things, the following factors in
connection with an investment in the Certificates.
LIMITED LIQUIDITY
There can be no assurance that a secondary market for the Certificates of
any Series will develop or, if it does develop, that it will provide
Certificateholders with liquidity of investment or will continue for the life of
the Certificates. Donaldson, Lufkin & Jenrette Securities Corporation (through
one or more of its affiliates) intends to make a secondary market in the
Certificates, but has no obligation to do so. In addition, the market value of
Certificates of each Series will fluctuate with changes in prevailing rates of
interest. Consequently, sale of the Certificates by a Holder in any secondary
market which may develop may be at a discount from par value or from their
purchase price. Certificateholders have no optional redemption rights.
YIELD, PREPAYMENT AND MATURITY
The rate at which prepayments (which include both voluntary prepayments by
the obligors on the Loans and liquidations due to defaults and foreclosures)
occur on the Loans underlying or comprising the Mortgage Assets for a Series
will be affected by a variety of factors, including, without limitation, the
level of prevailing interest rates and economic, demographic, tax, social, legal
and other factors. Prepayments on the Loans comprising or underlying the
Mortgage Assets for a Series generally will result in a faster rate of
distributions of principal on the Certificates. Thus, the prepayment experience
on the Loans comprising or underlying the Mortgage Assets will affect the
average life and yield to investors of each Class and the extent to which each
such Class is paid prior to its Final Scheduled Distribution Date. A Series may
include an Interest Weighted Class offered at a significant premium or a
Principal Weighted Class offered at a substantial discount. Yields on such
Classes of Certificates will be extremely sensitive to prepayments on the Loans
comprising or underlying the Mortgage Assets for such Series. In general if a
Certificate, including a Certificate of an Interest Weighted Class, is purchased
at a premium and principal distributions on the Loans occur at a rate faster
than anticipated at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that assumed at the time of purchase.
Where the amount of interest allocated with respect to an Interest Weighted
Class is extremely disproportionate to principal, a Certificateholder could,
under some such prepayment scenarios, fail to recoup its original investment.
Conversely, if a Certificate, including a Certificate of a Principal Weighted
Class, is purchased at a discount and principal distributions thereon occur at a
rate slower than assumed at the time of purchase, the investor's actual yield to
maturity could be significantly lower than that originally anticipated. Any
rating assigned to the Certificates by a Rating Agency will reflect only such
Rating Agency's assessment of the likelihood that timely distributions will be
made with respect to such Certificates in accordance with the related Pooling
and Servicing Agreement. Such rating will not constitute an assessment of the
likelihood that principal prepayments on the Loans underlying or comprising the
Mortgage Assets will be made by borrowers or of the degree to which the rate of
such prepayments might differ from that originally anticipated. As a result,
such rating will not address the possibility that prepayment rates higher or
lower than anticipated by an investor may cause such investor to experience a
lower than anticipated yield, or that an investor purchasing an Interest
Weighted Certificate at a significant premium might fail to recoup its initial
investment. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS."
CREDIT SUPPORT LIMITATIONS
The amount, type and nature of insurance policies, subordination,
Certificate Guarantee Insurance, letters of credit and other credit support, if
any, required with respect to a Series will be determined on the basis of
criteria established by each Rating Agency rating such Series. Such criteria are
necessarily based upon an actuarial analysis of the behavior of Loans in a
larger group. Such actuarial analysis is the basis upon which each Rating Agency
determines (a) required amounts and types of pool insurance, special hazard
insurance, reserve funds, subordination or other credit support and (b) limits
on the number and amount of Loans which have various special payment
characteristics, have various Loan-to-Value Ratios and/or were
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made for various purposes (e.g., primary residence, second home, refinancing).
There can be no assurance that the historical data supporting such actuarial
analysis will accurately reflect future experience nor any assurance that the
data derived from a large pool of housing loans accurately predicts the
delinquency, foreclosure or loss experience of any particular pool of Loans.
In addition, if distributions in reduction of the principal balance of
Certificates of a Series of Multiple Class Certificates are made in order of the
respective Final Scheduled Distribution Dates of the Class, any limits with
respect to the aggregate amount of claims under any related pool insurance
policy and the special hazard insurance policy may be exhausted before the
principal of the later-maturing Classes has been repaid. As a result, the impact
of significant losses on the Mortgage Loans may bear primarily upon the
Certificates of the later-maturing Classes.
The Prospectus Supplement for a Series will describe any reserve funds,
insurance policies, letter of credit or other third-party credit support
relating to the Mortgage Assets or to the Certificates of such Series. Use of
such reserve funds and payments under such insurance policies, letter of credit
or other third-party credit support will be subject to the conditions and
limitations described herein and in the related Prospectus Supplement. Moreover,
such reserve funds, insurance policies, letter of credit or other credit support
will not cover all potential losses or risks. The obligations of the issuers of
any credit support such as a pool insurance policy, special hazard insurance
policy, bankruptcy bond, letter of credit, Certificate Guarantee Insurance,
repurchase bond or other third-party credit support will not be guaranteed or
insured by the United States, or by any agency or instrumentality thereof. A
Series of Certificates may include a Class or multiple Classes of Subordinate
Certificates to the extent described in the related Prospectus Supplement.
Although such subordination is intended to reduce the risk of delinquent
distributions or ultimate losses to Holders of Senior Certificates, the
Subordinated Amount will be limited and will decline under certain circumstances
and the related Subordination Reserve Fund, if any, could be depleted in certain
circumstances. See "DESCRIPTION OF THE CERTIFICATES," "THE TRUST FUNDS" and
"CREDIT SUPPORT."
CERTAIN LOANS AND MORTGAGED PROPERTY
Loans such as GPM Loans, GEM Loans, ARMs, Bi-Weekly Loans and Buy-Down Loans
are of recent origin. As a result, reliable prepayment, loss and foreclosure
statistics relating to such housing loans are not available. Such Loans may be
underwritten on the basis of an assessment that the borrower will have the
ability to make payments in higher amounts in later years and, in the case of
Loans with adjustable mortgage rates, after relatively short periods of time.
See "LOAN UNDERWRITING PROCEDURES and STANDARDS" and "CREDIT SUPPORT." Other
loans may be underwritten principally on the basis of the initial Loan-to-Value
Ratio of the Loans. To the extent losses on Loans exceed levels estimated by the
Rating Agency rating the Series in determining required levels of
overcollateralization or other credit support, the Trust Fund may experience a
loss. Furthermore, Loans made with respect to Multifamily Property, Manufactured
Homes or Cooperative Dwellings may entail risks of loss in the event of
delinquency and foreclosure or repossession that are greater than similar risks
associated with traditional single-family property. To the extent losses on such
Loans exceed levels estimated by the Rating Agency in determining required
levels of overcollateralization or other credit support, the Trust Fund may
experience a loss. See "SERVICING OF LOANS--Maintenance of Insurance Policies
and Other Servicing Procedures" and "CREDIT SUPPORT."
LIMITED OBLIGATIONS AND ASSETS OF DEPOSITOR
Unless otherwise set forth in the Prospectus Supplement for a Series of
Certificates, the Trust Fund for a Series will be the only available source of
funds to make distributions on the Certificates of such Series. The only
obligations of the Depositor with respect to the Certificates of any Series will
be pursuant to certain representations and warranties. See "THE POOLING AND
SERVICING AGREEMENTS--Assignment of Mortgage Assets" herein. The Depositor does
not have, and is not expected in the future to have, any significant assets with
which to meet any obligation to repurchase Mortgage Assets with respect to which
there has been a breach of any representation or warranty. If, for example, the
Depositor were required to repurchase a Loan which constitutes a Mortgage Asset,
its only sources of funds to make such repurchase
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would be from funds obtained from the enforcement of a corresponding obligation,
if any, on the part of the originator of the Loans, Servicer or Master Servicer,
as the case may be, or from a reserve fund established to provide funds for such
repurchases. See "THE DEPOSITOR."
ERISA CONSIDERATIONS
Generally, ERISA applies to investments made by employee benefit plans and
transactions involving the assets of such plans. Due to the complexity of
regulations which govern such plans, prospective investors that are subject to
ERISA are urged to consult their own counsel regarding consequences under ERISA
of acquisition, ownership and disposition of the Certificates of any Series. See
"ERISA CONSIDERATIONS."
CERTAIN FEDERAL TAX CONSIDERATIONS REGARDING REMIC RESIDUAL INTERESTS
Holders of REMIC Residual Interests will be required to report on their
federal income tax returns as ordinary income their pro rata share of the
taxable income of the REMIC regardless of the amount or timing of their receipt
of cash payments as described in "CERTAIN FEDERAL INCOME TAX
CONSIDERATIONS--Residual Interests in a REMIC." Accordingly, under certain
circumstances, holders of Certificates which constitute REMIC Residual Interests
might have taxable income and tax liabilities arising from such investment
during a taxable year in excess of the cash received during such period. The
requirement that Holders of Residual Interest Certificates report their pro rata
share of the taxable income and net loss of the REMIC will continue until the
principal balances of all Classes of Certificates of the related Series have
been reduced to zero, even though holders of Residual Interests have received
full payment of their stated interest and principal. A portion (or, in certain
circumstances, all) of a Residual Interest Certificateholder's share of the
REMIC taxable income may be treated as "excess inclusion" income to such holder
which (i) except in the case of certain thrift institutions, will not be subject
to offset by losses from other activities, (ii) for a tax-exempt Holder, will be
treated as unrelated business taxable income and (iii) for a foreign holder,
will not qualify for exemption from withholding tax. Individual Holders of
Certificates constituting Residual Interests may be limited in their ability to
deduct servicing fees and other expenses of the REMIC. Because of the special
tax treatment of REMIC residual interests, the taxable income arising in a given
year on a REMIC residual interest will not be equal to the taxable income
associated with investment in a corporate bond or stripped instrument having
similar cash flow characteristics and pre-tax yield. Therefore, the after-tax
yield on the Residual Interest Certificates may be significantly less than that
of a corporate bond or stripped instrument having similar cash flow
characteristics.
DESCRIPTION OF THE CERTIFICATES
GENERAL
The Certificates will be issued in Series pursuant to separate Pooling and
Servicing Agreements between the Depositor and the Trustee for the related
Series identified in the related Prospectus Supplement. The following summaries
describe certain provisions common to each Series. The summaries do not purport
to be complete and are subject to, and are qualified in their entirety by
reference to, the provisions of the Pooling and Servicing Agreement and the
Prospectus Supplement relating to each Series. When particular provisions or
terms used in the Pooling and Servicing Agreement are referred to, such
provisions or terms shall be as specified in the Pooling and Servicing
Agreement.
Each Series will consist of one or more Classes, one or more of which may
consist of Compound Interest Certificates, Floating Interest Certificates,
Interest Weighted Certificates, Principal Weighted Certificates or Reduced
Volatility Certificates ("RV's" or "RV Certificates"). A Series may also include
one or more Classes of Subordinate Certificates. Unless otherwise specified in
the related Prospectus Supplement, a Class of Subordinate Certificates will be
offered hereby or by such Prospectus Supplement only if rated by a Rating Agency
in at least its second highest applicable rating category. If so specified in
the related Prospectus Supplement, the Mortgage Assets in a Trust Fund may be
divided into multiple Asset Groups and the Certificates of each separate Class
will evidence beneficial ownership of each corresponding Asset Group.
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Each Series will be issued in fully registered form, in the minimum original
principal amount or notional amount for Certificates of each Class specified in
the related Prospectus Supplement. The transfer of the Certificates may be
registered, and the Certificates may be exchanged, without the payment of any
service charge payable in connection with such registration of transfer or
exchange. If specified in the related Prospectus Supplement, one or more Classes
of a Series may be available in book-entry form only.
VALUATION OF TRUST ASSETS
Each Mortgage Asset included in the Trust Fund for a Multiple Class Series
will be assigned an initial Asset Value determined in the manner and subject to
the assumptions summarized in the related Prospectus Supplement. The Asset Value
of the Mortgage Assets will not be less than the initial aggregate principal
amount of the Certificates of the related Multiple Class Series at the date of
issuance thereof.
The Asset Value of Mortgage Assets represents the principal amount of
Certificates of a Multiple Class Series that, based on certain assumptions, can
be supported by the scheduled principal and interest due on the Mortgage Assets
irrespective of prepayments thereon, the reinvestment income thereon at the
Assumed Reinvestment Rate (which may be zero) and the moneys available to be
withdrawn from related Reserve Funds, if any, as specified in the related
Prospectus Supplement. Individual Mortgage Assets for a Series which share
similar characteristics may be aggregated into one or more groups (each an
"Asset Group"), each of which will be assigned a single aggregate Asset Value.
If so specified in the related Prospectus Supplement, the Mortgage Assets in a
Trust Fund may be divided into multiple Asset Groups and the Certificates of
separate Classes will evidence beneficial ownership of each corresponding Asset
Group. Unless the related Prospectus Supplement provides otherwise, the
aggregate Asset Value of an Asset Group will be calculated as though the
underlying Mortgage Assets constitute a single Loan having such of the
characteristics of the Mortgage Assets included in the Asset Group that would
result in the lowest Asset Value being assigned to each Mortgage Asset included
in such Asset Group.
There are a number of alternative means of determining Asset Value of a
Mortgage Asset, including determinations based on the discounted present value
of the remaining scheduled payments on such Mortgage Asset, determinations based
on the relationship between the interest rate borne by such Mortgage Asset and
the Certificate Rate or Rates for the related Classes of Certificates, or based
upon the aggregate outstanding principal balances of the Mortgage Assets. The
Prospectus Supplement for a Multiple Class Series will specify the method or
methods and summarize the related assumptions used to determine the Asset Values
of the Mortgage Assets in the related Trust Fund.
The Assumed Reinvestment Rate, if any, for a Multiple Class Series will be
the highest rate permitted by each Rating Agency rating such Series or a rate
insured, guaranteed or otherwise provided for by means of a surety bond,
interest rate swap agreement, interest rate cap agreement, Guaranteed Investment
Contract, or other arrangement satisfactory to each such Rating Agency. See "THE
POOLING AND SERVICING AGREEMENTS--Investment of Funds."
DISTRIBUTIONS ON THE CERTIFICATES
GENERAL. Commencing on the date specified in the related Prospectus
Supplement, distributions of principal and interest on the Certificates will be
made on each Distribution Date to the extent of the "Available Distribution
Amount" as set forth in the related Prospectus Supplement.
Distributions of interest on Certificates which receive interest will be
made periodically at the intervals and at the Pass-Through Rate or Certificate
Rate specified or, with respect to Floating Interest Certificates, determined in
the manner described in the related Prospectus Supplement. Interest on the
Certificates will be calculated on the basis of a 360-day year consisting of
twelve 30-day months unless otherwise specified in the related Prospectus
Supplement.
If funds in the Certificate Account (together with any amounts transferred
from any reserve fund or applicable credit support) are insufficient to make the
full distribution to Certificateholders described above on any Distribution
Date, the funds available for distribution to the Certificateholders of each
Class will be
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distributed in accordance with their respective interests therein, except that
Subordinate Certificateholders, if any, will not, subject to the limitations
described in the related Prospectus Supplement, receive any distributions until
Senior Certificateholders receive the amount of present distributions due them
and the amount of distributions owed them which were not timely distributed
thereon and to which they are entitled (in each case calculated as described in
the related Prospectus Supplement). If specified in the related Prospectus
Supplement, the difference between the amount which the Certificateholders would
have received if there had been sufficient eligible funds available for
distribution and the amount actually distributed, plus interest at the
applicable Pass-Through Rate or Certificate Rate will be included in the
calculation of the amount which the Certificateholders are entitled to receive
on the next Distribution Date. See "THE POOLING AND SERVICING
AGREEMENTS--Deficiency Events."
Distributions of principal of and interest on Certificates of a Series will
be made by check mailed to Certificateholders of such Series registered as such
on the close of business on the record date specified in the related Prospectus
Supplement at their addresses appearing on the Certificate Register, except that
(a) distributions may be made by wire transfer (at the expense of the
Certificateholder requesting payment by wire transfer) in certain circumstances
described in the related Prospectus Supplement and (b) the final distribution in
retirement of a Certificate will be made only upon presentation and surrender of
such Certificate at the corporate trust office of the Trustee for such Series or
such other office of the Trustee as specified in the Prospectus Supplement.
Notice of the final distribution on a Certificate will be mailed to the Holder
of such Certificate before the Distribution Date on which such final
distribution in retirement of the Certificate is expected to be made. If
specified in the related Prospectus Supplement, the Certificates of a Series or
certain Classes of a Series may be available only in book-entry form. See
"Book-Entry Registration" herein.
With respect to reports to be furnished to Certificateholders concerning a
distribution, see "THE POOLING AND SERVICING AGREEMENTS--Reports to
Certificateholders."
PASS-THROUGH CERTIFICATES GENERALLY. With respect to a Series other than a
Multiple Class Series, distributions on the Certificates on each Distribution
Date will generally be allocated to each Certificate entitled thereto on the
basis of the undivided percentage interest (the "Percentage Interest") evidenced
by such Certificate in the Trust Fund or on the basis of their outstanding
principal amounts or notional amounts (subject to any subordination of the
rights of any Subordinate Classes to receive current distributions as specified
in the related Prospectus Supplement). See "Subordinate Certificates" below. If
the Mortgage Assets for a Series have adjustable or variable interest or
pass-through rates, then the Pass-Through Rate of the Certificates of such
Series may also vary, due to changes in such rates and due to prepayments with
respect to Loans comprising or underlying the related Mortgage Assets. If the
Mortgage Assets for a Series have fixed interest or pass-through rates, then the
Pass-Through Rate on Certificates of the related Series may be fixed, or may
vary, to the extent prepayments cause changes in the weighted average interest
rate or pass-through rate of the Mortgage Assets. If the Mortgage Assets have
lifetime or periodic adjustment caps on the respective pass-through rates, then
the Pass-Through Rate on the Certificates of the related Series may also reflect
such caps.
If so specified in the related Prospectus Supplement, a Series may include a
Class of Interest Weighted Certificates, a Class of Principal Weighted
Certificates, or both. Unless otherwise specified in the Prospectus Supplement,
payments received from the Mortgage Assets will be allocated on the basis of the
Percentage Interest of each Class in the principal component of such
distributions, the interest component of such distributions, or both, and will
be further allocated on a pro rata basis among the Certificates within each
Class. The method or formula for determining the Percentage Interest of a
Certificate will be set forth in the related Prospectus Supplement.
MULTIPLE CLASS SERIES. Each Certificate of a Multiple Class Series will
have a principal amount or a notional amount and a specified Certificate Rate
(which may be zero). Interest distributions on a Multiple Class Series will be
made on each Certificate entitled to an interest distribution on each
Distribution Date at the Certificate Rate specified or, with respect to Floating
Interest Certificates, determined as described in
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the related Prospectus Supplement, to the extent funds are available in the
Certificate Account, subject to any subordination of the rights of any
Subordinate Class to receive current distributions. See "Subordinate and Other
Certificates" below and "CREDIT SUPPORT."
Interest on all Multiple Class Certificates currently entitled to receive
interest will be distributed on the Distribution Dates specified in the related
Prospectus Supplement, to the extent funds are available in the Certificate
Account, subject to any subordination of the rights of any Subordinate Class to
receive current distributions. See "Subordinate Certificates" below and "CREDIT
SUPPORT." Distributions of interest on a Class of Compound Interest Certificates
will commence only after the related Accrual Termination Date specified in the
related Prospectus Supplement. On each Distribution Date prior to and including
the Accrual Termination Date, interest on such Class of Compound Interest
Certificates will accrue and the amount of interest accrued on such Distribution
Date (the "Accrual Distribution Amount") will be added to the principal balance
thereof on the related Distribution Date. On each Distribution Date after the
Accrual Termination Date, interest distributions will be made on Classes of
Compound Interest Certificates on the basis of the current Compound Value of
such Class. The Compound Value of a Class of Compound Interest Certificates
equals the initial aggregate principal balance of the Class, plus accrued and
undistributed interest added to such Class through the immediately preceding
Distribution Date, less any principal distributions previously made in reduction
of the aggregate outstanding principal balance of such Class.
To the extent provided in the related Prospectus Supplement, a Series of
Multiple Class Certificates may include one or more Classes of Floating Interest
Certificates. The Certificate Rate of a Floating Interest Certificate will be a
variable or adjustable rate, subject to a Maximum Floating Rate, Minimum
Floating Rate, or both. For each Class of Floating Interest Certificates, the
related Prospectus Supplement will set forth the initial Floating Rate (or the
method of determining it), the Floating Interest Period, and the formula, index,
or other method by which the Floating Rate for each Floating Interest Period
will be determined.
To the extent provided in the related Prospectus Supplement, a series of
Multiple Class Certificates may include one or more classes of Reduced
Volatility Certificates.
Distributions of principal will be allocated among the Classes of a Multiple
Class Series in the order of priority and amount specified in the related
Prospectus Supplement. Unless otherwise specified in the related Prospectus
Supplement, the Principal Distribution Amount for a Multiple Class Series on
each Distribution Date will be an amount equal to the sum of (a) the Accrual
Distribution Amount, if any, (b) the Minimum Principal Distribution Amount and
(c) the percentage, if any, of Excess Cash Flow specified in the related
Prospectus Supplement.
SUBORDINATE CERTIFICATES. One or more Classes of a Series may consist of
Subordinate Certificates. Subordinate Certificates may be included in a Series
to provide credit support as described herein under "CREDIT SUPPORT" in lieu of
or in addition to other forms of credit support. The extent of subordination of
a Class of Subordinate Certificates may be limited as described in the related
Prospectus Supplement. See "CREDIT SUPPORT." If the Mortgage Assets are divided
into separate Asset Groups, beneficial ownership of which is evidenced by
separate Classes of a Series, credit support may be provided by a cross-support
feature which requires that distributions be made to Senior Certificates
evidencing beneficial ownership of one Asset Group prior to making distributions
on Subordinate Certificates evidencing a beneficial ownership interest in
another Asset Group within the Trust Fund. Except as otherwise specified in the
related Prospectus Supplement, Subordinate Certificates will not be offered
hereby or by such related Prospectus Supplement unless they are rated in one of
the two highest rating categories by at least one Rating Agency.
SPECIAL DISTRIBUTIONS AND OTHER DISTRIBUTIONS
SPECIAL DISTRIBUTIONS. To the extent specified in the related Prospectus
Supplement, Special Distributions in reduction of Certificate principal amount
may be made with respect to the Certificates of a Multiple Class Series on the
day or days of any month specified therein if, as a result of the prepayment
experience on the Mortgage Assets for such Series or the low yields available
for reinvestment, or both, it is determined
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(based on assumptions specified in the Pooling and Servicing Agreement and after
giving effect to the amounts, if any, available to be withdrawn from any reserve
fund for such Series) that the amount anticipated to be available in the
Certificate Account on the date specified in the related Prospectus Supplement
for such Series, will be insufficient to make scheduled distributions of
principal and interest on the Certificates of such Series on the next
Distribution Date. The amount distributed in reduction of principal amount will
not exceed the Principal Distribution Amount otherwise required to be paid on
the next Distribution Date. Therefore, the result of such a Special Distribution
with respect to the Certificates of a Multiple Class Series will be to reduce
their aggregate principal amount prior to the next scheduled Distribution Date.
All distributions in reduction of the Certificate principal amount pursuant
to any Special Distribution will be made in the order of priority and in the
manner specified in the related Prospectus Supplement. Notice of any Special
Distribution will be mailed by the Trustee to the Certificateholders of the
related Series prior to the Special Distribution Date.
OTHER DISTRIBUTIONS. If so specified in the related Prospectus Supplement
for a Series, in the event that Mortgage Assets having an aggregate Asset Value
at least equal to the initial aggregate principal balance of the Certificates of
a Multiple Class Series are not delivered to the Trustee on the related Closing
Date, the Depositor will deposit cash or Eligible Investments on an interim
basis with the Trustee on such Closing Date in lieu of such undelivered Mortgage
Assets. If Mortgage Assets are not delivered by the date specified in the
related Prospectus Supplement, the Trustee will make a distribution from the
interim deposit and any reinvestment income thereon in reduction of principal
balance of the Certificates on the next succeeding Distribution Date. Such a
distribution would affect weighted average life and yield to maturity of the
affected Certificates. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS."
OPTIONAL TERMINATION
If so specified in the related Prospectus Supplement for a Series, the
Depositor, the Master Servicer, or another entity designated in the related
Prospectus Supplement may, at its option, cause an early termination of a Trust
Fund by repurchasing all of the Mortgage Assets from such Trust Fund on or after
a date specified in the related Prospectus Supplement, or on or after such time
as the aggregate outstanding principal amount of the Mortgage Assets is less
than a specified percentage of their initial aggregate principal amount. In the
case of a Trust Fund for which a REMIC election has been made, the Trustee shall
receive a satisfactory opinion of counsel that the repurchase price will not
jeopardize the status of the REMIC and that the optional termination will be
conducted so as to constitute a "qualified liquidation" under Section 860F of
the Code. Such optional termination will be in addition to terminations which
may result from other events. See "THE POOLING AND SERVICING
AGREEMENTS--Deficiency Event" and "--Termination."
BOOK-ENTRY REGISTRATION
If so specified in the related Prospectus Supplement, the Certificates will
be issued in book-entry form in the minimum denominations specified in such
Prospectus Supplement and integral multiples thereof, and each Class will be
represented by a single Certificate registered in the name of the nominee of the
depository, The Depository Trust Company ("DTC"), a limited-purpose trust
company organized under the laws of the State of New York. If so specified in
the related Prospectus Supplement, no person acquiring an interest in the
Certificates (a "Certificateowner") will be entitled to receive a Certificate
issued in fully registered, certificated form (a "Definitive Certificate")
representing such person's interest in the Certificates except in the event that
the book-entry system for the Certificates is discontinued (as described below).
Unless and until Definitive Certificates are issued, it is anticipated that the
only Certificateholder of the Certificates will be Cede & Co., as nominee of
DTC. Certificateowners will not be registered "Certificateholders" or registered
"Holders" under the Pooling and Servicing Agreement, and Certificateowners will
only be permitted to exercise the rights of Certificateholders indirectly
through DTC Participants.
DTC was created to hold securities for its participating organizations
("Participants") and facilitate the clearance and settlement of securities
transactions between Participants through electronic book-entry
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changes in accounts of its Participants. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system also is available
to entities that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly ("indirect participants").
Certificateowners that are not Participants or Indirect Participants but
desire to purchase, sell or otherwise transfer ownership of Certificates may do
so only though Participants and Indirect Participants. Because DTC can only act
on behalf of Participants and Indirect Participants, the ability of a
Certificateowner to pledge such owner's Certificate to persons or entities that
do not participate in the DTC system, or otherwise take actions in respect of
such Certificate, may be limited. In addition, under a book-entry format,
Certificateowners may experience some delay in their receipt of principal and
interest distributions with respect to the Certificates since such distributions
will be forwarded to DTC and DTC will then forward such distributions to its
Participants which in turn will forward them to Indirect Participants or
Certificateowners.
Under the rules, regulations and procedures creating and affecting DTC and
its operations (the "Rules"), DTC Participants may make book-entry transfers
among Participants through DTC facilities with respect to the Certificates and
DTC, as registered holder, is required to receive and transmit principal and
interest distributions and distributions with respect to the Certificates.
Participants and Indirect Participants with which Certificateowners have
accounts with respect to Certificates similarly are required to make book-entry
transfers and receive and transmit such distributions on behalf of their
respective Certificateowners. Accordingly, although Certificateowners will not
possess certificates, the Rules provide a mechanism by which Certificateowners
will receive distributions and will be able to transfer their interests.
The Depositor understands that DTC will take any action permitted to be
taken by a Certificateholder under the Pooling and Servicing Agreement only at
the direction of one or more Participants to whose account with DTC the
Certificates are credited. Additionally, the Depositor understands that DTC will
take such actions with respect to holders of a certain specified interest in the
certificates or holders having a certain specified voting interest only at the
direction of and on behalf of Participants whose holdings represent that
specified interest or voting interest. DTC may take conflicting actions with
respect to other Holders of Certificates to the extent that such actions are
taken on behalf of Participants whose holdings represent that specified interest
or voting interest.
DTC may discontinue providing its services as securities depository with
respect to the Certificates at any time by giving reasonable notice to the
Depositor or the Trustee. Under such circumstances, in the event that a
successor securities depository is not obtained, Definitive Certificates will be
printed and delivered. In addition the Depositor may at its option elect to
discontinue use of the book-entry system through DTC. In that event, too,
Definitive Certificates will be printed and delivered.
YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS
PAYMENT DELAYS
With respect to any Series, a period of time will elapse between receipt of
payments or distributions on the Mortgage Assets and the Distribution Date on
which such payments or distributions are passed through to Certificateholders.
Such a delay will effectively reduce the yield that would otherwise be obtained
if payments or distributions were distributed on or near the date of receipt.
The related Prospectus Supplement may set forth an example of the timing of
receipts and the distribution thereof to Certificateholders.
PRINCIPAL PREPAYMENTS
With respect to a Series for which the Mortgage Assets consist of Loans or
participation interests therein, when a Loan prepays in full, the borrower will
generally be required to pay interest on the amount of prepayment only to the
prepayment date. In addition, the prepayment may not be required to be passed
through to Certificateholders until the month following receipt. The effect of
these provisions is to reduce the aggregate amount of interest which would
otherwise be available for distributions on the Certificates, thus effectively
reducing the yield that would be obtained if interest continued to accrue on the
Loan until
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the date on which the principal prepayment was scheduled to be paid. To the
extent specified in the related Prospectus Supplement, this effect on yield may
be mitigated by, among other things, an adjustment to the servicing fee
otherwise payable to the Master Servicer or Servicer with respect to any such
prepaid Loans. See "SERVICING OF LOANS--Advances and Limitations Thereon."
TIMING OF REDUCTION OF PRINCIPAL BALANCE
A Multiple Class Series may provide that, for purposes of calculating
interest distributions, the principal amount of the Certificates is deemed
reduced as of a date prior to the Distribution Date on which principal thereon
is actually distributed. Consequently, the amount of interest accrued during any
Interest Accrual Period will be less than the amount that would have accrued on
the actual principal balance of the Certificate outstanding. The effect of such
provisions is to produce a lower yield on the Certificates than would be
obtained if interest were to accrue on the Certificates on the actual unpaid
principal amount of such Certificates to each Distribution Date. The related
Prospectus Supplement will specify the time at which the principal amounts of
the Certificates are determined or are deemed to reduce for purposes of
calculating interest distributions on Certificates of a Multiple Class Series.
INTEREST OR PRINCIPAL WEIGHTED CERTIFICATES
If a Class of Certificates consists of Interest Weighted Certificates or
Principal Weighted Certificates, a lower rate of principal prepayments than
anticipated will negatively affect the yield to investors in Principal Weighted
Certificates, and a higher rate of principal prepayments than anticipated will
negatively affect the yield to investors in Interest Weighted Certificates. The
Prospectus Supplement for a Series including such Certificates will include a
table showing the effect of various levels of prepayment on yields on such
Certificates. Such tables will be intended to illustrate the sensitivity of
yields to various prepayment rates and will not be intended to predict, or
provide information which will enable investors to predict, yields or prepayment
rates.
FINAL SCHEDULED DISTRIBUTION DATE
The Final Scheduled Distribution Date of each Class of any Series other than
a Multiple Class Series will be the Distribution Date following the latest
stated maturity of any Mortgage Asset in the related Trust Fund. The Final
Scheduled Distribution Date of each Class of any Multiple Class Series will be
specified in the related Prospectus Supplement and will be the date (calculated
on the basis of the assumptions applicable to such Series described therein) on
which the entire aggregate principal balance of such Class will be reduced to
zero. Since prepayments on the Loans underlying or comprising the Mortgage
Assets will be used to make distributions in reduction of the outstanding
principal amount of the Certificates, it is likely that the actual maturity of
any Class will occur earlier, and may occur substantially earlier, than its
Final Scheduled Distribution Date.
PREPAYMENTS AND WEIGHTED AVERAGE LIFE
Weighted average life refers to the average amount of time that will elapse
from the date of issue of a security until each dollar of the principal of such
security will be repaid to the investor. The weighted average life of the
Certificates of a Series will be influenced by the rate at which principal on
the Loans comprising or underlying the Mortgage Assets for such Certificates is
paid, which may be in the form of scheduled amortization or prepayments (for
this purpose, the term "prepayment" includes prepayments, in whole or in part,
and liquidations due to default).
The rate of principal prepayments on pools of housing loans is influenced by
a variety of economic, demographic, geographic, legal, tax, social and other
factors. The rate of prepayments of conventional housing loans has fluctuated
significantly in recent years. In general, however, if prevailing interest rates
fall significantly below the interest rates on the Loans comprising or
underlying the Mortgage Assets for a Series, such Loans are likely to prepay at
rates higher than if prevailing interest rates remain at or above the interest
rates borne by such Loans. In this regard, it should be noted that the Loans
comprising or underlying the
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Mortgage Assets of a Series may have different interest rates, and the stated
pass-through or interest rate of certain Mortgage Assets or the Certificate Rate
or Pass-Through Rate on the Certificates may be a number of percentage points
less than interest rates on such Loans. In addition, the weighted average life
of the Certificates may be affected by the varying maturities of the Loans
comprising or underlying the Mortgage Assets. If any Loans comprising or
underlying the Mortgage Assets for a Series have actual terms-to-stated maturity
of less than those assumed in calculating the Final Scheduled Distribution Date
of the related Certificates, one or more Class of the Series may be fully paid
prior to its Final Scheduled Distribution Date, even in the absence of
prepayments and a reinvestment return higher than the Assumed Reinvestment Rate.
It is customary in the mortgage industry to compute the yield on a pool of
30-year, fixed rate, level payment mortgages as if the pool were a single loan
amortized according to the 30-year schedule and then prepaid in full at the end
of the twelfth year, and to compute the yield on a pool of 15-year, fixed rate,
level payment mortgages as if the pool were a single loan that is amortized
according to a 15-year schedule and then prepaid in full at the end of the
seventh year. Prepayments on loans are also commonly measured relative to a
prepayment standard or model, such as the Constant Prepayment Rate ("CPR")
prepayment model or the Standard Prepayment Assumption ("SPA") prepayment model
or the FHA Prepayment Experience, each as described below.
CPR represents a constant assumed rate of prepayment each month relative to
the then outstanding principal balance of a pool of loans for the life of such
loans. SPA represents an assumed rate of prepayment each month relative to the
then outstanding principal balance of a pool of loans. A prepayment assumption
of 100% of SPA assumes prepayment rates of 0.2% per annum of the then
outstanding principal balance of such loans in the first month of the life of
the loans and an additional 0.2% per annum in each month thereafter until the
thirtieth month. Beginning in the thirtieth month and in each month thereafter
during the life of the loans, 100% of SPA assumes a constant prepayment rate of
6% per annum.
The FHA, a division of HUD, has compiled statistics relating to fixed rate,
level-payment mortgage loans secured by Single Family Property and insured by
the FHA under the National Housing Act of 1934, as amended (the "Housing Act"),
at various interest rates, all of which permit assumption by the new buyer if
the home is sold. Such statistics indicate that while some of such mortgage
loans remain outstanding until their scheduled maturities, a substantial number
are paid prior to their respective stated maturities. The Actuarial Division of
HUD has prepared tables which, assuming full mortgage prepayments at the rates
experienced by the FHA, set forth the percentages of the original number of FHA
Loans in pools of fixed rate, level payment mortgage loans of varying maturities
that will remain outstanding on each anniversary of the original date of such
mortgage loans (assuming they all have the same origination date). Data relating
to fixed-rate mortgage loans with original maturities of 15 to 30 years for the
period 1970 to 1983, as compiled by HUD, indicate, for example, that, for a pool
of 30-year mortgage loans having a mortgage rate of 12% per annum, the aggregate
principal balance of the loans outstanding 12 years after origination is
expected to be approximately 46% of the original principal balance. By
comparison, 90.87% of the aggregate principal balance of such mortgage loans
would have been outstanding if such mortgage loans had amortized in accordance
with the applicable repayment schedule, without prepayments. The HUD data also
indicate, that for a pool of 15-year mortgage loans having a mortgage rate of
12% per annum, the aggregate principal balance of the loans outstanding seven
years after origination is expected to be approximately 40% of the original
principal balance. By comparison, 73.84% of the aggregate principal balance of
such mortgage loans would have been outstanding if such mortgage loans had
amortized in accordance with the applicable repayment schedule, without
prepayments. The percentage of loans in a pool that remains outstanding, as
indicated by the HUD data, is referred to herein as the "FHA Prepayment
Experience."
There may be substantial differences between the portfolio on which the FHA
statistics were based and the Loans comprising or underlying the Mortgage Assets
for a Series. To the extent that the Loans comprising or underlying the Mortgage
Assets for such Series have scheduled maturities differing from those of the
mortgage loans in the FHA statistics, the probability of prepayment of the Loans
comprising or underlying the Mortgage Assets may differ from that of mortgage
loans included in the FHA statistics. There is also no assurance that the
economic and other factors existing during the period covered by the FHA
statistics are applicable today or will be applicable in the future.
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Neither CPR, SPA, or the FHA Prepayment Experience nor any other prepayment
model or assumption purports to be an historical description of prepayment
experience or a prediction of the anticipated rate of prepayment of any pool of
loans, including the Loans underlying or comprising the Mortgage Assets. Thus,
it is likely that prepayment of any Loans comprising or underlying the Mortgage
Assets for any Series will not conform to the FHA Prepayment Experience or to
any level of CPR or SPA.
The Prospectus Supplement for each Multi-Class Series will describe the
prepayment standard or model used to prepare the illustrative tables setting
forth the weighted average life of each Class of such Series under a given set
of prepayment assumptions. The related Prospectus Supplement will also describe
the percentage of the initial principal balance of each Class of such Series
that would be outstanding on specified Distribution Dates for such Series based
on the assumptions stated in such Prospectus Supplement, including assumptions
that prepayments on the Loans comprising or underlying the related Mortgage
Assets are made at rates corresponding to various percentages of the FHA
Prepayment Experience, CPR, SPA or at such other rates specified in such
Prospectus Supplement. Such tables and assumptions are intended to illustrate
the sensitivity of weighted average life of the Certificates to various
prepayment rates and will not be intended to predict or to provide information
which will enable investors to predict the actual weighted average life of the
Certificates or prepayment rates of the Loans comprising or underlying the
related Mortgage Assets.
OTHER FACTORS AFFECTING WEIGHTED AVERAGE LIFE
TYPE OF LOAN. Mortgage Loans made with respect to Multi-family Properties
may have provisions which prevent prepayment for a number of years and may
provide for payments of interest only during a certain period followed by
amortization of principal on the basis of a schedule extending beyond the
maturity of the related mortgage loan. ARMs, Bi-weekly Loans, GEM Loans, GPM
Loans or Buy-Down Loans comprising or underlying the Mortgage Assets may
experience a rate of principal prepayments which is different from the principal
prepayment rate for ARMs, Bi-weekly Loans, GEM Loans and GPM Loans included in
any other mortgage pool or from Conventional fixed rate Loans or from other
adjustable rate or graduated equity mortgages having different characteristics.
Because ARMs, Bi-weekly Loans, GEM Loans and GPM Loans have not been originated
in large quantities until recently, there can be no certainty as to their
respective rates of prepayment in either stable or changing interest rate
environments.
In the case of Negatively Amortizing ARMs, if interest rates rise without a
simultaneous increase in the related Scheduled Payment, Deferred Interest and
Negative Amortization may result. However, borrowers may pay amounts in addition
to their Scheduled Payments in order to avoid such Negative Amortization and to
increase tax deductible interest payments. To the extent that any of such
Mortgage Loans negatively amortize over their respective terms, future interest
accruals are computed on the higher outstanding principal balance of such
mortgage loan and a smaller portion of the Scheduled Payment is applied to
principal than would be required to amortize the unpaid principal over its
remaining term. Accordingly, the weighted average life of such Loans will
increase. During a period of declining interest rates, the portion of each
Scheduled Payment in excess of the scheduled interest and principal due will be
applied to reduce the outstanding principal balance of the related Loan, thereby
resulting in accelerated amortization of such Negatively Amortizing ARM. Any
such acceleration in amortization of the principal balance of any Negatively
Amortizing ARM will shorten the weighted average life of such Mortgage Loan. The
application of partial prepayments to reduce the outstanding principal balance
of a Negatively Amortizing ARM will tend to reduce the weighted average life of
the mortgage loan and will adversely affect the yield to Holders who purchased
their Certificates at a premium, if any, and Holders of an Interest Weighted
Class. The pooling of Negatively Amortizing ARMs having Rate Adjustment Dates in
different months, together with different initial Mortgage Rates, Lifetime
Mortgage Rate Caps, Minimum Mortgage Rates and stated maturity dates, could
result in some Negatively Amortizing ARMs which comprise or underlie the
Mortgage Assets experiencing negative amortization while the amortization of
other Negatively Amortizing ARMs may be accelerated.
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If the Loans comprising or underlying the Mortgage Assets for a Series
include ARMs that permit the borrower to convert to a long-term fixed interest
rate loan, the Master Servicer, Servicer, or PMBS Servicer, as applicable, may,
if specified in the related Prospectus Supplement, be obligated to repurchase
any Loan so converted. Any such conversion and repurchase would reduce the
average weighted life of the Certificates of the related Series.
A GEM Loan provides for scheduled annual increases in the borrower's
Scheduled Payment. Because the additional portion of the Scheduled Payment is
applied to reduce the unpaid principal balance of the GEM Loan, the stated
maturity of a GEM Loan will be significantly shorter than the 25 to 30 year term
used as the basis for calculating the installments of principal and interest
applicable until the first adjustment date.
The prepayment experience with respect to Manufactured Home Loans will
generally not correspond to the prepayment experience on other types of housing
loans. Even though some Manufactured Home Loans may be FHA Loans, no statistics
similar to those describing the FHA experience above are available with respect
to Manufactured Home Loans.
FORECLOSURES AND PAYMENT PLANS. The number of foreclosures and the
principal amount of the Loans comprising or underlying the Mortgage Assets which
are foreclosed in relation to the number of Loans which are repaid in accordance
with their terms will affect the weighted average life of the Loans comprising
or underlying the Mortgage Assets and that of the related Series of
Certificates. Servicing decisions made with respect to the Loans, including the
use of payment plans prior to a demand for acceleration and the restructuring of
Loans in bankruptcy proceedings, may also have an impact upon the payment
patterns of particular Loans. In particular, the return to Holders of
Certificates who purchased their Certificates at a premium, if any, and the
yield on an Interest Weighted Class may be adversely affected by servicing
policies and decisions relating to foreclosures.
DUE ON SALE CLAUSES. The acceleration of prepayment as a result of certain
transfers of the Mortgaged Property securing a Loan is another factor affecting
prepayment rates, and is a factor that is not reflected in the FHA experience.
While each of the Mortgage Loans included in the FHA statistics is assumable by
a purchaser of the underlying mortgaged property, the Loans constituting or
underlying the Mortgage Assets may include "due-on-sale" clauses. Except as
otherwise described in the Prospectus Supplement for a Series, the PMBS Servicer
of Loans underlying Private Mortgage-Backed Securities and the Master Servicer
or the Servicer of Loans constituting or underlying the Mortgage Assets for a
Series will be required, to the extent it knows of any conveyance or prospective
conveyance of the related residence by any borrower, to enforce any
"due-on-sale" clause applicable to the related Loan under the circumstances and
in the manner it enforces such clauses with respect to other similar loans in
its portfolio. FHA Loans and VA Loans are not permitted to contain "due-on-sale"
clauses and are freely assumable by qualified persons. However, as homeowners
move or default on their housing loans, the Mortgaged Property is generally sold
and the loans prepaid, even though, by their terms, the loans are not
"due-on-sale" and could have been assumed by new buyers.
OPTIONAL TERMINATION. If so specified in the related Prospectus Supplement,
the entity specified therein may cause an early termination of the related Trust
Fund by its repurchase of the remaining Mortgage Assets therein. See
"DESCRIPTION OF THE CERTIFICATES--Optional Termination."
THE TRUST FUNDS
GENERAL
The Trust Fund for each Series will be held by the Trustee for the benefit
of the related Certificateholders. Each Trust Fund will consist of (a) the
Mortgage Assets; (b) amounts held from time to time in the Collection Account
and the Certificate Account established for such Series; (c) Mortgaged Property
which secured a Loan and which is acquired on behalf of the Certificateholders
by foreclosure, deed in lieu of foreclosure or repossession; (d) any reserve
fund for such Series, if specified in the related Prospectus Supplement; (e) the
Servicing Agreements, if any, relating to Loans in the Trust Fund; (f) any
primary mortgage insurance policies relating to Loans in the Trust Fund; (g) any
pool insurance policy, any special hazard insurance policy, any bankruptcy bond
or other credit support relating to the Series; (h) investments
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held in any fund or account or any Guaranteed Investment Contract and, if so
specified in the Prospectus Supplement, income from the reinvestment of such
funds; and (i) any other instrument or agreement relating to the Trust Fund and
specified in the related Prospectus Supplement (which may include an interest
rate swap agreement or an interest rate cap agreement or similar agreement
issued by a bank, insurance company or savings and loan association).
To the extent specified in the related Prospectus Supplement, certain
amounts ("Retained Interests") which are received with respect to a Private
Mortgage-Backed Security or Loan comprising the Mortgage Assets for a Series
will not be included in the Trust Fund for such Series, but will be retained by
or payable to the originator, Servicer or seller of such Private Mortgage-Backed
Security or Loan, free and clear of the interest of Certificateholders under the
related Pooling and Servicing Agreement.
Mortgage Assets in the Trust Fund for a Series may consist of any
combination of the following to the extent and as specified in the related
Prospectus Supplement: (a) Private Mortgage-Backed Securities, (b) Mortgage
Loans or participation interests therein and Manufactured Home Loans or
participation interests therein or (c) Agency Securities. Loans which comprise
the Mortgage Assets will be purchased by the Depositor directly or through an
affiliate in the open market or in privately negotiated transactions. Some of
the Loans may have been originated by the Depositor or an affiliate.
Participation interests in Loans may be purchased by the Depositor, or an
affiliate, pursuant to a participation agreement. See "THE POOLING AND SERVICING
AGREEMENTS--Assignment of Mortgage Assets."
PRIVATE MORTGAGE-BACKED SECURITIES
GENERAL. Private Mortgage-Backed Securities may consist of (a) mortgage
pass-through certificates, evidencing an undivided interest in a pool of Loans,
(b) collateralized mortgage obligations secured by Loans or (c) pass-through
certificates representing beneficial interests in Agency Securities. Private
Mortgage-Backed Securities will have been issued pursuant to a pooling and
servicing agreement, an indenture or similar agreement (a "PMBS Agreement"). The
seller/servicer of the underlying Loans will have entered into the PMBS
Agreement with the trustee under such PMBS Agreement (the "PMBS Trustee"). The
PMBS Trustee or its agent, or a custodian, will possess the Loans underlying
such Private Mortgage-Backed Security. Loans underlying a Private
Mortgage-Backed Security will be serviced by a servicer (the "PMBS Servicer")
directly or by one or more subservicers who may be subject to the supervision of
the PMBS Servicer. The PMBS Servicer will be an FNMA or FHLMC approved servicer
and, if FHA Loans underlie the Private Mortgage-Backed Securities, approved by
HUD as an FHA mortgagee.
The issuer of the Private Mortgage-Backed Securities (the "PMBS Issuer")
will be a financial institution or other entity engaged generally in the
business of mortgage lending, a public agency or instrumentality of a state,
local or federal government, or a limited purpose corporation organized for the
purpose of, among other things, establishing trusts and acquiring and selling
housing loans to such trusts, and selling beneficial interests in such trusts.
If so specified in the Prospectus Supplement, the PMBS Issuer may be an
affiliate of the Depositor. The obligations of the PMBS Issuer will generally be
limited to certain representations and warranties with respect to the assets
conveyed by it to the related trust. Unless otherwise specified in the related
Prospectus Supplement, the PMBS Issuer will not have guaranteed any of the
assets conveyed to the related trust or any of the Private Mortgage-Backed
Securities issued under the PMBS Agreement. Additionally, although the Loans
underlying the Private Mortgage-Backed Securities may be guaranteed by an agency
or instrumentality of the United States, the Private Mortgage-Backed Securities
themselves will not be so guaranteed.
Distributions of principal and interest will be made on the Private
Mortgage-Backed Securities on the dates specified in the related Prospectus
Supplement. The Private Mortgage-Backed Securities may be entitled to receive
nominal or no principal distributions or nominal or no interest distributions.
Principal and interest distributions will be made on the Private Mortgage-Backed
Securities by the PMBS Trustee or the PMBS Servicer. The PMBS Issuer or the PMBS
Servicer may have the right to repurchase assets underlying the Private
Mortgage-Backed Securities after a certain date or under other circumstances
specified in the related Prospectus Supplement.
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UNDERLYING LOANS. The Loans underlying the Private Mortgage-Backed
Securities may consist of fixed rate, level payment, fully amortizing Loans or
GEM Loans, GPM Loans, Buy-Down Loans, Bi-Weekly Loans, ARMs, or Loans having
balloon or other special payment features. Loans may be secured by Single Family
Property, Multifamily Property, Manufactured Homes, or, in the case of
Cooperative Loans, by an assignment of the proprietary lease or occupancy
agreement relating to a Cooperative Dwelling and the shares issued by the
related cooperative. Except as otherwise specified in the related Prospectus
Supplement, (i) no Loan will have had a Loan-to-Value Ratio at origination in
excess of 95%, (ii) each Mortgage Loan secured by Single Family Property and
having a Loan-to-Value Ratio in excess of 80% at origination will be covered by
a primary mortgage insurance policy, (iii) each Loan will have had an original
term to stated maturity of not less than 10 years and not more than 40 years,
(iv) no Loan that was more than 30 days delinquent as to the payment of
principal or interest will have been eligible for inclusion in the assets under
the related PMBS Agreement, (v) each Loan (other than a Cooperative Loan) will
be required to be covered by a standard hazard insurance policy (which may be a
blanket policy), and (vi) each Loan (other than a Cooperative Loan or a Loan
secured by a Manufactured Home) will be covered by a title insurance policy.
CREDIT SUPPORT RELATING TO PRIVATE MORTGAGE-BACKED SECURITIES. Credit
support in the form of reserve funds, subordination of other private mortgage
certificates issued under the PMBS Agreement, letters of credit, insurance
policies or other types of credit support may be provided with respect to the
Loans underlying the Private Mortgage-Backed Securities or with respect to the
Private Mortgage-Backed Securities themselves. The type, characteristics and
amount of credit support, if any, will be a function of certain characteristics
of the Loans and other factors and will have been established for the Private
Mortgage-Backed Securities on the basis of requirements of the rating agency
which assigned a rating to the Private Mortgage-Backed Securities.
ADDITIONAL INFORMATION. The Prospectus Supplement for a Series for which
the Trust Fund includes Private Mortgage-Backed Securities will specify (i) the
aggregate approximate principal amount and type of the Private Mortgage-Backed
Securities to be included in the Trust Fund, (ii) certain characteristics of the
Loans which comprise the underlying assets for the Private Mortgage-Backed
Securities including (A) the payment features of such Loans (i.e., whether they
are fixed rate or adjustable rate and whether they provide for fixed level
payments or other payment features), (B) the approximate aggregate principal
balance, if known, of underlying Loans insured or guaranteed by a governmental
entity, (C) the servicing fee or range of servicing fees with respect to the
Loans, and (D) the minimum and maximum stated maturities of the underlying Loans
at origination, (iii) the maximum original term-to-stated maturity of the
Private Mortgage-Backed Securities, (iv) the weighted average term-to-stated
maturity of the Private Mortgage-Backed Securities, (v) the pass-through or
certificate rate or ranges thereof for the Private Mortgage-Backed Securities,
(vi) the weighted average pass-through or certificate rate of the Private
Mortgage-Backed Securities, (vii) the PMBS Issuer, the PMBS Servicer (if other
than the PMBS Issuer) and the PMBS Trustee for such Private Mortgage-Backed
Securities, (viii) certain characteristics of credit support, if any, such as
reserve funds, insurance policies, letters of credit or guarantees relating to
the Loans underlying the Private Mortgage-Backed Securities or to such Private
Mortgage-Backed Securities themselves, (ix) the terms on which the underlying
Loans for such Private Mortgage-Backed Securities may, or are required to, be
purchased prior to their stated maturity or the stated maturity of the Private
Mortgage-Backed Securities and (x) the terms on which Loans may be substituted
for those originally underlying the Private Mortgage-Backed Securities.
THE AGENCY SECURITIES
All of the Agency Securities will be registered in the name of the Trustee
or its nominee or, in the case of Agency Securities issued only in book-entry
form, a financial intermediary (which may be the Trustee) that is a member of
the Federal Reserve System or of a clearing corporation on the books of which
the security is held. Each Agency Security will evidence an interest in a pool
of mortgage loans and/or cooperative loans and/or in principal distributions and
interest distributions thereon.
The descriptions of GNMA, FHLMC and FNMA Certificates that are set forth
below are descriptions of certificates representing proportionate interests in a
pool of mortgage loans and in the payments of
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principal and interest thereon. GNMA, FHLMC or FNMA may also issue
mortgage-backed securities representing a right to receive distributions of
interest only or principal only or disproportionate distributions of principal
or interest or to receive distributions of principal and/or interest prior or
subsequent to distributions on other certificates representing interests in the
same pool of mortgage loans. In addition, any of such issuers may issue
certificates representing interests in mortgage loans having characteristics
that are different from the types of mortgage loans described below. The terms
of any such certificates to be included in a Pool (and of the underlying
mortgage loans) will be described in the related Supplement, and the
descriptions that follow are subject to modification as appropriate to reflect
the terms of any such certificates that are actually included in a Pool.
GNMA. GNMA is a wholly owned corporate instrumentality of the United States
within the Department of Housing and Urban Development ("HUD"). Section 306(g)
of Title III of the National Housing Act of 1934, as amended (the "Housing
Act"), authorizes GNMA to guarantee the timely payment of the principal of and
interest on certificates that are based on and backed by a pool of loans ("FHA
Loans") insured by the United States Federal Housing Administration (the "FHA")
under the Housing Act or Title V of the Housing Act of 1949, or guaranteed by
the VA under the Servicemen's Readjustment Act of 1944, as amended, or Chapter
37 of Title 38, United States Code or by pools of other eligible mortgage loans.
Section 306(g) of the Housing Act provides that "the full faith and credit
of the United States is pledged to the payment of all amounts which may be
required to be paid under any guaranty under this subsection." In order to meet
its obligations under such guaranty, GNMA is authorized, under Section 306(d) of
the Housing Act, to borrow from the United States Treasury with no limitations
as to amount.
GNMA CERTIFICATES. All of the GNMA Certificates (the "GNMA Certificates")
will be mortgage-backed certificates issued and serviced by GNMA- or
FNMA-approved mortgage servicers. The mortgage loans underlying GNMA
Certificates may consist of FHA Loans secured by mortgages on one-to four-family
residential properties or multifamily residential properties, loans secured by
mortgages on one-to four-family residential properties or multifamily
residential properties, mortgage loans which are partially guaranteed by the
United States Department of Veteran Affairs (the "VA") and other mortgage loans
eligible for inclusion in mortgage pools underlying GNMA Certificates. Unless
otherwise specified in the related Supplement, at least 90 percent by original
principal amount of the mortgage loans underlying a GNMA Certificate will be
mortgage loans having maturities of 20 years or more.
Each GNMA Certificate provides for the payment by or on behalf of the issuer
of the GNMA Certificate to the registered holder of such GNMA Certificate of
monthly payments of principal and interest equal to the registered holder's
proportionate interest in the aggregate amount of the monthly scheduled
principal and interest payments on each underlying eligible mortgage loan, less
servicing and guaranty fees aggregating the excess of the interest on each such
mortgage loan over the GNMA Certificate pass-through rate. In addition, each
payment to a GNMA Certificateholder will include proportionate pass-through
payments to such holder of any prepayments of principal of the mortgage loan
underlying the GNMA Certificate, and the holder's proportionate interest in the
remaining principal balance in the event of a foreclosure or other disposition
of any such mortgage loan.
Unless otherwise specified in the related Supplement, the GNMA Certificates
included in a Trust Fund may be issued under either or both of the GNMA I
program ("GNMA I Certificates") and the GNMA II program ("GNMA II
Certificates"). All mortgages underlying a particular GNMA I Certificate must
have the same annual interest rate (except for pools of mortgages secured by
mobile homes). The annual interest rate on each GNMA I Certificate is one-half
percentage point less than the annual interest rate on the mortgage loans
included in the pool of mortgages backing such GNMA I Certificate. Mortgages
underlying a particular GNMA II Certificate may have annual interest rates that
vary from each other by up to one percentage point. The annual interest rate on
each GNMA II Certificate will be between one-half percentage point and one and
one-half percentage points less than the highest annual interest rate on the
mortgage loans included in the pool of mortgages backing such GNMA II
Certificate.
GNMA will have approved the issuance of each of the GNMA Certificates in
accordance with a guaranty agreement between GNMA and the servicer of the
mortgage loans underlying such GNMA
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Certificate. Pursuant to such agreement, the servicer is required to advance its
own funds in order to make timely payments of all amounts due on the GNMA
Certificate, even if the payments received by such servicer on the mortgage
loans backing the GNMA Certificate are less than the amounts due on such GNMA
Certificate. If a servicer is unable to make payments on a GNMA Certificate as
it becomes due, it must promptly notify GNMA and request GNMA to make such
payment. Upon such notification and request, GNMA will make such payments
directly to the registered holder of the GNMA Certificate. In the event no
payment is made by such servicer and such servicer fails to notify and request
GNMA to make such payment, the registered holder of the GNMA Certificate has
recourse only against GNMA to obtain such payment. The registered holder of the
GNMA Certificates included in a Pool is entitled to proceed directly against
GNMA under the terms of each GNMA Certificate or the guaranty agreement or
contract relating to such GNMA Certificate for any amounts that are not paid
when due under each GNMA Certificate.
As described above, the GNMA Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FHLMC. FHLMC is a corporate instrumentality of the United States created
pursuant to Title III of the Emergency Home Finance Act of 1970, as amended (the
"FHLMC Act"). FHLMC's common stock is owned by the Federal Home Loan Banks, and
its preferred stock is owned by the stockholders of such Federal Home Loan
Banks. FHLMC was established primarily for the purpose of increasing the
availability of mortgage credit for the financing of urgently needed housing. It
seeks to provide an enhanced degree of liquidity for residential mortgage
investments primarily by assisting in the development of secondary markets for
conventional mortgages. The principal activity of FHLMC currently consists of
the purchase of first lien conventional residential mortgage loans or
participation interests in such mortgage loans and the resale of the mortgage
loans so purchased in the form of mortgage securities. FHLMC is confined to
purchasing, so far as practicable, conventional mortgage loans and participation
interests therein which it deems to be of such quality, type and class as to
meet generally the purchase standards imposed by private institutional mortgage
investors.
FHLMC CERTIFICATES. FHLMC Certificates (the "FHLMC Certificates") represent
an undivided interest in a group of mortgage loans purchased by FHLMC. Mortgage
loans underlying the FHLMC Certificates included in a Trust Fund will consist of
fixed- or adjustable-rate mortgage loans with original terms to maturity of from
10 to 30 years, all of which are secured by first liens on one- to four-family
residential properties or properties containing five or more units and designed
primarily for residential use.
FHLMC Certificates are issued and maintained and may be transferred only on
the book-entry system of a Federal Reserve Bank and may only be held of record
by entities eligible to maintain book-entry accounts at a Federal Reserve Bank.
Beneficial owners will hold FHLMC Certificates ordinarily through one or more
financial intermediaries. The rights of a beneficial owner of a FHLMC
Certificate against FHLMC or a Federal Reserve Bank may be exercised only
through the Federal Reserve Bank on whose book-entry system such Certificate is
held.
Under its Cash and Guarantor programs, FHLMC guarantees to each registered
holder of a FHLMC Certificate the timely payment of interest at the rate
provided for by such FHLMC Certificate on the registered holder's pro rata share
of the unpaid principal balance outstanding of the related mortgage loans,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal of the related mortgage
loans, without any offset or deduction, to the extent of such holder's pro rata
share thereof, but does not guarantee the timely payment of scheduled principal.
Pursuant to its guarantees, FHLMC indemnifies holders of FHLMC Certificates
against any diminution of principal by reason of charges for property repairs,
maintenance and foreclosure. FHLMC may remit the amount due on account of its
guarantee of ultimate collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of the claim by any mortgage insurer, or (iii) the expiration
of any right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for accelerated
payment of principal. In taking actions regarding the collection of principal
after default on the
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mortgage loans underlying FHLMC Certificates, including the timing of demand for
acceleration, FHLMC reserves the right to exercise its servicing judgment with
respect to the mortgages in the same manner as for mortgages that it has
purchased but not sold. In lieu of guaranteeing only the ultimate collection of
principal payments in the manner described above, FHLMC may, but will not be
obligated to, enter into one or more agreements with the Issuer and the Trustee
pursuant to which FHLMC will agree to guarantee the timely receipt of scheduled
principal payments. If such an agreement is entered into and is applicable to
all or any part of the FHLMC Certificates included in a Trust Fund, its
existence will be disclosed in the related Prospectus Supplement.
Under its Gold PC Program, FHLMC guarantees to each registered holder of a
FHLMC Certificate the timely payment of interest calculated in the same manner
as described above, as well as timely installments of scheduled principal
calculated on the basis of the weighted average remaining term to maturity of
the mortgage loans in the pool underlying the related FHLMC Certificate.
As described above, the FHLMC Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
FHLMC Certificates are not guaranteed by the United States or by any Federal
Home Loan Bank and do not constitute debts or obligations of the United States
or any Federal Home Loan Bank. The obligations of FHLMC under its guarantee are
obligations solely of FHLMC and are not backed by, nor entitled to, the full
faith and credit of the United States.
Under FHLMC's Cash Program, there is no limitation on the amount by which
interest rates on the mortgage loans underlying a FHLMC Certificate may exceed
the interest rate on the FHLMC Certificate. For FHLMC Pools formed under FHLMC's
Guarantor Program having pool numbers beginning with 18-012, the range between
the lowest and highest annual interest rates on the mortgage loans does not
exceed two percentage points. See "Additional Information" for the availability
of further information respecting FHLMC and FHLMC Certificates.
FNMA. FNMA is a federally chartered and stockholder owned corporation
organized and existing under the Federal National Mortgage Association Charter
Act, as amended. FNMA was originally established in 1938 as a United States
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder-owned and privately managed corporation by
legislation enacted in 1968.
FNMA provides funds to the mortgage market primarily by purchasing home
mortgage loans from local lenders, thereby replenishing their funds for
additional lending. FNMA acquires funds to purchase home mortgage loans from
many capital market investors that may not ordinarily invest in mortgages,
thereby expanding the total amount of funds available for housing. Operating
nationwide, FNMA helps to redistribute mortgage funds from capital-surplus to
capital-short areas. In addition, FNMA issues mortgage-backed securities
primarily in exchange for pools of mortgage loans from lenders.
FNMA CERTIFICATES. FNMA Certificates represent fractional interests in a
pool of mortgage loans formed by FNMA.
FNMA guarantees to each registered holder of a FNMA Certificate that it will
distribute amounts representing scheduled principal and interest at the
applicable pass-through rate on the underlying mortgage loans, whether or not
received, and such holder's proportionate share of the full principal amount of
any foreclosed or other finally liquidated mortgage loan, whether or not such
principal amount is actually recovered. If FNMA were unable to perform such
obligations, distributions on FNMA Certificates would consist solely of payments
and other recoveries on the underlying mortgage loans and, accordingly,
delinquencies and defaults would affect monthly distributions to holders of FNMA
Certificates. The obligations of FNMA under its guarantees are obligations
solely of FNMA and are not backed by, nor entitled to, the full faith and credit
of the United States.
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As described above, the FNMA Certificates included in a Trust Fund, and the
related underlying mortgage loans, may have characteristics and terms different
from those described above. Any such different characteristics and terms will be
described in the related Prospectus Supplement.
THE MORTGAGE LOANS
GENERAL. The Trust Fund for a Series may consist of Mortgage Loans or
participation interests therein. Mortgage Loans comprising the Mortgage Assets
and Mortgage Loans in which participation interests are conveyed to the Trustee
are both referred to herein as the "Mortgage Loans." If so specified in the
related Prospectus Supplement, the Mortgage Loans will have been originated by
mortgage lenders which are FNMA- or FHLMC-approved seller/servicers or by their
wholly-owned subsidiaries, and, in the case of FHA Loans, approved by HUD as an
FHA mortgagee. Some of the Mortgage Loans may have been originated by the
Depositor or any of its affiliates. The Mortgage Loans may include Conventional
Loans, FHA Loans or VA Loans. The Mortgage Loans may have fixed interest rates
or adjustable interest rates and may provide for fixed level payments or may be
GPM Loans, GEM Loans, Buy-Down Loans, Bi-Weekly Loans or Mortgage Loans with
other payment characteristics as described below and under "YIELD, PREPAYMENT
AND MATURITY CONSIDERATIONS" herein or in the related Prospectus Supplement.
ARMs may have a feature which permits the borrower to convert the rate thereon
to a long-term fixed rate. The Mortgage Loans may be secured by mortgages or
deeds of trust or other similar security instruments creating a first lien on
Mortgaged Property. The Mortgage Loans may also include Cooperative Loans
evidenced by promissory notes secured by a lien on the shares issued by private,
non-profit, cooperative housing corporations and on the related proprietary
leases or occupancy agreements granting exclusive rights to occupy specific
COOPERATIVE DWELLINGS. The Mortgage Loans may also include Condominium
Loans secured by a Mortgage on a Condominium Unit together with such Condominium
Unit's appurtenant interest in the common elements.
The Mortgaged Properties may include Single Family Property (i.e., one-to
four-family residential housing, including Condominium Units, and Cooperative
Dwellings) or Multifamily Property (i.e., multifamily residential rental
properties or cooperatively-owned properties consisting of five or more dwelling
units). The Mortgaged Properties may consist of detached individual dwellings,
individual condominiums, townhouses, duplexes, row houses, individual units in
planned unit developments and other attached dwelling units. Multifamily
Property may include mixed commercial and residential structures. Each Single
Family Property and Multifamily Property will be located on land owned in fee
simple by the borrower or on land leased by the borrower for a term at least two
years greater than the term of the related Mortgage Loan. The fee interest in
any leased land will be subject to the lien securing the related Mortgage Loan.
Attached dwellings may include owner-occupied structures where each borrower
owns the land upon which the unit is built, with the remaining adjacent land
owned in common or dwelling units subject to a proprietary lease or occupancy
agreement in a cooperatively owned apartment building. The proprietary lease or
occupancy agreement securing a Cooperative Loan is generally subordinate to any
blanket mortgage on the related cooperative apartment building and/or on the
underlying land. Additionally, in the case of a Cooperative Loan, the
proprietary lease or occupancy agreement is subject to termination and the
cooperative shares are subject to cancellation by the cooperative if the
tenant-stockholder fails to pay maintenance or other obligations or charges owed
by such tenant-stockholder. See "CERTAIN LEGAL ASPECTS OF LOANS."
The aggregate principal balance of Mortgage Loans which are owner-occupied
will be disclosed in the related Prospectus Supplement. Unless otherwise
specified in the Prospectus Supplement, the sole basis for a representation that
a given percentage of the Mortgage Loans are secured by Single-Family Property
that is owner-occupied will be either (i) the making of a representation by the
Mortgagor at origination of the Mortgage Loan either that the underlying
Mortgaged Property will be used by the borrower for a period of at least six
months every year or that the borrower intends to use the Mortgaged Property as
a primary residence, or (ii) a finding that the address of the underlying
Mortgaged Property is the borrower's mailing address as reflected in the
Servicer's records. To the extent specified in the related Prospectus
Supplement,
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the Mortgaged Properties may include non-owner occupied investment properties
and vacation and second homes. Mortgage Loans secured by investment properties
and Multifamily Property may also be secured by an assignment of leases and
rents and operating or other cash flow guarantees relating to the Loans to the
extent specified in the related Prospectus Supplement.
The characteristics of the Mortgage Loans comprising or underlying the
Mortgage Assets for a Series may vary to the extent that credit support is
provided in levels satisfactory to the Rating Agency which assigns a rating to a
Series of Certificates. Unless otherwise specified in the related Prospectus
Supplement for a Series, the following selection criteria shall apply with
respect to the Mortgage Loans comprising the Mortgage Assets:
(a) no Mortgage Loan will have had a Loan-to-Value Ratio at origination
in excess of 95%;
(b) no Mortgage Loan that is a Conventional Loan secured by a Single
Family Property may have a Loan-to-Value Ratio in excess of 80%, unless
covered by a primary mortgage insurance policy as described herein;
(c) each Mortgage Loan must have an original term to maturity of not
less than 10 years and not more than 40 years;
(d) no Mortgage Loan may be included which, as of the Cut-off Date, is
more than 30 days delinquent as to payment of principal or interest;
(e) no Mortgage Loan (other than a Cooperative Loan) may be included
unless a title insurance policy or, in lieu thereof, an attorney's opinion
of title, and a standard hazard insurance policy (which may be a blanket
policy) is in effect with respect to the Mortgaged Property securing such
Mortgage Loan.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained for 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, a cooperative and
the related borrower on a Cooperative Note do not maintain such insurance or do
not maintain adequate coverage or any insurance proceeds are not applied to the
restoration of the damaged property, damage to such borrower's Cooperative
Dwelling or such cooperative's building could significantly reduce the value of
the collateral securing such Cooperative Note.
The initial Loan-to-Value Ratio of any Mortgage Loan represents the ratio of
the principal amount of the Mortgage Loan outstanding at the origination of such
loan divided by the fair market value of the mortgaged property, as shown in the
appraisal prepared in connection with origination of the Mortgage Loan (the
"Appraised Value"). The fair market value of the Mortgaged Property securing any
Mortgage Loan is the lesser of the purchase price paid by the borrower or the
Appraised Value of such Mortgaged Property.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Buy-Down Loans, during the period (the "Buy-Down Period") when the
borrower is not obligated to pay the full Scheduled Payment otherwise due on
such loan, each of the Buy-Down Loans will provide for Scheduled Payments based
on a hypothetical reduced interest rate (the "Buy-Down Mortgage Rate") that will
not have been more than 3% below the mortgage rate at origination, and for
annual increases in the Buy-Down Mortgage Rate during the Buy-Down Period that
will not exceed 1%. The Buy-Down Period will not exceed three years. The maximum
amount of the Buy-Down Amounts that may be contributed with respect to a
Mortgaged Property having a Loan-to-Value Ratio (i) of 90% or less at
origination is limited to 10% of the Appraised Value of the Mortgaged Property,
and (ii) in excess of 90% at origination is limited to 6% of the Appraised Value
of the Mortgaged Property, unless otherwise indicated in the applicable
Prospectus Supplement. Unless specified otherwise in the related Prospectus
Supplement, the maximum amount of Funds ("Buy-Down Amounts") that may be
contributed by the Servicer of the related Mortgaged Loan is limited to 6% of
the Appraised Value of the Mortgaged Property. This limitation does not apply to
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contributions from immediate relatives or the employer of the mortgagor. Except
as may be otherwise indicated in the related Prospectus Supplement, the borrower
under each Buy-Down Loan will have been qualified at a mortgage rate which is
not more than 3% per annum below the current mortgage rate at origination.
Accordingly, the repayment of a Buy-Down Loan is dependent on the ability of the
borrower to make larger Scheduled Payments after the Buy-Down Amounts have been
depleted and, for certain Buy-Down Loans, while such Buy-Down Amounts are being
depleted.
Unless otherwise specified in the related Prospectus Supplement, with
respect to Multifamily Property, (a) no Mortgage Loan will have been delinquent
for more than 30 days within the 12-month period ending with the Cut-off Date,
(b) no more than two payments will have been 30 days or more delinquent during a
three-year period ending on the Cut-off Date, (c) Mortgage Loans with respect to
any single borrower will not exceed 5% of the aggregate principal balance of the
Loans comprising the Mortgage Assets as of the Cut-off Date, and (d) the debt
service coverage ratio with respect to each Mortgage Loan (calculated as
described in the related Prospectus Supplement) will not be less than 11:1.
Unless otherwise specified in the related Prospectus Supplement, the
Bi-Weekly Loans will consist of fixed-rate, bi-weekly payment, conventional,
fully-amortizing Mortgage Loans payable on every other Friday during the term
thereof and secured by first mortgages on one-to four-family residential
properties.
Unless otherwise specified in the related Prospectus Supplement, the ARMs
will provide for a fixed initial mortgage rate for either the first six or
twelve Scheduled Payments. Thereafter, the Mortgage Rates are subject to
periodic adjustment based, subject to the applicable limitations, on changes in
the relevant Index described in the applicable Prospectus Supplement, to a rate
equal to the Index plus the Gross Margin, which is a fixed percentage spread
over the Index established contractually for each ARM, at the time of its
origination. An ARM may be convertible into a fixed-rate Mortgage Loan. To the
extent specified in the related Prospectus Supplement, any ARM so converted may
be subject to repurchase by the Servicer or Master Servicer.
ARMs have features that are relatively new for the residential lending
market in the United States. In particular, adjustable mortgage rates can cause
payment increases that some borrowers may find difficult to make. However, each
of the ARMs provides that its mortgage rate may not be adjusted to a rate above
the applicable lifetime mortgage rate cap (the "Lifetime Mortgage Rate Cap") or
below the applicable lifetime minimum mortgage rate (the "Minimum Mortgage
Rate"), if any, for such ARM. In addition, certain of the ARMs provide for
limitations on the maximum amount by which their mortgage rates may adjust for
any single adjustment period (the "Maximum Mortgage Rate Adjustment"). Some ARMs
are payable in self-amortizing payments of principal and interest. Other ARMs
("Negatively Amortizing ARMs") instead provide for limitations on changes in the
Scheduled Payment on such ARMs to protect borrowers from payment increases due
to rising interest rates. Such limitations can result in Scheduled Payments
which are greater or less than the amount necessary to amortize a Negatively
Amortizing ARM by its original maturity at the mortgage rate in effect during
any particular adjustment period. In the event that the Scheduled Payment is not
sufficient to pay the interest accruing on a Negatively Amortizing ARM, then the
Deferred Interest is added to the principal balance of such ARM causing the
negative amortization thereof, and will be repaid through future Scheduled
Payments. If specified in the related Prospectus Supplement, Negatively
Amortizing ARMs may provide for the extension of their original stated maturity
to accommodate changes in their mortgage rate. The relevant Prospectus
Supplement will specify whether the ARMs comprising or underlying the Mortgage
Assets are Negatively Amortizing ARMs.
Unless otherwise specified in the related Prospectus Supplement, the index
applicable to any ARMs comprising the Mortgage Assets (the "Index") will be the
three-year Treasury Index, the one-year Treasury Index, the Six Month Treasury
Index or the Eleventh District Costs of Funds Index. If applicable, the
Prospectus Supplement for each Series will specify the Index to be used with
respect to any Mortgage Loans underlying such Series.
The related Prospectus Supplement for each Series will provide information
with respect to the Mortgage Loans as of the Cut-off Date, including, among
other things, (a) the aggregate outstanding principal balance of the Mortgage
Loans; (b) the weighted average mortgage rate on the Mortgage Loans,
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and, in the case of ARMs, the weighted average of the current mortgage rates and
the Lifetime Mortgage Rate Caps, if any; (c) the average outstanding principal
balance of the Mortgage Loans; (d) the weighted average remaining term-to-stated
maturity of the Mortgage Loans and the range of remaining terms-to-stated
maturity; (e) the range of Loan-to-Value Ratios of the Mortgage Loans; (f) the
relative percentage (by outstanding principal balance as of the Cut-off Date) of
Mortgage Loans that are ARMs, Buy-Down Loans, GEM Loans, GPM Loans, Cooperative
Loans, Conventional Loans, Bi-Weekly Loans, FHA Loans and VA Loans, (g) the
percentage of Mortgage Loans (by outstanding principal balance as of the Cut-off
Date) that are covered by primary mortgage insurance policies; (h) any pool
insurance policy, special hazard insurance policy or bankruptcy bond or other
credit support relating to the Mortgage Loans; (i) the geographic distribution
of the Mortgaged Properties securing the Mortgage Loans and (j) the percentage
of Mortgage Loans (by principal balance as of the Cut-off Date) that are secured
by Single Family Property, Multifamily Property, Cooperative Dwellings,
investment property and vacation or second homes. The related Prospectus
Supplement will also specify any other limitations on the types or
characteristics of Mortgage Loans which may comprise or underlie the Mortgage
Assets for a Series.
If information of the nature described above respecting the Mortgage Loans
is not known to the Depositor at the time the Certificates are initially
offered, more general information of the nature described above will be provided
in the Prospectus Supplement and the final specific information will be set
forth in a Current Report on Form 8-K to be available to investors on the date
of issuance of the related Series and to be filed with the Commission within 15
days after the initial issuance of such Certificates.
THE MANUFACTURED HOME LOANS
The Manufactured Home Loans comprising or underlying the Mortgage Assets for
a Series of Certificates will consist of manufactured housing conditional sales
contracts and installment loan agreements originated by a manufactured housing
dealer in the ordinary course of business and purchased by the Depositor. Each
Manufactured Home Loan will have been originated by a bank or savings
institution which is a FNMA- or FHLMC-approved seller/servicer or by any
financial institution approved for insurance by the Secretary of Housing and
Urban Development pursuant to Section 2 of the National Housing Act.
The Manufactured Home Loans may be Conventional Loans, FHA Loans or VA
Loans. Each Manufactured Home Loan will be secured by a Manufactured Home.
Unless otherwise specified in the related Prospectus Supplement, the
Manufactured Home Loans will be fully amortizing and will bear interest at a
fixed interest rate.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the Manufactured Homes securing the Manufactured Home Loans consist of
manufactured homes within the meaning of 42 United States Code, Section 5402(6),
which defines a "manufactured home" as "a structure, transportable in one or
more sections, which in the traveling mode, is eight body feet or more in width
or forty body feet or more in length, or, when erected on site, is three hundred
twenty or more square feet, and which is built on a permanent chassis and
designed to be used as a dwelling with or without a permanent foundation when
connected to the required utilities, and includes the plumbing, heating,
air-conditioning, and electrical systems contained therein; except that such
term shall include any structure which meets all the requirements of
[this]paragraph except the size requirements and with respect to which the
manufacturer voluntarily files a certification required by the Secretary of
Housing and Urban Development and complies with the standards established under
[this] chapter."
Unless otherwise specified in the related Prospectus Supplement for a
Series, the following restrictions apply with respect to Manufactured Home Loans
comprising or underlying the Mortgage Assets for a Series:
(a) no Manufactured Home Loan will have had a Loan-to-Value Ratio at
origination in excess of 95%;
(b) each Manufactured Home Loan must have an original term to maturity
of not less than three years and not more than 25 years;
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(c) no Manufactured Home Loan may be more than 30 days delinquent as to
payment of principal or interest as of the Cut-off Date; and
(d) each Manufactured Home Loan must have, as of the Cut-off Date, a
standard hazard insurance policy (which may be a blanket policy) in effect
with respect thereto.
The initial Loan-to-Value Ratio of any Manufactured Home Loan represents the
ratio of the principal amount of the Manufactured Home Loan outstanding at the
origination of such loan divided by the fair market value of the Manufactured
Home, as shown in the appraisal prepared in connection with origination of the
Manufactured Home Loan (the "Appraised Value"). The fair market value of the
Manufactured Home securing any Manufactured Home Loan is the lesser of the
purchase price paid by the borrower or the Appraised Value of such Manufactured
Home. With respect to underwriting of Manufactured Home Loans, see "LOAN
UNDERWRITING PROCEDURES AND STANDARDS." With respect to servicing of
Manufactured Home Loans, see "SERVICING OF LOANS."
The related Prospectus Supplement for each Series will provide information
with respect to the Manufactured Home Loans comprising the Mortgage Assets as of
the Cut-off Date, including, among other things, (a) the aggregate outstanding
principal balance of the Manufactured Home Loans comprising or underlying the
Mortgage Assets; (b) the weighted average interest rate on the Manufactured Home
Loans; (c) the average outstanding principal balance of the Manufactured Home
Loans; (d) the weighted average remaining scheduled term to maturity of the
Manufactured Home Loans and the range of remaining scheduled terms to maturity;
(e) the range of Loan-to-Value Ratios of the Manufactured Home Loans; (f) the
relative percentages (by principal balance as of the Cut-off Date) of
Manufactured Home Loans that were made on new Manufactured Homes and on used
Manufactured Homes; (g) any pool insurance policy, special hazard insurance
policy or bankruptcy bond or other credit support relating to the Manufactured
Home Loans; and (h) the distribution by state of Manufactured Homes securing the
Loans. The related Prospectus Supplement will also specify any other limitations
on the types or characteristics of Manufactured Home Loans which may be included
in the Mortgage Assets for a Series.
If information of the nature specified above respecting the Manufactured
Home Loans is not known to the Depositor at the time the Certificates are
initially offered, more general information of the nature described above will
be provided in the Prospectus Supplement and the final specific information will
be set forth in a Current Report on Form 8-K to be available to investors on the
date of issuance of the related Series and to be filed with the Commission
within 15 days after the initial issuance of such Certificates.
COLLECTION ACCOUNT AND CERTIFICATE ACCOUNT
Unless otherwise specified in the related Prospectus Supplement a separate
Collection Account for each Series will be established by the Master Servicer in
the name of the Trustee for deposit of all distributions received with respect
to the Mortgage Assets for such Series, all Advances, the amount of cash to be
initially deposited therein, if any, reinvestment income thereon and certain
other amounts required to be deposited therein pursuant to the Pooling and
Servicing Agreement. Unless otherwise specified in the related Prospectus
Supplement or Pooling and Servicing Agreement, any reinvestment income or other
gain from investments of funds in the Collection Account will be credited to
such Collection Account, and any loss resulting from such investments will be
charged to such Collection Account. Such reinvestment income may, however, be
payable to the Master Servicer or to a Servicer as additional servicing
compensation. See "SERVICING OF LOANS" and "THE POOLING AND SERVICING
AGREEMENTS--Investment of Funds." In such a case, such reinvestment income would
not be included in calculation of the Available Distribution Amount. See
"DESCRIPTION OF THE CERTIFICATES--Distributions on the Certificates."
Funds on deposit in the Collection Account will be available for deposit
into the Certificate Account for certain payments provided for in the Pooling
and Servicing Agreement. Unless otherwise specified in the Prospectus Supplement
or the Pooling and Servicing Agreement, amounts in the Collection Account
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constituting reinvestment income which is payable to the Master Servicer as
additional servicing compensation or for the reimbursement of advances or
expenses, amounts in respect of any Servicing Fee, Retained Interest, and
amounts to be deposited into any reserve fund will not be included in
determining amounts to be remitted to the Trustee for deposit into the
Certificate Account.
A separate Certificate Account will be established by the Trustee or, if so
specified in the related Prospectus Supplement, by the Master Servicer, in
either case in the name of the Trustee for the benefit of the Certificateholders
into which all funds received from the Master Servicer and all required
withdrawals from any reserve funds for such Series will be deposited, pending
distribution to the Certificateholders. Unless otherwise specified in the
related Prospectus Supplement, any reinvestment income or other gain from
investments of funds in the Certificate Account will be credited to the
Certificate Account and any loss resulting from such investments will be charged
to such Certificate Account. Such reinvestment income, may, however, be payable
to the Master Servicer as additional servicing compensation. On each
Distribution Date, all funds on deposit in the Certificate Account, subject to
certain permitted withdrawals by the Trustee as set forth in the Pooling and
Servicing Agreement, will be available for remittance to the Certificateholders;
provided that, if it is specified in the related Prospectus Supplement that the
Certificate Account will be maintained by the Master Servicer in the name of the
Trustee, then, prior to each Distribution Date, funds in the Certificate Account
will be transferred to a separate account established by and in the name of the
Trustee from which the funds on deposit therein will, subject to permitted
withdrawals by the Trustee as specified above, be available for remittance to
the Certificateholders. See also "THE POOLING AND SERVICING
AGREEMENTS--Certificate Account" herein.
OTHER FUNDS OR ACCOUNTS
A Trust Fund may include certain other funds and accounts or a security
interest in certain funds and accounts for the purpose of, among other things,
paying certain administrative fees and expenses of the Trust Fund and
accumulating funds pending their distribution. If so specified in the related
Prospectus Supplement, certain funds may be established with the Trustee with
respect to Buy-Down Loans, GPM Loans, or other Loans having special payment
features included in the Trust Fund in addition to or in lieu of any such
similar funds to be held by the Servicer. See "SERVICING OF LOANS--Payments on
Loans; Deposits to Collection Accounts." If Private Mortgage-Backed Securities
are backed by GPM Loans and the Asset Value with respect to a Multiple-Class
Series is determined on the basis of the scheduled maximum principal balance of
the GPM Loans, a GPM Fund will be established which will be similar to that
which would be established if GPM Loans constituted the Mortgage Assets. See
"SERVICING OF LOANS--Payments on Loans; Deposits to Collection Accounts" herein.
Other similar accounts may be established as specified in the related Prospectus
Supplement.
LOAN UNDERWRITING PROCEDURES AND STANDARDS
UNDERWRITING STANDARDS
The Depositor expects that all Loans comprising the Mortgage Assets for a
Series will have been originated in accordance with the underwriting procedures
and standards described herein, except as otherwise set forth in the related
Prospectus Supplement.
The originator of the Loans (or another entity specified in the related
Prospectus Supplement) will make representations and warranties concerning
compliance with such underwriting procedures and standards. Additionally, unless
otherwise specified in the related Prospectus Supplement, all or a sample of the
Loans comprising Mortgage Assets for a Series will be reviewed by or on behalf
of the Depositor to determine compliance with such underwriting standards and
procedures and compliance with other requirements for inclusion in the Trust
Fund.
Mortgage Loans will have been originated by a savings and loan association,
savings bank, commercial bank, credit union, insurance company or similar
institution which is supervised and examined by a federal or state authority or
by a mortgagee approved by the Secretary of Housing and Urban Development
pursuant to Sections 203 and 211 of the National Housing Act or a wholly-owned
subsidiary thereof.
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Manufactured Home Loans may have been originated by such institutions or by a
financial institution approved for insurance by the Secretary of Housing and
Urban Development pursuant to Section 2 of the National Housing Act. Except as
otherwise set forth in the related Prospectus Supplement for a Series of
Certificates, the originator of a Loan will have applied underwriting procedures
intended to evaluate the borrower's credit standing and repayment ability and
the value and adequacy of the related property as collateral. FHA Loans and VA
Loans will have been originated in compliance with the underwriting policies of
FHA and VA, respectively.
Each borrower will have been required to complete an application designed to
provide to the original lender pertinent credit information about the borrower.
As part of the description of the borrower's financial condition, the borrower
will have furnished information with respect to its assets, liabilities, income,
credit history, employment history and personal information, and an
authorization to apply for a credit report which summarizes the borrower's
credit history with local merchants and lenders and any record of bankruptcy. If
the borrower was self-employed, the borrower will have been required to submit
copies of recent tax returns. The borrower may also have been required to
authorize verifications of deposits at financial institutions where the borrower
had demand or savings accounts. With respect to Multifamily Property,
information concerning operating income and expenses will have been obtained
from the borrower showing operating income and expenses during the preceding
three calendar years. Certain considerations may cause an originator of Loans to
depart from these guidelines. For example, when two individuals co-sign the loan
documents, the incomes and expenses of both individuals may be included in the
computation.
The adequacy of the property financed by the related Loan as security for
repayment of such Loan will generally have been determined by appraisal in
accordance with pre-established appraisal procedure guidelines for appraisals
established by or acceptable to the originator. Appraisers may be staff
appraisers employed by the Loan originator or independent appraisers selected in
accordance with pre-established guidelines established by the Loan originator.
The appraisal procedure guidelines will have required that the appraiser or an
agent on its behalf to personally inspect the property and to verify that it was
in good condition and that construction, if new, had been completed. The
appraisal will have been based upon a market data analysis of recent sales of
comparable properties and, when deemed applicable, a replacement cost analysis
based on the current cost of constructing or purchasing a similar property.
Based on the data provided, certain verifications and the appraisal, a
determination will have been made by the original lender that the borrower's
monthly income would be sufficient to enable the borrower to meet its monthly
obligations on the Loan and other expenses related to the property (such as
property taxes, utility costs, standard hazard and primary mortgage insurance
and, if applicable, maintenance fees and other levies assessed by a Cooperative)
and certain other fixed obligations other than housing expenses. The originating
lender's guidelines for Loans secured by Single Family Property generally will
specify that Scheduled Payments plus taxes and insurance and all Scheduled
Payments extending beyond one year (including those mentioned above and other
fixed obligations, such as car payments) would equal no more than specified
percentages of the prospective borrower's gross income. These guidelines will
generally be applied only to the payments to be made during the first year of
the Loan. Except as otherwise specified in the related Prospectus Supplement,
with respect to Mortgage Loans that are Conventional Loans, underwriting
guidelines used to establish the relevant percentages of gross income will be
similar to underwriting guidelines used by FNMA and FHLMC at the time of
origination of the Loan, except that the ratio of Scheduled Payments and certain
other fixed obligations to monthly gross income may exceed the comparable FNMA
or FHLMC limits as specified in the related Prospectus Supplement.
With respect to FHA Loans and VA Loans, traditional underwriting guidelines
used by the FHA and the VA, as the case may be, which were in effect at the time
of origination of each Loan will generally have been applied. With respect to
Manufactured Home Loans that are Conventional Loans, the related Prospectus
Supplement will specify the required minimum downpayment, the maximum amount of
purchase price eligible for financing, the maximum original principal amount
that may be financed, and the limitations on ratios of borrower's Scheduled
Payment to gross monthly income and monthly income net of other fixed
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payment obligations. With respect to Multifamily Property, the Loan originator
will have made an assessment of the capabilities of the management of the
project, including a review of management's past performance record, its
management reporting and control procedures (to determine its ability to
recognize and respond to problems) and its accounting procedures to determine
cash management ability. Income derived from the Mortgaged Property constituting
investment property may have been considered for underwriting purposes, rather
than the income of the borrower from other sources. With respect to Mortgaged
Property consisting of vacation or second homes, no income derived from the
property will have been considered for underwriting purposes.
Certain types of Loans that may be included in the Mortgage Assets for a
Series are recently developed and may involve additional uncertainties not
present in traditional types of loans. For example, Buy-Down Loans, GEM Loans
and GPM Loans provide for escalating or variable payments by the borrower. These
types of Loans are underwritten on the basis of a judgment that the borrower
will have the ability to make larger Scheduled Payments in subsequent years.
ARMs may involve similar assessments.
To the extent specified in the related Prospectus Supplement, the Depositor
may purchase Loans (or participation interests therein) for inclusion in a Trust
Fund that are underwritten under standards and procedures which vary from and
are less stringent than those described herein. For instance, Loans may be
underwritten under a "limited documentation program," if specified in the
Prospectus Supplement. With respect to such Loans, minimal investigation into
the borrowers' credit history and income profile is undertaken by the originator
and such Loans may be underwritten primarily on the basis of an appraisal of the
Mortgaged Property and Loan-to-Value Ratio on origination. Thus, if the
Loan-to-Value Ratio is less than a percentage specified in the related
Prospectus Supplement, the originator may forego certain aspects of the review
relating to monthly income, and traditional ratios of monthly or total expenses
to gross income may not be applied.
In addition, Mortgage Loans may have been originated in connection with a
governmental program under which underwriting standards were significantly less
stringent and designed to promote home ownership or the availability of
affordable residential rental property notwithstanding higher risks of default
and losses. The related Prospectus Supplement will specify the underwriting
standards applicable to such Mortgage Loans.
The underwriting standards applied by the Loan originator require that the
underwriting officers be satisfied that the value of the property being
financed, as indicated by an appraisal, currently supports and is anticipated to
support in the future the outstanding loan balance, and provides sufficient
value to mitigate the effects of adverse shifts in real estate values. Certain
states where the Mortgaged Properties may be located have "antideficiency" laws
requiring, in general, that lenders providing credit on Single Family Property
look solely to the property for repayment in the event of foreclosure. See
"CERTAIN LEGAL ASPECTS OF LOANS" herein.
LOSS EXPERIENCE
The general appreciation of real estate values experienced in the past has
been a factor in limiting the general loss experience on Conventional Loans.
However, there can be no assurance that the past pattern of appreciation in
value of the real property securing such Loans will continue. Further, there is
no assurance that appreciation of real estate values generally will limit loss
experiences on non-traditional housing such as Multifamily Property,
Manufactured Homes or Cooperative Dwellings. Similarly, no assurance can be
given that the value of the Mortgaged Property (including Cooperative Dwellings)
securing a Loan has remained or will remain at the level existing on the date of
origination of such Loan. If the residential real estate market should
experience an overall decline in property values such that the outstanding
balances of the Loans and any secondary financing on the Mortgaged Properties
securing such Loans become equal to or greater than the value of such Mortgaged
Properties, then the actual rates of delinquencies, foreclosures and losses
could be higher than those now generally experienced in the mortgage lending
industry. In addition,
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the value of property securing Cooperative Loans and the delinquency rates with
respect to Cooperative Loans, could be adversely affected if the current
favorable tax treatment of cooperative tenant stockholders were to become less
favorable. See "CERTAIN LEGAL ASPECTS OF LOANS" herein.
No assurance can be given that values of Manufactured Homes have or will
remain at the levels existing on the dates of origination of the related Loan.
Manufactured Homes are less likely to experience appreciation in value and more
likely to experience depreciation in value over time than other types of
Mortgaged Property. Additionally, delinquency, loss and foreclosure experience
on Manufactured Home Loans may be adversely affected to a greater degree by
regional and local economic conditions than more traditional Mortgaged Property.
Loans secured by Multifamily Property may also be more susceptible to losses due
to changes in local and regional economic conditions than Loans secured by
Single Family Property. For example, unemployment resulting from an economic
downturn in local industry may sharply affect occupancy rates. Also, interest
rate fluctuations can make home ownership a more attractive alternative to
renting, causing occupancy rates and market rents to decline. New construction
can create an oversupply, particularly in a market that has experienced high
vacancy rates.
To the extent that losses resulting from delinquencies, losses and
foreclosures or repossession of Mortgaged Property with respect to Loans
included in the Mortgage Assets for a Series of Certificates are not covered by
the methods of credit support or the insurance policies described herein or in
the related Prospectus Supplement, such losses will be borne by Holders of the
Certificates of such Series. Even where credit support covers all losses
resulting from delinquency and foreclosure or repossession, the effect of
foreclosures and repossessions may be to increase prepayment experience on the
Mortgage Assets, thus reducing average weighted life and affecting yield to
maturity. See "YIELD, PREPAYMENT AND MATURITY CONSIDERATIONS."
REPRESENTATIONS AND WARRANTIES
Unless otherwise specified in the related Prospectus Supplement or in the
Pooling and Servicing Agreement, the Master Servicer will represent and warrant
to the Depositor and the Trustee with respect to the Mortgage Loans comprising
the Mortgage Assets in a Trust Fund, upon delivery of the Mortgage Loans to the
Trustee hereunder, among other things, that based upon representations of the
originator of the Loans: (i) to the best of its knowledge the information set
forth in the Final Mortgage Loan Schedule is complete, true and correct as of
the Cut-off Date; (ii) it had good and marketable title to the Mortgage Note and
the Mortgage and it was the sole owner of each of the Mortgage Loans free and
clear of any and all liens, claims, pledges, participation interests, equities,
charges or security interests of any nature and has full right and authority,
subject to no interest or participation of, or agreement with, any other party,
to sell and assign the same; (iii) each Mortgage evidences a valid subsisting
and enforceable first lien on the property therein described, and such Mortgaged
Property is free and clear of all encumbrances and liens having priority over
the first lien of the related Mortgage, except for Liens for real estate taxes
and special assessments not yet due and payable and, covenants, conditions and
restrictions, rights of way, easements and other matters of the public record as
of the date of recording which are acceptable to mortgage lending institutions
generally, or which are specifically referred to in the lender's title insurance
policy delivered to the originator of the Mortgage Loan and either which are
referred to or otherwise considered in the appraisal made for the originator of
the Mortgage Loan, or which do not adversely affect the appraised value of the
Mortgaged Property as set forth in such appraisal, and other matters to which
like properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by the Mortgage or the use,
enjoyment, value or marketability of the related Mortgaged Property; (iv) the
terms of Mortgage Note and the Mortgage have not been impaired, altered or
modified in any respect, except by a written instrument which has been recorded,
if necessary, to protect the interest of Certificateholders and which has been
delivered to the Trustee and the substance of which has been approved by the
primary mortgage guaranty insurer, if any; (v) no instrument of release or
waiver has been executed in connection with the Mortgage Loan, and no Mortgagor
has been released, in whole or in part, except in connection with an assumption
agreement which has been approved by the primary mortgage guaranty insurer, if
any, and which has been delivered to the Trustee; (vi) to the best of the Master
Servicer's knowledge, there are no defaults in
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complying with the terms of the Mortgage, and all taxes, governmental
assessments, insurance premiums, water, sewer and municipal charges, leasehold
payments or ground rents which previously became due and owing with respect to
the Mortgage have been paid, or an escrow of funds has been established in an
amount sufficient to pay for every such item which remains unpaid and which has
been assessed but is not yet due and payable. The Master Servicer, and to the
best of its knowledge, the Servicer, has not advanced funds, or induced,
solicited or knowingly received any advance of funds by a party other than the
Mortgagor, directly or indirectly, for the payment of any amount required by the
Mortgage, except for interest accruing from the date of the Mortgage Note or
date of disbursement of the Mortgage proceeds, whichever is greater, to the day
which precedes by one month the Due Date of the first installment of principal
and interest; (vii) to the best of the Master Servicer's knowledge, there is no
proceeding pending or threatened for the total or partial condemnation of the
Mortgaged Property, nor is such a proceeding currently occurring, and as of the
Closing Date such property to the best of the Master Servicer's knowledge, is
undamaged by waste, fire, earthquake or earth movement, windstorm, flood,
tornado or other casualty, so as to materially, adversely affect the value of
the Mortgaged Property as security for the Mortgage Loan; (viii) to the best of
the Master Servicer's knowledge, there are no mechanics' or similar liens or
claims which have been filed for work, labor or material (and, to the best of
the Master Servicer's knowledge, no rights are outstanding that under law could
give rise to such lien) affecting the Mortgaged Property which are, or may be,
liens prior or equal to, or coordinate with, the lien of the Mortgage; (ix) to
the best of the Master Servicer's knowledge, all of the improvements which were
included for the purpose of determining the appraised value of the Mortgaged
Property lie wholly within the boundaries and building restriction lines of such
property or are insured against, and no improvements on adjoining properties
encroach upon the Mortgaged Property; (x) the Master Servicer has no knowledge
of any circumstances or conditions with respect to the Mortgage, the Mortgaged
Property, the Mortgagor or the Mortgagor's credit standing which would cause
investors to regard the Mortgage Loan as an unacceptable investment, cause the
Mortgage Loan to become delinquent, or materially and adversely affect the value
or marketability of the Mortgage Loan; (xi) to the best of the Master Servicer's
knowledge, no improvement located on or being part of the Mortgaged Property is
in violation of any applicable zoning law or regulation. All inspections,
licenses and certificates required to be made or issued with respect to all
occupied portions of the Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to certificates of occupancy
and fire underwriting certificates, have been made or obtained from the
appropriate authorities and the Mortgaged Property is lawfully occupied under
applicable law; (xii) to the best of the Master Servicer's knowledge, no person
other than the Master Servicer has any interest in any Mortgage Loan, whether as
mortgagee, assignee, pledgee or otherwise; (xiii) all payments required to be
made up to the Cut-off Date for each Mortgage Loan under the terms of the
related Mortgage Note have been made. No payment required under any Mortgage
Loan is delinquent more than 30 days or has been delinquent more than 30 days
more than once during the twelve-month period immediately preceding the Cut-off
Date; (xiv) the Mortgage file contains each of the documents and instruments
specified to be included therein duly executed and in due and proper form,
enforceable in accordance with their terms. The Mortgage Note and the Mortgage
are on forms substantially similar to forms acceptable to the Depositor. Each
appraisal is on a form acceptable to FNMA or FHLMC with such riders as are
acceptable to FNMA and FHLMC, as the case may be; (xv) the Mortgage Note and the
related Mortgage are genuine, and, to the best of the Master Servicer's
knowledge, each is the legal, valid and binding obligation of the maker thereof,
enforceable in accordance with its terms, such enforceability being subject to
bankruptcy, insolvency, moratorium or other laws affecting the rights of
creditors generally, and to general principles of equity. To the best of the
Master Servicer's knowledge, all parties to the Mortgage Note and the Mortgage
had legal capacity to execute the Mortgage Note and the Mortgage and each
Mortgage Note and Mortgage have been duly and properly executed by such parties;
(xvi) any and all requirements of any federal, state or local law including,
without limitation, usury, truth-in-lending, real estate settlement procedures,
consumer credit protection, equal credit opportunity or disclosure laws
applicable to the Mortgage Loan have been complied with in all material
respects, and the Master Servicer shall maintain in its possession, available
for each Certificateholder's inspection, evidence of compliance in accordance
with its generally accepted business practices; (xvii) the proceeds of the
Mortgage Loan have been fully disbursed, there is no requirement for future
advances thereunder and any and all requirements as to completion of any on-site
or off-site improvements and as to disbursements of any escrow funds therefor
have been complied
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with. All costs, fees and expenses incurred in making, or closing or recording
the Mortgage Loans were paid; (xviii) each Mortgage Loan is covered by an ALTA
or CLTA mortgage title insurance policy with an adjustable rate mortgage
endorsement and an extended coverage endorsement, if applicable, such
endorsements substantially in the form of ALTA Form 6.0, 6.1 or 6.2 and CLTA
Form 100 or another California equivalent of such ALTA Forms, respectively, or
such other generally acceptable form of policy or insurance acceptable to FNMA
or FHLMC, issued by and the valid and binding obligation of a title insurer
acceptable to FNMA or FHLMC and, at the time of issuance thereof, qualified to
do business in the jurisdiction where the property subject to the Mortgage is
located, insuring the Master Servicer or the originating mortgagee, and
successor owners of indebtedness secured by the insured Mortgage, as to the
first priority lien of the Mortgage in an amount at least equal to 125% of the
original principal amount of the Mortgage Loan. The Master Servicer is the sole
insured of such mortgage title insurance policy, the assignment to the Trust
Fund of such mortgage title insurance policy does not require the consent of or
notification to the insurer, such mortgage title insurance policy is in full
force and effect and will be in full force and effect and inure to the benefit
of Certificateholders upon the consummation of the transactions contemplated by
the Pooling and Servicing Agreement. To the best of the Master Servicer's
knowledge, no claims have been made under such mortgage title insurance policy
and no prior holder of the related Mortgage, including the Master Servicer, has
done, by act or omission, anything which would impair the coverage of such
mortgage title insurance policy; (xix) all improvements upon the Mortgaged
Property are insured by a generally acceptable insurer against loss by fire,
hazards of extended coverage and such other hazards as are customary in the area
where the Mortgaged Property is located, pursuant to insurance policies
conforming to the requirements of the related Pooling and Servicing Agreement.
All individual insurance policies (collectively, the "hazard insurance policy")
contain a standard mortgagee clause naming the Master Servicer or the original
mortgagee and, its successors in interest, as mortgagee and the Master Servicer
has received no notice that any premiums due and payable thereon have not been
paid. The Mortgage obligates the Mortgagor thereunder to maintain all such
insurance at the Mortgagor's cost and expense, and upon the Mortgagor's failure
to do so, authorizes the holder of the Mortgage to obtain and maintain such
insurance at the Mortgagor's cost and expense and to seek reimbursement therefor
from the Mortgagor; (xx) to the best of the Master Servicer's knowledge, there
is no material default, breach, violation or event of acceleration existing
under the Mortgage or the related Mortgage Note and no event which, with the
passage of time or with notice and the expiration of any grace or cure period,
would constitute such a default, breach, violation or event of acceleration; and
the Master Servicer has not waived any such default, breach, violation or event
of acceleration; (xxi) the Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
nor will the operation of any of the terms of the Mortgage Note or the Mortgage,
or the exercise of any right thereunder, render either the Mortgage Note or the
Mortgage unenforceable, in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and, to the best of the Master Servicer's knowledge, no such right of
rescission, set-off, counterclaim or defense has been asserted with respect
thereto; (xxii) the Mortgage Loan was originated by the Master Servicer or by a
savings and loan association, savings bank, commercial bank, credit union,
insurance company, or similar institution which is supervised and examined by a
Federal or State authority, or by a mortgagee approved by the Secretary of HUD
or subsequently acquired by the Master Servicer from such originator; (xxiii)
the Mortgage contains an enforceable provision for the acceleration of the
payment of the unpaid principal balance of the Mortgage Loan in the event the
related Mortgaged Property is sold to a Mortgagor who does not meet the credit
standards of the Master Servicer, such enforceability being subject to
bankruptcy, insolvency, moratorium or other laws affecting the rights of
creditors generally, and to general principles of equity; (xxiv) the related
Mortgage Note is not and has not been secured by any collateral except the lien
of the corresponding Mortgage; (xxv) the related Mortgage contains customary and
enforceable provisions which render the rights and remedies of the holder
thereof adequate for the realization against the Mortgaged Property of the
benefits of the security, including, (y) in the case of a Mortgage designated as
a deed of trust, by trustee's sale, and (z) otherwise by judicial foreclosure.
The Master Servicer has no knowledge of any homestead or other exemption
available to the Mortgagor which would interfere with the right to sell the
Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage;
(xxvi) with respect to each Mortgage constituting a deed of trust, a trustee,
duly qualified if required under applicable law to serve as such, has been
properly designated and currently so
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serves and is named in such Mortgage, and no fees or expenses are or will become
payable by the Certificateholders to the trustee under the deed of trust, except
in connection with a trustee's sale after default by the Mortgagor; (xxvii) the
Mortgage Loan files contain an appraisal of the related Mortgaged Property
signed prior to the approval of the Mortgage Loan application by a qualified
appraiser, approved by the mortgage originator, who to the best of the Master
Servicer's knowledge, had no interest, direct or indirect, in the Mortgaged
Property or in any loan made on the security thereof, and whose compensation was
not affected by the approval or disapproval of the Mortgage Loan. The appraisal
is in a form acceptable to FNMA and FHLMC and meets the requirements of the
Office of Thrift Supervision or its predecessor as they existed at the time of
origination; and (xxviii) any other representations and warranties respecting
the Mortgage Loans specified in the related Prospectus Supplement or the related
Pooling and Servicing Agreement.
If the Mortgage Loans include Cooperative Loans, no representations or
warranties with respect to title insurance or hazard insurance will be given. In
addition, if the Mortgage Loans include Condominium Loans, no representation
regarding hazard insurance will be given. Generally, the Cooperative or
Condominium Association itself is responsible for the maintenance of hazard
insurance for property owned by the Cooperative and the Condominium Association
is responsible for maintaining standard hazard insurance, insuring the entire
Condominium Building (including each individual Condominium Unit), and the
borrowers of that Cooperative or Condominium do not maintain separate hazard
insurance on their individual Cooperative Dwellings or Condominium Units. See
"SERVICING OF LOANS--Maintenance of Insurance Policies and Other Servicing
Procedures" herein. With respect to a Cooperative Loan, the Depositor will
represent and warrant based, in part, upon representations and warranties of the
originator of such Cooperative Loan that (i) the security interest created by
the cooperative security agreements is a valid first lien on the collateral
securing the Cooperative Loan (subject to the right of the related Cooperative
to cancel shares and terminate the proprietary lease for unpaid assessments) and
(ii) the related Cooperative Dwelling is free of material damage and in good
repair.
Unless otherwise specified in the related Prospectus Supplement, with
respect to each Manufactured Home Loan, the Depositor based upon representations
and warranties of the originator of such Manufactured Home Loan will represent
and warrant, among other things that (i) immediately prior to the transfer and
assignment of the Manufactured Home Loans to the Trustee, the Depositor had good
title to, and was the sole owner of, each Manufactured Home Loan; (ii) as of the
date of such transfer and assignment, the Manufactured Home Loans are subject to
no offsets, defenses or counterclaims; (iii) each Manufactured Home Loan at the
time it was made complied in all material respects with applicable state and
federal laws, including usury, equal credit opportunity and truth-in-lending or
similar disclosure laws; (iv) as of the date of such transfer and assignment,
each Manufactured Home Loan constitutes a valid first lien on the related
Manufactured Home and such Manufactured Home is free of material damage and is
in good repair; (v) as of the date of such representation and warranty, no
Manufactured Home Loan is more than 30 days delinquent and there are no
delinquent tax or assessment liens against the related Manufactured Home; and
(vi) with respect to each Manufactured Home Loan, any required hazard insurance
policy was effective at the origination of each Manufactured Home Loan and
remained in effect on the date of the transfer and assignment of the
Manufactured Home Loan from the Depositor and that all premiums due on such
insurance have been paid in full.
Upon the discovery of the breach of any representation or warranty made by
the Master Servicer in respect of a Loan that adversely affects the payments of
principal and interest on the Loan or otherwise adversely and materially affects
the value of such Loan, the Master Servicer will be obligated to cure such
breach in all material respects, repurchase such Loan from the Trustee, or
deliver a Qualified Substitute Mortgage Loan as described below under "THE
POOLING AND SERVICING AGREEMENTS--Assignment of Mortgage Assets." See "SPECIAL
CONSIDERATIONS--Limited Obligations and Assets of the Depositor." The PMBS
Trustee (in the case of Private Mortgage-Backed Securities) or the Trustee, as
applicable, will be required to enforce this obligation following the practices
it would employ in its good faith business judgment were it the owner of such
Loan. If so specified in the related Prospectus Supplement, the Master Servicer
may be obligated to enforce such obligations rather than the Trustee or PMBS
Trustee.
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SERVICING OF LOANS
GENERAL
Customary servicing functions with respect to Loans constituting the
Mortgage Assets in the Trust Fund will be provided by the Master Servicer
directly or through one or more servicers (the "Servicers") subject to
supervision by the Master Servicer. If the Master Servicer is not directly
servicing the Loans, then the Master Servicer will (i) administer and supervise
the performance by the Servicers of their servicing responsibilities under their
servicing agreements ("Servicing Agreements") with the Master Servicer, (ii)
maintain any standard or special hazard insurance policy, primary mortgage
insurance bankruptcy bond or pool insurance policy required for the related
Loans and (iii) advance funds as described below under "Advances." If the Master
Servicer services the Loans through Servicers as its agents, the Master Servicer
will be ultimately responsible for the performance of all servicing activities,
including those performed by the Servicers, notwithstanding its delegation of
certain responsibilities to such Servicer.
The Master Servicer will be a party to the Pooling and Servicing Agreement
for any Series for which Loans comprise the Mortgage Assets and may be a party
to a Participation Agreement executed with respect to any Participation
Certificates which constitute the Mortgage Assets. The Master Servicer may be an
affiliate of the Depositor. Unless otherwise specified in the related Prospectus
Supplement, the Master Servicer and each Servicer will be required to be a FNMA-
or FHLMC-approved seller/servicer and, in the case of FHA Loans, approved by HUD
as an FHA mortgagee.
The Master Servicer will be paid a Servicing Fee for the performance of its
services and duties under each Pooling and Servicing Agreement as specified in
the related Prospectus Supplement. Each Servicer, if any, will be entitled to
receive a portion of the Servicing Fee. In addition, the Master Servicer or
Servicer may be entitled to retain late charges, assumption fees and similar
charges to the extent collected from mortgagors. If a Servicer is terminated by
the Master Servicer, the servicing function of the Servicer will be either
transferred to a substitute Servicer or performed by the Master Servicer. The
Master Servicer will be entitled to retain the portion of the Servicing Fee paid
to the Servicer under a terminated Servicing Agreement if the Master Servicer
elects to perform such servicing functions itself.
The Master Servicer, at its election, may pay itself the Servicing Fee for a
Series with respect to each Mortgage Loan either by (a) withholding the
Servicing Fee from any scheduled payment of interest prior to the deposit of
such payment in the Collection Account for such Series, (b) withdrawing the
Servicing Fee from the Collection Account after the entire Scheduled Payment has
been deposited in the Collection Account, or (c) requesting that the Trustee pay
the Servicing Fee out of amounts in the Certificate Account.
COLLECTION PROCEDURES; ESCROW ACCOUNTS
The Master Servicer will make reasonable efforts to collect all payments
required to be made under the Mortgage Loans and will, consistent with the
Pooling and Servicing Agreement for a Series and any applicable insurance
policies and other credit supports, follow such collection procedures as it
follows with respect to comparable loans held in its own portfolio. Consistent
with the above, the Master Servicer may, in its discretion, (i) waive any
assumption fee, late payment charge, or other charge in connection with a Loan
and (ii) arrange with a mortgagor a schedule for the liquidation of
delinquencies by extending the Due Dates for Scheduled Payments on such Loan.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer, to the extent permitted by law, will establish and maintain escrow
accounts ("Escrow Accounts") in which payments by borrowers to pay taxes,
assessments, mortgage and hazard insurance premiums, and other comparable items
that are required to be paid to the mortgagee will be deposited. Mortgage Loans
and Manufactured Home Loans may not require such payments under the loan related
documents, in which case the Master Servicer would not be required to establish
any Escrow Account with respect to such Loans. Withdrawals from the Escrow
Accounts are to be made to effect timely payment of taxes, assessments, mortgage
and hazard insurance, to refund to borrowers amounts determined to be overages,
to pay interest to borrowers on balances in the Escrow Account to the extent
required by law, to repair or otherwise protect the property
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securing the related Loan and to clear and terminate such Escrow Account. The
Master Servicer will be responsible for the administration of the Escrow
Accounts and generally will make advances to such account when a deficiency
exists therein.
DEPOSITS TO AND WITHDRAWALS FROM THE COLLECTION ACCOUNT
Unless otherwise indicated in the related Prospectus Supplement, the
Collection Account will be a non-interest bearing account maintained (i) at a
depository institution or trust company, the long-term unsecured debt
obligations of which at the time of any deposit therein are rated within the two
highest rating categories by each Rating Agency rating the Certificates of such
Series or (ii) in an account or accounts the deposits in which are insured to
the maximum extent available by the FDIC or which are secured in a manner
meeting requirements established by each Rating Agency, or (iii) in which such
accounts are insured by the FDIC (to the limits established by the FDIC), the
uninsured deposits in which are otherwise secured that, as evidenced by an
opinion of counsel delivered to the Trustee, the Certificateholders have a claim
with respect to the funds in such account or a perfected first security interest
against any collateral (which shall be limited to Eligible Investments) securing
such funds that is superior to claims of any other depositors or creditors of
the depository institution or trust company with which such account is
maintained, so long as such account shall not adversely affect the rating on the
Certificates or (iv) any other account acceptable to each Rating Agency rating
the Certificates of the related Series.
If so specified in the related Prospectus Supplement, the Collection Account
may be maintained as an interest-bearing account, or the funds held therein may
be invested, pending remittance to the Trustee, in Eligible Investments. Unless
otherwise specified in the related Prospectus Supplement, the Master Servicer
will be entitled to receive as additional compensation any interest or other
income earned on funds in the Collection Account.
The Master Servicer will deposit into the Collection Account for each Series
on the Business Day following the Closing Date any amounts representing
Scheduled Payments due after the related Cut-off Date but received by the Master
Servicer on or before the related Cut-off Date, and thereafter, after the date
of receipt thereof, the following payments and collections received or made by
it (other than in respect of principal of and interest on the related Loans due
on or before such Cut-off Date):
(i) All payments on account of principal, including prepayments, on such
Loans net of any portion of such payments that represent recoveries of
nonrecoverable Advances;
(ii) All payments on account of interest on such Loans net of any
portion thereof retained by the related Servicer (including the Master
Servicer), if any, as servicing compensation on the Loans in accordance with
the related Pooling and Servicing Agreement;
(iii) All Insurance Proceeds and all amounts received by the Master
Servicer in connection with the liquidation of defaulted Loans or property
acquired in respect thereof, whether through foreclosure sale or otherwise,
including payments in connection with such Loans received from the
mortgagor, other than amounts required to be paid to the mortgagor pursuant
to the terms of the applicable Mortgage or otherwise pursuant to law
("Liquidation Proceeds"), exclusive of proceeds to be applied to the
restoration or repair of the Mortgaged Property or released to the Mortgagor
in accordance with the Master Servicer's normal servicing procedures, net of
expenses incurred by the Master Servicer (or the related Servicer) in
connection with the liquidation of any defaulted Mortgage Loan and not
recovered under a primary mortgage insurance policy ("Liquidation
Expenses"); unpaid servicing compensation and nonrecoverable Advances in
accordance with the related Pooling and Servicing Agreement;
(iv) All proceeds received of any Loans pursuant to the related Pooling
and Servicing Agreement;
(v) All amounts required to be deposited therein in connection with any
losses on Eligible Investments pursuant to the related Pooling and Servicing
Agreement;
(vi) All Advances for such Series made by the Master Servicer or a
Servicer pursuant to the related Pooling and Servicing Agreement; and
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(vii) All other amounts required to be deposited therein pursuant to the
related Pooling and Servicing Agreement.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer is permitted, from time to time, to make withdrawals from the
Collection Account for each Series for the following purposes:
(i) to reimburse itself for Advances for such Series made by it pursuant
to the related Pooling and Servicing Agreement; the Master Servicer's right
to reimburse itself being limited to amounts received on or in respect of
particular Loans (including, for this purpose, Liquidation Proceeds and
amounts representing proceeds of insurance policies covering the related
Mortgaged Property) which represent late recoveries of Scheduled Payments
respecting which any such Advance was made;
(ii) to reimburse itself for any Advances for such Series that the
Master Servicer determines in good faith it will be unable to recover from
amounts representing late recoveries of Scheduled Payments respecting which
such Advance was made or from Liquidation Proceeds or the proceeds of
insurance policies;
(iii) to reimburse itself from Liquidation Proceeds for Liquidation
Expenses and for amounts expended by it in good faith in connection with the
restoration of damaged Mortgaged Property and, to the extent that
Liquidation Proceeds after such reimbursement are in excess of the
outstanding principal balance of the related Loan, together with accrued and
unpaid interest thereon at the applicable Pass-Through Rate to the Due Date
next succeeding the date of its receipt of such Liquidation Proceeds, to pay
to itself out of such excess the amount of any unpaid servicing compensation
with respect to the related Mortgage Loan and to pay any unpaid servicing
compensation to the Servicer;
(iv) to pay to itself as servicing compensation that portion of any
payment as to interest that equals the Servicing Fee with respect to such
Mortgage Loan for the period with respect to which such interest payment was
made, and, as additional servicing compensation, earnings on or investment
income with respect to funds credited to the Collection Account;
(v) to reimburse itself from Insurance Proceeds for insurance expenses
and to pay any unpaid servicing compensation to itself, such payment of
servicing compensation to be made in accordance with the related Pooling and
Servicing Agreement and being limited to the amount, if any, by which the
aggregate of Liquidation Proceeds and Insurance Proceeds received in
connection with the liquidation of a defaulted Mortgage Loan is, after the
deduction of insurance expenses, and servicing compensation payable to the
Servicer of such Mortgage Loan, if any, in excess of the outstanding
principal balance of such Mortgage Loan, together with accrued and unpaid
interest thereon at the applicable Pass-Through Rate;
(vi) to pay to itself, a Servicer or the Depositor, as the case may be,
with respect to each Mortgage Loan or property acquired in respect thereof
that has been repurchased pursuant to the Pooling and Servicing Agreement,
all amounts received thereon and not taken into account in determining the
related outstanding principal balance of such repurchased Mortgage Loan;
(vii) to reimburse itself or the Depositor for expenses incurred by and
reimbursable to it or the Depositor with respect to indemnification;
(viii) to make payments to certain Certificateholders in the manner
specified in the Pooling and Servicing Agreement;
(ix) to withdraw any amount deposited in the Collection Account and not
required to be deposited therein; and
(x) to clear and terminate the Collection Account pursuant to the
related Pooling and Servicing Agreement.
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SERVICING ACCOUNTS
In those cases where a Servicer is servicing a Mortgage Loan, the Servicer
will establish and maintain an account (a "Servicing Account") that will comply
with the standards set forth above, and which is otherwise acceptable to the
Master Servicer. The Servicer is required to deposit into the Servicing Account
all proceeds of Mortgage Loans received by the Servicer, subject to withdrawal
to the extent permitted by the applicable servicing agreement. On the date
specified in the related Prospectus Supplement, the Servicer will remit to the
Master Servicer all funds held in the Servicing Account with respect to each
Mortgage Loan consisting of an amount equal to the sum of (i) all amounts
received by the Servicer with respect to the Mortgage Loans serviced by it as of
the Servicer Remittance Date, except (a) any monthly payment prepaid for a Due
Date subsequent to the month in which the Servicer Remittance Date occurs, (b)
any amounts received by such Servicer with respect to such Mortgage Loans that
constitute a late recovery with respect to an advance previously made by such
Servicer with respect to such Mortgage Loans, and (c) any Retained Interest
payable to such Servicer under the terms of such servicing agreement; (ii) all
partial principal Prepayments received in the calendar month prior to the month
of the Servicer Remittance Date or applied as of the Due Date in the month of
the Servicer Remittance Date; (iii) all principal Prepayments in full received
in the calendar month prior to the month of the Servicer Remittance Date, in
each case together with interest received thereon through the date of prepayment
at the applicable Mortgage Rate (net of the related servicing compensation and
any Retained Interest payable to such Servicer under the terms of such servicing
agreement) whether or not received from the Mortgagor; and (iv) all Insurance
Proceeds and Liquidation Proceeds (net of Liquidation Expenses) received in the
calendar month prior to the month of the Servicer Remittance Date. The Servicer
may deduct from each remittance, as provided above, an amount equal to the
servicing fee to which it is then entitled pursuant to the applicable servicing
agreement, to the extent not previously paid to or retained by it. The Servicer
may, to the extent described in the related Prospectus Supplement, be required
to advance any monthly installment of principal and interest that was not
received, less its servicing fee, by the date specified in the related
Prospectus Supplement.
BUY-DOWN LOANS, GPM LOANS AND OTHER SUBSIDIZED LOANS
With respect to each Buy-Down Loan, if any, included in a Trust Fund the
Master Servicer will deposit all Buy-Down Amounts in a custodial account (which
may be interest-bearing) complying with the requirements set forth above for the
Collection Account (the "Buy-Down Fund"). The amount of such deposit, together
with investment earnings thereon at the rate specified in the related Prospectus
Supplement, will provide sufficient funds to support the payments on such
Buy-Down Loan on a level debt service basis. The Master Servicer will not be
obligated to add to the Buy-Down Account should amounts therein and investment
earnings prove insufficient to maintain the scheduled level of payments on the
Buy-Down Loans, in which event distributions to the Certificateholders may be
affected. Unless otherwise provided in the related Prospectus Supplement, a
Buy-Down Fund will not be included in or deemed to be a part of the Trust Fund.
The terms of certain of the Loans may provide for the contribution of
subsidy funds by the seller of the related Mortgaged Property or by another
entity. With respect to each such Loan, the Master Servicer will deposit the
subsidy funds in a custodial account (which may be interest bearing) complying
with the requirements set forth above for the Collection Account set forth above
(a "Subsidy Fund"). Unless otherwise specified in the related Prospectus
Supplement, the terms of each such Loan will provide for the contribution of the
entire undiscounted amount of subsidy amounts necessary to maintain the
scheduled level of payments due during the early years of such Loan. Neither the
Master Servicer, any Servicer nor the Depositor will be obligated to add to such
Subsidy Fund any of its own funds. Unless otherwise provided in the related
Prospectus Supplement, such Subsidy Fund will not be included in or deemed to be
a part of the Trust Fund.
If the Depositor values any GPM Loans deposited into the Trust Fund for a
Multiple Class Series on the basis of such GPM Loan's scheduled maximum
principal balance, the Master Servicer will, if and to the extent provided in
the related Prospectus Supplement, deposit in a custodial account (which may be
interest bearing) (the "GPM Fund") complying with the requirements set forth
above for the Collection Account an
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amount which, together with reinvestment income thereon at the rate set forth in
the related Prospectus Supplement, will be sufficient to cover the amount by
which payments of principal and interest on such GPM Loans assumed in
calculating payments due on the Certificates of such Multiple Class Series
exceed the scheduled payments on such GPM Loans. The Trustee will withdraw
amounts from the GPM Fund for a Series upon a prepayment of such GPM Loan as
necessary and apply such amounts to the payment of principal and interest on the
Certificates of such Series. Neither the Depositor, the Master Servicer nor any
Servicer will be obligated to supplement the GPM Fund should amounts therein and
investment earnings thereon prove insufficient to maintain the scheduled level
of payments, in which event, distributions to the Certificateholders may be
affected. Unless otherwise specified in the related Prospectus Supplement, such
GPM Fund will not be included in or deemed to be part of the Trust Fund.
With respect to any other type of Loan which provides for payments other
than on the basis of level payments, an account may be established as described
in the related Prospectus Supplement on terms similar to those relating to the
Buy-Down Fund, Subsidiary Fund or the GPM Fund.
ADVANCES AND LIMITATIONS THEREON
GENERAL. The related Prospectus Supplement will describe the circumstances
under which the Master Servicer or Servicer will make Advances with respect to
delinquent payments on Loans. Unless otherwise specified in the related
Prospectus Supplement, neither the Master Servicer nor any Servicer will be
obligated to make Advances, and such obligation may be limited in amount, may be
limited to advances received from the Servicers, if any, or may not be activated
until a certain portion of a specified reserve fund is depleted. If the Master
Servicer is obligated to make Advances, a surety bond or other credit support
may be provided with respect to such obligation as described in the related
Prospectus Supplement. Advances are intended to provide liquidity and not to
guarantee or insure against losses. Accordingly, any funds advanced are
recoverable by the Servicer or the Master Servicer, as the case may be, out of
amounts received on particular Loans which represent late recoveries of
principal or interest, proceeds of insurance polices or Liquidation Proceeds
respecting which any such Advance was made. If an Advance is made and
subsequently determined to be nonrecoverable from late collections, proceeds of
insurance polices or Liquidation Proceeds from the related Loan, the Servicer or
Master Servicer will be entitled to reimbursement from other funds in the
Certificate Account, Collection Account or Servicing Account, as the case may
be, or from a specified reserve fund as applicable, to the extent specified in
the related Prospectus Supplement.
ADVANCES IN CONNECTION WITH PREPAID LOANS. In addition when a borrower
makes a principal prepayment in full between Due Dates on the related Loan, the
borrower will generally be required to pay interest on the principal amount
prepaid only to the date of such prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Certificateholders of a Series will not be adversely affected by any resulting
shortfall in interest, the Master Servicer may be obligated to advance moneys
from its own funds to the extent necessary to include in its remittance to the
Trustee for deposit into the Certificate Account an amount equal to a full
Scheduled Payment of interest on the related Loan (adjusted to the applicable
Pass-Through Rate). Any such principal prepayment, together with a full
Scheduled Payment of interest thereon at the applicable Pass-Through Rate (to
the extent of such adjustment or advance), will be distributed to
Certificateholders on the related Distribution Date. If the amount necessary to
include a full Scheduled Payment of interest as described above exceeds the
amount which the Master Servicer is obligated to advance, as applicable, a
shortfall may occur as a result of a prepayment in full. See "YIELD, PREPAYMENT
AND MATURITY CONSIDERATIONS."
MAINTENANCE OF INSURANCE POLICIES AND OTHER SERVICING PROCEDURES
STANDARD HAZARD INSURANCE; FLOOD INSURANCE. Except as otherwise specified
in the related Prospectus Supplement, the Master Servicer will be required to
maintain or to cause the borrower on each Loan to maintain or will use its best
reasonable efforts to cause each Servicer of a Loan to maintain a standard
hazard insurance policy providing coverage of the standard form of fire
insurance with extended coverage for certain other hazards as is customary in
the state in which the property securing the related Loan is
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located. See "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE" herein. Unless
otherwise specified in the related Prospectus Supplement, coverage will be in an
amount at least equal to the greater of (i) the amount necessary to avoid the
enforcement of any co-insurance clause contained in the policy or (ii) the
outstanding principal balance of the related Loan. The Master Servicer will also
maintain on REO Property that secured a defaulted Loan and that has been
acquired upon foreclosure, deed in lieu of foreclosure, or repossession, a
standard hazard insurance policy in an amount that is at least equal to the
maximum insurable value of such REO Property. No earthquake or other additional
insurance will be required of any borrower or will be maintained on REO Property
acquired in respect of a defaulted Loan, other than pursuant to such applicable
laws and regulations as shall at any time be in force and shall require such
additional insurance. When, at the time of origination of a Loan, the property
securing that Loan is located in a federally designated special flood hazard
area, the Master Servicer will cause to be maintained or use its best reasonable
efforts to cause the Servicer to maintain with respect to such property flood
insurance as required under the Flood Disaster Protection Act of 1973, to the
extent available, or as described in the related Prospectus Supplement.
Any amounts collected by the Master Servicer or the Servicer, as the case
may be, under any such policies of insurance (other than amounts to be applied
to the restoration or repair of the Mortgaged Property, released to the borrower
in accordance with normal servicing procedures or used to reimburse the Master
Servicer for amounts to which it is entitled to reimbursement) will be deposited
in the Collection Account. In the event that the Master Servicer obtains and
maintains a blanket policy insuring against hazard losses on all of the Loans,
written by an insurer then acceptable to each Rating Agency which assigns a
rating to such Series, it will conclusively be deemed to have satisfied its
obligations to cause to be maintained a standard hazard insurance policy for
each Loan or related REO Property. This blanket policy may contain a deductible
clause, in which case the Master Servicer will, in the event that there has been
a loss that would have been covered by such policy absent such deductible
clause, deposit in the Collection Account the amount not otherwise payable under
the blanket policy because of the application of such deductible clause.
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. Similarly, the Depositor
will not require that a standard hazard or flood insurance policy be maintained
on a Condominium Unit relating to any Condominium Loan. Generally, the
Condominium Association is responsible for maintenance of hazard insurance
insuring the entire Condominium building (including each individual Condominium
Unit), and the owner(s) of an individual Condominium Unit do not maintain
separate hazard insurance policies. To the extent, however, that a Condominium
Association and the related borrower on a Condominium 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
Condominium Unit or the related Condominium Building could significantly reduce
the value of the collateral securing such Condominium Loan to the extent not
covered by other credit support.
SPECIAL HAZARD INSURANCE POLICY. If, and to the extent specified in the
related Prospectus Supplement, the Master Servicer will maintain a special
hazard insurance policy, in the amount set forth in the related Prospectus
Supplement, in full force and effect with respect to the Loans. Unless otherwise
specified in the related Prospectus Supplement, the special hazard insurance
policy will provide for a fixed premium rate based on the declining aggregate
outstanding principal balance of the Loans. The Master Servicer will agree to
pay the premium for any special hazard insurance policy on a timely basis. If
the special hazard insurance
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policy is canceled or terminated for any reason (other than the exhaustion of
total policy coverage), the Master Servicer will exercise its best reasonable
efforts to obtain from another insurer a replacement policy comparable to the
special hazard insurance policy with a total coverage which is equal to the then
existing coverage of the terminated special hazard insurance policy; provided
that if the cost of any such replacement policy is greater than the cost of the
terminated special hazard insurance policy, the amount of coverage under the
replacement policy will, unless otherwise specified in the related Prospectus
Supplement, be reduced to a level such that the applicable premium does not
exceed 150% of the cost of the special hazard insurance policy that was
replaced. Any amounts collected by the Master Servicer under the special hazard
insurance policy in the nature of insurance proceeds will be deposited in the
Collection Account (net of amounts to be used to repair, restore or replace the
related property securing the Loan or to reimburse the Master Servicer (or a
Servicer) for related amounts owed to it). Certain characteristics of the
special hazard insurance policy are described under "DESCRIPTION OF MORTGAGE AND
OTHER INSURANCE-- Hazard Insurance on the Loans."
PRIMARY MORTGAGE INSURANCE. To the extent described in the related
Prospectus Supplement, the Master Servicer will be required to use its best
reasonable efforts to keep, or to cause each Servicer to keep, in full force and
effect, a primary mortgage insurance policy with respect to each Conventional
Loan secured by Single Family Property for which such coverage is required for
as long as the related mortgagor is obligated to maintain such primary mortgage
insurance under the terms of the related Loan. The Master Servicer will not
cancel or refuse to renew any such primary mortgage insurance policy in effect
at the date of the initial issuance of the Certificates that is required to be
kept in force unless a replacement primary mortgage insurance policy for such
cancelled or nonrenewed policy is maintained with a Qualified Insurer.
Primary insurance policies will be required with respect to Manufactured
Home Loans only to the extent described in the related Prospectus Supplement. If
primary mortgage insurance is to be maintained with respect to Manufactured Home
Loans, the Master Servicer will be required to maintain such insurance as
described above. For further information regarding the extent of coverage under
a primary mortgage insurance policy, see "DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE--Mortgage Insurance on the Loans."
FHA INSURANCE AND VA GUARANTEES. To the extent specified in the related
Prospectus Supplement, all or a portion of the Loans may be insured by the FHA
or guaranteed by the VA. The Master Servicer will be required to take such steps
as are reasonably necessary to keep such insurance and guarantees in full force
and effect. See "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE--Mortgage Insurance
on the Loans."
POOL INSURANCE POLICY. If so specified in the related Prospectus
Supplement, the Master Servicer will be obligated to use its best reasonable
efforts to maintain a pool insurance policy with respect to the Loans in the
amount and with the coverage described in the related Prospectus Supplement.
Unless otherwise specified in the related Prospectus Supplement, the pool
insurance policy will provide for a fixed premium rate on the declining
aggregate outstanding principal balance of the Loans. The Master Servicer will
be obligated to pay the premiums for such pool insurance policy on a timely
basis.
The Prospectus Supplement will identify the pool insurer for the related
Series of Certificates. If the pool insurer ceases to be a Qualified Insurer
because it is not approved as an insurer by FHLMC or FNMA or because its
claims-paying ability is no longer rated in the category required by the related
Prospectus Supplement, the Master Servicer will be obligated to review, no less
often than monthly, the financial condition of the pool insurer to determine
whether recoveries under the pool insurance policy are jeopardized by reason of
the financial condition of the pool insurer. If the Master Servicer determines
that recoveries may be so jeopardized or if the pool insurer ceases to be
qualified under applicable law to transact a mortgage guaranty insurance
business, the Master Servicer will exercise its best reasonable efforts to
obtain from another Qualified Insurer a comparable replacement pool insurance
policy with a total coverage equal to the then outstanding coverage of the pool
insurance policy to be replaced; provided that, if the premium rate on the
replacement policy is greater than that of the existing pool insurance policy,
then the coverage of the replacement policy will, unless otherwise specified in
the related Prospectus Supplement, be
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reduced to a level such that its premium rate does not exceed 150% of the
premium rate on the pool insurance policy to be replaced. Payments made under a
pool insurance policy will be deposited into the Collection Account (net of
expenses of the Master Servicer or any related unreimbursed Advances or unpaid
Servicing Fee). Certain characteristics of the pool insurance policy are
described under "DESCRIPTION OF MORTGAGE AND OTHER INSURANCE--Mortgage Insurance
on the Loans."
BANKRUPTCY BOND. If so specified in the related Prospectus Supplement, the
Master Servicer will be obligated to use its best reasonable efforts to obtain
and thereafter maintain a bankruptcy bond or similar insurance or guaranty in
full force and effect throughout the term of the related Pooling and Servicing
Agreement, unless coverage thereunder has been exhausted through payment of
claims. If so specified in the Prospectus Supplement, the Master Servicer will
be required to pay from its servicing compensation the premiums for the
bankruptcy bond on a timely basis. Coverage under the bankruptcy bond may be
cancelled or reduced by the Master Servicer at any time, provided that such
cancellation or reduction does not adversely affect the then current rating of
the related Series of Certificates. See "DESCRIPTION OF MORTGAGE AND OTHER
INSURANCE--Bankruptcy Bond" herein.
PRESENTATION OF CLAIMS; REALIZATION UPON DEFAULTED LOANS
The Master Servicer, on behalf of the Trustee and the Certificateholders,
will be required to present or cause to be presented, claims with respect to any
standard hazard insurance policy, pool insurance policy, special hazard
insurance policy, bankruptcy bond, or primary mortgage insurance policy, and to
the FHA and the VA, if applicable in respect of any FHA insurance or VA
guarantee respecting defaulted Mortgage Loans.
The Master Servicer will use its reasonable best efforts to foreclose upon,
repossess or otherwise comparably convert the ownership of the real properties
securing such of the related Loans 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 foreclosure or other conversion, the Master
Servicer will follow such practices and procedures as it deems necessary or
advisable and as are normal and usual in its servicing activities with respect
to comparable loans serviced by it. However, the Master Servicer will not be
required to expend its own funds in connection with any foreclosure or towards
the restoration of the property unless it determines: (i) that such restoration
or foreclosure will increase the Liquidation Proceeds in respect of the related
Mortgage Loan available to the Certificateholders after reimbursement to itself
for such expenses and (ii) that such expenses will be recoverable by it either
through Liquidation Proceeds or the proceeds of insurance. Notwithstanding
anything to the contrary herein, in the case of a Trust Fund for which a REMIC
election has been made, the Master Servicer shall not liquidate any collateral
acquired through foreclosure later than one year after the acquisition of such
collateral. While the holder of Mortgaged Property acquired through foreclosure
can often maximize its recovery by providing financing to a new purchaser, the
Trust Fund will have no ability to do so and neither the Master Servicer nor any
Servicer will be required to do so.
Similarly, if any property securing a defaulted Loan is damaged and
proceeds, if any, from the related standard hazard insurance policy or the
applicable special hazard insurance policy, if any, are insufficient to restore
the damaged property to a condition sufficient to permit recovery under any pool
insurance policy or any primary mortgage insurance policy, FHA insurance, or VA
guarantee, neither the Master Servicer nor any Servicer will be required to
expend its own funds to restore the damaged property unless it determines (i)
that such restoration will increase the Liquidation Proceeds in respect of the
Loan after reimbursement of the expenses incurred by such Servicer or the Master
Servicer and (ii) that such expenses will be recoverable by it through proceeds
of the sale of the property or proceeds of the related pool insurance policy or
any related primary mortgage insurance policy, FHA insurance, or VA guarantee.
As to collateral securing a Cooperative Loan, 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
proprietary lease or occupancy agreement securing that Cooperative Loan. See
"CERTAIN LEGAL ASPECTS OF LOANS--Foreclosure on Shares of Cooperatives" herein.
This approval is usually based on the purchaser's income and net worth and
numerous other factors. Although the Cooperative's
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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 Fund's ability to sell and realize the
value of those shares.
With respect to a Loan secured by a Multifamily Property, the market value
of any property obtained in foreclosure or by deed in lieu of foreclosure will
be based substantially on the operating income obtained by renting the dwelling
units. As a default on a Loan secured by Multifamily Property is likely to have
occurred because operating income, net of expenses, is insufficient to make debt
service payments on the related Loan, it can be anticipated that the market
value of such property will be less than anticipated when such Loan was
originated. To the extent that equity does not cushion the loss in market value
and such loss is not covered by other credit support, a loss may be experienced
by the related Trust Fund. With respect to a defaulted Manufactured Home Loan,
the value of the related Manufactured Home can be expected to be less on resale
than a new Manufactured Home. To the extent equity does not cushion the loss in
market value, and such loss is not covered by other credit support, a loss may
be experienced by the Trust Fund.
ENFORCEMENT OF DUE-ON-SALE CLAUSES
Unless otherwise specified in the related Prospectus Supplement for a
Series, when any Mortgaged Property is about to be conveyed by the borrower, the
Master Servicer will, to the extent it has knowledge of such prospective
conveyance and prior to the time of the consummation of such conveyance,
exercise the Trustee's right to accelerate the maturity of such Loan under the
applicable "due-on-sale" clause, if any, unless the Master Servicer reasonably
believes that such clause is not enforceable under applicable law or if the
enforcement of such clause would result in loss of coverage under any primary
mortgage insurance policy. If such conditions are not met or the Master Servicer
reasonably believes that enforcement of a due-on-sale clause will not be
enforceable, the Master Servicer is authorized to accept from or enter into an
assumption agreement, on behalf of the Trustee, with the person to whom such
property has been or is about to be conveyed, pursuant to which such person
becomes liable under the Loan and pursuant to which the original borrower is
released from liability and such person is substituted as the borrower and
becomes liable under the Loan. Any fee collected in connection with an
assumption will be retained by the Master Servicer as additional servicing
compensation. The terms of a Loan may not be changed in connection with an
assumption except that, if the terms of the Loan so permit, and subject to
certain other conditions, the interest rate may be increased (but not decreased)
to a prevailing market rate. Unless otherwise specified in the related
Prospectus Supplement, Certificateholders would not benefit from any such
increase.
SERVICING COMPENSATION AND PAYMENT OF EXPENSES
Except as otherwise provided in the related Prospectus Supplement, the
Master Servicer or any Servicer will be entitled to a servicing fee in an amount
to be determined as specified in the related Prospectus Supplement. The
servicing fee may be fixed or variable, as specified in the related Prospectus
Supplement. The Master Servicer or any Servicer will be entitled to servicing
compensation, unless otherwise specified in the related Prospectus Supplement,
in the form of assumption fees, late payment charges, or excess proceeds
following disposition of property in connection with defaulted Loans.
Unless otherwise specified in the related Prospectus Supplement, the Master
Servicer will pay the fees of the Servicers, if any, and certain expenses
incurred in connection with the servicing of the Loans, including, without
limitation, the payment of the fees and expenses of the Trustee and independent
accountants, payment of insurance policy premiums and the cost of credit
support, if any, payment of expenses incurred in enforcing the obligations of
Servicers and in preparation of reports to Certificateholders. Certain of these
expenses may be reimbursable pursuant to the terms of the Pooling and Servicing
Agreement from Liquidation Proceeds and the proceeds of insurance policies and,
in the case of enforcement of the obligations of Servicers, from any recoveries
in excess of amounts due with respect to the related Loans or from specific
recoveries of costs.
The Master Servicer will be entitled to reimbursement for certain expenses
incurred by it in connection with the liquidation of defaulted Loans. The
related Trust Fund will suffer no loss by reason of such expenses
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to the extent claims are paid under related insurance policies or from the
Liquidation Proceeds. If claims are either not made or paid under the applicable
insurance policies or if coverage thereunder has been exhausted, the related
Trust Fund will suffer a loss to the extent that Liquidation Proceeds, after
reimbursement of the Master Servicer's expenses, are less than the outstanding
principal balance of and unpaid interest on the related Loan which would be
distributable to Certificateholders. In addition, the Master Servicer will be
entitled to reimbursement of expenditures incurred by it in connection with the
restoration of property securing a defaulted Loan, such right of reimbursement
being prior to the rights of the Certificateholders to receive any related
proceeds of insurance policies, Liquidation Proceeds or amounts derived from
other credit supports. The Master Servicer is also entitled to reimbursement
from the Collection Account and the Certificate Account for Advances.
When a borrower makes a principal prepayment in full between Due Dates on
the related Loan, the borrower will generally be required to pay interest on the
amount prepaid only to the date of prepayment. If and to the extent provided in
the related Prospectus Supplement, in order that one or more Classes of the
Certificateholders of a Series will not be adversely affected by any resulting
shortfall in interest, the amount of the Servicing Fee may be reduced, to the
extent necessary to include in the Master Servicer's remittance to the Trustee
for deposit into the Certificate Account, an amount equal to a full scheduled
payment of interest on the related Loan (adjusted to the applicable Pass-Through
Rate). Any such principal prepayment, together with a full Scheduled Payment of
interest thereon at the applicable Pass-Through Rate (to the extent of such
adjustment or advance), will be distributed to Certificateholders on the related
Distribution Date. If the amount necessary to include a full Scheduled Payment
of interest as described above exceeds the amount of Servicing Fee, a shortfall
to Certificateholders may occur as a result of a prepayment in full. See "YIELD,
PREPAYMENT AND MATURITY CONSIDERATIONS."
The rights of the Master Servicer to receive funds from the Collection
Account or the Certificate Account for a Series, whether as the Servicing Fee or
other compensation, or for the reimbursement of Advances, expenses or otherwise,
are not subordinate to the rights of Certificateholders of such Series.
EVIDENCE AS TO COMPLIANCE
The Pooling and Servicing Agreement for each Series will provide that each
year, a firm of independent public accountants will furnish a statement to the
Trustee to the effect that such firm has examined certain documents and records
relating to the servicing of the Loans by the Master Servicer and that, on the
basis of such examination, such firm is of the opinion that the servicing has
been conducted in compliance with the Pooling and Servicing Agreement except for
(i) such exceptions as such firm believes to be immaterial and (ii) such other
exceptions as are set forth in such statement.
The Pooling and Servicing Agreement for each Series will also provide for
delivery to the Trustee for such Series of an annual Statement signed by an
officer of the Master Servicer to the effect that the Master Servicer has
fulfilled its obligations under the Pooling and Servicing Agreement throughout
the preceding calendar year.
CERTAIN MATTERS REGARDING THE MASTER SERVICER
The Master Servicer for each Series will be identified in the related
Prospectus Supplement. The Master Servicer may be an affiliate of the Depositor
and may have other business relationships with the Depositor and its affiliates.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer may not resign from its obligations and duties under the Pooling and
Servicing Agreement except upon its determination that its duties thereunder are
no longer permissible under applicable law. No such resignation will become
effective until the Trustee or a successor Master Servicer has assumed the
Master Servicer's obligations and duties under the Pooling and Servicing
Agreement.
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In the event of an Event of Default under the Pooling and Servicing
Agreement, the Master Servicer may be replaced by the Trustee or a successor
Master Servicer. See "THE POOLING AND SERVICING AGREEMENTS--Rights upon Events
of Default" herein.
Unless otherwise provided in the Prospectus Supplement, the Master Servicer
has the right, with the consent of the Trustee, which consent shall not be
unreasonably withheld, to assign its rights and delegate its duties and
obligations under the Pooling and Servicing Agreement for each Series; provided
that the purchaser or transferee accepting such assignment or delegation (i) is
qualified to service mortgage loans for FNMA or FHLMC, (ii) has a net worth of
not less than $15,000,000, (iii) will not cause any Rating Agency rating the
Certificates of such Series to qualify, downgrade or withdraw its rating in
effect immediately prior to such assignment, sale or transfer as a result of
such assignment, sale or transfer; and (iv) executes and delivers to the
Depositor and the Trustee an agreement, in form and substance reasonably
satisfactory to the Trustee, which contains an assumption by such purchaser or
transferee of the due and punctual performance and performed or observed by the
Master Servicer under the Pooling and Servicing Agreement from and after the
date of such agreement. To the extent that the Master Servicer transfers its
obligations to a wholly-owned subsidiary or affiliate, such subsidiary or
affiliate need not satisfy the criteria set forth above. However, in such
instance the assigning Master Servicer will remain liable for the servicing
obligations under the Pooling and Servicing Agreement. Any entity into which the
Master Servicer is merged or consolidated or any successor corporation resulting
from any merger, conversion or consolidation will succeed to the Master
Servicer's obligations under the related Pooling and Servicing Agreement,
provided that such successor or surviving entity meets the requirements for a
successor Master Servicer set forth above.
Each Pooling and Servicing Agreement will also provide that neither the
Master Servicer, nor any director, officer, employee or agent of the Master
Servicer, will be under any liability to the related Trust Fund or the
Certificateholders for any action taken or for failing to take any action in
good faith pursuant to the Pooling and Servicing Agreement or for errors in
judgment; provided, however, that neither the Master Servicer nor any such
person will be protected against any breach of warranty or representations made
under the Pooling and Servicing Agreement or the failure to perform its
obligations in compliance with any standard of care set forth in the Pooling and
Servicing Agreement or liability which would otherwise be imposed by reason of
willful misfeasance, bad faith or negligence in the performance of their duties
or by reason of reckless disregard of their obligations and duties thereunder.
Each Pooling and Servicing Agreement will further provide that the Master
Servicer and any director, officer, employee or agent of the Master Servicer is
entitled to indemnification from the related Trust Fund and will be held
harmless against any loss, liability or expense incurred in connection with any
legal action relating to the Pooling and Servicing Agreement or the
Certificates, other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence in the performance of duties
thereunder or by reason of reckless disregard of obligations and duties
thereunder. In addition, the Pooling and Servicing Agreement provides that the
Master Servicer is not under any obligation to appear in, prosecute or defend
any legal action which is not incidental to its servicing responsibilities under
the Pooling and Servicing Agreement which, in its opinion, may involve it in any
expense or liability. The Master Servicer may, in its discretion, undertake any
such action which it may deem necessary or desirable with respect to the Pooling
and Servicing Agreement and the rights and duties of the parties thereto and the
interests of the Certificateholders thereunder. In such event, the legal
expenses and costs of such action and any liability resulting therefrom will be
expenses, costs, and liabilities of the Trust Fund and the Master Servicer will
be entitled to be reimbursed therefor out of the Collection Account (or the
Certificate Account, if applicable).
CREDIT SUPPORT
GENERAL
For any Series, credit support may be provided with respect to one or more
Classes thereof or the related Mortgage Assets. Credit support may be in the
form of a letter of credit, the subordination of one or more Classes of the
Certificates of such Series, the establishment of one or more reserve funds, use
of a pool insurance policy, bankruptcy bond, repurchase bond or special hazard
insurance policy, certificate guarantee insurance, the use of cross-support
features or another method of credit support described in the related
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Prospectus Supplement, or any combination of the foregoing, in any case, in such
amounts and having such terms and conditions as are acceptable to each Rating
Agency which assigns a rating to the Certificates of the related Series.
Unless otherwise specified in the related Prospectus Supplement for a
Series, the credit support will not provide protection against all risks of loss
and will not guarantee repayment of the entire principal balance of the
Certificates and interest thereon at the Pass-Through Rate or Certificate Rate,
as applicable. If losses occur which exceed the amount covered by credit support
or which are not covered by the credit support, Certificateholders will bear
their allocable share of deficiencies. See "THE POOLING AND SERVICING
AGREEMENTS--Deficiency Event." If credit support is provided with respect to a
Series, or the related Mortgage Assets, the related Prospectus Supplement will
include a description of (a) the amount payable under such credit support, (b)
any conditions to payment thereunder not otherwise described herein, (c) the
conditions under which the amount payable under such credit support may be
reduced and under which such credit support may be terminated or replaced and
(d) the material provisions of any agreement relating to such credit support.
Additionally, the related Prospectus Supplement will set forth certain
information with respect to the issuer of any third-party credit support,
including (a) a brief description of its principal business activities, (b) its
principal place of business, place of incorporation and the jurisdiction under
which it is chartered or licensed to do business, (c) if applicable, the
identity of regulatory agencies which exercise primary jurisdiction over the
conduct of its business and (d) its total assets, and its stockholders' or
policyholders' surplus, if applicable, as of the date specified in the
Prospectus Supplement.
SUBORDINATE CERTIFICATES; SUBORDINATION RESERVE FUND
If so specified in the related Prospectus Supplement, one or more Classes of
a Series may be Subordinate Certificates. If so specified in the related
Prospectus Supplement, the rights of the Subordinate Certificateholders to
receive distributions of principal and interest from the Certificate Account on
any Distribution Date will be subordinated to such rights of the Senior
Certificateholders to the extent of the then applicable Subordinated Amount as
defined in the related Prospectus Supplement. The Subordinated Amount will
decrease whenever amounts otherwise payable to the Subordinate
Certificateholders are paid to the Senior Certificateholders (including amounts
withdrawn from the Subordination Reserve Fund, if any, and paid to the Senior
Certificateholders), and will (unless otherwise specified in the related
Prospectus Supplement) increase whenever there is distributed to the Subordinate
Certificateholders amounts in respect of which subordination payments have
previously been paid to the Senior Certificateholders (which will occur when
subordination payments in respect of delinquencies and certain other
deficiencies have been recovered).
A Series may include a Class or Subordinate Certificates entitled to receive
cash flows remaining after distributions made to all other Classes. Such right
will effectively be subordinate to the rights of other Certificateholders, but
will not be limited to the Subordinated Amount. If so specified in the related
Prospectus Supplement, the subordination of a Class may apply only in the event
of certain types of losses not covered by insurance policies or other credit
support, such as losses arising from damage to property securing a Loan not
covered by standard hazard insurance policies, losses resulting from the
bankruptcy of a borrower and application of certain provisions of the Bankruptcy
Code, or losses resulting from the denial of insurance coverage due to fraud or
misrepresentation in connection with the origination of a Loan.
With respect to any Series which includes one or more Classes of Subordinate
Certificates, a Subordination Reserve Fund may be established if so specified in
the related Prospectus Supplement. The Subordination Reserve Fund, if any, will
be funded with cash, a letter of credit, a demand note or Eligible Reserve Fund
Investments, or by the retention of amounts of principal or interest otherwise
payable to Holders of Subordinate Certificates, or both, as specified in the
related Prospectus Supplement. The Subordination Reserve Fund will not be a part
of the Trust Fund, unless otherwise specified in the related Prospectus
Supplement. If the Subordination Reserve Fund is not a part of the Trust Fund,
the Trustee will have a security interest therein on behalf of the Senior
Certificateholders. Moneys will be withdrawn from the Subordination Reserve Fund
to make distributions of principal of or interest on Senior Certificates under
the circumstances set forth in the related Prospectus Supplement.
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Moneys deposited in any Subordination Reserve Fund will be invested in
Eligible Reserve Fund Investments. Unless otherwise specified in the related
Prospectus Supplement, any reinvestment income or other gain from such
investments will be credited to the Subordination Reserve Fund for such Series,
and any loss resulting from such investments will be charged to such
Subordination Reserve Fund. Amounts in any Subordination Reserve Fund in excess
of the Required Reserve Fund Balance may be periodically released to the
Subordinate Certificateholders under the conditions and to the extent specified
in the related Prospectus Supplement. Additional information concerning any
Subordination Reserve Fund will be set forth in the related Prospectus
Supplement, including the amount of any initial deposit to such Subordination
Reserve Fund, the Required Reserve Fund Balance to be maintained therein, the
purposes for which funds in the Subordination Reserve Fund may be applied to
make distributions to Senior Certificateholders and the employment of
reinvestment earnings on amounts in the Subordination Reserve Fund, if any.
CROSS-SUPPORT FEATURES
If the Mortgage Assets for a Series are divided into separate Asset Groups,
the beneficial ownership of which is evidenced by a separate Class or Classes of
a Series, credit support may be provided by a cross-support feature which
requires that distributions be made on Senior Certificates evidencing the
beneficial ownership of one Asset Group prior to distributions on Subordinate
Certificates evidencing the beneficial ownership interest in another Asset Group
within the Trust Fund. The related Prospectus Supplement for a Series which
includes a cross-support feature will describe the manner and conditions for
applying such cross-support feature.
INSURANCE
Credit support with respect to a Series may be provided by various forms of
insurance policies, subject to limits on the aggregate dollar amount of claims
that will be payable under each such insurance policy, with respect to all Loans
comprising or underlying the Mortgage Assets for a Series, or such of the Loans
as have certain characteristics. Such insurance policies include primary
mortgage insurance and standard hazard insurance and may, if specified in the
related Prospectus Supplement, include a pool insurance policy covering losses
in amounts in excess of coverage of any primary insurance policy, a special
hazard insurance policy covering certain risks not covered by standard hazard
insurance policies, a bankruptcy bond covering certain losses resulting from the
bankruptcy of a borrower and application of certain provisions of the Bankruptcy
Code, a repurchase bond covering the repurchase of a Loan for which mortgage
insurance or hazard insurance coverage has been denied due to misrepresentations
in connection with the organization of the related Loan, or other insurance
covering other risks associated with the particular type of Loan. See
"DESCRIPTION OF MORTGAGE AND OTHER INSURANCE." Copies of the actual pool
insurance policy, special hazard insurance policy, bankruptcy bond or repurchase
bond, if any, relating to the Loans comprising the Mortgage Assets for a Series
will be filed with the Commission as an exhibit to a Current Report on Form 8-K
to be filed within 15 days of issuance of the Certificates of the related
Series.
LETTER OF CREDIT
The letter of credit, if any, with respect to a Series of Certificates will
be issued by the bank or financial institution specified in the related
Prospectus Supplement (the "L/C Bank"). Under the letter of credit, the L/C Bank
will be obligated to honor drawings thereunder in an aggregate fixed dollar
amount, net of unreimbursed payments thereunder, equal to the percentage
specified in the related Prospectus Supplement of the aggregate principal
balance of the Loans on the related Cut-off Date or of one or more Classes of
Certificates (the "L/C Percentage"). If so specified in the related Prospectus
Supplement, the letter of credit may permit drawings in the event of losses not
covered by insurance policies or other credit support, such as losses arising
from damage not covered by standard hazard insurance policies, losses resulting
from the bankruptcy of a borrower and the application of certain provisions of
the Bankruptcy Code, or losses resulting from denial of insurance coverage due
to misrepresentations in connection with the origination of a Loan. The amount
available under the letter of credit will, in all cases, be reduced to the
extent of the unreimbursed payments thereunder. The obligations of the L/C Bank
under the letter of credit for each
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Series of Certificates will expire at the earlier of the date specified in the
related Prospectus Supplement or the termination of the Trust Fund. See
"DESCRIPTION OF THE CERTIFICATES--Optional Termination" and "THE POOLING AND
SERVICING AGREEMENTS--Termination." A copy of the letter of credit for a Series,
if any, will be filed with the Commission as an exhibit to a Current Report on
Form 8-K to be filed within 15 days of issuance of the Certificates of the
related Series.
CERTIFICATE GUARANTEE INSURANCE
Certificate Guarantee Insurance, if any, with respect to a Series of
Certificates will be provided by one or more insurance companies. Such
Certificate Guarantee Insurance will guarantee, with respect to one or more
Classes of Certificates of the related Series, timely distributions of interest
and full distributions of principal on the basis of a schedule of principal
distributions set forth in or determined in the manner specified in the related
Prospectus Supplement. If so specified in the related Prospectus Supplement, the
Certificate Guarantee Insurance will also guarantee against any payment made to
a Certificateholder which is subsequently recovered as a "voidable preference"
payment under the Bankruptcy Code. A copy of the certificate guarantee insurance
for a Series, if any, will be filed with the Commission as an exhibit to a
Current Report on Form 8-K to be filed with the Commission within 15 days of
issuance of the Certificates of the related Series.
RESERVE FUNDS
One or more Reserve Funds may be established with respect to a Series, in
which cash, a letter of credit, Eligible Reserve Fund Investments, a demand note
or a combination thereof, in the amounts, if any, so specified in the related
Prospectus Supplement will be deposited. The Reserve Funds for a Series may also
be funded over time by depositing therein a specified amount of the
distributions received on the related Mortgage Assets as specified in the
related Prospectus Supplement.
Amounts on deposit in any reserve fund for a Series, together with the
reinvestment income thereon, will be applied by the Trustee for the purposes, in
the manner, and to the extent specified in the related Prospectus Supplement. A
Reserve Fund may be provided to increase the likelihood of timely payments of
principal of and interest on the Certificates, if required as a condition to the
rating of such Series by each Rating Agency rating such Series, or to reduce the
likelihood of Special Distributions with respect to any Multiple-Class Series.
If so specified in the related Prospectus Supplement, Reserve Funds may be
established to provide limited protection, in an amount satisfactory to each
Rating Agency which assigns a rating to the Certificates, against certain types
of losses not covered by insurance policies or other credit support, such as
losses arising from damage not covered by standard hazard insurance policies,
losses resulting from the bankruptcy of a borrower and the application of
certain provisions of the Bankruptcy Code or losses resulting from denial of
insurance coverage due to fraud or misrepresentation in connection with the
origination of a Loan. Following each Distribution Date amounts in such Reserve
Fund in excess of any required reserve fund balance may be released from the
Reserve Fund under the conditions and to the extent specified in the related
Prospectus Supplement and will not be available for further application by the
Trustee.
Moneys deposited in any Reserve Funds will be invested in Eligible Reserve
Fund Investments, except as otherwise specified in the related Prospectus
Supplement. Unless otherwise specified in the related Prospectus Supplement, any
reinvestment income or other gain from such investments will be credited to the
related Reserve Fund for such Series, and any loss resulting from such
investments will be charged to such Reserve Fund. However, such income may be
payable to the Master Servicer or a Servicer as additional servicing
compensation. See "SERVICING OF LOANS" and "THE POOLING AND SERVICING
AGREEMENTS--Investment of Funds." The Reserve Fund, if any, for a Series will
not be a part of the Trust Fund unless otherwise specified in the related
Prospectus Supplement.
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Additional information concerning any Reserve Fund will be set forth in the
related Prospectus Supplement, including the initial balance of such Reserve
Fund, the required Reserve Fund balance to be maintained, the purposes for which
funds in the Reserve Fund may be applied to make distributions to
Certificateholders and use of investment earnings from the Reserve Fund, if any.
DESCRIPTION OF MORTGAGE AND OTHER INSURANCE
The following descriptions of primary mortgage insurance policies, pool
insurance policies, special hazard insurance policies, standard hazard insurance
policies, bankruptcy bonds, repurchase bonds and other insurance and the
respective coverages thereunder are general descriptions only and do not purport
to be complete.
MORTGAGE INSURANCE ON THE LOANS
GENERAL. Unless otherwise specified in the related Prospectus Supplement,
all Mortgage Loans that are Conventional Loans secured by Single Family Property
and which had initial Loan-to-Value Ratios of greater than 80% will be covered
by primary mortgage insurance policies providing coverage on the amount of each
such Mortgage Loan in excess of 75% of the original Appraised Value of the
related Mortgaged Property and remaining in force until the principal balance of
such Mortgage Loan is reduced to 80% of such original Appraised Value. In
addition, each Mortgage Loan that is a Conventional Loan secured by a vacation
or second home and which had a Loan-to-Value Ratio of more than 70% at
origination will be covered by a primary mortgage insurance policy until the
principal balance of such Mortgage Loan is reduced to below 70% of Appraised
Value.
A pool insurance policy will be obtained if so specified in the related
Prospectus Supplement to cover any loss (subject to limitations described
herein) occurring as a result of default by the borrowers to the extent not
covered by any primary mortgage insurance policy, FHA Insurance or VA Guarantee.
See "Pool Insurance Policy" below. Neither the primary mortgage insurance
policies nor any pool insurance policy will insure against certain losses
sustained in the event of a personal bankruptcy of the borrower under a Mortgage
Loan. See "CERTAIN LEGAL ASPECTS OF LOANS" herein. Such losses will be covered
to the extent described in the related Prospectus Supplement by the bankruptcy
bond or other credit support, if any.
To the extent that the primary mortgage insurance policies do not cover all
losses on a defaulted or foreclosed Mortgage Loan, and to the extent such losses
are not covered by the pool insurance policy or other credit support for such
Series, such losses, if any, would affect payments to Certificateholders. In
addition, the pool insurance policy and primary mortgage insurance policies do
not provide coverage against hazard losses. See "Hazard Insurance on the Loans"
below. Certain hazard risks will not be insured and the occurrence of such
hazards could adversely affect payments to the Certificateholders.
PRIMARY MORTGAGE INSURANCE. Although the terms and conditions of primary
mortgage insurance vary, the amount of a claim for benefits under a primary
mortgage insurance policy covering a Mortgage Loan (herein referred to as the
"Insured Loss") will consist of the insured percentage (typically ranging from
12% to 25%) of the unpaid principal amount of the covered Mortgage Loan and
accrued and unpaid interest thereon and reimbursement of certain expenses, less
(i) all rents or other payments collected or received by the insured (other than
the proceeds of hazard insurance) that are derived from or in any way related to
the Mortgaged Property, (ii) hazard insurance proceeds in excess of the amount
required to restore the Mortgaged Property and which have not been applied to
the payment of the Mortgage Loan, (iii) amounts expended but not approved by the
mortgage insurer, (iv) claim payments previously made by the mortgage insurer
and (v) unpaid premiums.
Primary mortgage insurance policies reimburse certain losses sustained by
reason of defaults in payments by borrowers. Primary mortgage insurance policies
will not insure against, and exclude from coverage, a loss sustained by reason
of a default arising from or involving certain matters, including (i) fraud or
negligence in origination or servicing of the Mortgage Loans, including
misrepresentation by the originator,
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borrower or other persons involved in the origination of the Mortgage Loan; (ii)
failure to construct the Mortgaged Property subject to the Mortgage Loan in
accordance with specified plans; (iii) physical damage to the Mortgaged
Property; and (d) the related Servicer not being approved as a servicer by the
mortgage insurer.
Primary mortgage insurance policies generally contain provisions
substantially as follows: (i) under the policy, a claim includes unpaid
principal, accrued interest at the applicable loan interest rate to the date of
filing of a claim thereunder and certain advances (with a limitation on
attorneys" fees for foreclosures of 3% of the unpaid principal balance and
accumulated delinquent interest) described below; (ii) when a claim is
presented, the mortgage insurer will have the option of (a) paying the claim in
full and taking title to the property and arranging for the sale thereof or (b)
paying the insured percentage of the claim and allowing the insured to retain
title to the property; (iii) unless earlier directed by the mortgage insurer,
claims must be made within a specified period of time (typically, 60 days) after
the insured has acquired good and merchantable title to the property; and (iv) a
claim must be paid within a specific period of time (typically, 60 days) after
the claim is accepted by the mortgage insurer.
As conditions precedent to the filing of or payment of a claim under a
primary mortgage insurance policy covering a Mortgage Loan, the insured will be
required to (i) advance or discharge (a) all hazard insurance policy premiums
and (b) as necessary and approved in advance by the mortgage insurer, (1) real
estate property taxes, (2) all expenses required to maintain the related
Mortgaged Property in at least as good a condition as existed at the effective
date of such primary mortgage insurance policy, ordinary wear and tear excepted,
(3) Mortgaged Property sales expenses, (4) any outstanding liens (as defined in
such primary mortgage insurance policy) on the Mortgaged Property and (5)
foreclosure costs, including court costs and reasonable attorneys' fees; (ii) in
the event of any physical loss or damage to the Mortgaged Property, have
restored and repaired the Mortgaged Property to at least as good a condition as
existed at the effective date of such primary mortgage insurance policy,
ordinary wear and tear excepted; and (iii) tender to the mortgage insurer good
and merchantable title to and possession of the Mortgaged Property.
Other provisions and conditions of each primary mortgage insurance policy
covering a Mortgage Loan will generally include that: (a) no change may be made
in the terms of such Mortgage Loan without the consent of the mortgage insurer;
(b) written notice must be given to the mortgage insurer within 10 days after
the insured becomes aware that a borrower is delinquent in the payment of a sum
equal to the aggregate of two Scheduled Payments due under such Mortgage Loan or
that any proceedings affecting the borrower's interest in the Mortgaged Property
securing such Mortgage Loan have been commenced, and thereafter the insured must
report monthly to the mortgage insurer the status of any such Mortgage Loan
until such Mortgage Loan is brought current, such proceedings are terminated or
a claim is filed; (c) the mortgage insurer will have the right to purchase such
Mortgage Loan, at any time subsequent to the 10 days' notice described in (b)
above and prior to the commencement of foreclosure proceedings, at a price equal
to the unpaid principal amount of the Mortgage Loan plus accrued and unpaid
interest thereon at the applicable Mortgage Rate and reimbursable amounts
expended by the insured for the real estate taxes and fire and extended coverage
insurance on the Mortgaged Property for a period not exceeding 12 months and
less the sum of any claim previously paid under the policy with respect to such
Mortgage Loan and any due and unpaid premium with respect to such policy; (d)
the insured must commence proceedings at certain times specified in the policy
and diligently proceed to obtain good and merchantable title to and possession
of the Mortgaged Property; (e) the insured must notify the mortgage insurer of
the institution of such proceedings, provide it with copies of documents
relating thereto, notify the mortgage insurer of the price amounts specified in
(c) above at least 15 days prior to the sale of the Mortgaged Property by
foreclosure, and bid such amount unless the mortgage insurer specifies a lower
or higher amount; and (f) the insured may accept a conveyance of the Mortgaged
Property in lieu of foreclosure with written approval of the mortgage insurer,
provided the ability of the insured to assign specified rights to the mortgage
insurer are not thereby impaired or the specified rights of the mortgage insurer
are not thereby adversely affected.
The mortgage insurer will be required to pay to the insured either: (i) the
insured percentage of the loss; or (ii) at its option under certain of the
primary mortgage insurance policies, the sum of the delinquent Scheduled
Payments plus any advances made by the insured, both to the date of the claim
payment, and
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thereafter, Scheduled Payments in the amount that would have become due under
the Mortgage Loan if it had not been discharged plus any advances made by the
insured until the earlier of (a) the date the Mortgage Loan would have been
discharged in full if the default had not occurred, or (b) an approved sale. Any
rents or other payments collected or received by the insured which are derived
from or are in any way related to the Mortgaged Property will be deducted from
any claim payment.
FHA INSURANCE AND VA GUARANTEES. The FHA is responsible for administering
various federal programs, including mortgage insurance, authorized under the
Housing Act, as amended, and the United States Housing Act of 1937, as amended.
The insurance premiums for FHA Loans will be collected by HUD-approved
lenders or by the Master Servicer or Servicer and paid to the FHA. The
regulations governing FHA single-family mortgage insurance programs provide that
insurance benefits are payable either upon foreclosure (or other acquisition of
possession) and conveyance of the mortgaged premises to HUD or upon assignment
of the defaulted Mortgage Loan to HUD. With respect to a defaulted FHA Loan, the
Master Servicer or Servicer is limited in its ability to initiate foreclosure
proceedings. When it is determined, by the Master Servicer or Servicer or HUD,
that default was caused by circumstances beyond the mortgagor's control, the
Master Servicer or Servicer is expected to make an effort to avoid foreclosure
by entering, if feasible, into one of a number of available forms of forbearance
plans with the mortgagor. Such plans may involve the reduction or suspension of
Scheduled Payments for a specified period, with such payments to be made upon or
before the maturity date of the Mortgage Note, or the recasting of payments due
under the Mortgage Note up to or beyond the scheduled maturity date. In
addition, when a default caused by such circumstances is accompanied by certain
other criteria, HUD may provide relief by making payments to the Master Servicer
or the Servicer in partial or full satisfaction of amounts due under the
Mortgage Loan (which payments are to be repaid by the borrower to HUD) or by
accepting assignment of the Mortgage Loan from the Master Servicer or the
Servicer. With certain exceptions, at least three full installments must be due
and unpaid under the Mortgage Loan, and HUD must have rejected any request for
relief from the mortgagor before the Master Servicer or the Servicer may
initiate foreclosure proceedings.
HUD has the option, in most cases, to pay insurance claims in cash or in
debentures issued by HUD. Presently, claims are being paid in cash, and claims
have not been paid in debentures since 1965. HUD debentures issued in
satisfaction of FHA insurance claims bear interest at the applicable HUD
debenture interest rate. The Master Servicer or the Servicer of each FHA Loan
will be obligated to purchase any such debenture issued in satisfaction of a
defaulted FHA Loan serviced by it for an amount equal to the unpaid principal
balance of the FHA Loan.
The amount of insurance benefits generally paid by the FHA is equal to the
entire unpaid principal amount of the defaulted Mortgage Loan adjusted to
reimburse the Master Servicer or the Servicer for certain costs and expenses and
to deduct certain amounts received or retained by the Master Servicer or the
Servicer after default. When entitlement to insurance benefits results from
foreclosure (or other acquisition of possession) and conveyance to HUD, the
Master Servicer or the Servicer is compensated for no more than two-thirds of
its foreclosure costs, and is compensated for interest accrued and unpaid prior
to such date but in general only to the extent it was allowed pursuant to a
forbearance plan approved by HUD. When entitlement to insurance benefits results
from assignment of the Mortgage Loan to HUD, the insurance payment includes full
compensation for interest accrued and unpaid to the assignment date. The
insurance payment itself, upon foreclosure of an FHA Loan, bears interest from a
date 30 days after the borrower's first uncorrected failure to perform any
obligation or make any payment due under the Mortgage Loan and, upon assignment,
from the date of assignment, to the date of payment of the claim, in each case
at the same mortgage rate as the applicable HUD debenture interest rate as
described above.
With respect to a defaulted VA Loan, the Master Servicer or the Servicer is,
absent exceptional circumstances, authorized to announce its intention to
foreclose only when the default has continued for three months. Generally, a
claim for the guarantee is submitted after liquidation of the mortgaged
property.
The amount payable under the guarantee will be the percentage of the VA Loan
originally guaranteed applied to indebtedness outstanding as of the applicable
date of computation as specified in the VA
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regulations. Payments under the guarantee will equal the unpaid principal amount
of the VA Loan, interest accrued on the unpaid balance of the VA Loan to the
appropriate date of computation and limited expenses of the mortgagee, but in
each case only to the extent that such amounts have not been recovered through
liquidation of the Mortgaged Property. The amount payable under the guarantee
may in no event exceed the amount of the original guarantee.
The maximum guarantee that may be issued by the VA under a VA Loan as of
January 1, 1986 is the lesser of 60% of the original principal amount of the VA
Loan or $27,500. The liability on the guarantee is reduced or increased pro rata
with any reduction or increase in the amount of indebtedness, but in no event
will the amount payable on the guarantee exceed the amount of the original
guarantee. The VA may, at its option and without regard to the guarantee, make
full payment to a mortgagee of unsatisfied indebtedness on a mortgage upon its
assignment to the VA.
POOL INSURANCE POLICY. If so specified in the related Prospectus
Supplement, the Master Servicer will be required to maintain the pool insurance
policy and to present or cause the Servicers, if any, to present claims
thereunder on behalf of the Trustee and the Certificateholders. See "SERVICING
OF LOANS--Maintenance of Insurance Policies and Other Servicing Procedures."
Although the terms and conditions of pool insurance policies vary to some
degree, the following describes material aspects of such policies generally. The
related Prospectus Supplement will describe any provisions of a pool insurance
policy which are materially different from those described below.
The responsibilities of the Master Servicer, the amount of claim for
benefits, the conditions precedent to the filing or payment of a claim, the
policy provisions and the payment of claims under a pool insurance policy are
generally similar to those described above for primary mortgage insurance
policies, subject to the aggregate limit on the amount of coverage. It may also
be a condition precedent to the payment of any claim under the pool insurance
policy that the insured maintain a primary mortgage insurance policy that is
acceptable to the pool insurer on all Mortgage Loans in the related Trust Fund
that have Loan-to-Value Ratios at the time of origination in excess of 80% and
that a claim under such primary mortgage insurance policy has been submitted and
settled. FHA Insurance and VA Guarantees will be deemed to be acceptable primary
insurance policies under the pool insurance policy. Assuming satisfaction of
these conditions, the pool insurer will pay to the insured the amount of the
loss which will generally be: (i) the amount of the unpaid principal balance of
the defaulted Mortgage Loan immediately prior to the sale of the Mortgaged
Property, (ii) the amount of the accumulated unpaid interest on such Mortgage
Loan to the date of claim settlement at the contractual rate of interest and
(iii) advances made by the insured as described above less certain payments. An
"approved sale" is (i) a sale of the Mortgaged Property acquired by the insured
because of a default by the borrower to which the pool insurer has given prior
approval, (ii) a foreclosure or trustee's sale of the Mortgaged Property at a
price exceeding the maximum amount specified by the pool insurer, (iii) the
acquisition of the Mortgaged Property under the primary mortgage insurance
policy by the mortgage insurer or (iv) the acquisition of the Mortgaged Property
by the pool insurer.
As a condition precedent to the payment of any loss, the insured must
provide the pool insurer with good and merchantable title to the Mortgaged
Property. If any Mortgaged Property securing a defaulted Mortgage Loan is
damaged and the proceeds, if any, from the related standard hazard insurance
policy or the applicable special hazard insurance policy, if any, are
insufficient to restore the damaged Mortgaged Property to a condition sufficient
to permit recovery under the pool insurance policy, the Master Servicer will not
be required to expend its own funds to restore the damaged property unless it
determines (i) that such restoration will increase the proceeds to the
Certificateholders on liquidation of the Mortgage Loan after reimbursement of
the Master Servicer for its expenses and (ii) that such expenses will be
recoverable by it through liquidation proceeds or insurance proceeds.
The original amount of coverage under the pool insurance policy will be
reduced over the life of the Certificates by the aggregate net dollar amount of
claims paid less the aggregate net dollar amount realized by the pool insurer
upon disposition of all foreclosed Mortgaged Properties covered thereby. The
amount of claims paid includes certain expenses incurred by the Master Servicer
as well as accrued interest at the applicable interest rate on delinquent
Mortgage Loans to the date of payment of the claim. See "CERTAIN
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LEGAL ASPECTS OF LOANS" herein. Accordingly, if aggregate net claims paid under
a pool insurance policy reach the original policy limit, coverage under the pool
insurance policy will lapse and any further losses will be borne by the Trust
Fund, and thus will affect adversely payments on the Certificates. In addition,
the exhaustion of coverage under any pool insurance policy may affect the Master
Servicer's or Servicer's willingness or obligation to make Advances. If the
Master Servicer or a Servicer determines that an Advance in respect of a
delinquent Loan would not be recoverable from the proceeds of the liquidation of
such Loan or otherwise, it will not be obligated to make an advance respecting
any such delinquency since the Advance would not be ultimately recoverable by
it. See "SERVICING OF LOANS--Advances and Limitations Thereon."
MORTGAGE INSURANCE WITH RESPECT TO MANUFACTURED HOME LOANS. A Manufactured
Home Loan may be an FHA Loan or a VA Loan. Any primary mortgage or similar
insurance and any pool insurance policy with respect to Manufactured Home Loans
will be described in the related Prospectus Supplement.
HAZARD INSURANCE ON THE LOANS
STANDARD HAZARD INSURANCE POLICIES. The standard hazard insurance policies
will provide for coverage at least equal to the applicable state standard form
of fire insurance policy with extended coverage for property of the type
securing the related Loans. In general, the standard form of fire and extended
coverage policy will cover physical damage to or destruction of, the
improvements on the property caused by fire, lightning, explosion, smoke,
windstorm, hail, riot, strike and civil commotion, subject to the conditions and
exclusions particularized in each policy. Because the standard hazard insurance
policies relating to the Loans will be underwritten by different hazard insurers
and will cover properties located in various states, such policies will not
contain identical terms and conditions. The basic terms, however, generally will
be determined by state law and generally will be similar. Most such policies
typically will not cover any physical damage resulting from war, revolution,
governmental actions, floods and other water-related causes, earth movement
(including earthquakes, landslides, and mud-flows), nuclear reaction, 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. Uninsured risks not covered by a
special hazard insurance policy or other form of credit support will adversely
affect distributions to Certificateholders. When a property securing a Loan is
located in a flood area identified by HUD pursuant to the Flood Disaster
Protection Act of 1973, as amended, the Master Servicer will be required to
cause flood insurance to be maintained with respect to such property, to the
extent available.
The standard hazard insurance policies covering properties securing Loans
typically will contain a "coinsurance" clause which, in effect, will require the
insured at all times to carry hazard insurance of a specified percentage
(generally 80% to 90%) of the full replacement value of the dwellings,
structures and other improvements on the Mortgaged Property in order to recover
the full amount of any partial loss. If the insured's coverage falls below this
specified percentage, such clause will provide that the hazard insurer's
liability in the event of partial loss will not exceed the greater of (i) the
actual cash value (the replacement cost less physical depreciation) of the
dwellings, structures and other improvements damaged or destroyed or (ii) such
proportion of the loss, without deduction for depreciation, as the amount of
insurance carried bears to the specified percentage of the full replacement cost
of such dwellings, structures and other improvements on the Mortgaged Property.
Since the amount of hazard insurance to be maintained on the improvements
securing the Loans declines as the principal balances owing thereon decrease,
and since the value of residential real estate in the areas which the Mortgaged
Property is located fluctuates in value over time, the effect of this
requirement in the event of partial loss may be that hazard insurance proceeds
will be insufficient to restore fully the damage to the Mortgaged Property.
The Depositor will not require that a standard hazard or flood insurance
policy be maintained for any Cooperative Loan. Generally, the Cooperative 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 either the
Cooperative or the related borrower do not maintain such insurance, or do not
maintain adequate coverage, or do not apply any
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insurance proceeds to the restoration of damaged property, then damage to such
borrower's Cooperative Dwelling or such Cooperative's building could
significantly reduce the value of the Mortgaged Property securing such
Cooperative Loan. Similarly, the Depositor will not require that a standard
hazard or flood insurance policy be maintained for any Condominium Loan.
Generally, the Condominium Association is responsible for maintenance of hazard
insurance for the Condominium Building (including the individual Condominium
Units) and the owner(s) of an individual Condominium Unit do not maintain
separate hazard insurance policies. To the extent, however, that either the
Condominium Association or the related borrower do not maintain such insurance,
or do not maintain adequate coverage, or do not apply any insurance proceeds to
the restoration of damaged property, then damage to such borrower's Condominium
Unit or such Condominium Building could significantly reduce the value of the
Mortgaged Property securing such Condominium Loan.
SPECIAL HAZARD INSURANCE POLICY. Although the terms of such policies vary
to some degree, a special hazard insurance policy typically provides that, where
there has been damage to property securing a defaulted or foreclosed Loan (title
to which has been acquired by the insured) and to the extent such damage is not
covered by the standard hazard insurance policy or any flood insurance policy,
if applicable, required to be maintained with respect to such property, or in
connection with partial loss resulting from the application of the coinsurance
clause in a standard 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 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 by the Master Servicer or the
Servicer 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 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 of the property will reduce coverage by such
amount. Special hazard insurance policies typically do 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 in a federally designated
flood area), chemical contamination and certain other risks.
Restoration of the property with the proceeds described under (i) above is
expected to satisfy the condition under the pool insurance policy that the
property be restored before a claim under such pool insurance policy may be
validly presented with respect to the defaulted Loan secured by such property.
The payment described under (ii) above will render unnecessary presentation of a
claim in respect of such Loan under the pool insurance policy. Therefore, so
long as the pool insurance policy remains in effect, the payment by the special
hazard insurer of the cost of repair or of the unpaid principal balance of the
related Loan plus accrued interest and certain expenses will not affect the
total insurance proceeds paid to holders of the Certificates, but will affect
the relative amounts of coverage remaining under the special hazard insurance
policy and pool insurance policy.
OTHER HAZARD-RELATED INSURANCE; LIABILITY INSURANCE. With respect to Loans
secured by Multifamily Property, certain additional insurance policies may be
required with respect to the Multifamily Property; for example, general
liability insurance for bodily injury and property damage, steam boiler coverage
where a steam boiler or other pressure vessel is in operation, and rent loss
insurance to cover operating income losses following damage or destruction of
the Mortgaged Property. With respect to a Series for which Loans secured by
Multifamily Property are included in the Trust Fund, the related Prospectus
Supplement will specify the required types and amounts of additional insurance
and describe the general terms of such insurance and conditions to payment
thereunder.
BANKRUPTCY BOND
In the event of a bankruptcy of a borrower, the bankruptcy court may
establish the value of the property securing the related Loan at an amount less
than the then outstanding principal balance of such Loan. The amount of the
secured debt could be reduced to such value, and the holder of such Loan thus
would become an unsecured creditor to the extent the outstanding principal
balance of such Loan exceeds the value so
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assigned to the property by the bankruptcy court. In addition, certain other
modifications of the terms of a Loan can result from a bankruptcy proceeding.
See "CERTAIN LEGAL ASPECTS OF LOANS" herein. If so provided in the related
Prospectus Supplement, the Master Servicer 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 Loan or a reduction by such court of the
principal amount of a 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 for all Loans in the Trust Fund secured by
single unit primary residences. Such amount will be reduced by payments made
under such bankruptcy bond in respect of such Loans, unless otherwise specified
in the related Prospectus Supplement, and will not be restored.
REPURCHASE BOND
If so specified in the related Prospectus Supplement, the Depositor or
Master Servicer will be obligated to repurchase any Loan (up to an aggregate
dollar amount specified in the related Prospectus Supplement) for which
insurance coverage is denied due to dishonesty, misrepresentation or fraud in
connection with the origination or sale of such Loan. Such obligation may be
secured by a surety bond guaranteeing payment of the amount to be paid by the
Depositor or the Master Servicer.
THE POOLING AND SERVICING AGREEMENTS
The following summaries describe certain provisions of the Pooling and
Servicing Agreements. The summaries do not purport to be complete and are
subject to, and qualified in their entirety by reference to, the provisions of
the Pooling and Servicing Agreements. Where particular provisions or terms used
in the Pooling and Servicing Agreements are referred to, such provisions or
terms are as specified in the Pooling and Servicing Agreements.
ASSIGNMENT OF MORTGAGE ASSETS
GENERAL. The Depositor will transfer, convey and assign to the Trustee all
right, title and interest of the Depositor in the Mortgage Assets and other
property to be included in the Trust Fund for a Series. Such assignment will
include all principal and interest due on or with respect to the Mortgage Assets
after the Cut-off Date specified in the related Prospectus Supplement (except
for any Retained Interests). The Trustee will, concurrently with such
assignment, execute and deliver the Certificates.
ASSIGNMENT OF PRIVATE MORTGAGE-BACKED SECURITIES. The Depositor will cause
Private Mortgage-Backed Securities to be registered in the name of the Trustee
(or its nominee or correspondent). The Trustee (or its agent or correspondent)
will have possession of any certificated Private Mortgage-Backed Securities.
Unless otherwise specified in the related Prospectus Supplement, the Trustee
will not be in possession of or be assignee of record of any underlying assets
for a Private Mortgage-Backed Security. See "THE TRUST FUNDS--Private
Mortgage-Backed Securities" herein. Each Private Mortgage-Backed Security will
be identified in a schedule appearing as an exhibit to the related Pooling and
Servicing Agreement (the "Mortgage Certificate Schedule"), which will specify
the original principal amount, outstanding principal balance as of the Cut-off
Date, annual pass-through rate or interest rate and maturity date for each
Private Mortgage-Backed Security conveyed to the Trustee. In the Pooling and
Servicing Agreement, the Depositor will represent and warrant to the Trustee
regarding the Private Mortgage-Backed Securities: (i) that the information
contained in the Mortgage Certificate Schedule is true and correct in all
material respects; (ii) that, immediately prior to the conveyance of the Private
Mortgage-Backed Securities, the Depositor had good title thereto, and was the
sole owner thereof (subject to any Retained Interests); (iii) that there has
been no other sale by it of such Private Mortgage-Backed Securities and (iv)
that there is no existing lien, charge, security interest or other encumbrance
(other than any Retained Interest) on such Private Mortgage-Backed Securities.
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ASSIGNMENT OF AGENCY SECURITIES. The Depositor will cause the Agency
Securities to be registered in the name of the Trustee (or its nominee or
correspondent). The Trustee (or its agent or correspondent) will have possession
of any certificated Agency Security.
ASSIGNMENT OF MORTGAGE LOANS. In addition, the Depositor will, as to each
Mortgage Loan, deliver or cause to be delivered to the Trustee, or, as specified
in the related Prospectus Supplement, the Custodian, the Mortgage Note endorsed
without recourse to the order of the Trustee or in blank, the original Mortgage
with evidence of recording indicated thereon (except for any Mortgage not
returned from the public recording office, in which case a copy of such Mortgage
will be delivered, together with a certificate that the original of such
mortgage was delivered to such recording office) and an assignment of the
Mortgage in recordable form. The Trustee, or, if so specified in the related
Prospectus Supplement, the Custodian, will hold such documents in trust for the
benefit of the Certificateholders.
If so specified in the related Prospectus Supplement, the Depositor will, at
the time of delivery of the Certificates, cause assignments to the Trustee of
the Mortgage Loans to be recorded in the appropriate public office for real
property records, except in states where, in the opinion of counsel acceptable
to the Trustee, such recording is not required to protect the Trustee's interest
in the Mortgage Loan. If specified in the related Prospectus Supplement, the
Depositor will cause such assignments to be so recorded within the time after
delivery of the Certificates as is specified in the related Prospectus
Supplement, in which event, the Pooling and Servicing Agreement may, as
specified in the related Prospectus Supplement, require the Depositor to
repurchase from the Trustee any Mortgage Loan required to be recorded but not
recorded within such time, at the price described above with respect to
repurchase by reason of defective documentation. Unless otherwise provided in
the related Prospectus Supplement, the enforcement of the repurchase obligation
would constitute the sole remedy available to the Certificateholders or the
Trustee for the failure of a Mortgage Loan to be recorded.
With respect to any Mortgage Loans which are Cooperative Loans, the
Depositor will cause to be delivered to the Trustee, its agent, or a custodian,
the related original cooperative note endorsed to the order of the Trustee, the
original security agreement, the proprietary lease or occupancy agreement, the
recognition agreement, an executed financing agreement and the relevant stock
certificate and related blank stock powers. The Depositor will file in the
appropriate office an assignment and a financing statement evidencing the
Trustee's security interest in each Cooperative Loan.
Each Mortgage Loan will be identified in a schedule appearing as an exhibit
to the Trust Agreement (the "Mortgage Loan Schedule"). Such Mortgage Loan
Schedule will specify the number of Mortgage Loans which are Cooperative Loans
and, with respect to each Mortgage Loan: the original principal amount and
unpaid principal balance as of the Cut-off Date; the current interest rate; the
current Scheduled Payment of principal and interest; the maturity date of the
related mortgage note; if the Mortgage Loan is an ARM, the Lifetime Mortgage
Rate Cap, if any, and the current Index; and, if the Mortgage Loan is a GPM
Loan, a CEM Loan, a Buy-Down Loan or a Mortgage Loan with other than fixed
Scheduled Payments and level amortization, the terms thereof.
ASSIGNMENT OF MANUFACTURED HOME LOANS. The Depositor will cause any
Manufactured Home Loans included in the Mortgage Assets for a Series of
Certificates to be assigned to the Trustee, together with principal and interest
due on or with respect to the Manufactured Home Loans after the Cut-off Date
specified in the related Prospectus Supplement. Each Manufactured Home Loan will
be identified in a loan schedule (the "Loan Schedule") appearing as an exhibit
to the related Pooling and Servicing Agreement. Such Loan Schedule will specify,
with respect to each Manufactured Home Loan, among other things: the original
principal balance and the outstanding principal balance as of the close of
business on the Cut-off Date; the interest rate; the current Scheduled Payment
of principal and interest; and the maturity date of the Manufactured Home Loan.
In addition, with respect to each Manufactured Home Loan, the Depositor will
deliver or cause to be delivered to the Trustee, or, as specified in the related
Prospectus Supplement, the custodian, the original Manufactured Home Loan and
copies of documents and instruments related to each Manufactured Home Loan and
the security interest in the Manufactured Home securing each Manufactured Home
Loan. To give
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notice of the right, title and interest of the Certificateholders to the
Manufactured Home Loans, the Depositor will cause a UCC-1 financing statement to
be filed identifying the Trustee as the secured party and identifying all
Manufactured Home Loans as collateral. Unless otherwise specified in the related
Prospectus Supplement, the Manufactured Home Loans will not be stamped or
otherwise marked to reflect their assignment from the Depositor to the Trustee.
Therefore, if a subsequent purchaser were able to take physical possession of
the Manufactured Home Loans without notice of such assignment, the interest of
the Certificateholders in the Manufactured Home Loans could be defeated. See
"CERTAIN LEGAL ASPECTS OF LOANS--Manufactured Home Loans."
The Depositor will provide limited representations and warranties to the
Trustee concerning the Manufactured Home Loans. Such representations and
warranties will include: (i) that the information contained in the Loan Schedule
provides an accurate listing of the Manufactured Home Loans and that the
information respecting such Manufactured Home Loans set forth in such 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 Manufactured Home Loans, the Depositor had good title to,
and was sole owner of, each such Manufactured Home Loan (subject to any Retained
Interests); (iii) that there has been no other sale by it of such Manufactured
Home Loans and that the Manufactured Home Loan is not subject to any lien,
charge, security interest or other encumbrance; (iv) if the Master Servicer will
not directly service the Manufactured Home Loans, each Servicing Agreement
entered into with a Servicer with respect to Manufactured Home Loans comprising
the Mortgage Assets has been assigned and conveyed to the Trustee and is not
subject to any offset, counterclaim, encumbrance or other charge; and (v) the
Depositor has obtained from each of the Master Servicer, the Servicer, the
originator of the Manufactured Home Loans or such other entity that is the
seller of the related Manufactured Home Loan representations and warranties
relating to certain information respecting the origination of and current status
of the Manufactured Home Loans, and has no knowledge of any fact which would
cause it to believe that such representations and warranties are inaccurate in
any material respect. See "LOAN UNDERWRITING PROCEDURES AND STANDARDS" herein.
ASSIGNMENT OF PARTICIPATION CERTIFICATES. The Depositor will cause any
Participation Certificates obtained under a participation agreement to be
assigned to the Trustee by delivering to the Trustee the Participation
Certificate, which will be reregistered in the name of the Trustee. Unless
otherwise specified in the related Prospectus Supplement, the Trustee will not
be in possession of or be assignee of record with respect to the Loans
represented by the Participation Certificate. Each Participation Certificate
will be identified in a "Participation Certificate Schedule" which will specify
the original principal balance, outstanding principal balance as of the Cut-off
Date, pass-through rate and maturity date for each Participation Certificate. In
the Pooling and Servicing Agreement, the Depositor will represent and warrant to
the Trustee regarding the Participation Certificate: (i) that the information
contained in the Participation Certificate Schedule is true and correct in all
material respects; (ii) that, immediately prior to the conveyance of the
Participation Certificates, the Depositor had good title to and was sole owner
of the Participation Certificate; (iii) that there has been no other sale by it
of such Participation Certificate and (iv) that such Participation Certificate
is not subject to any existing lien, charge, security interest or other
encumbrance (other than any Retained Interests).
REPURCHASE AND SUBSTITUTION OF NON-CONFORMING LOANS
Unless otherwise provided in the related Prospectus Supplement, if any
document in the Loan file delivered by the Depositor to the Trustee is found by
the Trustee within 90 days of the execution of the related Pooling and Servicing
Agreement (or promptly after the Trustee's receipt of any document permitted to
be delivered after the Closing Date) to be defective in any material respect and
the related Servicer does not cure such defect within 60 days from the date the
Master Servicer was notified of the defect by the Trustee, or within such other
period specified in the related Prospectus Supplement, the related Servicer if,
and to the extent it is obligated to do so under the related servicing agreement
will, not later than 90 days or within such other period specified in the
related Prospectus Supplement, from the date the Master Servicer was notified of
the defect by the Trustee, repurchase the related Mortgage Loan or any property
acquired in
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respect thereof from the Trustee at a price equal to the outstanding principal
balance of such Mortgage Loan (or, in the case of a foreclosed Mortgage Loan,
the outstanding principal balance of such Mortgage Loan immediately prior to
foreclosure), plus accrued and unpaid interest to the date of the next scheduled
payment on such Mortgage Loan at the related Pass-Through Rate or Certificate
Rate.
Unless otherwise provided in the related Prospectus Supplement, the Master
Servicer may, rather than repurchase the Loan as described above, remove such
Loan from the Trust Fund (the "Deleted Loan") and substitute in its place one or
more other Loans (each, a "Qualified Substitute Mortgage Loan") provided,
however, that (i) with respect to a Trust Fund for which no REMIC election is
made, such substitution must be effected within 90 days of the date of initial
issuance of the Certificates and (ii) with respect to a Trust Fund for which a
REMIC election is made, the Trustee must have received a satisfactory opinion of
counsel that such substitution will not cause the Trust Fund to lose its status
as a REMIC.
Any Qualified Substitute Mortgage Loan will have, on the date of
substitution, (i) an outstanding principal balance, after deduction of all
Scheduled Payments due in the month of substitution, not in excess of the
outstanding principal balance of the Deleted Loan (the amount of any shortfall
to be deposited to the Certificate Account in the month of substitution for
distribution to Certificateholders), (ii) an interest rate not less than (and
not more than 2% greater than) the interest rate of the Deleted Loan, (iii) a
remaining term-to-stated maturity not greater than (and not more than one year
less than) that of the Deleted Loan, and will (iv) comply with all of the
representations and warranties set forth in the applicable agreement as of the
date of substitution.
Unless otherwise provided in the related Prospectus Supplement, the
above-described cure, repurchase or substitution obligations constitute the sole
remedies available to the Certificateholders or the Trustee for a material
defect in a Loan document.
Unless otherwise specified in the related Prospectus Supplement, the
Depositor will make representations and warranties with respect to Loans which
comprise the Mortgage Assets for a Series. See "LOAN UNDERWRITING PROCEDURES AND
STANDARDS--Representations and Warranties" above. If the related Servicer cannot
cure a breach of any such representations and warranties in all material
respects within 60 days after notification by the Master Servicer of such
breach, and if such breach is of a nature that adversely affects the payments of
principal and interest on the Loan or otherwise adversely and materially affects
the value of such Loan, the Servicer is obligated to substitute or repurchase
the affected Mortgage Loan if such Servicer is required to do so under the
applicable servicing agreement.
REPORTS TO CERTIFICATEHOLDERS
The Master Servicer will prepare and will forward or will provide to the
Trustee for forwarding to each Certificateholder on each Distribution Date, or
as soon thereafter as is practicable, a statement setting forth, to the extent
applicable to any Series as specified in the related Pooling and Servicing
Agreement, among other things:
(i) as applicable, either (A) the amount of such distribution allocable
to principal on the Mortgage Assets, separately identifying the aggregate
amount of any principal prepayments included therein and the amount, if any,
advanced by the Master Servicer or by a Servicer or (B) the amount of the
principal distribution in reduction of stated principal amount (or Compound
Value) of each Class and the aggregate unpaid principal amount (or Compound
Value) of each Class following such distribution;
(ii) as applicable, either (A) the amount of such distribution allocable
to interest on the Mortgage Assets and the amount, if any, advanced by the
Master Servicer or a Servicer or (B) the amount of the interest
distribution;
(iii) the amount of servicing compensation with respect to the Mortgage
Assets paid during the Due Period commencing on the Due Date to which such
distribution relates and the amount of servicing compensation during such
period attributable to penalties and fees;
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(iv) with respect to Compound Interest Certificates, prior to the
Accrual Termination Date in addition to the information specified in (i)(B)
above, the amount of interest accrued on such Certificates during the
related Interest Accrual Period and added to the Compound Value thereof;
(v) in the case of Floating Interest Certificates, the Floating Rate
applicable to the distribution being made;
(vi) if applicable, the amount of any shortfall (i.e., the difference
between the aggregate amounts of principal and interest which
Certificateholders would have received if there were sufficient eligible
funds in the Certificate Account and the amounts actually distributed);
(vii) if applicable, the number and aggregate principal balances of Loans
delinquent for (A) two consecutive payments and (B) three or more
consecutive payments, as of the close of business on the Determination Date
to which such distribution relates;
(viii) if applicable, the book value of any REO Property acquired on
behalf of Certificateholders through foreclosure, grant of a deed in lieu of
foreclosure or repossession as of the close of business on the Business Day
preceding the Distribution Date to which such distribution relates;
(ix) if applicable, the amount of coverage under any pool insurance
policy as of the close of business on the applicable Distribution Date;
(x) if applicable, the amount of coverage under any special hazard
insurance policy as of the close of business on the applicable Distribution
Date;
(xi) if applicable, the amount of coverage under any bankruptcy bond as
of the close of business on the applicable Distribution Date;
(xii) in the case of any other credit support described in the related
Prospectus Supplement, the amount of coverage of such credit support as of
the close of business on the applicable Distribution Date;
(xiii) in the case of any Series which includes a Subordinate Class, the
Subordinated Amount, if any, determined as of the related Determination Date
and if the distribution to the Senior Certificateholders is less than their
required distribution, the amount of the shortfall;
(xiv) the amount of any withdrawal from any applicable Reserve Fund
included in amounts actually distributed to Certificateholders and the
remaining balance of each Reserve Fund (including any Subordination Reserve
Fund), if any, on such Distribution Date, after giving effect to
distributions made on such date; and
(xv) such other information as specified in the related Pooling and
Servicing Agreement.
In addition, within a reasonable period of time after the end of each
calendar year the Master Servicer, unless otherwise specified in the related
Prospectus Supplement, will furnish to each Certificateholder of record at any
time during such calendar year a report summarizing the items provided to
Certificateholders as specified in the Pooling and Servicing Agreement to enable
Certificateholders to prepare their tax returns including, without limitation,
the amount of original issue discount accrued on the Certificates, if
applicable. Information in the Distribution Date and annual reports provided to
the Certificateholders will not have been examined and reported upon by an
independent public accountant. However, the Master Servicer will provide to the
Trustee a report by independent public accountants with respect to the Master
Servicer's servicing of the Loans. See "SERVICING OF LOANS--Evidence as to
Compliance" herein.
INVESTMENT OF FUNDS
The Certificate Account, Collection Account or Custodial Account, if any,
and any other funds and accounts for a Series that may be invested by the
Trustee or by the Master Servicer or by the Servicer, if any, can be invested
only in Eligible Investments acceptable to each Rating Agency rating such
Series, which may include, without limitation, (i) direct obligations of, and
obligations fully guaranteed by, the United States of
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America, or any agency of the United States of America, the obligations of which
are backed by the full faith and credit of the United States of America; (ii)
general obligations of or obligations guaranteed by any state of the United
States of America or the District of Columbia receiving one of the two highest
long-term ratings of each Rating Agency, or such lower ratings as will not
result in the downgrading or withdrawal of the ratings then assigned to the
Certificates by each Rating Agency; (iii) commercial paper which is then rated
in the highest commercial paper rating categories of each Rating Agency, or such
lower category as will not result in the downgrading or withdrawal of the
ratings then assigned to the Certificates by each Rating Agency; (iv)
certificates of deposit, demand or time deposits, federal funds or bankers'
acceptances issued by any depository institution or trust company incorporated
under the laws of the United States of America or of any state thereof and
subject to supervision and examination by federal and/or state banking
authorities, provided that the commercial paper and/or long term debt
obligations of such depository institution or trust company (or in the case of
the principal depository institution in a holding company system, the commercial
paper or long term debt obligations of such holding company) are then rated in
the highest rating category of each Rating Agency, in the case of commercial
paper, or in the second highest category in the case of long term debt
obligations; (v) demand or time deposits or certificates of deposit issued by
any bank or trust company or savings and loan association and fully insured by
the FDIC; (vi) guaranteed reinvestment agreements issued by any bank, insurance
company or other corporation which do not adversely affect the rating on the
Certificates of such Series at the time of the issuance of or investing in such
guaranteed reinvestment agreements; (vii) repurchase obligations with respect to
any security described in (i) and (ii) above or any other security issued or
guaranteed by an agency or instrumentality of the United States of America, in
either case entered into with a depository institution or trust company (acting
as principal) described in (iv) above; (viii) securities bearing interest or
sold at a discount issued by any corporation incorporated under the laws of the
United States of America or any state thereof which, at the time of such
investment or contractual commitment providing for such investments are then
rated in one of the two highest categories of each Rating Agency, or in such
lower rating category as will not result in the downgrading or withdrawal of the
ratings then assigned to the Certificates of such Series by each Rating Agency;
and (ix) such other investments which do not adversely affect the rating on the
Certificates of such Series as confirmed in writing by each Rating Agency.
Funds held in a Reserve Fund or Subordinated Reserve Fund may be invested in
certain Eligible Reserve Fund Investments which may include Eligible
Investments, mortgage loans, mortgage pass-through or participation securities,
mortgage-backed bonds or notes or other investments to the extent specified in
the related Prospectus Supplement.
Eligible Investments or Eligible Reserve Fund Investments with respect to a
Series will include only obligations or securities that mature on or before the
date on which the amounts in the Collection Account are required to be remitted
to the Trustee and amounts in the Certificate Account, any Reserve Fund or the
Subordinated Reserve Fund for such Series are required or may be anticipated to
be required to be applied for the benefit of Certificateholders of such Series.
If so provided in the related Prospectus Supplement, the reinvestment income
from the Subordination Reserve Fund, other Reserve Fund, Servicer Account,
Collection Account or the Certificate Account may be property of the Master
Servicer or a Servicer and not available for distributions to
Certificateholders. See "SERVICING OF LOANS" herein.
EVENT OF DEFAULT
Events of Default under the Pooling and Servicing Agreement for each Series
include (i) any failure by the Master Servicer to distribute to
Certificateholders of such Series any required payment which continues
unremedied for five business days, or one business day for certain other
required payments, after the giving of written notice of such failure to the
Master Servicer by the Trustee or the Depositor for such Series, or to the
Master Servicer and the Trustee by the Holders of Certificates of such Series
evidencing not less than 25% of the aggregate outstanding principal amount of
the Certificates for such Series, (ii) any failure by the Master Servicer duly
to observe or perform in any material respect any other of its covenants or
agreements in the Pooling and Servicing Agreement which continues unremedied for
60 days (or 15 days in the case of a
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failure to maintain any insurance policy required to be maintained pursuant to
the Pooling and Servicing Agreement) after the giving of written notice of such
failure to the Master Servicer by the Trustee or the Depositor, or to the Master
Servicer and the Trustee by the Holders of Certificates of such Series
evidencing not less than 25% of the aggregate outstanding principal amount of
the Certificates and (iii) certain events in insolvency, readjustment of debt,
marshalling of assets and liabilities or similar proceedings and certain actions
by the Master Servicer indicating its insolvency, reorganization or inability to
pay its obligations.
RIGHTS UPON EVENT OF DEFAULT
So long as an Event of Default remains unremedied under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series or Holders of
Certificates of such Series evidencing not less than 25% of the aggregate
outstanding principal amount of the Certificates for such Series (the first 25%
who provide such notice) or the Depositor may terminate all of the rights and
obligations of the Master Servicer as servicer under the Pooling and Servicing
Agreement and in and to the Mortgage Loans (other than its right as a
Certificateholder under the Pooling and Servicing Agreement which rights the
Master Servicer will retain under all circumstances), whereupon the Trustee will
succeed to all the responsibilities, duties and liabilities of the Master
Servicer under the Pooling and Servicing Agreement and will be entitled to
reasonable servicing compensation not to exceed the applicable servicing fee,
together with other servicing compensation in the form of assumption fees, late
payment charges or otherwise as provided in the Pooling and Servicing Agreement.
If, however, the RTC or the FDIC is appointed as the receiver for the Master
Servicer, and no Event of Default other than such receivership or insolvency
exists, the RTC or the FDIC may have the power to prevent either the Trustee or
the Certificateholders from effecting a transfer of servicing.
In the event that the Trustee is unwilling or unable so to act, it may
select, or petition a court of competent jurisdiction to appoint, any
established mortgage loan servicing institution the appointment of which does
not adversely affect the then current rating of the Certificates of the related
Series to act as successor Master Servicer under the provisions of such Pooling
and Servicing Agreement relating to the servicing of the Mortgage Loans. The
successor Master Servicer would be entitled to reasonable servicing compensation
in an amount not to exceed the Servicing Fee as set forth in the related
Prospectus Supplement, together with the other servicing compensation in the
form of assumption fees, late payment charges or otherwise, as provided in the
Pooling and Servicing Agreement.
During the continuance of any Event of Default under the Pooling and
Servicing Agreement for a Series, the Trustee for such Series will have the
right to take action to enforce its rights and remedies and to protect and
enforce the rights and remedies of the Certificateholders of such Series, and
Holders of Certificates evidencing not less than 25% of the aggregate
outstanding principal amount of the Certificates for such Series may direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or exercising any trust or power conferred upon that Trustee.
However, the Trustee will not be under any obligation to pursue any such remedy
or to exercise any of such trusts or powers unless such Certificateholders have
offered the Trustee reasonable security or indemnity against the cost, expenses
and liabilities which may be incurred by the Trustee therein or thereby. Also,
the Trustee may decline to follow any such direction if the Trustee determines
that the action or proceeding so directed may not lawfully be taken or would
involve it in personal liability or be unjustly prejudicial to the non-assenting
Certificateholders.
No Certificateholder of a Series, solely by virtue of such Holder's status
as a Certificateholder, will have any right under the Pooling and Servicing
Agreement for such Series to institute any proceeding with respect to the Trust
Agreement, unless such Holder previously has given to the Trustee for such
Series written notice of default and unless the Holders of Certificates
evidencing not less than 25% of the aggregate outstanding principal amount of
the Certificates for such Series have made written request upon the Trustee to
institute such proceeding in its own name as Trustee thereunder and have offered
to the Trustee reasonable indemnity, and the Trustee for 60 days has neglected
or refused to institute any such proceeding.
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DEFICIENCY EVENT
A "Deficiency Event" with respect to the Certificates of a Multiple-Class
Series is defined in the Pooling and Servicing Agreement as being the inability
of the Trustee to distribute to Holders of one or more Classes of Certificates
of such Series (other than any Class of Subordinate Certificates prior to the
time that the Available Distribution Amount is reduced to zero), in accordance
with the terms thereof and the Pooling and Servicing Agreement, any distribution
of principal or interest thereon when and as distributable, in each case because
of the insufficiency for such purpose of the funds then held in the related
Trust Fund.
Upon the occurrence of a Deficiency Event, the Trustee (unless otherwise
specified in the related Prospectus Supplement) is required to determine whether
or not the application on a monthly basis (regardless of the frequency of
regular Distribution Dates) of all future Scheduled Payments on the Mortgage
Assets included in the related Trust Fund and other amounts receivable with
respect to such Trust Fund towards payments on such Certificates in accordance
with the priorities as to distributions of principal and interest set forth in
such Certificates will be sufficient to make distributions of interest at the
applicable Certificate Rates and to distribute in full the principal amount of
each such outstanding Certificate on or before its respective Stated Maturity.
The Trustee (unless otherwise specified in the related Prospectus
Supplement) will obtain and rely upon an opinion or report of a firm of
independent accountants of recognized national reputation as to the sufficiency
of the amounts receivable with respect to such Trust Fund to make such
distributions on the Certificates, which opinion or report will be conclusive
evidence as to such sufficiency. Pending the making of any such determination,
distributions on the Certificates will continue to be made in accordance with
their terms.
In the event that the Trustee (unless otherwise specified in the related
Prospectus Supplement) makes a determination of sufficiency, the Trustee will
apply all amounts received in respect of the related Trust Fund (after payment
of fees and expenses of the Trustee and accountants for the Trust Fund) to
distributions on the Certificates of such Series in accordance with their terms,
except that such distributions will be made monthly and without regard to the
amount of principal that would otherwise be distributable on any Distribution
Date. Under certain circumstances following such positive determination, the
Trustee may resume making distributions on such Certificates expressly in
accordance with their terms.
If the Trustee (unless otherwise specified in the related Prospectus
Supplement) is unable to make the positive determination described above, the
Trustee will apply all amounts received in respect of the related Trust Fund
(after payment of Trustee and accountants' fees and expenses) to monthly
distributions on the Certificates of such Series pro rata, without regard to the
priorities as to distribution of principal set forth in such Certificates, and
such Certificates will, to the extent permitted by applicable law, accrue
interest at the highest Certificate Rate borne by any Certificate of such Series
(excluding any Interest Weighted Class or any Class with a Floating Rate that
varies inversely with a current Index) or, with respect to each Class of
Floating Interest Certificates, at the weighted average Certificate Rate,
calculated on the basis of the maximum interest rate applicable to such Class on
the original principal amount of the Certificates of that Class (excluding any
Interest Weighted Class or any Class with a Floating Rate that varies inversely
with a current Index). In such event, the Holders evidencing not less than at
least 66% or more of the aggregate outstanding principal amount of the
Certificates of such Series may direct the Trustee to sell the related Trust
Fund, any such direction being irrevocable and binding upon the Holders of all
Certificates of such Series and upon the owners of the residual interests in
such Trust Fund. In the absence of such a direction, the Trustee may not sell
all or any portion of such Trust Fund.
THE TRUSTEE
The identity of the commercial bank, savings and loan association or trust
company named as the Trustee for each Series of Certificates will be set forth
in the related Prospectus Supplement. The entity serving as Trustee may have
normal banking relationships with the Depositor or the Master Servicer. In
addition, for the purpose of meeting the legal requirements of certain local
jurisdictions, the Trustee will have the power to appoint co-trustees or
separate trustees of all or any part of the Trust Fund relating to a
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Series of Certificates. In the event of such appointment, all rights, powers,
duties and obligations conferred or imposed upon the Trustee by the Pooling and
Servicing Agreement relating to such Series will be conferred or imposed upon
the Trustee and each 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 may also appoint agents to perform any of the
responsibilities of the Trustee, which agents shall have any or all of the
rights, powers, duties and obligations of the Trustee conferred on them by such
appointment; provided that the Trustee shall continue to be responsible for its
duties and obligations under the Pooling and Servicing Agreement.
DUTIES OF THE TRUSTEE
The Trustee makes no representations as to the validity or sufficiency of
the Pooling and Servicing Agreement, the Certificates or of any Mortgage Asset
or related documents. If no Event of Default (as defined in the related Pooling
and Servicing Agreement) has occurred, the Trustee is required to perform only
those duties specifically required of it under the Pooling and Servicing
Agreement. Upon receipt of the various certificates, statements, reports or
other instruments required to be furnished to it, the Trustee is required to
examine them to determine whether they are in the form required by the related
Pooling and Servicing Agreement. However, the Trustee will not be responsible
for the accuracy or content of any such documents furnished by it or the
Certificateholders to the Master Servicer under the Pooling and Servicing
Agreement.
The Trustee may be held liable for its own grossly negligent action or
failure to act, or for its own willful misconduct; provided, however, that the
Trustee will not be personally liable with respect to any action taken, suffered
or omitted to be taken by it in good faith in accordance with the direction of
the Certificateholders in an Event of Default, see "Rights Upon Event of
Default" above. The Trustee is not required to expend or risk its own funds or
otherwise incur any financial liability in the performance of any of its duties
under a Pooling and Servicing Agreement, or in the exercise of any of its rights
or powers, if it has reasonable grounds for believing that repayment of such
funds or adequate indemnity against such risk or liability is not reasonably
assured to it.
RESIGNATION OF TRUSTEE
The Trustee may, upon written notice to the Depositor, resign at any time,
in which event the Depositor will be obligated to use its best efforts to
appoint a successor Trustee. If no successor Trustee has been appointed and has
accepted the appointment within 30 days after giving such notice of resignation,
the resigning Trustee may petition any court of competent jurisdiction for
appointment of a successor Trustee. The Trustee may also be removed at any time
(i) by the Depositor, if the Trustee ceases to be eligible to continue as such
under the Pooling and Servicing Agreement, (ii) if the Trustee becomes
insolvent, (iii) if a tax is imposed or threatened with respect to the Trust
Fund by any state in which the Trustee or the Trust Fund held by the Trustee
pursuant to the Pooling and Servicing Agreement is located, or (iv) by the
Holders of Certificates evidencing over 50% of the aggregate outstanding
principal amount of the Certificates in the Trust Fund upon 30 days' advance
written notice to the Trustee and to the Depositor. 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.
CERTIFICATE ACCOUNT
The Trustee will establish a separate account (the "Certificate Account") in
its name as Trustee for the Certificateholders, or if it is so specified in the
related Prospectus Supplement, the Certificate Account may be established by the
Master Servicer in the name of the Trustee. If specified in the related
Prospectus Supplement, the Certificate Account may be maintained as an interest
bearing account or the funds held therein may be invested, pending disbursement
to Certificateholders of the related Series, pursuant to the terms of the
Pooling and Servicing Agreement, in Eligible Investments. If so specified in the
related Prospectus Supplement, the Master Servicer will be entitled to receive
as additional compensation, any
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interest or other income earned on funds in the Certificate Account. There will
be deposited into the Certificate Account monthly all funds received from the
Master Servicer and required withdrawals from any reserve funds. Unless
otherwise specified in the related Prospectus Supplement, the Trustee is
permitted from time to time to make withdrawals from the Certificate Account for
each Series to remove amounts deposited therein in error, to pay to the Master
Servicer any reinvestment income on funds held in the Certificate Account to the
extent it is entitled, to remit to the Master Servicer its Servicing Fee,
assumption or substitution fees, late payment charges and other mortgagor
charges, reimbursement of Advances and expenses, to make deposits to any reserve
fund, to make regular distributions to the Certificateholders, to clear and
terminate the Certificate Account and to make other withdrawals as required or
permitted by the related Pooling and Servicing Agreement.
EXPENSE RESERVE FUND
If specified in the Prospectus Supplement relating to a Series, the
Depositor may deposit on the related Closing Date in an account to be
established with the Trustee (the "Expense Reserve Fund") cash or Eligible
Investments which will be available to pay anticipated fees and expenses of the
Trustee or other agents. The Expense Reserve Fund for a Series may also be
funded over time through the deposit therein of all or a portion of cash flow,
to the extent described in the related Prospectus Supplement. The Expense
Reserve Fund, if any, will not be part of the Trust Fund held for the benefit of
the Holders. Amounts on deposit in any Expense Reserve Fund will be invested in
one or more Eligible Investments.
AMENDMENT OF POOLING AND SERVICING AGREEMENT
Unless otherwise specified in the Prospectus Supplement, the Pooling and
Servicing Agreement for each Series of Certificates may be amended by the
Depositor, the Master Servicer, and the Trustee with
respect to such Series, without notice to or consent of the Certificateholders
(i) to cure any ambiguity, (ii) to correct or supplement any provision therein
which may be defective or inconsistent with any other provision therein, (iii)
to make any other provisions with respect to matters or questions arising under
such Pooling and Servicing Agreement which are not inconsistent with any other
provisions of such Pooling and Servicing Agreement or (iv) to comply with any
requirements imposed by the Code; provided that such amendment (other than
pursuant to clause (iv) above) will not adversely affect in any material respect
the interests of any Certificateholders of such Series. The Pooling and
Servicing Agreement for each Series may also be amended by the Trustee, the
Master Servicer and the Depositor with respect to such Series with the consent
of the Holders possessing not less than 66 2/3% of the aggregate outstanding
principal amount of the Certificates of each Class of such Series affected
thereby, for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of such Pooling and Servicing Agreement or
modifying in any manner the rights of Certificateholders of such Series;
provided, however, that no such amendment may (i) reduce the amount or delay the
timing of payments on any Certificate without the consent of the Holder of such
Certificate; (ii) adversely affect the REMIC status, if a REMIC election has
been made, for the related Trust Fund of a Series; or (iii) reduce the aforesaid
percentage of aggregate outstanding principal amount of Certificates of each
Class, the Holders of which are required to consent to any such amendment
without the consent of the Holders of 100% of the aggregate outstanding
principal amount of each Class of Certificates affected thereby.
VOTING RIGHTS
The related Prospectus Supplement will set forth the method of determining
allocation of voting rights with respect to a Series, if other than as set forth
herein.
LIST OF CERTIFICATEHOLDERS
Upon written request of three or more Certificateholders of record of a
Series for purposes of communicating with other Certificateholders with respect
to their rights under the Pooling and Servicing Agreement or under the
Certificates for such Series, which request is accompanied by a copy of the
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communication which such Certificateholders propose to transmit, the Trustee
will afford such Certificateholders access during business hours to the most
recent list of Certificateholders of that Series held by the Trustee.
No Pooling and Servicing Agreement will provide for the holding of any
annual or other meeting of Certificateholders.
REMIC ADMINISTRATOR
With respect to any Multiple-Class Series, preparation of certain reports
and certain other administrative duties with respect to the Trust Fund may be
performed by a REMIC administrator, who may be an affiliate of the Depositor.
TERMINATION
The obligations created by the Pooling and Servicing Agreement for a Series
will terminate upon the distribution to Certificateholders of all amounts
distributable to them pursuant to such Pooling and Servicing Agreement after (i)
the later of the final payment or other liquidation of the last Mortgage Loan
remaining in the Trust Fund for such Series or the disposition of all property
acquired upon foreclosure or deed in lieu of foreclosure in respect of any
Mortgage Loan or (ii) the repurchase by the Master Servicer from the Trustee for
such Series of all Mortgage Loans at that time subject to the Pooling and
Servicing Agreement and all property acquired in respect of any Mortgage Loan,
as described below. The Pooling and Servicing Agreement for each Series permits,
but does not require, the Master Servicer to repurchase from the Trust Fund for
such Series all remaining Mortgage Loans at a price equal to 100% of the
aggregate principal balances of such Mortgage Loans, plus accrued interest at
the related Pass-Through Rate through the last day of the Due Period in which
repurchase occurs plus the lesser of (A) the appraised value of any such
property and (B) the Stated Principal Balance of the Mortgage Loan relating to
such property. The exercise of such right will effect early retirement of the
Certificates of such Series, but the Master Servicer's right to so purchase is
subject to the aggregate principal balances of the Mortgage Loans at the time of
repurchase being less than a fixed percentage, to be set forth in the related
Prospectus Supplement, of the Cut-off Date Aggregate Principal Balance. In no
event, however, will the trust created by the Pooling and Servicing Agreement
continue beyond the expiration of 21 years from the death of the last survivor
of certain persons identified therein. For each Series, the Master Servicer or
the Trustee, as applicable, will give written notice of termination of the
Pooling and Servicing Agreement to each Certificateholder, and the final
distribution will be made only upon surrender and cancellation of the
Certificates at an office or agency specified in the notice of termination. If
so provided in the related Prospectus Supplement for a Series, the Depositor or
another entity may effect an optional termination of the Trust Fund under the
circumstances described in such Prospectus Supplement. See "DESCRIPTION OF THE
CERTIFICATES--Optional Termination" herein.
CERTAIN LEGAL ASPECTS OF LOANS
The following discussion contains summaries of certain legal aspects of
housing loans which are general in nature. Because such legal aspects are
governed by applicable state law (which laws may differ substantially), the
summaries do not purport to be complete nor to reflect the laws of any
particular state, nor to encompass the laws of all states in which the
properties securing the housing loans are situated. The summaries are qualified
in their entirety by reference to the applicable federal and state laws
governing the
Loans.
MORTGAGES
The Mortgage Loans comprising or underlying the Mortgage Assets for a Series
will be secured by either mortgages or deeds of trust or deeds to secure debt,
depending upon the prevailing practice in the state in which the property
subject to a Mortgage Loan is located. The filing of a mortgage, deed of trust
or deed to secure debt creates a lien or title interest upon the real property
covered by such instrument and
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represents the security for the repayment of an obligation that is customarily
evidenced by a promissory note. It is not prior to the lien for real estate
taxes and assessments or other charges imposed under governmental police powers.
Priority with respect to such instruments depends on their terms and in some
cases the term of separate subordination or intercreditor agreements, the
knowledge of the parties to the mortgage and generally on the order of recording
with the applicable state, county or municipal office. There are two parties to
a mortgage, the mortgagor, who is the borrower/homeowner or the land trustee (as
described below), and the mortgagee, who is the lender. Under the mortgage
instrument, the mortgagor delivers to the mortgagee a note or bond and the
mortgage. In the case of a land trust, there are three parties because title to
the property is held by a land trustee under a land trust agreement of which the
borrower/homeowner is the beneficiary. At origination of a mortgage loan, the
borrower executes a separate undertaking to make payments on the mortgage note.
A deed of trust transaction normally has three parties, the trustor, who is the
borrower/homeowner, the beneficiary, who is the lender, and the trustee, a
third-party grantee. Under a deed of trust, the trustor grants the property,
irrevocably until the debt is paid, in trust, generally with a power of sale, to
the trustee to secure payment of the obligation. The mortgagee's authority under
a mortgage and the trustee's authority under a deed of trust are governed by the
law of the state in which the real property is located, the express provisions
of the mortgage or deed of trust, and, in some cases, in deed of trust
transactions, the directions of the beneficiary.
COOPERATIVE LOANS
If specified in the Prospectus Supplement relating to a series of
Certificates, the Mortgage Loans may also contain Cooperative Loans evidenced by
promissory notes secured by security interests in shares issued by private
corporations which are entitled to be treated as housing cooperatives under the
Code and in the related proprietary leases or occupancy agreements granting
exclusive rights to occupy specific dwelling units in the corporations'
buildings. The security agreement will create a lien upon, or grant a title
interest in, the property which it covers, the priority of which will depend on
the terms of the particular security agreement as well as the order of
recordation of the agreement in the appropriate recording office. Such a lien or
title interest is not prior to the lien for real estate taxes and assessments
and other charges imposed under governmental police powers.
Unless otherwise specified in the related Prospectus Supplement, all
cooperative apartments relating to the Cooperative Loans are located in the
State of New York. A corporation which is entitled to be treated as a housing
cooperative under the Code owns all the real property or some interest therein
sufficient to permit it to own the building and all separate dwelling units
therein. The Cooperative is directly responsible for property management and, in
most cases, payment of real estate taxes and hazard and liability insurance. If
there is a blanket mortgage or mortgages on the cooperative apartment building
and/or underlying land, as is generally the case, or an underlying lease of the
land, as is the case in some instances, the Cooperative, as property mortgagor,
is also responsible for meeting these mortgage or rental obligations. The
interest of the occupant under proprietary leases or occupancy agreements as to
which that Cooperative is the landlord are generally subordinate to the interest
of the holder of a blanket mortgage and to the interest of the holder of a land
lease. If the Cooperative is unable to meet the payment obligations (i) arising
under a blanket mortgage, the mortgagee holding a blanket mortgage could
foreclose on that mortgage and terminate all subordinate proprietary leases and
occupancy agreements or (ii) arising under its land lease, the holder of the
land lease could terminate it and all subordinate proprietary leases and
occupancy agreements. Also, a 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 final payment at maturity. The
inability of the Cooperative to refinance a mortgage and its consequent
inability to make such final payment could lead to foreclosure by the mortgagee.
Similarly, a land lease has an expiration date and the inability of the
Cooperative to extend its term or, in the alternative, to purchase the land
could lead to termination of the Cooperative's interest in the property and
termination of all proprietary leases and occupancy agreements. A foreclosure by
the holder of a blanket mortgage could eliminate or significantly diminish the
value of any collateral held by the lender who financed an individual
tenant-stockholder of Cooperative shares or, in the case of the Mortgage Loans,
the collateral securing the Cooperative Loans. Similarly, the termination of the
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land lease by its holder could eliminate or significantly diminish the value of
any collateral held by the lender who financed an individual tenant-stockholder
of the Cooperative shares or, in the case of the Mortgage Loans, the collateral
securing the Cooperative Loans.
The Cooperative is owned by tenant-stockholders who, through ownership of
stock or shares 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 are 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. See "Realizing on Cooperative Loan Security" below.
TAX ASPECTS OF COOPERATIVE OWNERSHIP. In general, a "tenant-stockholder"
(as defined in Section 216(b)(2) of the Code) of a corporation that qualifies as
a "cooperative housing corporation" within the meaning of Section 216(b)(1) of
the Code 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 Section
216(a) of the Code to the corporation under Sections 163 and 164 of the Code. In
order for a corporation to qualify under Section 216(b)(1) of the Code 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 Section
216(b)(1) of the Code 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 tenant-stockholders under
Section 216(a) of the Code with respect to those years. In view of the
significance of the tax benefits accorded tenant-stockholders of a corporation
that qualifies under Section 216(b)(1) of the Code, the likelihood that such a
failure would be permitted to continue over a period of years appears remote.
FORECLOSURE ON 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 which authorizes
the trustee to sell the property upon any default by the borrower under the
terms of the note or deed of trust. In some states, the trustee must record a
notice of default and send a copy to the borrower-trustor and to any person who
has recorded a request for a copy of a notice of default and notice of sale. In
addition, the trustee in some states must provide notice to any other individual
having an interest in the real property, including any junior lienholders. The
trustor, borrower, or any 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, recorded and sent to all parties having an
interest in the real property.
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An action to foreclose a mortgage is an action to recover the mortgage debt
by enforcing the mortgagee's rights under the mortgage. It is regulated by
statutes and rules and subject throughout to the court's equitable powers.
Generally, a mortgagor is bound by the terms of the mortgage note and the
mortgage as made and cannot be relieved from his default if the mortgagee has
exercised his rights in a commercially reasonable manner. However, since a
foreclosure action historically was equitable in nature, the court may exercise
equitable powers to relieve a mortgagor of a default and deny the mortgagee
foreclosure on proof that either the mortgagor's default was neither willful nor
in bad faith or the mortgagee's action established a waiver, fraud, bad faith,
or oppressive or unconscionable conduct such as to warrant a court of equity to
refuse affirmative relief to the mortgagee. Under certain circumstances a court
of equity may relieve the mortgagor from an entirely technical default where
such default was not willful.
A foreclosure action is subject to most of the delays and expenses of other
lawsuits if defenses or counterclaims are interposed, sometimes requiring up to
several years to complete. Moreover, a non-collusive, regularly conducted
foreclosure sale may be challenged as a fraudulent conveyance, regardless of the
parties' intent, if a court determines that the sale was for less than fair
consideration and such sale occurred while the mortgagor was insolvent and
within one year (or within the state statute of limitations if the trustee in
bankruptcy elects to proceed under state fraudulent conveyance law) of the
filing of bankruptcy. Similarly, a suit against the debtor on the mortgage note
may take several years and, generally, is a remedy alternative to foreclosure,
the mortgagee being precluded from pursuing both at the same time.
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 potential third party purchasers at the sale
have in determining the exact status of title and because the physical condition
of the property may have deteriorated during the foreclosure proceedings, it is
uncommon for a third party to purchase the property at a foreclosure sale. In
some states, potential buyers may further be unwilling to purchase a property at
a foreclosure sale as a result of the 1980 decision of the United States Court
of Appeals for the Fifth Circuit in Durrett v. Washington National Insurance
Company. The court in Durrett held that even a non-collusive, regularly
conducted foreclosure sale was a fraudulent transfer under section 67d of the
former Bankruptcy Act (section 548 of the current United States Bankruptcy Code)
and, therefore, could be rescinded in favor of the bankrupt's estate, if (i) the
foreclosure sale was held while the debtor was insolvent and not more than one
year prior to the filing of the bankruptcy petition, and (ii) the price paid for
the foreclosed property did not represent "fair consideration" ("reasonably
equivalent value" under the United States Bankruptcy Code). However, on May 23,
1994, Durrett was effectively overruled by the United States Supreme Court in
BFP v. Resolution Trust Corporation, as Receiver for Imperial Federal Savings
and Loan Association, et al., in which the Court held that "reasonably
equivalent value", for foreclosed property, is the price in fact received at the
foreclosure sale, so long as all the requirements of the State's foreclosure law
have been complied with. It is common for the lender to purchase the property
from the trustee or referee for an amount which may be equal to the principal
amount of the mortgage or deed of trust plus accrued and unpaid interest and the
expenses of foreclosure, in which event the mortgagor's debt will be
extinguished or the lender may purchase for a lesser amount in order to preserve
its right against a borrower to seek a deficiency judgment in states where such
a judgment is available. Thereafter, the lender will assume the burdens of
ownership, including obtaining casualty insurance, paying taxes 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 guaranty insurance proceeds.
The proceeds received by the referee or trustee from the sale are applied
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. Any remaining proceeds are generally payable to the holders of junior
mortgages or deeds of trust and other liens and claims in order of their
priority, whether or not the borrower
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is in default. Any additional proceeds are generally payable to the mortgagor or
trustor. The payment of the proceeds to the holders of junior mortgages may
occur in the foreclosure action of the senior mortgagee or may require the
institution of separate legal proceedings.
The purposes of a foreclosure action are to enable the mortgagee to realize
upon its security and to bar the mortgagor, and all persons who have an interest
in the property which is subordinate to the foreclosing mortgagee, from their
"equity of redemption." The doctrine of equity of redemption provides that,
until the property covered by a mortgage has been sold in accordance with a
properly conducted foreclosure and foreclosure sale, those having an interest
which is subordinate to that of the foreclosing mortgagee have an equity of
redemption and may redeem the property by paying the entire debt with interest.
In addition, in some states, when a foreclosure action has been commenced, the
redeeming party must pay certain costs of such action. Those having an equity of
redemption must be made parties and duly summoned to the foreclosure action in
order for their equity of redemption to be barred.
REALIZING UPON COOPERATIVE LOAN SECURITY
The Cooperative shares and proprietary lease or occupancy agreement 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 by-laws, as well as in the proprietary lease or
occupancy agreement. The proprietary lease or occupancy agreement, even while
pledged, may be cancelled by the Cooperative for failure by the
tenant-stockholder to pay rent or other obligations or charges owed by such
tenant-stockholder, including mechanics' liens against the Cooperative apartment
building incurred by such tenant-stockholder. Commonly, rent and other
obligations and charges arising under a proprietary lease or occupancy agreement
which are owed to the Cooperative are made liens upon the shares to which the
proprietary lease or occupancy agreement relates. In addition, the proprietary
lease or occupancy agreement generally permits the Cooperative to terminate such
lease or agreement in the event the borrower defaults in the performance of
covenants 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 or which have become liens on the shares relating
to the 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 the lender succeeds to
the tenant-shareholder's shares and proprietary lease or occupancy agreement as
the result of realizing upon its collateral for 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-stockholder.
In New York, lenders generally have realized upon the pledged shares and
proprietary lease or occupancy agreement given to secure a Cooperative Loan by
public sale in accordance with the provisions of Article 9 of the New York
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 sale has been conducted in a
"commercially reasonable" manner will depend on the facts in each
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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 sale.
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.
RIGHTS OF REDEMPTION
In some states, after sale pursuant to a deed of trust or foreclosure of a
mortgage, the trustor or mortgagor and foreclosed junior lienors are given a
statutory period in which to redeem the property from the foreclosure sale. The
right of redemption should be distinguished from the equity of redemption, which
is a nonstatutory right that must be exercised prior to the foreclosure sale. In
some states, redemption may occur only upon payment of the entire principal
balance of the loan, accrued interest and expenses of foreclosure. In other
states, redemption may be authorized if the former borrower pays only a portion
of the sums due. The effect of a statutory right of redemption is to diminish
the ability of the lender to sell the foreclosed property. The right 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
a right of redemption is to force the lender to retain the property and pay the
expenses of ownership until the redemption period has run. In some states, there
is no right to redeem property after a trustee's sale under a deed of trust.
ANTI-DEFICIENCY LEGISLATION AND OTHER LIMITATIONS ON LENDERS
Certain states have imposed statutory prohibitions which limit the remedies
of a beneficiary under a deed of trust or a mortgagee under a mortgage. In some
states, statutes limit 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 is 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. In
certain other states, the lender has the option of bringing a personal action
against the borrower on the debt without first exhausting such security; however
in some of these states, the lender, following judgment on such personal action,
may be deemed to have elected a remedy and may be precluded from exercising
remedies with respect to the security. Consequently, the practical effect of the
election requirement, in those states permitting such election, is that lenders
will usually proceed against the security first rather than 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. Certain
state laws also place a limitation on the mortgagee with respect to late payment
charges.
FOR COOPERATIVE LOANS. Generally, lenders realize on cooperative shares and
the accompanying proprietary lease given to secure a Cooperative Loan under
Article 9 of the UCC. 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.
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FEDERAL BANKRUPTCY AND OTHER LAWS AFFECTING CREDITORS' RIGHTS. In addition
to laws limiting or prohibiting deficiency judgments, numerous other statutory
provisions, including the federal bankruptcy laws, the Federal Soldiers' and
Sailors' Relief Act, and state laws affording relief to debtors, may interfere
with or affect the ability of the secured lender to realize upon collateral
and/or enforce a deficiency judgment. For example, with respect to federal
bankruptcy law, the filing of a petition acts as a stay against the enforcement
of remedies for collection of a debt. Moreover, a court with federal bankruptcy
jurisdiction may permit a debtor through a Chapter 13 under the Bankruptcy Code
rehabilitative plan to cure a monetary default with respect to a loan on a
debtor's residence by paying arrearages within a reasonable time period and
reinstating the original loan payment schedule even though the lender
accelerated the loan and the lender has taken all steps to realize upon his
security (provided no sale of the property has yet occurred) prior to the filing
of the debtor's Chapter 13 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 loan default by permitting
the obligor to pay arrearages over a number of years.
Courts with federal bankruptcy jurisdiction have also indicated that the
terms of a loan secured by property of the debtor may be modified if the
borrower has filed a petition under Chapter 13. 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. In all cases, the secured creditor is entitled to the value of its
security plus post-petition interest, attorney's fees and costs to the extent
the value of the security exceeds the debt.
In a Chapter 11 case under the Bankruptcy Code, the lender is precluded from
foreclosing without authorization from the bankruptcy court. The lender's lien
may be transferred to other collateral and/or be limited in amount to the value
of the lender's interest in the collateral as of the date of the bankruptcy. The
loan term may be extended, the interest rate may be adjusted to market rates and
the priority of the loan may be subordinated to bankruptcy court-approved
financing. The bankruptcy court can, in effect, invalidate due-on-sale clauses
through confirmed Chapter 11 plans of reorganization.
The Bankruptcy Code provides priority to certain tax liens over the lender's
security. This may delay or interfere with the enforcement of rights in respect
of a defaulted Loan. In addition, substantive requirements are imposed upon
lenders in connection with the origination and the servicing of mortgage loans
by numerous federal and some state consumer protection laws. The 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 and regulations. These federal laws impose specific statutory
liabilities upon lenders who originate loans and who fail to comply with the
provisions of the law. In some cases, this liability may affect assignees of the
loans.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT. Generally, under the terms of the
Soldiers' and Sailors' Civil Relief Act of 1940, as amended (the "Relief Act"),
a borrower who enters military service after the origination of such borrower's
Mortgage Loan (including a borrower who is a member of the National Guard or is
in reserve status at the time of the origination of the Mortgage Loan and is
later called to active duty) may not be charged interest above an annual rate of
6% during the period of such borrower's active duty status, unless a court
orders otherwise upon application of the lender. It is possible that such
interest rate limitation could have an effect, for an indeterminate period of
time, on the ability of the Trust Fund to collect full amounts of interest on
certain of the Mortgage Loans. Unless otherwise provided in the applicable
Prospectus Supplement, any shortfall in interest collections resulting from the
application of the Relief Act could result in losses to the holders of the
Certificates. In addition, the Relief Act imposes limitations which would impair
the ability of the Trust Fund 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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DUE-ON-SALE CLAUSES IN MORTGAGE LOANS
Due-on-sale clauses permit the lender to accelerate the maturity of the loan
if the borrower sells or transfers all or part of the real property securing the
loan without the lender's prior written consent. The enforceability of these
clauses has been impaired in various ways in certain states by statutory or
decisional law. The ability of lenders and their assignees and transferees to
enforce due-on-sale clauses was addressed by Congress when it enacted the
Garn-St Germain Depository Institutions Act of 1982 (the "Garn-St Germain Act").
The legislation, subject to certain exceptions, provides for federal preemption
of all state restrictions on the enforceability of due-on-sale clauses. 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. Excluded from the preemption are loans
originated or assumed during a "window period" ("Window Period Loans"). The
window period runs from the date the state restricted the enforcement of the
clauses, either by constitution, statute, or statewide judicial proclamation, to
October 15, 1982. All Window Period Loans are governed by the restrictive state
law until October 15, 1985, unless the state acted to extend the effect of the
window period by further regulating such loans. The Garn-St Germain Act further
provides that loans originated by a federal savings bank or a federally
chartered savings and loan association shall be governed by the regulations of
the Office of Thrift Supervision (the "OTS"), as successor to the Federal Home
Loan Bank Board. These regulations preempt any state law restrictions and
expressly allow these federal lenders to enforce due-on-sale clauses. Loans
originated by such institutions are not subject to the window period and
therefore due-on-sale clauses in such loans are enforceable regardless of the
date the loans originated.
Although neither the Garn-St Germain Act nor the Federal Home Loan Bank
Board regulations promulgated thereunder actually lists the states with window
periods ("Window Period States"), FHLMC has taken the position, in prescribing
mortgage loan servicing standards with respect to loans which it has purchased,
that the Window Period States are Arizona, Arkansas, California, Colorado,
Florida, Georgia, Iowa, Michigan, Minnesota, New Mexico, Utah and Washington.
(Despite Florida's status as a Window Period State, Florida case law indicates
that courts no longer require a lender to show an impairment of security before
enforcing a due-on-sale clause.) In regulations issued on November 8, 1983, as
amended on December 9, 1983, the Comptroller of the Currency indicated that
certain loans which were originated by national banks prior to October 15, 1982
and which were secured by property located in the states listed above were
Window Period Loans. These regulations limit the effect of state law
restrictions on the enforcement of due-on-sale clauses, with respect to Window
Period Loans originated by national banks, by shortening the window period. On
December 3, 1982, the National Credit Union Administration issued final
regulations allowing federal credit unions to enforce due-on-sale clauses in
long term first mortgage loans for transfers occurring on or after November 18,
1982, notwithstanding state law restrictions.
Under the Garn-St Germain Act, unless a Window Period State took action by
October 15, 1985 to further regulate enforcement of due-on-sale clauses, such
clauses would become enforceable even in Window Period Loans. Five of the Window
Period States (Arizona, Minnesota, Michigan, Washington and Utah) have acted to
restrict the enforceability of due-on-sale clauses in Window Period Loans beyond
October 15, 1985. The actions taken vary among such states. The Garn-St Germain
Act also sets forth nine specific instances in which no lender covered by the
Garn-St Germain Act may exercise its option pursuant to 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 also prohibit the
imposition of a prepayment penalty upon the acceleration of a loan pursuant to a
due-on-sale clause. The inability to enforce a due-on-sale clause may result in
a loan bearing an interest rate below the current market rate being assumed by a
new home buyer rather than being paid off, which may have an impact upon the
average life of the loans related to a Series and the number of such loans which
may be outstanding until maturity.
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ENFORCEABILITY OF PREPAYMENT AND LATE PAYMENT FEES
Forms of notes, mortgages and deeds of trust used by lenders may contain
provisions obligating the borrower to pay a late charge if payments are not
timely made, and in some circumstances may provide for prepayment fees or
penalties if the obligation is paid prior to maturity. In certain states, there
are or may be specific limitations upon the 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. Late charges and prepayment fees are typically retained by
servicers as additional servicing compensation.
EQUITABLE LIMITATIONS ON REMEDIES
In connection with lenders' attempts to realize upon their security, courts
have invoked general equitable principles. The equitable principles are
generally designed to relieve the borrower from the legal effect of his defaults
under the loan documents. Examples of judicial remedies that have been fashioned
include judicial requirements that the lender undertake affirmative and
expensive actions to determine the causes for the borrower's default and the
likelihood that the borrower will be able to reinstate the loan. In some cases,
courts have substituted their judgment for the lender's judgment and have
required that lenders reinstate loans or recast payment schedules in order to
accommodate borrowers who are suffering from temporary financial disability. In
other cases, courts have limited the right of a lender to realize upon his
security if the default under the security agreement is not monetary, such as
the borrower's failure to adequately maintain the property or the borrower's
execution of secondary financing 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 security agreements receive notices in addition to the
statutorily-prescribed minimums. For the most part, these cases have upheld the
notice provisions as being reasonable or have found that, in cases involving the
sale by a trustee under a deed of trust or by a mortgagee under a mortgage
having a power of sale, there is insufficient state action to afford
constitutional protections to the borrower.
The Mortgage Loans may include a debt-acceleration clause, which permits the
lender to accelerate the debt upon a monetary default of the borrower, after the
applicable cure period. The courts of all states will enforce clauses providing
for acceleration in the event of a material payment default. However, courts of
any state, exercising equity jurisdiction, may refuse to allow a lender to
foreclose a mortgage or deed of trust when an acceleration of the indebtedness
would be inequitable or unjust and the circumstances would render the
acceleration unconscionable.
Most conventional single-family mortgage loans may be prepaid in full or in
part without penalty. The regulations of the Federal Home Loan Bank Board, as
succeeded by the OTS, prohibit the imposition of a prepayment penalty or
equivalent fee for or in connection with the acceleration of a loan by exercise
of a due-on-sale clause. A mortgagee to whom a prepayment in full has been
tendered may be compelled to give either a release of the mortgage or an
instrument assigning the existing mortgage. The absence of a restraint on
prepayment, particularly with respect to Mortgage Loans having higher mortgage
rates, may increase the likelihood of refinancing or other early retirements of
the Mortgage Loans.
APPLICABILITY OF USURY LAWS
Title V of the Depository Institutions Deregulation and Monetary Control Act
of 1980, enacted in March 1980 ("Title V"), provides that state usury
limitations shall not apply to certain types of residential first mortgage loans
originated by certain lenders after March 31, 1980. Similar federal statutes
were in effect with respect to mortgage loans made during the first three months
of 1980. The OTS, as successor to the Federal Home Loan Bank Board, is
authorized to issue rules and regulations and to publish interpretations
governing implementation of Title V. Title V authorizes any state to reimpose
interest rate limits by adopting, before April 1, 1983, a state law, or by
certifying that the voters of such state have voted in favor of any provision,
constitutional or otherwise, which expressly rejects an application of the
federal law. Fifteen
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states adopted such a law prior to the April 1, 1983 deadline. In addition, even
where Title V is not so rejected, any state is authorized by the law to adopt a
provision limiting discount points or other charges on mortgage loans covered by
Title V.
In any state in which application of Title V has been expressly rejected or
a provision limiting discount points or other charges is adopted, no Mortgage
Loans originated after the date of such state action will be eligible as
Mortgage Assets if such Mortgage Loans bear interest or provide for discount
points or charges in excess of permitted levels. No Mortgage Loan originated
prior to January 1, 1980 will bear interest or provide for discount points or
charges in excess of permitted levels.
ADJUSTABLE INTEREST RATE LOANS
ARMs originated by non-federally chartered lenders have historically been
subject to a variety of restrictions. Such restrictions differed from state to
state, resulting in difficulties in determining whether a particular alternative
mortgage instrument originated by a state-chartered lender complied with
applicable law. These difficulties were alleviated substantially as a result of
the enactment of Title VIII of the Garn-St Germain Act ("Title VIII"). Title
VIII provides that, notwithstanding any state law to the contrary, state-
chartered banks may originate "alternative mortgage instruments" (including
ARMs) in accordance with regulations promulgated by the Comptroller of the
Currency with respect to origination of alternative mortgage instruments by
national banks; state chartered credit unions may originate alternative mortgage
instruments in accordance with regulations promulgated by the National Credit
Union Administration with respect to origination of alternative mortgage
instruments by federal credit unions and all other non-federally chartered
housing creditors, including state-chartered savings and loan associations; and
state-chartered savings banks and mortgage banking companies may originate
alternative mortgage instruments in accordance with the regulations promulgated
by the Federal Home Loan Bank Board, as succeeded by the OTS, with respect to
origination of alternative mortgage instruments by federal savings and loan
associations. Title VIII provides that any state may reject applicability of the
provisions of Title VIII by adopting, prior to October 15, 1985, a law or
constitutional provision expressly rejecting the applicability of such
provisions. Certain states have taken such action.
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
possibly 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 otherwise is 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.
MANUFACTURED HOME LOANS
SECURITY INTERESTS IN THE MANUFACTURED HOMES. Law governing perfection of a
security interest in a Manufactured Home varies from state to state. Security
interests in Manufactured Homes may be perfected either by notation of the
secured party's lien on the cetificate 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 lender of a servicer 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 Home Loan is registered. In the event
such notation or delivery is not effected or the security interest is not filed
in
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accordance with the applicable law (for example, is filed under a motor vehicle
title statute rather than under the UCC, in a few states), a first priority
security interest in the Manufactured Home securing a Manufactured Home Loan may
not be obtained.
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 Manufactured Home under applicable
state real estate law. In order to perfect a security interest in a Manufactured
Home under real estate laws, the holder of the security interest must file
either a "fixture filing" under the provisions or 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 estate records office of the county where
the home is located. Manufactured Home Loans typically contain provisions
prohibiting the borrower from permanently attaching the Manufactured Home to its
site. 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 its site, other parties could
obtain an interest in the manufactured home which is prior to the security
interest originally retained by the lender or its assignee.
With respect to a Series of Certificates evidencing interests in a Trust
Fund that includes Manufactured Home Loans and as described in the related
Prospectus Supplement, the Master Servicer may be required to perfect a security
interest in the Manufactured Home under applicable real estate laws. If such
real estate filings are not made and if any of the foregoing events were to
occur, the only recourse of the Certificateholders would be against the Master
Servicer pursuant to its repurchase obligation for breach of warranties. A PMBS
Agreement pursuant to which Private Mortgage-Backed Securities backed by
Manufactured Home Loans are issued will, unless otherwise specified in the
related Prospectus Supplement, have substantially similar requirements for
perfection of a security interest.
In general, upon an assignment of a Manufactured Home Loan, the certificate
of title relating to the Manufactured Home will not be amended to identify the
assignee as the new secured party. In most states, an 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
assignor's rights as the secured party. However, in some states there exists a
risk that, in the absence of an amendment to the certificate of title, such
assignment of the security interest might not be held effective against
creditors of the assignor.
RELOCATION OF A MANUFACTURED HOME. In the event that the owner of a
Manufactured Home moves the home 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
reregisters the Manufactured Home in such state. If the owner were to relocate a
Manufactured Home to another state and not reregister the Manufactured Home in
such state, and if steps are not taken to reperfect the Trustee's security
interest in such state, the security interest in the Manufactured Home would
cease to be perfected. A majority of states generally require surrender of a
certificate of title to reregister a Manufactured Home; accordingly, possession
of the certificate of title to such Manufactured Home must be surrendered or, in
the case of Manufactured Homes registered in states which provide for notation
of lien, the notice of surrender must be given to any person whose security
interest in the Manufactured Home is noted on the certificate of title.
Accordingly, the owner of the Manufactured Home Loan would have the opportunity
to reperfect its 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, reregistration could defeat perfection. In
the ordinary course of servicing the Manufactured Home Loans, the Master
Servicer will be required to take steps to effect reperfection upon receipt of
notice of reregistration or information from the borrower as to relocation.
Similarly, when a borrower under a Manufactured Home Loan sells the related
Manufactured Home, the Trustee must surrender possession of the certificate of
title or the Trustee will receive notice as a result of its lien noted thereon
and accordingly will be an opportunity to require satisfaction of the related
Manufactured
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Home Loan before release of the lien. Under the Pooling and Servicing Agreement,
the Master Servicer is obligated to take such steps, at the Master Servicer's
expense, as are necessary to maintain perfection of security interests in the
Manufactured Homes. PMBS Agreements pursuant to which Private Mortgage-Backed
Securities backed by Manufactured Home Loans are issued will impose
substantially similar requirements.
INTERVENING LIENS. Under the laws of most states, liens for repairs
performed on a Manufactured Home take priority even over a perfected security
interest. The Master Servicer or the originator of such Loans will represent
that it has no knowledge of any such liens with respect to any Manufactured Home
securing payment on any Manufactured Home Loan. However, such liens could arise
at any time during the term of a Manufactured Home Loan. No notice will be given
to the Trustee or Certificateholders in the event such a lien arises. PMBS
Agreements pursuant to which Private Mortgage-Backed Securities backed by
Manufactured Home Loans are issued will contain substantially similar
requirements.
ENFORCEMENT OF SECURITY INTERESTS IN MANUFACTURED HOMES. So long as the
Manufactured Home has not become subject to the real estate law, a creditor can
repossess a Manufactured Home securing a Manufactured Home Loan 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
Manufactured Home Loan 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 holder of a
Manufactured Home Loan 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 or subsequently perfected interests or, thereafter, to
the borrower.
Under the laws applicable in most states, a creditor is entitled to obtain a
deficiency judgment from a borrower for any deficiency on repossession and
resale of the Manufactured Home securing such borrower's loan. However, some
states impose prohibitions or limitations on deficiency judgments. See
"Anti-deficiency Legislation and Other Limitations on Lenders" above.
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. See "Federal Banktuptcy and Other Laws Affecting Creditors' Rights"
and "Equitable Limitations on Remedies" above.
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 who 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 borrower thereunder. The effect of this
rule is to subject the assignee of such a contract to all claims and defenses
which the borrower could assert against the seller of goods. Liability under
this rule is limited to amounts paid under a Manufactured Home Loan; however,
the borrower also may be able to assert the rule to set off remaining amounts
due as a defense against a claim brought against such borrower. Numerous other
federal and state consumer protection laws impose requirements applicable to the
origination and lending pursuant to the Manufactured Home Loan, 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 Manufactured Home Loan.
TRANSFERS OF MANUFACTURED HOMES; ENFORCEABILITY OF "DUE-ON-SALE"
CLAUSES. Loans and installment sale contracts relating to a Manufactured Home
Loan typically prohibit the sale or transfer of the related
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Manufactured Homes without the consent of the lender and permit the acceleration
of the maturity of the Manufactured Home Loans by the lender upon any such sale
or transfer for which no such consent is granted.
In the case of a transfer of a Manufactured Home, the lender's ability to
accelerate the maturity of the related Manufactured Home Loan will depend on the
enforceability under state law of the "due-on-sale" clause. The Garn-St Germain
Depository Institutions Act of 1982 preempts, subject to certain exceptions and
conditions, state laws prohibiting enforcement of "due-on-sale" clauses
applicable to the Manufactured Homes. See "Due-on-Sale Clauses in Mortgage
Loans" above. With respect to any Manufactured Home Loan secured by a
Manufactured Home occupied by the borrower, the ability to accelerate will not
apply to those types of transfers discussed in "Due-on-Sale Clauses in Mortgage
Loans" above. FHA Loans and VA Loans are not permitted to contain "due-on-sale"
clauses, and so are freely assumable.
APPLICABILITY OF USURY LAWS. Title V provides that, subject to the
following conditions, state usury limitations shall not apply to any loan which
is secured by a first lien on certain kinds of Manufactured Homes. The
Manufactured Home Loans would be covered if they satisfy certain conditions,
among other things, governing the terms of any prepayments, late charges and
deferral fees and requiring a 30-day notice period prior to instituting any
action leading to repossession of or foreclosure with respect to the related
unit. See "Applicability of Usury Laws" above.
SOLDIERS' AND SAILORS' CIVIL RELIEF ACT. Generally, under the terms of the
Relief Act, a borrower who enters military service after the origination of such
borrower's Manufactured Home Loan (including a borrower who is a member of the
National Guard or is in reserve status at the time of the origination of the
Manufactured Home 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 could have an effect, for an
indeterminate period of time, on the ability of the Trust Fund to collect full
amounts of interest on certain of the Manufactured Home Loans. Unless otherwise
provided in the applicable Prospectus Supplement, any shortfall in interest
collections resulting from the application of the Relief Act could result in
losses to the holders of the Certificates, In addition, the Relief Act imposes
limitations which would impair the ability of the Trust Fund to enforce the lien
with respect to an affected Manufactured Home Loan during the borrower's period
of active duty status. Thus, in the event that such a Manufactured Home Loan
goes into default, there may be delays and losses occasioned by the inability to
enforce the lien with respect to the Manufactured Home in a timely fashion.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL
The following is a general discussion of the anticipated material federal
income tax consequences of the purchase, ownership and disposition of the
Certificates offered hereunder where Brown & Wood or Thacher Proffitt & Wood is
identified in the applicable Prospectus Supplement as counsel to the Depositor
(hereinafter "Counsel to the Depositor"). For a general discussion of the
anticipated material federal income tax consequences of the purchase, ownership
and disposition of the Certificates where Skadden, Arps, Slate, Meagher & Flom
is identified in the applicable Prospectus Supplement as counsel to the
Depositor, see "Certain Federal Income Tax Considerations" in the related
Prospectus Supplement. This discussion is directed solely to Certificateholders
that hold the Certificates as capital assets within the meaning of Section 1221
of the Internal Revenue Code of 1986 (the "Code") and does not purport to
discuss all federal income tax consequences that may be applicable to particular
categories of investors, some of which (such as banks, insurance companies and
foreign investors) may be subject to special rules. Further, the authorities on
which this discussion, and the opinion referred to below, are based are subject
to change or differing interpretations, which could apply retroactively.
Taxpayers should consult their own tax advisors and tax return preparers
regarding the preparation of any item on a tax return, even where the
anticipated tax treatment has been discussed herein. In addition to the federal
income tax consequences described herein, potential investors should consider
the state and local tax consequences, if any, of the purchase, ownership
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and disposition of the Certificates. See "State and Other Tax Consequences."
Certificateholders are advised to consult their own tax advisors concerning the
federal, state, local or other tax consequences to them of the purchase,
ownership and disposition of the Certificates offered hereunder.
The following discussion addresses securities of two general types: (i)
certificates ("REMIC Certificates") representing interests in a Trust Fund, or a
portion thereof, which the Trustee will covenant to elect to have treated as a
real estate mortgage investment conduit ("REMIC") under Sections 860A through
860G (the "REMIC Provisions") of the Code and (ii) certificates ("Grantor Trust
Certificates") representing certain interests in a Trust Fund ("Grantor Trust
Fund") which the Master Servicer or the Trustee will covenant not to elect to
have treated as a REMIC. The Prospectus Supplement for each series of
Certificates will indicate whether a REMIC election (or elections) will be made
for the related Trust Fund and, if such an election is to be made, will identify
all "regular interests" and the "residual interests" in the REMIC. For purposes
of this tax discussion, references to a "Certificateholder" or a "holder" are to
the beneficial owner of a Certificate.
The following discussion is based in part upon the rules governing original
issue discount that are set forth in Sections 1271-1273 and 1275 of the Code and
in the Treasury regulations issued thereunder (the "OID Regulations"), and in
part upon the REMIC Provisions and the Treasury regulations issued thereunder
(the "REMIC Regulations"). The OID Regulations do not adequately address certain
issues relevant to, and in some instances provide that they are not applicable
to, securities such as the Certificates.
REMICS
CLASSIFICATION OF REMICS
Upon the issuance of each series of REMIC Certificates, Counsel to the
Depositor will deliver its opinion generally to the effect that, assuming
compliance with all provisions of the related Pooling and Servicing Agreement,
the related Trust Fund (or each applicable portion thereof) will qualify as a
REMIC and the REMIC Certificates offered with respect thereto will be considered
to evidence ownership of "regular interests" ("REMIC Regular Certificates") or
"residual interests" ("REMIC Residual Certificates") in that REMIC within the
meaning of the REMIC Provisions.
If an entity electing to be treated as a REMIC fails to comply with one or
more of the ongoing requirements of the Code for such status during any taxable
year, the Code provides that the entity will not be treated as a REMIC for such
year or thereafter. In that event, such entity may be taxable as a corporation
under Treasury regulations, and the related REMIC Certificates may not be
accorded the status or given the tax treatment described below. Although the
Code authorizes the Treasury Department to issue regulations providing relief in
the event of an indadvertent termination of REMIC status, no such regulations
have been issued. Any such relief, moreover, may be accompanied by sanctions,
such as the imposition of a corporate tax on all or a portion of the Trust
Fund's income for the period in which the requirements for such status are not
satisfied. The Pooling and Servicing Agreement with respect to each REMIC will
include provisions designed to maintain the Trust Fund's status as a REMIC under
the REMIC Provisions. It is not anticipated that the status of any Trust Fund as
a REMIC will be terminated.
CHARACTERIZATION OF INVESTMENTS IN REMIC CERTIFICATES
In general, the REMIC Certificates will be "qualifying real property loans"
within the meaning of Section 593(d) of the Code, "real estate assets" within
the meaning of Section 856(c)(5)(A) of the Code and assets described in Section
7701(a)(19)(C) of the Code in the same proportion that the assets of the REMIC
underlying such Certificates would be so treated. Moreover, if 95% or more of
the assets of the REMIC qualify for any of the foregoing treatments at all times
during a calendar year, the REMIC Certificates will qualify for the
corresponding status in their entirety for that calendar year. Interest
(including original issue discount) on the REMIC Regular Certificates and income
allocated to the class of REMIC Residual Certificates will be interest described
in Section 856(c)(3)(B) of the Code to the extent that such Certificates are
treated as "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code. In addition, the REMIC Regular Certificates will be "qualified
mortgages" within the meaning of Section 860G(a)(3) of the Code if transferred
to another REMIC on its startup day in exchange for a regular or residual
interest
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therein. The determination as to the percentage of the REMIC's assets that
constitute assets described in the foregoing sections of the Code will be made
with respect to each calendar quarter based on the average adjusted basis of
each category of the assets held by the REMIC during such calendar quarter. The
REMIC will report those determinations to Certificateholders in the manner and
at the times required by applicable Treasury regulations.
The assets of the REMIC will include, in addition to Mortgage Loans,
payments on Mortgage Loans held pending distribution on the REMIC Certificates
and may include property acquired by foreclosure held pending sale, and amounts
in reserve accounts. It is unclear whether property acquired by foreclosure held
pending sale, or amounts in reserve accounts would be considered to be part of
the Mortgage Loans, or whether such assets (to the extent not invested in assets
described in the foregoing sections) otherwise would receive the same treatment
as the Mortgage Loans for purposes of all the foregoing sections. In addition,
in some instances Mortgage Loans may not be treated entirely as assets described
in the foregoing sections. If so, the related Prospectus Supplement will
describe the Mortgage Loans that may not be so treated. The REMIC Regulations do
provide, however, that payments on Mortgage Loans held pending distribution are
considered part of the Mortgage Loans for purposes of Sections 593(d) and
856(c)(5)(A) of the Code.
TIERED REMIC STRUCTURES
For certain series of REMIC Certificates, two or more separate elections may
be made to treat designated portions of the related Trust Fund as REMICs
("Tiered REMICs") for federal income tax purposes. Upon the issuance of any such
series of REMIC Certificates, Counsel to the Depositor will deliver its opinion
generally to the effect that, assuming compliance with all provisions of the
related Pooling and Servicing Agreement, the Tiered REMICs will each qualify as
a REMIC and the REMIC Certificates issued by the Tiered REMICs will be
considered to evidence ownership of REMIC regular interests or REMIC residual
interests in the related REMIC within the meaning of the REMIC Provisions.
Solely for purposes of determining whether the REMIC Certificates will be
"qualifying real property loans" under Section 593(d) of the Code, "real estate
assets" within the meaning of Section 856(c)(5)(A) of the Code, and "loans
secured by an interest in real property" under Section 7701(a)(19)(C) of the
Code, and whether the income on such Certificates is interest described in
Section 856(c)(3)(B) of the Code, the Tiered REMICs will be treated as one
REMIC.
TAXATION OF OWNERS OF REMIC REGULAR CERTIFICATES
GENERAL
Except as otherwise stated in this discussion, REMIC Regular Certificates
will be treated for federal income tax purposes as debt instruments issued by
the REMIC and not as ownership interests in the REMIC or its assets. Moreover,
holders of REMIC Regular Certificates that otherwise report income under a cash
method of accounting will be required to report income with respect to REMIC
Regular Certificates under an accrual method.
ORIGINAL ISSUE DISCOUNT
Certain REMIC Regular Certificates may be issued with "original issue
discount" within the meaning of Section 1273(a) of the Code. Any holders of
REMIC Regular Certificates issued with original issue discount generally will be
required to include original issue discount in income as it accrues, in
accordance with the method described below, in advance of the receipt of the
cash attributable to such income. In addition, Section 1272(a)(6) of the Code
provides special rules applicable to REMIC Regular Certificates and certain
other debt instruments issued with original issue discount. Regulations have not
been issued under that section.
The Code requires that a prepayment assumption be used with respect to
Mortgage Loans held by a REMIC in computing the accrual of original issue
discount on REMIC Regular Certificates issued by that REMIC, and that
adjustments be made in the amount and rate of accrual of such discount to
reflect differences between the actual prepayment rate and the prepayment
assumption. The prepayment assumption is to be determined in a manner prescribed
in Treasury regulations; as noted above, those regulations have not been issued.
The Conference Committee Report (the "Committee Report") accompanying the Tax
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Reform Act of 1986 indicates that the regulations will provide that the
prepayment assumption used with respect to a REMIC Regular Certificate must be
the same as that used in pricing the initial offering of such REMIC Regular
Certificate. The prepayment assumption (the "Prepayment Assumption") used in
reporting original issue discount for each series will be consistent with this
standard and will be disclosed in the related Prospectus Supplement. However,
neither the Depositor, any Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate.
The original issue discount, if any, on a REMIC Regular Certificate will be
the excess of its stated redemption price over its issue price. The issue price
of a particular class of REMIC Regular Certificates will be the first cash price
at which a substantial amount of REMIC Regular Certificates of that class is
sold (excluding sales to bond houses, brokers and underwriters). If less than a
substantial amount of a particular class of REMIC Regular Certificates is sold
for cash on or prior to the date of their initial issuance (the "Closing Date"),
the issue price for such class will be the fair market value of such class on
the Closing Date. Under the OID Regulations, the stated redempton price of a
REMIC Regular Certificate is equal to the total of all payments to be made on
such Certificate other than "qualified stated interest." "Qualified stated
interest" includes interest that is unconditionally payable at least annually at
a single fixed rate, at a "qualified floating rate," a combination of a single
fixed rate and one or more "qualified floating rates" or one "qualified inverse
floating rate," or a combination of "qualified floating rates" or at an
"objective rate" that does not operate in a manner that accelerates or defers
interest payments on such REMIC Regular Certificate.
In the case of REMIC Regular Certificates bearing adjustable interest rates,
the determination of the total amount of original issue discount and the timing
of the inclusion thereof will vary according to the characteristics of such
REMIC Regular Certificates. If the original issue discount rules apply to such
Certificates, the related Prospectus Supplement will describe the manner in
which such rules will be applied with respect to those Certificates in preparing
information returns to the Certificateholders and the Internal Revenue Service
(the "IRS").
Certain classes of the REMIC Regular Certificates may provide for the first
interest payment with respect to such Certificates to be made more than one
month after the date of issuance, a period which is longer than the subsequent
monthly intervals between interest payments. Assuming the "accrual period" (as
defined below) for original issue discount is each monthly period that ends on a
Distribution Date, in some cases, as a consequence of this "long first accrual
period," all interest payments may be required to be included in the stated
redemption price of the REMIC Regular Certificate and accounted for as original
discount. Because interest on REMIC Regular Certificates must in any event be
accounted for under an accrual method, applying this analysis would result in
only a slight difference in the timing of the inclusion in income of the yield
on the REMIC Regular Certificates.
In addition, if the accrued interest to be paid on the first Distribution
Date is computed with respect to a period that begins prior to the Closing Date,
a portion of the purchase price paid for a REMIC Regular Certificate will
reflect such accrued interest. In such cases, information returns to the
Certificateholders and the IRS will be based on the position that the portion of
the purchase price paid for the interest accrued with respect to periods prior
to the Closing Date is treated as part of the overall cost of such REMIC Regular
Certificate (and not as a separate asset the cost of which is recovered entirely
out of interest received on the next Distribution Date) and that the portion of
the interest paid on the first Distribution Date in excess of interest accrued
for a number of days corresponding to the number of days from the Closing Date
to the first Distribution Date should be included in the stated redemption price
of such REMIC Regular Certificate. However, the OID Regulations state that all
or some portion of such accrued interest may be treated as a separate asset the
cost of which is recovered entirely out of interest paid on the first
Disribution Date. It is unclear how an election to do so would be made under the
OID Regulations and whether such an election could be made unilaterally by a
Certificateholder.
Notwithstanding the general definition of original issue discount, original
issue discount on a REMIC Regular Certificate will be considered to be de
minimis if it is less than 0.25% of the stated redemption price
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of the REMIC Regular Certificate multiplied by its weighted average life. For
this purpose, the weighted average life of the REMIC Regular Certificate is
computed as the sum of the amounts determined, as to each payment included in
the stated redemption price of such REMIC Regular Certificate, by multiplying
(i) the number of complete years (rounding down for partial years) from the
issue date until such payment is expected to be made (presumably taking into
account the Prepayment Assumption) by (ii) a fraction, the numerator of which is
the amount of payment, and the denominator of which is the stated redemption
price at maturity of such REMIC Regular Certificate. Under the OID Regulations,
original issue discount of only a de minimis amount (other than de minimis
original issue discount attributable to a so-called "teaser" interest rate or an
initial interest holiday) will be included in income as each payment of stated
principal is made, based on the product of the total amount of such de minimis
original issue discount and a fraction, the numerator of which is the amount of
such principal payment and the denominator of which is the outstanding stated
principal amount of the REMIC Regular Certificate. The OID Regulations also
would permit a Certificateholder to elect to accrue de minimis original issue
discount into income currently based on a constant yield method. See "Taxation
of Owners of REMIC Regular Certificates--Market Discount" for a description of
such election under the OID Regulations.
If original issue discount on a REMIC Regular Certificate is in excess of a
de minimis amount, the holder of such Certificate must include in ordinary gross
income the sum of the "daily portions" of original issue discount for each day
during its taxable year on which it held such REMIC Regular Certificate,
including the purchase date but excluding the disposition date. In the case of
an original holder of a REMIC Regular Certificate, the daily portions of
original issue discount will be determined as follows.
As to each "accrual period," that is, unless otherwise stated in the related
Prospectus Supplement, each period that ends on a date that corresponds to a
Distribution Date and begins on the first day following the immediately
preceding accrual period (or in the case of the first such period, begins on the
Closing Date), a calculation will be made of the portion of the original issue
discount that accrued during such accrual period. The portion of original issue
discount that accrues in any accrual period will equal the excess, if any, of
(i) the sum of (A) the present value, as of the end of the accrual period, of
all of the distributions remaining to be made on the REMIC Regular Certificate,
if any, in future periods and (B) the distributions made on such REMIC Regular
Certificate during the accrual period of amounts included in the stated
redemption price, over (ii) the adjusted issue price of such REMIC Regular
Certificate at the beginning of the accrual period. The present value of the
remaining distributions referred to in the preceding sentence will be calculated
(i) assuming that distributions on the REMIC Regular Certificate will be
received in future periods based on the Mortgage Loans being prepaid at a rate
equal to the Prepayment Assumption and (ii) using a discount rate equal to the
original yield to maturity of the Certificate. For these purposes, the original
yield to maturity of the Certificate will be calculated based on its issue price
and assuming that distributions on the Certificate will be made in all accrual
periods based on the Mortgage Loans being prepaid at a rate equal to the
Prepayment Assumption. The adjusted issue price of a REMIC Regular Certificate
at the beginning of any accrual period will equal the issue price of such
Certificate, increased by the aggregate amount of original issue discount that
accrued with respect to such Certificate in prior accrual periods, and reduced
by the amount of any distributions made on such REMIC Regular Certificate in
prior accrual periods of amounts included in the stated redemption price. The
original issue discount accruing during any accrual period, computed as
described above, will be allocated ratably to each day during the accrual period
to determine the daily portion of original issue discount for such day.
A subsequent purchaser of a REMIC Regular Certificate that purchases such
Certificate at a cost (excluding any portion of such cost attributable to
accrued qualified stated interest) less than its remaining stated redemption
price will also be required to include in gross income the daily portions of any
original issue discount with respect to such Certificate. However, each such
daily portion will be reduced, if such cost is in excess of the REMIC Regular
Certificate's "adjusted issue price," in proportion to the ratio such excess
bears to the aggregate original issue discount remaining to be accrued on such
REMIC Regular Certificate. The adjusted issue price of a REMIC Regular
Certificate on any given day equals the sum of (i) the adjusted
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issue price (or, in the case of the first accrual period, the issue price) of
such Certificate at the beginning of the accrual period which includes such day
and (ii) the daily portions of original issue discount for all days during such
accrual period prior to such day.
MARKET DISCOUNT
A Certificateholder that purchases a REMIC Regular Certificate at a market
discount, that is, in the case of a REMIC Regular Certificate issued without
original issue discount, at a purchase price less than its remaining stated
principal amount, or in the case of a REMIC Regular Certificate issued with
original issue discount, at a purchase price less than its adjusted issue price
will recognize gain upon receipt of each distribution representing stated
redemption price. In particular, under Section 1276 of the Code such a
Certificateholder generally will be required to allocate the portion of each
such distribution representing stated redemption price first to accrued market
discount not previously included in income, and to recognize ordinary income to
that extent. A Certificateholder may elect to include market discount in income
currently as it accrues rather than including it on a deferred basis in
accordance with the foregoing. If made, such election will apply to all market
discount bonds acquired by such Certificateholder on or after the first day of
the first taxable year to which such election applies. In addition, the OID
Regulations permit a Certificateholder to elect to accrue all interest, discount
(including de minimis market or original issue discount) and premium in income
as interest, based on a constant yield method. If such an election were made
with respect to a REMIC Regular Certificate with market discount, the
Certificateholder would be deemed to have made an election to include currently
market discount in income with respect to all other debt instruments having
market discount that such Certificateholder acquires during the taxable year of
the election or thereafter, and possibly previously acquired instruments.
Similarly, a Certificateholder that made this election for a Certificate that is
acquired at a premium would be deemed to have made an election to amortize bond
premium with respect to all debt instruments having amortizable bond premium
that such Certificateholder owns or acquires. See "Taxation of Owners of REMIC
Regular Certificates--Premium." Each of these elections to accrue interest,
discount and premium with respect to a Certificate on a constant yield method or
as interest would be irrevocable.
However, market discount with respect to a REMIC Regular Certificate will be
considered to be de minimis for purposes of Section 1276 of the Code if such
market discount is less than 0.25% of the remaining stated redemption price of
such REMIC Regular Certificate multiplied by the number of complete years to
maturity remaining after the date of its purchase. In interpreting a similar
rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the Prepayment Assumption. If
market discount is treated as de minimis under this rule, it appears that the
actual discount would be treated in a manner similar to original issue discount
of a de minimis amount. See "Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." Such treatment would result in discount
being included in income at a slower rate than discount would be required to be
included in income using the method described above.
Section 1276(b)(3) of the Code specifically authorizes the Treasury
Department to issue regulations providing for the method for accruing market
discount on debt instruments, the principal of which is payable in more than one
installment. Until regulations are issued by the Treasury Department certain
rules described in the Committee Report will apply. The Committee Report
indicates that in each accrual period market discount on REMIC Regular
Certificates should accrue, at the Certificateholder's option: (i) on the basis
of a constant yield method, (ii) in the case of a REMIC Regular Certificate
issued without original issue discount, in an amount that bears the same ratio
to the total remaining market discount as the stated interest paid in the
accrual period bears to the total amount of stated interest remaining to be paid
on the REMIC Regular Certificate as of the beginning of the accrual period, or
(iii) in the case of a REMIC Regular Certificate issued with original issue
discount, in an amount that bears the same ratio to the total remaining market
discount as the original issue discount accrued in the accrual period bears to
the total original issue discount remaining on the REMIC Regular Certificate at
the beginning of the accrual period. Morever, the Prepayment Assumption used in
calculating the accrual of original issue discount is also used in calculating
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the accrual of market discount. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a REMIC Regular Certificate
purchased at a discount in the secondary market.
To the extent that REMIC Regular Certificates provide for monthly or other
periodic distributions throughout their term, the effect of these rules may be
to require market discount to be includible in income at a rate that is not
significantly slower than the rate at which such discount would accrue if it
were original issue discount. Moreover, in any event a holder of a REMIC Regular
Certificate generally will be required to treat a portion of any gain on the
sale or exchange of such Certificate as ordinary income to the extent of the
market discount accrued to the date of disposition under one of the foregoing
methods, less any accrued market discount previously reported as ordinary
income.
Further, under Section 1277 of the Code a holder of a REMIC Regular
Certificate may be required to defer a portion of its interest deductions for
the taxable year attributable to any indebtedness incurred or continued to
purchase or carry such Regular Certificate. For these purposes, the de minimis
rule referred to above applies. Any such deferred interest expense would not
exceed the market discount that accrues during such taxable year and is, in
general, allowed as a deduction not later than the year in which such market
discount is includible in income. If such holder elects to include market
discount in income currently as it accrues on all market discount instruments
acquired by such holder in that taxable year or thereafter, the interest
deferral rule described above will not apply.
PREMIUM
A REMIC Regular Certificate purchased at a cost (excluding any portion of
such cost attributable to accrued qualified stated interest) greater than its
remaining stated redemption price will be considered to be purchased at a
premium. The holder of such a REMIC Regular Certificate may elect under Section
171 of the Code to amortize such premium under the constant yield method over
the life of the Certificate. If made, such an election will apply to all debt
instruments having amortizable bond premium that the holder owns or subsequently
acquires. Amortizable premium will be treated as an offset to interest income on
the related debt instrument rather than as a separate interest deduction. The
OID Regulations also permit Certificateholders to elect to account for all
interest, discount and premium based on a constant yield method, further
treating the Certificateholder as having made the election to amortize premium
generally. See "Taxation of Owners of REMIC Regular Certificates--Market
Discount." The Committee Report states that the same rules that apply to accrual
of market discount (which rules will require use of a prepayment assumption in
accruing market discount with respect to REMIC Regular Certificates without
regard to whether such Certificates have original issue discount) will also
apply in amortizing bond premium under Section 171 of the Code.
REALIZED LOSSES
Under Section 166 of the Code, both corporate holders of the REMIC Regular
Certificates and noncorporate holders of the REMIC Regular Certificates that
acquire such Certificates in connection with a trade or business should be
allowed to deduct, as ordinary losses, any losses sustained during a taxable
year in which their Certificates become wholly or partially worthless as the
result of one or more realized losses on the Mortgage Loans. However, it appears
that a noncorporate holder that does not acquire a REMIC Regular Certificate in
connection with a trade or business will not be entitled to deduct a loss under
Section 166 of the Code until such holder's Certificate becomes wholly worthless
(i.e., until its outstanding principal balance has been reduced to zero) and
that the loss will be characterized as a short-term capital loss.
Each holder of a REMIC Regular Certificate will be required to accrue
interest and original issue discount with respect to such Certificates, without
giving effect to any reductions in distributions attributable to defaults or
delinquencies on the Mortgage Loans until it can be established that any such
reduction ultimately will not be recoverable. As a result, the amount of taxable
income reported in any period by the holder of a REMIC Regular Certificate could
exceed the amount of economic income actually realized by the holder in such
period. Although the holder of a REMIC Regular Certificate eventually will
recognize a
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loss or reduction in income attributable to previously accrued and included
income that as the result of a realized loss ultimately will not be realized,
the law is unclear with respect to the timing and character of such loss or
reduction in income.
TAXATION OF OWNERS OF REMIC RESIDUAL CERTIFICATES
GENERAL
As residual interests, the REMIC Residual Certificates will be subject to
tax rules that differ significantly from those that would apply if the REMIC
Residual Certificates were treated for federal income tax purposes as direct
ownership interests in the Mortgage Loans or as debt instruments issued by the
REMIC.
An owner of a REMIC Residual Certificate generally will be required to
report its daily portion of the taxable income or, subject to the limitations
noted in this discussion, the net loss of the REMIC for each day during a
calendar quarter that such holder owned such REMIC Residual Certificate. For
this purpose, the taxable income or net loss of the REMIC will be allocated to
each day in the calendar quarter ratably using a "30 days per month/90 days per
quarter/360 days per year" convention unless otherwise disclosed in the related
Prospectus Supplement. The daily amounts so allocated will then be allocated
among the REMIC Residual Certificateholders in proportion to their respective
ownership interests on such day. Any amount included in the gross income of or
allowed as a loss to any REMIC Residual Certificateholder by virtue of this
paragraph will be treated as ordinary income or loss. The taxable income of the
REMIC will be determined under the rules described below in "Taxable Income of
the REMIC" and will be taxable to the REMIC Residual Certificateholders without
regard to the timing or amount of cash distributions by the REMIC. Ordinary
income derived from REMIC Residual Certificates will be "portfolio income" for
purposes of the taxation of taxpayers subject to limitations under Section 469
of the Code on the deductibility of "passive losses."
A holder of a REMIC Residual Certificate that purchased such Certificate
from a prior holder also will be required to report on its federal income tax
return amounts representing its daily share of the taxable income (or net loss)
of the REMIC for each day that it holds such Certificate. Those daily amounts
generally will equal the amounts of taxable income or net loss determined as
described above. The Committee Report indicates that certain modifications of
the general rules may be made, by regulations, legislation or otherwise, to
reduce (or increase) the income of a REMIC Residual Certificateholder that
purchased such Certificate from a prior holder of such Certificate at a price
greater than (or less than) the adjusted basis (as defined below) such REMIC
Residual Certificate would have had in the hands of an original holder of such
Certificate. The REMIC Regulations, however, do not provide for any such
modifications.
Any payments received by a holder of a REMIC Residual Certificate in
connection with the acquisition of such REMIC Residual Certificate will be taken
into account in determining the income of such holder for federal income tax
purposes. Although it appears likely that any such payment would be includible
in income immediately upon its receipt, the IRS might assert that such payment
should be included in income over time according to an amortization schedule or
according to some other method. Because of the uncertainty concerning the
treatment of such payments, holders of REMIC Residual Certificates should
consult their tax advisors concerning the treatment of such payments for income
tax purposes.
The amount of income REMIC Residual Certificateholders will be required to
report (or the tax liability associated with such income) may exceed the amount
of cash distributions received from the REMIC for the corresponding period.
Consequently, REMIC Residual Certificateholders should have other sources of
funds sufficient to pay any federal income taxes due as a result of their
ownership of REMIC Residual Certificates or unrelated deductions against which
income may be offset, subject to the rules relating to "excess inclusions,"
residual interests without "significant value" and "noneconomic" residual
interests discussed below. The fact that the tax liability associated with the
income allocated to REMIC Residual Certificateholders may exceed the cash
distributions received by such REMIC Residual Certificateholders for the
corresponding period may significantly adversely affect such REMIC Residual
Certificateholders' after-tax rate of return.
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TAXABLE INCOME OF THE REMIC
The taxable income of the REMIC will equal the income from the Mortgage
Loans and other assets of the REMIC plus any cancellation of indebtedness income
due to the allocation of realized losses to REMIC Regular Certificates, less the
deductions allowed to the REMIC for interest (including original issue discount
and reduced by any premium on issuance) on the REMIC Regular Certificates (and
any other class of REMIC Certificates constituting "regular interests" in the
REMIC not offered hereby), amortization of any premium on the Mortgage Loans,
bad debt losses with respect to the Mortgage Loans and, except as described
below, servicing, administrative and other expenses.
For purposes of determining its taxable income, the REMIC will have an
initial aggregate basis in its assets equal to the sum of the issue prices of
all REMIC Certificates (or, if a class of REMIC Certificates is not sold
initially, their fair market values). Such aggregate basis will be allocated
among the Mortgage Loans and the other assets of the REMIC in proportion to
their respective fair market values. The issue price of any REMIC Certificates
offered hereby will be determined in the manner described above under
"--Taxation of Owners of REMIC Regular Certificates--Original Issue Discount."
The issue price of a REMIC Certificate received in exchange for an interest in
the Mortgage Loans or other property will equal the fair market value of such
interests in the Mortgage Loans or other property. Accordingly, if one or more
classes of REMIC Certificates are retained initially rather than sold, the
Trustee may be required to estimate the fair market value of such interests in
order to determine the basis of the REMIC in the Mortgage Loans and other
property held by the REMIC.
Subject to possible application of the de minimis rules, the method of
accrual by the REMIC of original issue discount income and market discount
income with respect to Mortgage Loans that it holds will be equivalent to the
method for accruing original issue discount income for holders of REMIC Regular
Certificates (that is, under the constant yield method taking into account the
Prepayment Assumption). However, a REMIC that acquires loans at a market
discount must include such market discount in income currently as it accrues, on
a constant yield basis. See "--Taxation of Owners of REMIC Regular Certificates"
above, which describes a method for accruing such discount income that is
analogous to that required to be used by a REMIC as to Mortgage Loans with
market discount that it holds.
A Mortgage Loan will be deemed to have been acquired with discount (or
premium) to the extent that the REMIC's basis therein, determined as described
above, is less than (or greater than) its stated redemption price. Any such
discount will be includible in the income of the REMIC as it accrues, in advance
of the cash attributable to such income, under a method similar to the method
described above for accruing original issue discount on the REMIC Regular
Certificates. It is anticipated that the REMIC will elect under Section 171 of
the Code to amortize any premium on the Mortgage Loans. Premium on any Mortgage
Loan to which such election applies may be amortized under a constant yield
method, presumably taking into account the Prepayment Assumption. Further, such
an election would not apply to any Mortgage Loan originated on or before
September 27, 1985. Instead, premium on such a Mortgage Loan should be allocated
among the principal payments thereon and be deductible by the REMIC as those
payments become due or upon the prepayment of such Mortgage Loan.
A REMIC will be allowed deductions for interest (including original issue
discount) on the REMIC Regular Certificates (including any other class of REMIC
Certificates constituting "regular interests" in the REMIC not offered hereby)
equal to the deductions that would be allowed if the REMIC Regular Certificates
(including any other class of REMIC Certificates constituting "regular
interests" in the REMIC not offered hereby) were indebtedness of the REMIC.
Original issue discount will be considered to accrue for this purpose as
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount," except that the de minimis rule and the
adjustments for subsequent holders of REMIC Regular Certificates (including any
other class of REMIC Certificates constituting "regular interests" in the REMIC
not offered hereby) described therein will not apply.
If a class of REMIC Regular Certificates is issued at a price in excess of
the stated redemption price of such class (such excess "Issue Premium"), the net
amount of interest deductions that are allowed the REMIC in each taxable year
with respect to the REMIC Regular Certificates of such class will be reduced by
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an amount equal to the portion of the Issue Premium that is considered to be
amortized or repaid in that year. Although the matter is not entirely certain,
it is likely that Issue Premium would be amortized under a constant yield method
in a manner analogous to the method of accruing original issue discount
described above under "--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount."
As a general rule, the taxable income of a REMIC will be determined in the
same manner as if the REMIC were an individual having the calendar year as its
taxable year and using the accrual method of accounting. However, no item of
income, gain, loss or deduction allocable to a prohibited transaction will be
taken into account. See "--Prohibited Transactions and Other Possible REMIC
Taxes" below. Further, the limitation on miscellaneous itemized deductions
imposed on individuals by Section 67 of the Code (which allows such deductions
only to the extent they exceed in the aggregate two percent of the taxpayer's
adjusted gross income) will not be applied at the REMIC level so that the REMIC
will be allowed deductions for servicing, administrative and other non-interest
expenses in determining its taxable income. All such expenses will be allocated
as a separate item to the holders of REMIC Certificates, subject to the
limitation of Section 67 of the Code. See "--Possible Pass-Through of
Miscellaneous Itemized Deductions." If the deductions allowed to the REMIC
exceed its gross income for a calendar quarter, such excess will be the net loss
for the REMIC for that calendar quarter.
BASIS RULES, NET LOSSES AND DISTRIBUTIONS
The adjusted basis of a REMIC Residual Certificate will be equal to the
amount paid for such Certificate, increased by amounts included in the income of
the REMIC Residual Certificateholder and decreased (but not below zero) by
distributions made, and by net losses allocated, to such REMIC Residual
Certificateholder.
A REMIC Residual Certificateholder is not allowed to take into account any
net loss for any calendar quarter to the extent such net loss exceeds such REMIC
Residual Certificateholder's adjusted basis in its REMIC Residual Certificate as
of the close of such calendar quarter (determined without regard to such net
loss). Any loss that is not currently deductible by reason of this limitation
may be carried forward indefinitely to future calendar quarters and, subject to
the same limitation, may be used only to offset income from the REMIC Residual
Certificate. The ability of REMIC Residual Certificateholders to deduct net
losses may be subject to additional limitations under the Code, as to which
REMIC Residual Certificateholders should consult their tax advisors.
Any distribution on a REMIC Residual Certificate will be treated as a
non-taxable return of capital to the extent it does not exceed the holder's
adjusted basis in such Certificate. To the extent a distribution on a REMIC
Residual Certificate exceeds such adjusted basis, it will be treated as gain
from the sale of such Certificate. Holders of certain REMIC Residual
Certificates may be entitled to distributions early in the term of the related
REMIC under circumstances in which their bases in such REMIC Residual
Certificates will not be sufficiently large that such distributions will be
treated as nontaxable returns of capital. Their bases in such REMIC Residual
Certificates will initially equal the amount paid for such REMIC Residual
Certificates and will be increased by their allocable shares of the taxable
income of the REMIC. However, such basis increases may not occur until the end
of the calendar quarter, or perhaps the end of the calendar year, with respect
to which such REMIC taxable income is allocated to the REMIC Residual
Certificateholders. To the extent such REMIC Residual Certificateholders'
initial bases are less than the distributions to such REMIC Residual
Certificateholders, and increases in such initial bases either occur after such
distributions or (together with their initial bases) are less than the amount of
such distributions, gain will be recognized to such REMIC Residual
Certificateholders on such distributions and will be treated as gain from the
sale of their REMIC Residual Certificates.
The effect of these rules is that a REMIC Residual Certificateholder may not
amortize its basis in a REMIC Residual Certificate, but may only recover its
basis through distributions, through the deduction of any net losses of the
REMIC or upon the sale of its REMIC Residual Certificate. See "--Sales of REMIC
Certificates," below. For a discussion of possible modifications of these rules
that may require adjustments to income of a holder of a REMIC Residual
Certificate other than an original holder in order to reflect any
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difference between the cost of such REMIC Residual Certificate to such REMIC
Residual Certificateholder and the adjusted basis such REMIC Residual
Certificate would have had in the hands of an original holder, see "--Taxation
of Owners of REMIC Residual Certificates--General."
EXCESS INCLUSIONS
Any "excess inclusions" with respect to a REMIC Residual Certificate will,
with an exception discussed below for certain REMIC Residual Certificates held
by thrift institutions, be subject to federal income tax in all events.
In general, the "excess inclusions" with respect to a REMIC Residual
Certificate for any calendar quarter will be the excess, if any, of (i) the
daily portions of REMIC taxable income allocable to such REMIC Residual
Certificate over (ii) the sum of the "daily accruals" (as defined below) for
each day during such quarter that such REMIC Residual Certificate was held by
the REMIC Residual Certificateholder. The daily accruals of a REMIC Residual
Certificateholder will be determined by allocating to each day during a calendar
quarter its ratable portion of the product of the "adjusted issue price" of the
REMIC Residual Certificate at the beginning of the calendar quarter and 120% of
the "long-term Federal rate" in effect on the Closing Date. For this purpose,
the adjusted issue price of a REMIC Residual Certificate as of the beginning of
any calendar quarter will be equal to the issue price of the REMIC Residual
Certificate, increased by the sum of the daily accruals for all prior quarters
and decreased (but not below zero) by any distributions made with respect to
such REMIC Residual Certificate before the beginning of such quarter. The issue
price of a REMIC Residual Certificate is the initial offering price to the
public (excluding bond houses and brokers) at which a substantial amount of the
REMIC Residual Certificates were sold. The "long-term Federal 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.
For REMIC Residual Certificateholders, an excess inclusion (i) will not be
permitted to be offset by deductions, losses or loss carryovers from other
activities, (ii) will be treated as "unrelated business taxable income" to an
otherwise tax-exempt organization and (iii) will not be eligible for any rate
reduction or exemption under any applicable tax treaty with respect to the 30%
United States withholding tax imposed on distributions to REMIC Residual
Certificateholders that are foreign investors. See, however, "--Foreign
Investors in REMIC Certificates," below.
As an exception to the general rules described above, thrift institutions
are allowed to offset their excess inclusions with unrelated deductions, losses
or loss carryovers, but only if the REMIC Residual Certificates are considered
to have "significant value." The REMIC Regulations provide that in order to be
treated as having significant value, the REMIC Residual Certificates must have
an aggregate issue price at least equal to two percent of the aggregate issue
prices of all of the related REMIC's Regular and Residual Certificates. In
addition, based on the Prepayment Assumption, the anticipated weighted average
life of the REMIC Residual Certificates must equal or exceed 20 percent of the
anticipated weighted average life of the REMIC, based on the Prepayment
Assumption and on any required or permitted clean up calls or required qualified
liquidation provided for in the REMIC's organizational documents. Although it
has not done so, the Treasury also has authority to issue regulations that would
treat the entire amount of income accruing on a REMIC Residual Certificate as an
excess inclusion if the REMIC Residual Certificates are considered not to have
"significant value." The related Prospectus Supplement will disclose whether
offered REMIC Residual Certificates may be considered to have "significant
value" under the REMIC Regulations; provided, however, that any disclosure that
a REMIC Residual Certificate will have "significant value" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will have "significant value" for purposes of the
above-described rules. The above described exception for thrift institutions
applies only to those residual interests held directly by, and deductions,
losses and loss carryovers incurred by, such institutions (and not by other
members of an affiliated group of corporations filing a consolidated income tax
return) or by certain wholly owned direct subsidiaries of such institutions
formed or operated exclusively in connection with the organization and operation
of one or more REMICs.
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In the case of any REMIC Residual Certificates held by a real estate
investment trust, the aggregate excess inclusions with respect to such
Certificates, reduced (but not below zero) by the real estate investment trust
taxable income (within the meaning of Section 857(b)(2) of the Code, excluding
any net capital gain), will be allocated among the shareholders of such trust in
proportion to the dividends received by such shareholders from such trust, and
any amount so allocated will be treated as an excess inclusion with respect to a
REMIC Residual Certificate as if held directly by such shareholder. Treasury
regulations yet to be issued could apply a similar rule to regulated investment
companies, common trust funds and certain cooperatives; the REMIC Regulations
currently do not address this subject.
NONECONOMIC REMIC RESIDUAL CERTIFICATES
Under the REMIC Regulations, a transfer of a "noneconomic" REMIC Residual
Certificate will be disregarded for all federal income tax purposes if "a
significant purpose of the transfer was to enable the transferor to impede the
assessment or collection of tax." If such transfer is disregarded, the purported
transferor will continue to remain liable for any taxes due with respect to the
income on such "noneconomic" REMIC Residual Certificate. The REMIC Regulations
provide that a REMIC Residual Certificate is noneconomic unless, based on the
Prepayment Assumption and on any required or permitted clean up calls or
required qualified liquidation provided for in the REMIC's organizational
documents, (1) the present value of the expected future distributions
(discounted using the "applicable Federal rate" for obligations whose term ends
on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) on the REMIC Residual Certificate equals at
least the present value of the expected tax on the anticipated excess
inclusions, and (2) the transferor reasonably expects that the transferee will
receive distributions with respect to the REMIC Residual Certificate at or after
the time the taxes accrue on the anticipated excess inclusions in an amount
sufficient to satisfy the accrued taxes. Accordingly, all transfers of REMIC
Residual Certificates that may constitute noneconomic residual interests will be
subject to certain restrictions under the terms of the related Pooling and
Servicing Agreement that are intended to reduce the possibility of any such
transfer being disregarded. Such restrictions will require each party to a
transfer to provide an affidavit that no purpose of such transfer is to impede
the assessment or collection of tax, including certain representations as to the
financial condition of the prospective transferee, as to which the transferor
will also be required to make a reasonable investigation to determine such
transferee's historic payments of its debts and ability to continue to pay its
debts as they come due in the future. Prior to purchasing a REMIC Residual
Certificate, prospective purchasers should consider the possibility that a
purported transfer of such REMIC Residual Certificate by such a purchaser to
another purchaser at some future date might be disregarded in accordance with
the above-described rules, which would result in the retention of tax liability
by such purchaser.
The related Prospectus Supplement will disclose whether offered REMIC
Residual Certificates may be considered "noneconomic" residual interests under
the REMIC Regulations; provided, however, that any disclosure that a REMIC
Residual Certificate will not be considered "noneconomic" will be based upon
certain assumptions, and the Depositor will make no representation that a REMIC
Residual Certificate will not be considered "noneconomic" for purposes of the
above-described rules. See "--Foreign Investors In REMIC Certificates--REMIC
Residual Certificates" below for additional restrictions applicable to transfers
of certain REMIC Residual Certificates to foreign persons.
MARK-TO-MARKET RULES
On December 28, 1993, the IRS released temporary 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 owned by 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 "negative value" REMIC Residual Certificate is not treated as a
security and thus generally may not be marked to market. This exclusion from the
mark-to-market requirement is expanded to include all REMIC Residual
Certificates under proposed Treasury regulations published January 4, 1995 which
provide that any REMIC Residual Certificate issued after
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January 4, 1995 will not be treated as a security and therefore generally may
not be marked to market. Prospective purchasers of a REMIC Residual Certificate
should consult their tax advisors regarding the possible application of the
mark-to-market requirement to REMIC Residual Certificates.
POSSIBLE PASS-THROUGH OF MISCELLANEOUS ITEMIZED DEDUCTIONS
Fees and expenses of a REMIC generally will be allocated to the holders of
the REMIC Residual Certificates. The applicable Treasury regulations indicate,
however, that in the case of a REMIC that is similar to a single class grantor
trust, all or a portion of such fees and expenses should be allocated to the
holders of the related REMIC Regular Certificates. Unless otherwise stated in
the related Prospectus Supplement, such fees and expenses will be allocated to
holders of the related REMIC Residual Certificates in their entirety and not to
the holders of the related REMIC Regular Certificates.
With respect to REMIC Residual Certificates or REMIC Regular Certificates
the holders of which receive an allocation of fees and expenses in accordance
with the preceding discussion, if any holder thereof is an individual, estate or
trust, or a "pass-through entity" beneficially owned by one or more individuals,
estates or trusts, (i) an amount equal to such individual's, estate's or trust's
share of such fees and expenses will be added to the gross income of such holder
and (ii) such individual's, estate's or trust's share of such fees and expenses
will be treated as a miscellaneous itemized deduction allowable subject to the
limitation of Section 67 of the Code, which permits such deductions only to the
extent they exceed in the aggregate two percent of a taxpayer's adjusted gross
income. In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of such Certificates
that are subject to the limitations of either Section 67 or Section 68 of the
Code may be substantial. Furthermore, in determining the alternative minimum
taxable income of such a holder of a REMIC Certificate that is an individual,
estate or trust, or a "pass-through entity" beneficially owned by one or more
individuals, estates or trusts, no deduction will be allowed for such holder's
allocable portion of servicing fees and other miscellaneous itemized deductions
of the REMIC, even though an amount equal to the amount of such fees and other
deductions will be included in such holder's gross income. Accordingly, such
REMIC Certificates may not be appropriate investments for individuals, estates
or trusts, or pass-through entities beneficially owned by one or more
individuals, estates or trusts. Such prospective investors should carefully
consult with their own tax advisors prior to making an investment in such
Certificates.
SALES OF REMIC CERTIFICATES
If a REMIC Certificate is sold, the selling Certificateholder will recognize
gain or loss equal to the difference between the amount realized on the sale and
its adjusted basis in the REMIC Regular Certificate. The adjusted basis of a
REMIC Regular Certificate generally will equal the cost of such REMIC Regular
Certificate to such Certificateholder, increased by income reported by such
Certificateholder with respect to
such REMIC Regular Certificate (including original issue discount and market
discount income) and reduced (but not below zero) by distributions on such REMIC
Regular Certificate received by such Certificateholder and by any amortized
premium. The adjusted basis of a REMIC Residual Certificate will be determined
as described under "--Taxation of Owners of REMIC Residual Certificates--Basis
Rules, Net Losses and Distributions." Except as provided in the following two
paragraphs, any such gain or loss will be capital gain or loss provided such
REMIC Certficate is held as a capital asset (generally property held for
investment) within the meaning of Section 1221 of the Code. The Code as of the
date of this prospectus provides for a top marginal tax rate of 39.6% for
individuals and a maximum marginal rate for long-term capital gains of
individuals of 28%. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income or
loss remains relevant for other purposes.
Gain from the sale of a REMIC Regular Certificate that might otherwise be
capital gain will be treated as ordinary income to the extent such gain does not
exceed the excess, if any, of (i) the amount that would have been includible in
the seller's income with respect to such REMIC Regular Certificate assuming that
income had accrued thereon at a rate equal to 110% of the "applicable Federal
rate" (generally a rate based
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on an average of current yields on Treasury securities having a maturity
comparable to that of the Certificate based on the application of the Prepayment
Assumption to such Certificate, which rate is computed and published monthly by
the IRS), determined as of the date of purchase of such Certificate, over (ii)
the amount of ordinary income actually includible in the seller's income prior
to such sale. In addition, gain recognized on the sale of a REMIC Regular
Certificate by a seller who purchased such Certificate at a market discount will
be taxable as ordinary income in an amount not exceeding the portion of such
discount that accrued during the period such REMIC Certificate was held by such
holder, reduced by any market discount included in income under the rules
described above under "--Taxation of Owners of REMIC Regular
Certificates--Market Discount and--Premium."
REMIC Certificates will be "evidences of indebtedness" within the meaning of
Section 582(c)(1) of the Code, so that gain or loss recognized from the sale of
a REMIC Certificate by a bank or thrift institution to which such section
applies will be ordinary income or loss.
A portion of any gain from the sale of a REMIC Regular Certificate that
might otherwise be capital gain may be treated as ordinary income to the extent
that such Certificate is held as part of a "conversion transaction" within the
meaning of Section 1258 of the Code. A conversion transaction generally is one
in which the taxpayer has taken two or more positions in the same or similar
property that reduce or eliminate market risk, if substantially all of the
taxpayer's return is attributable to the time value of the taxpayer's net
investment in such transaction. The amount of gain so realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for the taxable year, for purposes
of the rule that limits the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
Except as may be provided in Treasury regulations yet to be issued, if the
seller of a REMIC Residual Certificate reacquires a REMIC Residual Certificate,
or acquires any other residual interest in a REMIC or any similar interest in a
"taxable mortgage pool" (as defined in Section 7701(i) of the Code) during the
period beginning six months before, and ending six months after, the date of
such sale, such sale will be subject to the "wash sale" rules of Section 1091 of
the Code. In that event, any loss realized by the Residual Certificateholder on
the sale will not be deductible, but instead will be added to such REMIC
Residual Certificateholder's adjusted basis in the newly acquired asset.
PROHIBITED TRANSACTIONS AND OTHER POSSIBLE REMIC TAXES
The Code imposes a tax on REMICs equal to 100% of the net income derived
from "prohibited transactions" (a "Prohibited Transaction Tax"). In general,
subject to certain specified exceptions, a prohibited transaction means the
disposition of a Mortgage Loan, the receipt of income from a source other than a
Mortgage Loan or certain other permitted investments, the receipt of
compensation for services, or gain from the disposition of an asset purchased
with the payments on the Mortgage Loans for temporary investment pending
distribution on the REMIC Certificates. It is not anticipated that any REMIC
will engage in any prohibited transactions in which it would recognize a
material amount of net income.
In addition, certain contributions to a REMIC made after the day on which
the REMIC issues all of its interests could result in the imposition of a tax on
the REMIC equal to 100% of the value of the contributed property (a
"Contributions Tax"). Each Pooling and Servicing Agreement will include
provisions designed to prevent the acceptance of any contributions that would be
subject to such tax.
REMICs also are 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. "Net income from foreclosure
property" generally means gain from the sale of a foreclosure property that is
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inventory property and gross income from foreclosure property other than
qualifying rents and other qualifying income for a real estate investment trust.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any REMIC will recognize "net income from foreclosure property"
subject to federal income tax.
Unless otherwise disclosed in the related Prospectus Supplement, it is not
anticipated that any material state or local income or franchise tax will be
imposed on any REMIC.
Unless otherwise stated in the related Prospectus Supplement, and to the
extent permitted by then applicable laws, any Prohibited Transactions Tax,
Contributions Tax, tax on "net income from foreclosure property" or state or
local income or franchise tax that may be imposed on the REMIC will be borne by
the related Master Servicer or Trustee, in either case out of its own funds,
provided that the Master Servicer or the Trustee, as the case may be, has
sufficient assets to do so, and provided further that such tax arises out of a
breach of the Master Servicer's or the Trustee's obligations, as the case may
be, under the related Pooling and Servicing Agreement and in respect of
compliance with applicable laws and regulations. Any such tax not borne by the
Master Servicer or the Trustee will be charged against the related Trust Fund,
resulting in a reduction in amounts payable to holders of the related REMIC
Certificates.
TAX AND RESTRICTIONS ON TRANSFERS OF REMIC RESIDUAL CERTIFICATES TO CERTAIN
ORGANIZATIONS.
If a REMIC Residual Certificate is transferred to a "disqualified
organization" (as defined below), a tax would be imposed in an amount
(determined under the REMIC Regulations) equal to the product of (i) the present
value (discounted using the "applicable Federal rate" for obligations whose term
ends on the close of the last quarter in which excess inclusions are expected to
accrue with respect to the REMIC Residual Certificate, which rate is computed
and published monthly by the IRS) of the total anticipated excess inclusions
with respect to such REMIC Residual Certificate for periods after the transfer
and (ii) the highest marginal federal income tax rate applicable to
corporations. The anticipated excess inclusions must be determined as of the
date that the REMIC Residual Certificate is transferred and must be based on
events that have occurred up to the time of such transfer, the Prepayment
Assumption and any required or permitted clean up calls or required qualified
liquidation provided for in the REMIC's organizational documents. Such a tax
would be generally imposed on the transferor of the REMIC Residual Certificate,
except that where such transfer is through an agent for a disqualified
organization, the tax would instead be imposed on such agent. However, a
transferor of a REMIC Residual Certificate would in no event be liable for such
tax with respect to a transfer if the transferee furnishes to the transferor an
affidavit that the transferee is not a disqualified organization, and, as of the
time of the transfer, the transferor did not have actual knowledge that such
affidavit was false. Moreover, an entity will not qualify as a REMIC unless
there are reasonable arrangements designed to ensure that (i) residual interests
in such entity are not held by disqualified organizations and (ii) information
necessary for the application of the tax described herein will be made
available. Restrictions on the transfer of REMIC Residual Certificates and
certain other provisions that are intended to meet this requirement will be
included in the related Pooling and Servicing Agreement, and will be discussed
more fully in any Prospectus Supplement relating to the offering of any REMIC
Residual Certificate.
In addition, if a "pass-through entity" (as defined below) includes in
income excess inclusions with respect to a REMIC Residual Certificate and a
disqualified organization is the record holder of an interest in such entity,
then a tax will be imposed on such entity equal to the product of (i) the amount
of excess inclusions on the REMIC Residual Certificate that are allocable to the
interest in the pass-through entity held by such disqualified organization and
(ii) the highest marginal federal income tax rate imposed on corporations. A
pass-through entity will not be subject to this tax for any period, however, if
each record holder of an interest in such pass-through entity furnishes to such
pass-through entity (i) such holder's social security number and a statement
under penalty of perjury that such social security number is that of the record
holder or (ii) a statement under penalty of perjury that such record holder is
not a disqualified organization.
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For these purposes, a "disqualified organization" means (i) the United
States, any State or political subdivision thereof, any foreign government, any
international organization, or any agency or instrumentality of the foregoing
(not including instrumentalities described in Section 168(h)(2)(D) of the Code
or the Federal Home Loan Mortgage Corporation), (ii) any organization (other
than a cooperative described in Section 521 of the Code) that is exempt from
federal income tax, unless it is subject to the tax imposed by Section 511 of
the Code or (iii) any organization described in Section 1381(a)(2)(C) of the
Code. For these purposes, a "pass-through entity" means any regulated investment
company, real estate investment trust, trust, partnership or certain other
entities described in Section 860E(e)(6) of the Code. In addition, a person
holding an interest in a pass-through entity as a nominee for another person
will, with respect to such interest, be treated as a pass-through entity.
TERMINATION AND LIQUIDATION
A REMIC will terminate immediately after the Distribution Date following
receipt by the REMIC of the final payment in respect of the Mortgage Loans or
upon a sale of the REMIC's assets following the adoption by the REMIC of a plan
of complete liquidation. The last distribution on a REMIC Regular Certificate
will be treated as a payment in retirement of a debt instrument. In the case of
a REMIC Residual Certificate, if the last distribution on such REMIC Residual
Certificate is less than the REMIC Residual Certificateholder's adjusted basis
in such Certificate, such REMIC Residual Certificateholder should (but may not)
be treated as realizing a loss equal to the amount of such difference, and such
loss may be treated as a capital loss. If the REMIC adopts a plan of complete
liquidation, within the meaning of Section 860F(a)(4)(A)(i) of the Code, which
may be accomplished by designating in the REMIC's final tax return a date on
which such adoption is deemed to occur, and sells all of its assets (other than
cash) within a 90-day period beginning on such date, the REMIC will not be
subjected to any "prohibited transactions taxes" solely on account of such
qualified liquidation, provided that the REMIC credits or distributes in
liquidation all of the sale proceeds plus its cash (other than the amounts
retained to meet claims) to holders of Regular and Residual Certificates within
the 90-day period.
REPORTING AND OTHER ADMINISTRATIVE MATTERS
Solely for purposes of the administrative provisions of the Code, the REMIC
will be treated as a partnership and REMIC Residual Certificateholders will be
treated as partners. Unless otherwise stated in the related Prospectus
Supplement, the Trustee will file REMIC federal income tax returns on behalf of
the REMIC, will generally hold at least a nominal amount of REMIC Residual
Certificates, and will be designated as and will act as the "tax matters person"
with respect to the REMIC in all respects.
As the tax matters person, the Trustee will, subject to certain notice
requirements and various restrictions and limitations, generally have the
authority to act on behalf of the REMIC and the REMIC Residual
Certificateholders in connection with the administrative and judicial review of
items of income, deduction, gain or loss of the REMIC, as well as the REMIC's
classification. REMIC Residual Certificateholders will generally be required to
report such REMIC items consistently with their treatment on the related REMIC's
tax return and may in some circumstances be bound by a settlement agreement
between the Trustee, as tax matters person, and the IRS concerning any such
REMIC item. Adjustments made to the REMIC tax return may require a REMIC
Residual Certificateholder to make corresponding adjustments on its return, and
an audit of the REMIC's tax return, or the adjustments resulting from such an
audit, could result in an audit of a REMIC Residual Certificateholder's return.
No REMIC will be registered as a tax shelter pursuant to Section 6111 of the
Code because it is not anticipated that any REMIC will have a net loss for any
of the first five taxable years of its existence. Any person that holds a REMIC
Residual Certificate as a nominee for another person may be required to furnish
to the related REMIC, in a manner to be provided in Treasury regulations, with
the name and address of such person and other information.
Reporting of interest income, including any original issue discount, with
respect to REMIC Regular Certificates is required annually, and may be required
more frequently under Treasury regulations. These information reports generally
are required to be sent to individual holders of REMIC Regular Interests and the
IRS; holders of REMIC Regular Certificates that are corporations, trusts,
securities dealers and certain other non-individuals will be provided interest
and original issue discount income information and the
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information set forth in the following paragraph upon request in accordance with
the requirements of the applicable regulations. The information must be provided
by the later of 30 days after the end of the quarter for which the information
was requested, or two weeks after the receipt of the request. The REMIC must
also comply with rules requiring a REMIC Regular Certificate issued with
original issue discount to disclose on its face the amount of original issue
discount and the issue date, and requiring such information to be reported to
the IRS. Reporting with respect to the REMIC Residual Certificates, including
income, excess inclusions, investment expenses and relevant information
regarding qualification of the REMIC's assets, will be made as required under
the Treasury regulations, generally on a quarterly basis.
As applicable, the REMIC Regular Certificate information reports will
include a statement of the adjusted issue price of the REMIC Regular Certificate
at the beginning of each accrual period. In addition, the reports will include
information required by regulations with respect to computing the accrual of any
market discount. Because exact computation of the accrual of market discount on
a constant yield method would require information relating to the holder's
purchase price that the Master Servicer will not have, such regulations only
require that information pertaining to the appropriate proportionate method of
accruing market discount be provided. See "--Taxation of Owners of REMIC Regular
Certificates--Market Discount."
The responsibility for complying with the foregoing reporting rules will be
borne by the Trustee.
BACKUP WITHHOLDING WITH RESPECT TO REMIC CERTIFICATES
Payments of interest and principal, as well as payments of proceeds from the
sale of REMIC Certificates, may be subject to the "backup withholding tax" under
Section 3406 of the Code at a rate of 31% if recipients of such payments fail to
furnish to the payor certain information, including their taxpayer
identification numbers, or otherwise fail to establish an exemption from such
tax. Any amounts deducted and withheld from a distribution to a recipient would
be allowed as a credit against such recipient's federal income tax. Furthermore,
certain penalties may be imposed by the IRS on a recipient of payments that is
required to supply information but that does not do so in the proper manner.
FOREIGN INVESTORS IN REMIC CERTIFICATES
A REMIC Regular Certificateholder that is not a "United States person" (as
defined below) and is not subject to federal income tax as a result of any
direct or indirect connection to the United States in addition to its ownership
of a REMIC Regular Certificate will not, unless otherwise disclosed in the
related Prospectus Supplement, be subject to United States federal income or
withholding tax in respect of a distribution on a REMIC Regular Certificate,
provided that the holder complies to the extent necessary with certain
identification requirements (including delivery of a statement, signed by the
Certificateholder under penalties of perjury, certifying that such
Certificateholder is not a United States person and providing the name and
address of such Certificateholder). For these purposes, "United States 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 whose income from
sources without the United States is includible in gross income for United
States federal income tax purposes regardless of its connection with the conduct
of a trade or business within the United States. It is possible that the IRS may
assert that the foregoing tax exemption should not apply with respect to a REMIC
Regular Certificate held by a REMIC Residual Certificateholder that owns
directly or indirectly a 10% or greater interest in the REMIC Residual
Certificates. If the holder does not qualify for exemption, distributions of
interest, including distributions in respect of accrued original issue discount,
to such holder may be subject to a tax rate of 30%, subject to reduction under
any applicable tax treaty.
In addition, the foregoing rules will not apply to exempt a United States
shareholder of a controlled foreign corporation from taxation on such United
States shareholder's allocable portion of the interest income received by such
controlled foreign corporation.
Further, it appears that a REMIC Regular Certificate would not be included
in the estate of a non-resident alien individual and would not be subject to
United States estate taxes. However, Certificateholders who are non-resident
alien individuals should consult their tax advisors concerning this question.
Unless
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otherwise stated in the related Prospectus Supplement, transfers of REMIC
Residual Certificates to investors that are not United States persons will be
prohibited under the related Pooling and Servicing Agreement.
Certain restrictions relating to transfers of REMIC Residual Certificates to
and by investors who are not "United States persons" (as defined above) are also
imposed by the REMIC Regulations. If such a transfer is disregarded, the
purported transferor of a REMIC Residual Certificate continues to remain liable
for any taxes due with respect to the income on such Certificate. Prior to
purchasing a REMIC Residual Certificate, prospective purchasers are advised to
review the transferor and transferee affidavits that are required to be
delivered upon a transfer of a REMIC Residual Certificate (forms of which are
attached to the Pooling and Servicing Agreement as exhibits thereto) and should
consider the possibility that a purported transfer of such REMIC Residual
Certificate by such purchaser to another purchaser at some future date might be
disregarded, which would result in the retention of tax liability by such
purchaser and the possibility that an amount equal to the total distributions on
such REMIC Residual Certificate might be withheld to satisfy the United States
federal income tax liability thereon.
GRANTOR TRUST FUNDS
CLASSIFICATION OF GRANTOR TRUST FUNDS
With respect to each series of Grantor Trust Certificates, Counsel to the
Depositor will deliver its opinion to the effect that, assuming compliance with
all provisions of the related Pooling and Servicing Agreement, the related
Grantor Trust Fund will be classified as a grantor trust under subpart E, part I
of subchapter J of the Code and not as a partnership or an association taxable
as a corporation. Accordingly, each holder of a Grantor Trust Certificate
generally will be treated as the owner of an interest in the Mortgage Loans
included in the Grantor Trust Fund.
For purposes of the following discussion, a Grantor Trust Certificate
representing an undivided equitable ownership interest in the principal of the
Mortgage Loans constituting the related Grantor Trust Fund, together with
interest thereon at a pass-through rate, will be referred to as a "Grantor Trust
Fractional Interest Certificate." A Grantor Trust Certificate representing
ownership of all or a portion of the difference between interest paid on the
Mortgage Loans constituting the related Grantor Trust Fund (net of normal
administration fees and any Spread) and interest paid to the holders of Grantor
Trust Fractional Interest Certificates issued with respect to such Grantor Trust
Fund will be referred to as a "Grantor Trust Strip Certificate." A Grantor Trust
Strip Certificate may also evidence a nominal ownership interest in the
principal of the Mortgage Loans constituting the related Grantor Trust Fund.
CHARACTERIZATION OF INVESTMENTS IN GRANTOR TRUST CERTIFICATES
GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
In the case of Grantor Trust Fractional Interest Certificates, unless
otherwise disclosed in the related Prospectus Supplement and subject to the
discussion below with respect to Buydown Mortgage Loans, Counsel to the
Depositor will deliver an opinion, in general, that Grantor Trust Fractional
Interest Certificates will represent interests in (i) "qualifying real property
loans" within the meaning of Section 593(d) of the Code; (ii) "loans . . .
secured by an interest in real property" within the meaning of Section
7701(a)(19)(C) of the Code; (iii) "obligation[s] (including any participation or
certificate of beneficial ownership therein) which [are] principally secured by
an interest in real property" within the meaning of Section 860G(a)(3)(A) of the
Code; and (iv) "real estate assets" within the meaning of Section 856(c)(5)(A)
of the Code. In addition, Counsel to the Depositor will deliver an opinion that
interest on Grantor Trust Fractional Interest Certificates will, to the same
extent, be considered "interest on obligations secured by mortgages on real
property or on interests in real property" within the meaning of Section
856(c)(3)(B) of the Code.
The assets constituting certain Grantor Trust Funds may include Buydown
Mortgage Loans. The characterization of an investment in Buydown Mortgage Loans
will depend upon the precise terms of the related Buydown Agreement, but to the
extent that such Buydown Mortgage Loans are secured by a bank
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account or other personal property, they may not be treated in their entirety as
assets described in the foregoing sections of the Code. No directly applicable
precedents exist with respect to the federal income tax treatment or the
characterization of investments in Buydown Mortgage Loans. Accordingly, holders
of Grantor Trust Certificates should consult their own tax advisors with respect
to the characterization of investments in Grantor Trust Certificates
representing an interest in a Grantor Trust Fund that includes Buydown Mortgage
Loans.
GRANTOR TRUST STRIP CERTIFICATES
Even if Grantor Trust Strip Certificates evidence an interest in a Grantor
Trust Fund consisting of Mortgage Loans that are "loans . . . secured by an
interest in real property" within the meaning of Section 7701(a)(19)(C) of the
Code, "qualifying real property loans" within the meaning of Section 593(d) of
the Code, and "real estate assets" within the meaning of Section 856(c)(5)(A) of
the Code, and the interest on which is "interest on obligations secured by
mortgages on real property" within the meaning of Section 856(c)(3)(B) of the
Code, it is unclear whether the Grantor Trust Strip Certificates, and the income
therefrom, will be so characterized. However, the policies underlying such
sections (namely, to encourage or require investments in mortgage loans by
thrift institutions and real estate investment trusts) may suggest that such
characterization is appropriate. Counsel to the Depositor will not deliver any
opinion on these questions. Prospective purchasers to which such
characterization of an investment in Grantor Trust Strip Certificates is
material should consult their tax advisors regarding whether the Grantor Trust
Strip Certificates, and the income therefrom, will be so characterized.
The Grantor Trust Strip Certificates will be "obligation[s] (including any
participation or certificate of beneficial ownership therein) which [are]
principally secured by an interest in real property" within the meaning of
Section 860G(a)(3)(A) of the Code.
TAXATION OF OWNERS OF GRANTOR TRUST FRACTIONAL INTEREST CERTIFICATES
Holders of a particular series of Grantor Trust Fractional Interest
Certificates generally will be required to report on their federal income tax
returns their shares of the entire income from the Mortgage Loans (including
amounts used to pay reasonable servicing fees and other expenses) and will be
entitled to deduct their shares of any such reasonable servicing fees and other
expenses. Because of stripped interests, market or original issue discount, or
premium, the amount includible in income on account of a Grantor Trust
Fractional Interest Certificate may differ significantly from the amount
distributable thereon representing interest on the Mortgage Loans. Under Section
67 of the Code, an individual, estate or trust holding a Grantor Trust
Fractional Interest Certificate directly or through certain pass-through
entities will be allowed a deduction for such reasonable servicing fees and
expenses only to the extent that the aggregate of such holder's miscellaneous
itemized deductions exceeds two percent of such holder's adjusted gross income.
In addition, Section 68 of the Code provides that the amount of itemized
deductions otherwise allowable for an individual whose adjusted gross income
exceeds a specified amount will be reduced by the lesser of (i) 3% of the excess
of the individual's adjusted gross income over such amount or (ii) 80% of the
amount of itemized deductions otherwise allowable for the taxable year. The
amount of additional taxable income reportable by holders of Grantor Trust
Fractional Interest Certificates who are subject to the limitations of either
Section 67 or Section 68 of the Code may be substantial. Further,
Certificateholders (other than corporations) subject to the alternative minimum
tax may not deduct miscellaneous itemized deductions in determining such
holders' alternative minimum taxable income. Although it is not entirely clear,
it appears that in transactions in which multiple classes of Grantor Trust
Certificates (including Grantor Trust Strip Certificates) are issued, such fees
and expenses should be allocated among the classes of Grantor Trust Certificates
using a method that recognizes that each such class benefits from the related
services. In the absence of statutory or administrative clarification as to the
method to be used, it currently is intended to base information returns or
reports to the IRS and Certificateholders on a method that allocates such
expenses among classes of Grantor Trust Certificates with respect to each period
based on the distributions made to each such class during that period.
The federal income tax treatment of Grantor Trust Fractional Interest
Certificates of any series will depend on whether they are subject to the
"stripped bond" rules of Section 1286 of the Code. Grantor Trust
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Fractional Interest Certificates may be subject to those rules if (i) a class of
Grantor Trust Strip Certificates is issued as part of the same series of
Certificates or (ii) the Depositor or any of its affiliates retains (for its own
account or for purposes of resale) a right to receive a specified portion of the
interest payable on the Mortgage Loans. Further, the IRS has ruled that an
unreasonably high servicing fee retained by a seller or servicer will be treated
as a retained ownership interest in mortgages that constitutes a stripped
coupon. For purposes of determining what constitutes reasonable servicing fees
for various types of mortgages, the IRS has established certain "safe harbors."
The servicing fees paid with respect to the Mortgage Loans for certain series of
Grantor Trust Certificates may be higher than the "safe harbors" and,
accordingly, may not constitute reasonable servicing compensation. The related
Prospectus Supplement will include information regarding servicing fees paid to
the Master Servicer, any subservicer or their respective affiliates necessary to
determine whether the preceding "safe harbor" rules apply.
IF STRIPPED BOND RULES APPLY
If the stripped bond rules apply, each Grantor Trust Fractional Interest
Certificate will be treated as having been issued with "original issue discount"
within the meaning of Section 1273(a) of the Code, subject, however, to the
discussion below regarding the treatment of certain stripped bonds as market
discount bonds and the discussion regarding de minimis market discount. See
"--Taxation of Owners Grantor Trust Fractional Interest Certificates--Market
Discount." Under the stripped bond rules, the holder of a Grantor Trust
Fractional Interest Certificate (whether a cash or accrual method taxpayer) will
be required to report interest income from its Grantor Trust Fractional Interest
Certificate for each month in an amount equal to the income that accrues on such
Certificate in that month calculated under a constant yield method, in
accordance with the rules of the Code relating to original issue discount.
The original issue discount on a Grantor Trust Fractional Interest
Certificate will be the excess of such Certificate's stated redemption price
over its issue price. The issue price of a Grantor Trust Fractional Interest
Certificate as to any purchaser will be equal to the price paid by such
purchaser for the Certificate. The stated redemption price of a Grantor Trust
Fractional Interest Certificate will be the sum of all payments to be made on
such Certificate other than "qualified stated interest," if any, as well as such
Certificate's share of reasonable servicing fees and other expenses. See
"--Taxation of Owners Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply" for a definition of "qualified stated
interest." In general, the amount of such income that accrues in any month would
equal the product of such holder's adjusted basis in such Grantor Trust
Fractional Interest Certificate at the beginning of such month (See "--Sales of
Grantor Trust Certificates") and the yield of such Certificate to such holder.
Such yield would be computed at the rate (compounded based on the regular
interval between payment dates) that, if used to discount the holder's share of
future payments on the Mortgage Loans, would cause the present value of those
future payments to equal the price at which the holder purchased such
Certificate. In computing yield under the stripped bond rules, a
Certificateholder's share of future payments on the Mortgage Loans will not
include any payments made in respect of any ownership interest in the Mortgage
Loans retained by the Depositor, the Master Servicer, any subservicer or their
respective affiliates, but will include such Certificateholder's share of any
reasonable servicing fees and other expenses.
Section 1272(a)(6) of the Code requires, (i) the use of a reasonable
prepayment assumption in accruing original issue discount and (ii) adjustments
in the accrual of original issue discount when prepayments do not conform to the
prepayment assumption, with respect to certain categories of debt instruments,
and regulations could be adopted applying those provisions to the Grantor Trust
Fractional Interest Certificates. It is unclear whether those provisions would
be applicable to the Grantor Trust Fractional Interest Certificates or whether
use of a reasonable prepayment assumption may be required or permitted without
reliance on those rules. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Fractional
Interest Certificate or, with respect to any holder, at the time of purchase of
the Certificate by that holder. Certificateholders are advised to consult their
own tax advisors concerning reporting original issue discount in general and, in
particular, whether a prepayment assumption should be used in reporting original
issue discount with respect to Grantor Trust Fractional Interest Certificates.
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In the case of a Grantor Trust Fractional Interest Certificate acquired at a
price equal to the principal amount of the Mortgage Loans allocable to such
Certificate, the use of a prepayment assumption generally would not have any
significant effect on the yield used in calculating accruals of interest income.
In the case, however, of a Grantor Trust Fractional Interest Certificate
acquired at a discount or premium (that is, at a price less than or greater than
such principal amount, respectively), the use of a reasonable prepayment
assumption would increase or decrease such yield, and thus accelerate or
decelerate, respectively, the reporting of income.
If a prepayment assumption is not used, then when a Mortgage Loan prepays in
full, the holder of a Grantor Trust Fractional Interest Certificate acquired at
a discount or a premium generally will recognize ordinary income or loss equal
to the difference between the portion of the prepaid principal amount of the
Mortgage Loan that is allocable to such Certificate and the portion of the
adjusted basis of such Certificate that is allocable to such Certificateholder's
interest in the Mortgage Loan. If a prepayment assumption is used, it appears
that no separate item of income or loss should be recognized upon a prepayment.
Instead, a prepayment should be treated as a partial payment of the stated
redemption price of the Grantor Trust Fractional Interest Certificate and
accounted for under a method similar to that described for taking account of
original issue discount on REMIC Regular Certificates. (See "--REMICs--Taxation
of Owners of REMIC Regular Certificates--Original Issue Discount.") It is
unclear whether any other adjustments would be required to reflect differences
between an assumed prepayment rate and the actual rate of prepayments.
In the absence of statutory or administrative clarification, it is currently
intended to base information reports or returns to the IRS and
Certificateholders in transactions subject to the stripped bond rules on a
prepayment assumption (the "Prepayment Assumption") that will be disclosed in
the related Prospectus Supplement and on a constant yield computed using a
representative initial offering price for each class of Certificates. However,
neither the Depositor, the Master Servicer nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to such Prepayment Assumption or any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders who bought at that price.
Under Treasury regulations Section 1.1286-1, certain stripped bonds are to
be treated as market discount bonds and, accordingly, any purchaser of such a
bond is to account for any discount on the bond as market discount rather than
original issue discount. This treatment only applies, however, if immediately
after the most recent disposition of the bond by a person stripping one or more
coupons from the bond and disposing of the bond or coupon (i) there is no
original issue discount (or only a de minimis amount of original issue discount)
or (ii) the annual stated rate of interest payable on the stripped bond is no
more than one percentage point lower than the gross interest rate payable on the
original mortgage loan (before subtracting any servicing fee or any stripped
coupon). If interest payable on a Grantor Trust Fractional Interest Certificate
is more than one percentage point lower than the gross interest rate payable on
the Mortgage Loans, the related Prospectus Supplement will disclose that fact.
If the original issue discount or market discount on a Grantor Trust Fractional
Interest Certificate determined under the stripped bond rules is less than 0.25%
of the stated redemption price multiplied by the weighted average maturity of
the Mortgage Loans, then such original issue discount or market discount will be
considered to be de minimis. Original issue discount or market discount of only
a de minimis amount will be included in income in the same manner as de minimis
original issue and market discount described in "--Taxation of Owners of Grantor
Trust Fractional Interest Certificates--If Stripped Bond Rules Do Not Apply" and
"--Market Discount."
IF STRIPPED BOND RULES DO NOT APPLY
Subject to the discussion below on original issue discount, if the stripped
bond rules do not apply to a Grantor Trust Fractional Interest Certificate, the
Certificateholder will be required to report its share of the interest income on
the Mortgage Loans in accordance with such Certificateholder's normal method of
a ccounting. The original issue discount rules will apply to a Grantor Trust
Fractional Interest Certificate to the extent it evidences an interest in
Mortgage Loans issued with original issue discount.
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The original issue discount, if any, on the Mortgage Loans will equal the
difference between the stated redemption price of such Mortgage Loans and their
issue price. Under the OID Regulations, the stated redemption price is equal to
the total of all payments to be made on such Mortgage Loan other than "qualified
stated interest." "Qualified stated interest" includes interest that is
unconditionally payable at least annually at a single fixed rate, at a
"qualified floating rate," a combination of a single fixed rate and one or more
"qualified floating rates" or one "qualified inverse floating rate," a
combination of "qualified floating rates" or an "objective rate" that does not
operate in a manner that accelerates or defers interest payments on such
Mortgage Loan. In general, the issue price of a Mortgage Loan will be the amount
received by the borrower from the lender under the terms of the Mortgage Loan,
less any "points" paid by the borrower, and the stated redemption price of a
Mortgage Loan will equal its principal amount, unless the Mortgage Loan provides
for an initial below market rate of interest or the acceleration or the deferral
of interest payments.
In the case of Mortgage Loans bearing adjustable or variable interest rates,
the related Prospectus Supplement will describe the manner in which such rules
will be applied with respect to those Mortgage Loans by the Trustee in preparing
information returns to the Certificateholders and the IRS.
Notwithstanding the general definition of original issue discount, original
issue discount will be considered to be de minimis if such original issue
discount is less than 0.25% of the stated redemption price multiplied by the
weighted average maturity of the Mortgage Loan. For this purpose, the weighted
average maturity of the Mortgage Loan will be computed as the sum of the amounts
determined as to each payment included in the stated redemption price of such
Mortgage Loan, by multiplying (i) the number of complete years (rounding down
for partial years) from the issue date until such payment is expected to be made
by (ii) a fraction, the numerator of which is the amount of payment and the
denominator of which is the stated redemption price of the Mortgage Loan. Under
the OID Regulations, original issue discount of only a de minimis amount (other
than de minimis original issue discount attributable to a so called "teaser"
rate or initial interest holiday) will be included in income as each payment of
stated principal is made, based on the product of the total amount of such de
minimis original issue discount and a fraction, the numerator of which is the
amount of each such payment and the denominator of which is the outstanding
stated principal amount of the Mortgage Loan. The OID Regulations also permit a
Certificateholder to elect to accrue de minimis original issue discount into
income currently based on a constant yield method. See "--Taxation of Owners of
Grantor Trust Fractional Interest Certificates--Market Discount" below.
If original issue discount is in excess of a de minimis amount, all original
issue discount with respect to a Mortgage Loan will be required to be accrued
and reported in income each month, based on a constant yield. The OID
Regulations suggest that no prepayment assumption is appropriate in computing
the yield on prepayable obligations issued with original issue discount. In the
absence of statutory or administrative clarification, it currently is not
intended to base information reports or returns to the IRS and
Certificateholders on the use of a prepayment assumption in transactions not
subject to the stripped bond rules. However, Section 1272(a)(6) of the Code may
require that a prepayment assumption be made in computing yield with respect to
all mortgage-backed securities. Certificateholders are advised to consult their
own tax advisors concerning whether a prepayment assumption should be used in
reporting original issue discount with respect to Grantor Trust Fractional
Interest Certificates. Certificateholders should refer to the related Prospectus
Supplement with respect to each series to determine whether and in what manner
the original issue discount rules will apply to the Mortgage Loans held in the
related Grantor Trust Fund.
A purchaser of a Grantor Trust Fractional Interest Certificate that
purchases such Certificate at a cost less than such Certificate's allocable
portion of the aggregate remaining stated redemption price of the Mortgage Loans
held in the related Grantor Trust Fund will also be required to include in gross
income such Certificate's daily portions of any original issue discount with
respect to such Mortgage Loans. However, each such daily portion will be
reduced, if the cost of such Grantor Trust Fractional Interest Certificate to
such purchaser is in excess of such Certificate's allocable portion of the
aggregate "adjusted issue prices" of the Mortgage Loans held in the related
Grantor Trust Fund, approximately in proportion to the ratio such excess bears
to such Certificate's allocable portion of the aggregate original issue discount
remaining to be accrued on such Mortgage Loans. The adjusted issue price of a
Mortgage Loan on any given day equals the
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sum of (i) the adjusted issue price (or, in the case of the first accrual
period, the issue price) of such Mortgage Loan at the beginning of the accrual
period that includes such day and (ii) the daily portions of original issue
discount for all days during such accrual period prior to such day. The adjusted
issue price of a Mortgage Loan at the beginning of any accrual period will equal
the issue price of such Mortgage Loan, increased by the aggregate amount of
original issue discount with respect to such Mortgage Loan that accrued in prior
accrual periods, and reduced by the amount of any payments made on such Mortgage
Loan in prior accrual periods of amounts included in its stated redemption
price.
The Trustee will provide to any holder of a Grantor Trust Fractional
Interest Certificate such information as such holder may reasonably request from
time to time with respect to original issue discount accruing on Grantor Trust
Fractional Interest Certificates. See "Grantor Trust Reporting" below.
MARKET DISCOUNT
If the stripped bond rules do not apply to the Grantor Trust Fractional
Interest Certificates, a Certificateholder may be subject to the market discount
rules of Sections 1276 through 1278 of the Code to the extent an interest in a
Mortgage Loan is considered to have been purchased at a "market discount," that
is, in the case of a Mortgage Loan issued without original issue discount, at a
purchase price less than its remaining stated redemption price (as defined
above), or in the case of a Mortgage Loan issued with original issue discount,
at a purchase price less than its adjusted issue price (as defined above). If
market discount is in excess of a de minimis amount (as described below), the
holder generally will be required to include in income in each month the amount
of such discount that has accrued (under the rules described in the next
paragraph) through such month that has not previously been included in income,
but limited, in the case of the portion of such discount that is allocable to
any Mortgage Loan, to the payment of stated redemption price on such Mortgage
Loan that is received by (or, in the case of accrual basis Certificateholders,
due to) the Trust Fund in that month. A Certificateholder may elect to include
market discount in income currently as it accrues, (under a constant yield
method based on the yield of the Certificate to such holder) rather than
including it on a deferred basis in accordance with the foregoing. If made, such
election will apply to all market discount bonds acquired by such
Certificateholder during or after the first taxable year to which such election
applies. In addition, the OID Regulations would permit a Certificateholder to
elect to accrue all interest, discount (including de minimis market or original
issue discount) and premium in income as interest, based on a constant yield
method. If such an election were made with respect to a Mortgage Loan with
market discount, the Certificateholder would be deemed to have made an election
to include currently market discount in income with respect to all other debt
instruments having market discount that such Certificateholder acquires during
the taxable year of the election or thereafter, and possibly previously acquired
instruments. Similarly, a Certificateholder that made this election for a
Certificate acquired at a premium would be deemed to have made an election to
amortize bond premium with respect to all debt instruments having amortizable
bond premium that such Certificateholder owns or acquires. See "--REMICs
Taxation of Owners of REMIC Regular Certificates--Premium." Each of these
elections to accrue interest, discount and premium with respect to a Certificate
on a constant yield method or as interest is irrevocable.
Section 1276(b)(3) of the Code authorized the Treasury Department to issue
regulations providing for the method for accruing market discount on debt
instruments, the principal of which is payable in more than one installment.
Until such time as regulations are issued by the Treasury Department, certain
rules described in the Committee Report apply. Under those rules, in each
accrual period, market discount on the Mortgage Loans should accrue, at the
Certificateholder's option: (i) on the basis of a constant yield method, (ii) in
the case of a Mortgage Loan issued without original issue discount, in an amount
that bears the same ratio to the total remaining market discount as the stated
interest paid in the accrual period bears to the total stated interest remaining
to be paid on the Mortgage Loan as of the beginning of the accrual period, or
(iii) in the case of a Mortgage Loan issued with original issue discount, in an
amount that bears the same ratio to the total remaining market discount as the
original issue discount accrued in the accrual period bears to the total
original issue discount remaining at the beginning of the accrual period. The
prepayment assumption, if any, used in calculating the accrual of original issue
discount is to be used in calculating the accrual of market discount. The effect
of using a prepayment assumption could be to accelerate the
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reporting of such discount income. Because the regulations referred to in this
paragraph have not been issued, it is not possible to predict what effect such
regulations might have on the tax treatment of a Mortgage Loan purchased at a
discount in the secondary market.
Because the Mortgage Loans will provide for periodic payments of stated
redemption price, such market discount may be required to be included in income
at a rate that is not significantly slower than the rate at which such discount
would be included in income if it were original issue discount.
Market discount with respect to Mortgage Loans generally will be considered
to exceed a de minimis amount if it is greater than 0.25% of the stated
redemption price of the Mortgage Loans multiplied by the number of complete
years to maturity remaining after the date of its purchase. In interpreting a
similar rule with respect to original issue discount on obligations payable in
installments, the OID Regulations refer to the weighted average maturity of
obligations, and it is likely that the same rule will be applied with respect to
market discount, presumably taking into account the prepayment assumption used,
if any. The effect of using a prepayment assumption could be to accelerate the
reporting of such discount income. If market discount is treated as de minimis
under the foregoing rule, it appears that actual discount would be treated in a
manner similar to original issue discount of a de minimis amount. See
"--Taxation of Owners of Grantor Trust Fractional Interest Certificates--If
Stripped Bond Rules Do Not Apply."
Further, under the rules described in "--REMICs--Taxation of Owners of REMIC
Regular Certificates--Market Discount" above, any discount that is not original
issue discount and exceeds a de minimis amount may require the deferral of
interest expense deductions attributable to accrued market discount not yet
includible in income, unless an election has been made to report market discount
currently as it accrues. This rule applies without regard to origination dates
of the Mortgage Loans.
PREMIUM
If a Certificateholder is treated as acquiring the underlying Mortgage Loans
at a premium, that is, at a price in excess of their remaining stated redemption
price, such Certificateholder may elect under Section 171 of the Code to
amortize using a constant yield method, the portion of such premium allocable to
Mortgage Loans originated after September 27, 1985. Amortizable premium is
treated as an offset to interest income on the related debt instrument, rather
than as a separate interest deduction. However, premiums allocable to Mortgage
Loans originated before September 28, 1985 or to Mortgage Loans for which an
amortization election is not made should be allocated among the payments of
stated redemption price on the Mortgage Loan and be allowed as a deduction as
such payments are made (or, for a Certificateholder using the accrual method of
accounting, when such payments of stated redemption price are due).
It is unclear whether a prepayment assumption should be used in computing
amortization of premium allowable under Section 171 of the Code. If premium is
not subject to amortization using a prepayment assumption and a Mortgage Loan
prepays in full, the holder of a Grantor Trust Fractional Interest Certificate
acquired at a premium should recognize a loss, equal to the difference between
the portion of the prepaid principal amount of the Mortgage Loan that is
allocable to the Certificate and the portion of the adjusted basis of the
Certificate that is allocable to the Mortgage Loan. If a prepayment assumption
is used to amortize such premium, it appears that such a loss would be
unavailable. Instead, if a prepayment assumption is used, a prepayment should be
treated as a partial payment of the stated redemption price of the Grantor Trust
Fractional Interest Certificate and accounted for under a method similar to that
described for taking account of original issue discount on REMIC Regular
Certificates. See "--REMICs--Taxation of Owners of REMIC Regular
Certificates--Original Issue Discount." It is unclear whether any other
adjustments would be required to reflect differences between the prepayment
assumption used, if any, and the actual rate of prepayments.
TAXATION OF OWNERS OF GRANTOR TRUST STRIP CERTIFICATES
The "stripped coupon" rules of Section 1286 of the Code will apply to the
Grantor Trust Strip Certificates. Except as described above in "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply," no regulations or published rulings under Section 1286 of the Code have
been issued and some uncertainty exists as to how it will be applied to
securities such as the
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Grantor Trust Strip Certificates. Accordingly, holders of Grantor Trust Strip
Certificates should consult their own tax advisors concerning the method to be
used in reporting income or loss with respect to such Certificates.
The OID Regulations do not apply to "stripped coupons," although they
provide general guidance as to how the original issue discount sections of the
Code will generally be applied. In addition, the discussion below is subject to
the discussion under "--Possible Application of Proposed Contingent Payment
Rules" and assumes that the holder of a Grantor Trust Strip Certificate will not
own any Grantor Trust Fractional Interest Certificates.
Under the stripped coupon rules, it appears that original issue discount
will be required to be accrued in each month on the Grantor Trust Strip
Certificates based on a constant yield method. In effect, each holder of Grantor
Trust Strip Certificates would include as interest income in each month an
amount equal to the product of such holder's adjusted basis in such Certificate
at the beginning of such month and the yield of such Certificate to such holder.
Such yield would be calculated based on the price paid for that Grantor Trust
Strip Certificate by its holder and the payments remaining to be made thereon at
the time of the purchase, plus an allocable portion of the servicing fees and
expenses to be paid with respect to the Mortgage Loans. See "--Taxation of
Owners of Grantor Trust Fractional Interest Certificates--If Stripped Bond Rules
Apply" above.
As noted above, Section 1272(a)(6) of the Code requires that a prepayment
assumption be used in computing the accrual of original issue discount with
respect to certain categories of debt instruments, and that adjustments be made
in the amount and rate of accrual of such discount when prepayments do not
conform to such prepayment assumption. Regulations could be adopted applying
those provisions to the Grantor Trust Strip Certificates. It is unclear whether
those provisions would be applicable to the Grantor Trust Strip Certificates or
whether use of a prepayment assumption may be required or permitted in the
absence of such regulations. It is also uncertain, if a prepayment assumption is
used, whether the assumed prepayment rate would be determined based on
conditions at the time of the first sale of the Grantor Trust Strip Certificate
or, with respect to any subsequent holder, at the time of purchase of the
Grantor Trust Strip Certificate by that holder.
The accrual of income on the Grantor Trust Strip Certificates will be
significantly slower if a prepayment assumption is permitted to be made than if
yield is computed assuming no prepayments. In the absence of statutory or
administrative clarification, it currently is intended to base information
returns or reports to the IRS and Certificateholders on the Prepayment
Assumption disclosed in the related Prospectus Supplement and on a constant
yield computed using a representative initial offering price for each class of
Certificates. However, neither the Depositor nor the Trustee will make any
representation that the Mortgage Loans will in fact prepay at a rate conforming
to the Prepayment Assumption or at any other rate and Certificateholders should
bear in mind that the use of a representative initial offering price will mean
that such information returns or reports, even if otherwise accepted as accurate
by the IRS, will in any event be accurate only as to the initial
Certificateholders of each series who bought at that price. Prospective
purchasers of the Grantor Trust Strip Certificates should consult their own tax
advisors regarding the use of the Prepayment Assumption.
It is unclear under what circumstances, if any, the prepayment of a Mortgage
Loan will give rise to a loss to the holder of a Grantor Trust Strip
Certificate. If a Grantor Trust Strip Certificate is treated as a single
instrument (rather than an interest in discrete mortgage loans) and the effect
of prepayments is taken into account in computing yield with respect to such
Certificate, it appears that no loss may be available as a result of any
particular prepayment unless prepayments occur at a rate faster than the
Prepayment Assumption. However, if a Grantor Trust Strip Certificate is treated
as an interest in discrete Mortgage Loans, or if the Prepayment Assumption is
not used, then when a Mortgage Loan is prepaid, the holder of a Grantor Trust
Strip Certificate should be able to recognize a loss equal to the portion of the
adjusted issue price of the Grantor Trust Strip Certificate that is allocable to
such Mortgage Loan.
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POSSIBLE APPLICATION OF PROPOSED CONTINGENT PAYMENT RULES
The coupon stripping rules' general treatment of stripped coupons is to
regard them as newly issued debt instruments in the hands of each purchaser. To
the extent that payments on the Grantor Trust Strip Certificates would cease if
the Mortgage Loans were prepaid in full, the Grantor Trust Strip Certificates
could be considered to be debt instruments providing for contingent payments.
Under the OID Regulations, debt instruments providing for contingent payments
are not subject to the same rules as debt instruments providing for
noncontingent payments, but no final regulations have been promulgated with
respect to contingent payment debt instruments. Proposed regulations were
promulgated on December 16, 1994 regarding contingent payment debt instruments.
As in the case of the OID Regulations, such proposed regulations do not
specifically address securities, such as the Grantor Trust Strip Certificates,
that are subject to the stripped bond rules of Section 1286 of the Code.
If the contingent payment rules under the proposed regulations were to
apply, the holder of a Grantor Trust Strip Certificate would be required to
apply a "noncontingent bond method." Under that method, the issuer of a Grantor
Trust Strip Certificate would determine a projected payment schedule with
respect to such Grantor Trust Strip Certificate. Holders of Grantor Trust Strip
Certificates would be bound by the issuer's projected payment schedule, which
would consist of all noncontingent payments and a projected amount for each
contingent payment based on the projected yield (as described below) of the
Grantor Trust Strip Certificate. The projected amount of each payment would be
determined so that the projected payment schedule reflected the projected yield
reasonably expected to be received by the holder of a Grantor Trust Strip
Certificate. The projected yield referred to above would be a reasonable rate,
not less than the "applicable Federal rate" that, as of the issue date,
reflected general market conditions, the credit quality of the issuer, and the
terms and conditions of the Mortgage Loans. The holder of a Grantor Trust Strip
Certificate would be required to include as interest income in each month the
adjusted issue price of the Grantor Trust Strip Certificate at the beginning of
the period multiplied by the projected yield, and would add to, or subtract
from, such income any variation between the payment actually received in such
month and the payment originally projected to be made in such month.
Certificateholders should consult their tax advisors concerning the possible
application of the contingent payment rules to the Grantor Trust Strip
Certificates.
SALES OF GRANTOR TRUST CERTIFICATES
Any gain or loss equal to the difference between the amount realized on the
sale or exchange of a Grantor Trust Certificate and its adjusted basis,
recognized on the sale or exchange of a Grantor Trust Certificate as a capital
asset, will be capital gain or loss, except to the extent of accrued and
unrecognized market discount, which will be treated as ordinary income, and (in
the case of banks and other financial institutions) except as provided in
Section 582(c) of the Code. The adjusted basis of a Grantor Trust Certificate
generally will equal its cost, increased by any income reported by the Seller
(including original issue discount and market discount income) and reduced (but
not below zero) by any previously reported losses, any amortized premium and by
any distributions with respect to such Grantor Trust Certificate. The Code as of
the date of this Prospectus provides a top marginal tax rate of 39.6% for
individuals and a maximum marginal rate for the long-term capital gains of
individuals of 28%. No such rate differential exists for corporations. In
addition, the distinction between a capital gain or loss and ordinary income or
loss remains relevant for other purposes.
Gain or loss from the sale of a Grantor Trust Certificate may be partially
or wholly ordinary and not capital in certain circumstances. Gain attributable
to accrued and unrecognized market discount will be treated as ordinary income,
as will gain or loss recognized by banks and other financial institutions
subject to Section 582(c) of the Code. Furthermore, a portion of any gain that
might otherwise be capital gain may be treated as ordinary income to the extent
that the Grantor Trust Certificate is held as part of a "conversion transaction"
within the meaning of Section 1258 of the Code. A conversion transaction
generally is one in which the taxpayer has taken two or more positions in the
same or similar property that reduce or eliminate market risk, if substantially
all of the taxpayer's return is attributable to the time value of the taxpayer's
net
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investment in such transaction. The amount of gain realized in a conversion
transaction that is recharacterized as ordinary income generally will not exceed
the amount of interest that would have accrued on the taxpayer's net investment
at 120% of the appropriate "applicable Federal rate" (which rate is computed and
published monthly by the IRS) at the time the taxpayer enters into the
conversion transaction, subject to appropriate reduction for prior inclusion of
interest and other ordinary income items from the transaction.
Finally, a taxpayer may elect to have net capital gain taxed at ordinary
income rates rather than capital gains rates in order to include such net
capital gain in total net investment income for that taxable year, for purposes
of the rule that limits on the deduction of interest on indebtedness incurred to
purchase or carry property held for investment to a taxpayer's net investment
income.
GRANTOR TRUST REPORTING
The Trustee will furnish to each holder of a Grantor Trust Certificate with
each distribution a statement setting forth the amount of such distribution
allocable to principal on the underlying Mortgage Loans and to interest thereon
at the related Pass-Through Rate. In addition, within a reasonable time after
the end of each calendar year, based on information provided by the Master
Servicer, the Trustee will furnish to each Certificateholder during such year
such customary factual information as the Trustee deems necessary or desirable
to enable holders of Grantor Trust Certificates to prepare their tax returns and
will furnish comparable information to the IRS as and when required by law to do
so. Because the rules for accruing discount and amortizing premium with respect
to the Grantor Trust Certificates are uncertain in various respects, there is no
assurance the IRS will agree with the Trustee's information reports of such
items of income and expense. Moreover, such information reports, even if
otherwise accepted as accurate by the IRS, will in any event be accurate only as
to the initial Certificateholders that bought their Certificates at the
representative initial offering price used in preparing such reports.
BACKUP WITHHOLDING
In general, the rules described in "--REMICs--Backup Withholding" will also
apply to Grantor Trust Certificates.
FOREIGN INVESTORS
In general, the discussion with respect to REMIC Regular Certificates in
"--REMICs--Foreign Investors in REMIC Certificates" applies to Grantor Trust
Certificates except that Grantor Trust Certificates will, unless otherwise
disclosed in the related Prospectus Supplement, be eligible for exemption from
U.S. withholding tax, subject to the conditions described in such discussion,
only to the extent the related Mortgage Loans were originated after July 18,
1984.
To the extent that interest on a Grantor Trust Certificate would be exempt
from United States withholding tax under Section 871(h)(1) of the Code, and the
Grantor Trust Certificate is not held in connection with a Certificateholder's
trade or business in the United States, such Grantor Trust Certificate will not
be subject to United States estate taxes in the estate of a non-resident alien
individual.
STATE AND OTHER TAX CONSEQUENCES
In addition to the federal income tax consequences described in "Certain
Federal Income Tax Consequences," potential investors should consider the state
and local tax consequences of the acquisition, ownership, and disposition of the
Certificates offered hereunder. State tax law may differ substantially from the
corresponding federal tax law, and this discussion does not purport to describe
any aspect of the tax laws of any state or other jurisdiction. Therefore,
prospective investors should consult their own tax advisors with respect to the
various tax consequences of investments in the Certificates offered hereunder.
ERISA CONSIDERATIONS
ERISA imposes certain fiduciary and prohibited transaction restrictions on
employee benefit plans subject to the fiduciary and prohibited transaction
restrictions under ERISA ("ERISA Plans"). The Code imposes essentially the same
prohibited transaction restrictions on tax-qualified retirement plans described
in Section 401(a) of the Code and on Individual Retirement Accounts described in
Section 408 of the Code
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(collectively, "Tax Favored Plans"). ERISA and the Code prohibit a broad range
of transactions involving assets of ERISA Plans and Tax Qualified Plans
(collectively, "Plans") and persons who have certain specified relationships to
such Plans (so-called "parties in interest" within the meaning of ERISA or
"disqualified persons" within the meaning of the Code) unless a statutory or
administrative exemption is available. Certain parties in interest or
disqualified persons that participate in a prohibited transaction may be subject
to a penalty or excise taxes, unless a statutory or administrative exemption is
available.
Certain affiliates of the Depositor, including Donaldson, Lufkin & Jenrette
Securities Corporation, the Underwriter of the Certificates, and Donaldson,
Lufkin & Jenrette Inc., the parent of the Depositor, might be considered or
might become "parties in interest" or "disqualified persons" with respect to a
Plan. Moreover, the Trustee, the Master Servicer or any other Servicer, any
insurer, special hazard insurer, primary insurer or any other issuer of a credit
support instrument relating to the Mortgage Assets in a Trust Fund or certain of
their respective affiliates might be considered "parties in interest."
Prohibited transactions within the meaning of ERISA and the Code may arise if
Certificates are acquired by a Plan with respect to which Donaldson, Lufkin &
Jenrette Securities Corporation or Donaldson, Lufkin & Jenrette Inc. is a party
in interest or disqualified person. The acquisition or holding of Certificates
by or on behalf of a Plan could be considered to give rise to a "prohibited
transaction" within the meaning of ERISA and the Code unless a statutory or
administrative exemption is available. One or more exemptions may be available,
however, with respect to any such prohibited transaction, including, but not
limited to: Prohibited Transaction Exemption ("PTE") 78-19, regarding
investments by insurance company pooled separate accounts; PTE 80-51, regarding
investments by bank collective investment funds; PTE 83-1, regarding mortgage
pool investment trusts; or PTE 84-14, regarding transactions effected by a
"qualified professional asset manager."
A final regulation promulgated by the Department of Labor (the "DOL")
defining the term "plan assets" was published in the Federal Register (the "DOL
Regulation"). Under the DOL Regulation, generally, when a Plan makes an equity
investment in another entity (for example, the purchase of a Residual Interest
in a REMIC), the underlying assets of that entity may be considered Plan assets
unless certain exceptions apply. There can be no assurance that any of the
exceptions set forth in the DOL Regulation will apply to the purchase or holding
of Certificates.
Under ERISA, any person who exercises any authority or control respecting
the management or disposition of the assets of a Plan, and any person who
provides investment advice with respect to such assets for a fee, is a fiduciary
of such Plan. A Plan's investment in Certificates may cause the housing loans
comprising or underlying the Mortgage Assets to be deemed Plan assets. If the
housing loans constitute Plan assets, then any party exercising management or
discretionary control regarding those assets may be deemed to be a Plan
"fiduciary," and thus subject to the fiduciary requirements and prohibited
transaction provisions of ERISA and the Code with respect to the housing loans.
The U.S. Department of Labor has granted to Donaldson, Lufkin & Jenrette
Securities Corporation an administrative exemption (Prohibited Transaction
Exemption 90-83, as amended; Exemption Application No. D-8346, 55 Fed. Reg. 50,
250 (1990)) (the "Exemption") from certain of the prohibited transaction rules
of ERISA and the related excise tax provisions of Section 4975 of the Code with
respect to the initial purchase, the holding and the subsequent resale by Plans
of certificates in pass-through trusts that consist of certain receivables,
loans, and other obligations that meet the conditions and requirements of the
Exemption. The Exemption applies to mortgage loans such as the Mortgage Loans in
the Mortgage Trust.
Among the conditions that must be satisfied for the Exemption to apply are
the following:
(1) the acquisition of the 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 interest evidenced by the certificates acquired by
the Plan are not subordinated to the rights and interests evidenced by other
certificates of the trust fund;
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(3) the 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 Corporation ("S&P"), Moody's
Investors Service, Inc. ("Moody's"), Duff & Phelps Inc. ("D&P") or Fitch
Investors Service, Inc. ("Fitch");
(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 the underwriters in
connection with the distribution of the certificates represents not more
than reasonable compensation for underwriting the certificates; the sum of
all payments made to and retained by the seller pursuant to the assignment
of the loans to the trust fund represents not more than the fair market
value of such loans; the sum of all payments made to and retained by the
servicer and any other servicer represents not more than reasonable
compensation for such person's services under the agreement pursuant to
which the loans are pooled and reimbursements of such person's reasonable
expenses in connection therewith; and
(6) the Plan investing in the 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 fund must also meet the following requirements:
(i) the corpus of the trust fund must consist solely of assets of the
type that have been included in other investment pools;
(ii) certificates in such other investment pools must have been rated in
one of the three highest rating categories of S&P, Moody's, Fitch or D&P for
at least one year prior to the Plan's acquisition of 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 any Plan's acquisition of certificates.
Moreover, the Exemption provides 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 an obligor 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; (ii) such fiduciary (or its affiliate) is an obligor with
respect to five percent or less of the fair market value of the obligations
contained in the trust; (iii) the 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 served
by the same entity. The Exemption does not apply to Plans sponsored by the
seller of a Certificate, the Underwriter, the Trustee, the Servicer, any obligor
with respect to Mortgage Loans included in the assets in the Mortgage Trust, or
any affiliate of such parties (the "Restricted Group").
Before purchasing a Certificate, a fiduciary of a Plan should itself confirm
that (a) the Certificates constitute "certificates" for purposes of the
Exemption and (b) that the specific and general conditions set forth in the
Exemption would be satisfied. In addition to making its own determination as to
the availability of the exemptive relief provided in the Exemption, the Plan
fiduciary should consider its general fiduciary obligations under ERISA in
determining whether to purchase a Certificate on behalf of a Plan.
There can be no assurance that any DOL exemption will apply with respect to
any particular Plan that acquires Certificates or, even if all of the conditions
specified therein were satisfied, that the exemption would apply to transactions
involving the Trust Fund. Prospective ERISA Plan investors should consult with
their legal advisors concerning the impact of ERISA and the Code and the
potential consequences to their specific circumstances prior to making an
investment in the Certificates.
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LEGAL INVESTMENT
Unless otherwise set forth in the related Prospectus Supplement,
Certificates 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 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 Certificates 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 provides, however, that in no event will
the enactment of any such legislation affect the validity of any contractual
commitment to purchase, hold or invest in "mortgage related securities," or
require the sale or other disposition of such securities so long as such
contractual commitment was made or such securities acquired prior to the
enactment of such legislation.
SMMEA also amended the legal investment authority of federally chartered
depository institutions as follows: federal savings and loan associations and
federal savings banks 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 Council has adopted a
supervisory policy statement (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 Office of Thrift Supervision with
an effective date of February 10, 1992. 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 Certificates 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 Certificates. Similar policy
statements 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 Certificates or to purchase any Class of
Certificates 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 Certificates for legal investment or other
purposes, or as to the ability of particular investors to purchase any Class of
Certificates under applicable legal investment restrictions. These uncertainties
may adversely affect the liquidity of any Class of Certificates. Accordingly,
all investors whose investment activities are subject to legal investment laws
and regulations, regulatory capital requirements or review by regulatory
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authorities should consult with their own legal advisors in determining whether
and to what extent the Certificates of any Class constitute legal investments
under SMMEA or are subject to investment, capital or other restrictions, and
whether SMMEA has been overridden in any jurisdiction applicable to such
investor.
LEGAL MATTERS
Certain legal matters in connection with the Certificates offered hereby
will be passed upon for the Depositor and for the Underwriters by Brown & Wood,
New York, New York, provided that if so specified in the related Prospectus
Supplement, certain legal matters in connection with the Certificates offered
hereby will be passed upon for the Depositor and for the Underwriters by
Skadden, Arps, Slate, Meagher & Flom, New York, New York, or by Thacher Proffitt
& Wood, New York, New York.
THE DEPOSITOR
The Depositor was incorporated in the State of Delaware on April 14, 1988
and is a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette Inc., a
Delaware corporation. The principal executive offices of the Depositor are
located at 140 Broadway, New York, New York 10005. Its telephone number is (212)
504-3000.
The Depositor was organized, among other things, for the purposes of
establishing trusts, selling beneficial interests therein and acquiring and
selling mortgage assets to such trusts. The Depositor has one class of common
stock, all of which is owned by Donaldson, Lufkin & Jenrette Inc.
Neither the Depositor, its parent nor any of the Depositor's affiliates will
ensure or guarantee distributions on the Certificates of any Series.
As described herein, the only obligations of the Depositor will be pursuant
to certain representations and warranties with respect to the Mortgage Assets.
See "LOAN UNDERWRITING STANDARDS-- Representations and Warranties" and "THE
POOLING AND SERVICING AGREEMENTS--Assignment of Mortgage Assets" herein. The
Depositor will have no ongoing servicing responsibilities or other
responsibilities with respect to any Mortgage Asset. The Depositor does not have
nor is it expected in the future to have any significant assets with which to
meet any obligations with respect to any Trust Fund. If the Depositor were
required to repurchase or substitute a Loan, its only source of funds to make
the required payment would be funds obtained from the Originator of such Loan,
or if applicable, the Master Servicer or, the Servicer. See "SPECIAL
CONSIDERATIONS" herein.
Mortgage Assets will be acquired by the Depositor directly or through one or
more affiliates.
USE OF PROCEEDS
The Depositor will apply all or substantially all of the net proceeds from
the sale of each Series offered hereby and by the related Prospectus Supplement
to purchase the Mortgage Assets, to repay indebtedness which has been incurred
to obtain funds to acquire the Mortgage Assets, to establish the reserve funds,
if any, for the Series and to pay costs of structuring, guaranteeing and issuing
the Certificates. If so specified in the related Prospectus Supplement,
Certificates may be exchanged by the Depositor for Mortgage Assets. Unless
otherwise specified in the related Prospectus Supplement, the Mortgage Assets
for each Series of Certificates will be acquired by the Depositor either
directly, or through one or more affiliates which will have acquired such
Mortgage Assets from time to time either in the open market or in privately
negotiated transactions.
PLAN OF DISTRIBUTION
Each Series of Certificates offered hereby and by means of the related
Prospectus Supplements may be sold directly by the Depositor or may be offered
through Donaldson, Lufkin & Jenrette Securities Corporation, an affiliate of the
Depositor, or through underwriting syndicates represented by Donaldson, Lufkin &
Jenrette Securities Corporation (the "Underwriters"). The Prospectus Supplement
with respect to each such Series of Certificates will set forth the terms of the
offering of such Series of Certificates and each
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Class within such Series, including the name or names of the Underwriters, the
proceeds to the Depositor, and including either the initial public offering
price, the discounts and commissions to the Underwriters and any discounts or
commissions allowed or reallowed to certain dealers, or the method by which the
prices at which the Underwriters will sell the Certificates will be determined.
Unless otherwise specified in the Prospectus Supplement, the Underwriters
will be obligated to purchase all of the Certificates of a Series described in
the Prospectus Supplement with respect to such Series if any such Certificates
are purchased. The Certificates may be acquired by the Underwriters for their
own account and may be resold from time to time in one or more transactions,
including negotiated transactions, at a fixed public offering price or at
varying prices determined at the time of sale.
If so indicated in the Prospectus Supplement, the Depositor will authorize
Underwriters or other persons acting as the Depositor's agents to solicit offers
by certain institutions to purchase the Certificates from the Depositor pursuant
to contracts providing for payment and delivery on a future date. Institutions
with which such contracts may be made include commercial and savings banks,
insurance companies, pension funds, investment companies, educational and
charitable institutions and others, but in all cases such institutions must be
approved by the Depositor. The obligation of any purchaser under any such
contract will be subject to the condition that the purchase of the offered
Certificates shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject. The Underwriters and such
other agents will not have any responsibility in respect of the validity or
performance of such contracts.
The Depositor may also sell the Certificates offered hereby and by means of
the related Prospectus Supplements from time to time in negotiated transactions
or otherwise, at prices determined at the time of sale. The Depositor may effect
such transactions by selling Certificates to or through dealers and such dealers
may receive compensation in the form of underwriting discounts, concessions or
commissions from the Depositor and any purchasers of Certificates for whom they
may act as agents.
The place and time for delivery of each Series of Certificates offered
hereby and by means of the related Prospectus Supplement will be set forth in
the Prospectus Supplement with respect to such Series.
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GLOSSARY
The following are abbreviated definitions of certain capitalized terms used
in this Prospectus. Unless otherwise provided in a "Supplemental Glossary" in
the Prospectus Supplement for a Series, such definitions will apply to
capitalized terms used in such Prospectus Supplement. The definitions may vary
from those in the Pooling and Servicing Agreement and the Pooling and Servicing
Agreement generally provides a more complete definition of certain of the terms.
Reference should be made to the Pooling and Servicing Agreement for a more
complete definition of such terms.
"Accrual Date" means, with respect to any Multiple Class Series, the date
upon which interest begins accruing on the Certificates of the Series, as
specified in such Certificates and the related Prospectus Supplement.
"Accrual Distribution Amount" means, with respect to any Distribution Date
for a Multiple Class Series that occurs prior to or on the Accrual Termination
Date, the aggregate amount of interest which has accrued on the Compound
Interest Certificates of such Series during the Interest Accrual Period ending
on or prior to such Distribution Date but which is not then required to be paid.
"Accrual Termination Date" means, with respect to a Class of Compound
Interest Certificates, the Distribution Date on which all Certificates of the
related Series with Stated Maturities earlier than that of such Class of
Compound Interest Certificates have been fully paid, or such other date or
period as may be specified in the related Prospectus Supplement.
"Advance" means a cash advance by the Master Servicer or a Servicer in
respect of delinquent payments of principal of and interest on a Loan, and for
the other purposes specified herein and in the related Prospectus Supplement.
"Agency Securities" means mortgage pass-through securities issued or
guaranteed by GNMA, FNMA, FHLMC or other government agencies or
government-sponsored agencies.
"Appraised Value" means, with respect to a property securing a Loan, the
lesser of the appraised value determined in an appraisal obtained at origination
of the Loan or the sales price of such mortgaged property.
"ARM" or "Adjustable Rate Mortgage" means a Mortgage Loan as to which the
related Mortgage Note provides for periodic adjustments in the interest rate
component of the Scheduled Payment pursuant to an Index as described in the
related Prospectus Supplement.
"Asset Group" means a group of individual Mortgage Assets which share
similar characteristics and are aggregated into one group for purposes of
assigning a single aggregate Asset Value.
"Asset Value" means, unless otherwise specified in the related Prospectus
Supplement for a Series, with respect to Mortgage Assets comprising the Trust
Fund for a Multiple Class Series, an amount equal to, as of the date of such
determination, the lesser of (a) the present value of the stream of remaining
regularly Scheduled Payments of principal and interest on the Mortgage Assets
(less any Retained Interest) through the earlier of (1) the Final Scheduled
Distribution Date of the Class of such Series having the latest Final Scheduled
Distribution Date or (2) the Distribution Date next succeeding the latest
maturity date of such Mortgage Assets (after taking into account applicable
withdrawals from any funds or accounts and charges for servicing, insurance and
related matters, as specified in the related Prospectus Supplement), together
with Reinvestment Income thereon at the Assumed Reinvestment Rate for such
Series, from the Assumed Deposit Date to the next succeeding Distribution Date,
discounted from such Distribution Date to the date for which such determination
is made with the same frequency as payments are made on the Certificates of such
Series at the weighted average Certificate Rate for such Series; provided that
if any Class pays more frequently than another Class, such determination shall
be made as provided in the related Series Supplement and (b) the maximum Asset
Value specified in the related Prospectus Supplement.
"Assumed Deposit Date" means the date specified therefor in the Prospectus
Supplement for a Series, upon which distributions on the Mortgage Assets are
assumed to be received for purposes of calculating Reinvestment Income thereon.
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"Assumed Reinvestment Rate" means, with respect to a Series, the per annum
rate or rates specified in the related Prospectus Supplement for a particular
period or periods as the "Assumed Reinvestment Rate" for funds held in any fund
or account for the Series.
"Available Distribution Amount" means the amount in the Certificate Account
(including amounts deposited therein from any reserve fund or other fund or
account) eligible for distribution to Certificateholders on a Distribution Date.
"Bankruptcy Code" means the federal bankruptcy code, 11 United States Code
101 et seq., and regulations promulgated thereunder.
"Bi-Weekly Loan" means a Mortgage Loan which provides for payments of
principal and interest by the borrower once every two weeks.
"Business Day" means a day that, in the City of New York or in the city or
cities in which the corporate trust office of the Trustee are located, is
neither a legal holiday nor a day on which banking institutions are authorized
or obligated by law, regulation or executive order to be closed.
"Buy-Down Fund" means a custodial account, established by the Master
Servicer or the Servicer for a Buy-Down Loan, that meets the requirements set
forth herein.
"Buy-Down Loan" means a level payment Mortgage Loan for which funds have
been provided by a Person other than the mortgagor to reduce the mortgagor's
Scheduled Payment during the early years of such Mortgage Loan.
"Certificate Account" means, with respect to a Series, the account
established in the name of the Trustee for the deposit of remittances received
from the Master Servicer in respect of the Mortgage Assets in a Trust Fund.
"Certificate Guarantee Insurance" means an insurance policy issued by one or
more insurance companies which will guarantee timely distributions of interest
and full distributions of principal of a Series on the basis of a schedule of
principal distributions set forth in or determined in the manner specified in
the related Prospectus Supplement for the Series.
"Certificateholder" or "Holder" means the Person in whose name a Certificate
is registered in the Certificate register.
"Certificate Rate" means, with respect to any Multiple Class Series, the per
annum rate at which interest accrues on the principal balance of the
Certificates of such Series or a Class of such Series, which rate may be fixed
or variable, as specified in the related Prospectus Supplement.
"Certificates" means the Mortgage Pass-Through Certificates.
"Class" means a Class of Certificates of a Series.
"Closing Date" means, with respect to a Series, the date specified in the
related Prospectus Supplement as the date on which Certificates of such Series
are first issued.
"Code" means the Internal Revenue Code of 1986, as amended, and regulations
promulgated thereunder.
"Collection Account" means, with respect to a Series, the account
established in the name of the Master Servicer for the deposit by the Master
Servicer of payments received from the Mortgage Assets in a Trust Fund (or from
the Servicers, if any).
"Compound Interest Certificate" means any Certificate of a Multiple Class
Series on which interest accrues and is added to the principal balance of such
Certificate periodically, but with respect to which no interest or principal
will be payable except during the period or periods specified in the related
Prospectus Supplement.
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"Compound Value" means, with respect to a Class of Compound Interest
Certificates, as of any Determination Date, the original principal balance of
such Class, plus all accrued and unpaid interest, if any, previously added to
the principal balance thereof and reduced by any payments of principal
previously made on such Class of Compound Interest Certificates.
"Condominium" means a form of ownership of real property wherein each owner
is entitled to the exclusive ownership and possession of his or her individual
Condominium Unit and also owns a proportionate undivided interest in all parts
of the Condominium Building (other than the individual Condominium Units) and
all areas or facilities, if any, for the common use of the Condominium Units.
"Condominium Association" means the person(s) appointed or elected by the
Condominium Unit owners to govern the affairs of the Condominium.
"Condominium Building" means a multi-unit building or buildings, or a group
of buildings whether or not attached to each other, located on property subject
to Condominium ownership.
"Condominium Loan" means a Loan secured by a Mortgage on a Condominium Unit
(together with its appurtenant interest in the common elements).
"Condominium Unit" means an individual housing unit in a Condominium
Building.
"Conventional Loan" means a Loan that is not insured or guaranteed by the
FHA or the VA.
"Cooperative" means a corporation owned by tenant-stockholders who, through
the ownership of stock, shares or membership certificates in the corporation,
receive proprietary leases or occupancy agreements which confer exclusive rights
to occupy specific units.
"Cooperative Dwelling" means an individual housing unit in a building owned
by a cooperative.
"Cooperative Loan" means a housing loan made with respect to a Cooperative
Dwelling and secured by an assignment by the borrower (tenant-stockholder) of a
security interest in shares issued by the applicable Cooperative.
"Cut-Off Date" means the date designated in the Pooling and Servicing
Agreement for a Series on or before which amounts due and payable with respect
to a Mortgage Asset will not inure to the benefit of Certificateholders of the
Series.
"Deferred Interest" means excess interest resulting when the amount of
interest paid by a Mortgagor on a Negatively Amortizing ARM in any month is less
than the amount of interest accrued on the Stated Principal Balance thereof.
"Deficiency Event" means, with respect to a Multiple Class Series, the
inability of the Trustee to distribute to Holders of one or more Classes of
Certificates of the Series (other than any Class of Subordinate Certificates
prior to the time that the Available Subordination Amount is reduced to zero),
in accordance with the terms thereof and the related Pooling and Servicing
Agreement, any distribution of principal or interest thereon when and as
distributable due to insufficient funds for such purpose then held in the
related Trust Fund.
"Deleted Mortgage Loan" means a Mortgage Loan which is repurchased from the
Trust Fund by the Depositor or as to which a Qualifying Substitute Loan is
substituted therefor.
"Depositor" means DLJ Mortgage Acceptance Corp.
"Determination Date" means the day specified in the related Prospectus
Supplement as the day on which the Master Servicer calculates the amounts to be
distributed to Certificateholders on the next succeeding Distribution Date.
"Distribution Date" means, with respect to a Series or Class, each date
specified as a distribution date for such Series or Class in the related
Prospectus Supplement.
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"Due Date" means each date, as specified in the related Prospectus
Supplement for a Series, on which any payment of principal or interest is due
and payable to the Trustee or its nominee on any Mortgage Asset.
"Eligible Investments" means any one or more of the obligations or
securities described as such at "THE POOLING AND SERVICING
AGREEMENTS--Investment of Funds."
"Eligible Reserve Fund Investments" means Eligible Investments and any other
obligations or securities described as Eligible Reserve Fund Investments in the
Applicable Pooling and Servicing Agreement, as described in the related
Prospectus Supplement for a Series.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Account" means an account, established and maintained by the Master
Servicer or the Servicer for a Loan, into which payments by borrowers to pay
taxes, assessments, mortgage and hazard insurance premium and other comparable
items that are required to be paid to the mortgagee are deposited.
"Excess Cash Flow" means, with respect to a Multiple Class Series, the
amount, if any, by which (a) the cash flow received from the Mortgage Assets in
the related Trust Fund and deposited in the related Certificate Account
(excluding any Retained Interest but including transfers from any applicable
Reserve Fund), net of applicable servicing fees, guarantee fees, insurance
premiums and other administrative expenses, on the relevant determination date
exceeds (b) the sum of (1) the Minimum Principal Distribution Amount for such
Series on such Distribution Date and (2) the Accrual Distribution Amount, if
any, on such Distribution Date.
"FDIC" means the Federal Deposit Insurance Corporation.
"FHA" means the Federal Housing Administration, a division of HUD.
"FHA Loan" means a fixed-rate housing loan insured by the FHA.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"Final Scheduled Distribution Date" means, with respect to a Class of a
Series, the date after which no Certificates of such Class will remain
outstanding assuming timely payments or distributions are made on the Mortgage
Assets in the related Trust Fund.
"Floating Interest Certificate" means any Certificate of a Multiple Class
Series which accrues interest at a Floating Rate.
"Floating Interest Distribution Date" means the Distribution Date for a
Class of Floating Interest Certificates, which may be either more or less
frequent than the Distribution Date for other Classes of the Series.
"Floating Interest Period" means the period of time during which a given
Certificate Rate applies to a Class of Floating Interest Certificates.
"Floating Rate" means a Certificate Rate which is subject to change from
time to time.
"FNMA" means the Federal National Mortgage Association.
"GEM Loan" means, unless specified otherwise in the related Prospectus
Supplement for a Series, a fixed rate, fully amortizing mortgage loan providing
for monthly payments based on a 10-to 30-year amortization schedule, with
further provisions for scheduled annual payment increases for a number of years
with the full amount of such increases being applied to principal, and with
further provision for level payments thereafter.
"GNMA" means the Government National Mortgage Association.
"GPM Certificate" means a Certificate backed by GPM Loans.
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"GPM Fund" means a trust account established by the Master Servicer or the
Servicer of a GPM Loan into which funds sufficient to cover the amount by which
payments of principal and interest on such GPM Loan assumed in calculating
payments due on the Certificates of the related Multiple Class Series exceed
scheduled payments on such GPM Loan.
"GPM Loan" means a mortgage loan providing for graduated payments, having an
amortization schedule (a) requiring the mortgagor's monthly installments of
principal and interest to increase at a predetermined rate annually for a
predetermined period of time after which the monthly installments became fixed
for the remainder of the mortgage term, (b) providing for deferred payment of a
portion of the interest due monthly during such period of time and (c) providing
for recoupment of the interest deferred through negative amortization whereby
the difference between the scheduled payment of interest on the mortgage note
and the amount of interest actually accrued is added monthly to the outstanding
principal balance of the mortgage note.
"Guaranteed Investment Contract" means a guaranteed investment contract or
reinvestment agreement providing for the investment of funds held in a fund or
account, guaranteeing a minimum or a fixed rate of return on the investment of
moneys deposited therein.
"HUD" means the United States Department of Housing and Urban Development.
"Index" means the index applicable to any adjustments in the Mortgage Rates
of any ARMs included in the Mortgage Assets.
"Insurance Policies" means certain mortgage insurance, hazard insurance and
other insurance policies required to be maintained with respect to Loans.
"Insurance Proceeds" means amounts paid by the insurer under any of the
Insurance Policies covering any Loan or Mortgaged Property.
"Interest Accrual Period" means the period specified in the related
Prospectus Supplement for a Multiple Class Series, during which interest accrues
on the Certificates or a Class of Certificates of such Series with respect to
any Distribution Date or Special Distribution Date.
"Interest Weighted Certificates" means a Class of Certificates entitled to a
greater percentage of interest on the Loans underlying or comprising the
Mortgage Assets for the Series than the percentage of principal, if any, on such
Loans to which it is entitled.
"IRS" means the Internal Revenue Service.
"L/C Bank" means the issuer of a letter of credit.
"L/C Percentage" means the maximum liability of an L/C Bank under a letter
of credit, equal to the percentage specified in the related Prospectus
Supplement for a Series for which a letter of credit is issued of the initial
aggregate principal balance of the Loans in the related Trust Fund or one or
more Classes of Certificates of the Series.
"Letter of Credit" means an irrevocable letter of credit issued by the L/C
Bank to provide limited protection against certain losses relating to Loans, as
described in the related Prospectus Supplement for a Series.
"Lifetime Mortgage Rate Cap" means the maximum permissible Mortgage Rate
during the life of each ARM.
"Liquidation Proceeds" means amounts received by the Master Servicer or
Servicer in connection with the liquidation of a mortgage, net of liquidation
expenses.
"Loan" means a Mortgage Loan (including an interest therein) or a
Manufactured Home Loan (including an interest therein) that is deposited by the
Depositor into the Trust Fund for a Series.
"Loan-to-Value Ratio" means the ratio, expressed as a percentage, of the
principal amount of a Loan at the date of determination to the Appraised Value.
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"Manufactured Home" means a manufactured home within the meaning of 42
United States Code, Section 5402(6), which defines a "manufactured home" as "a
structure, transportable in one or more sections, which in the traveling mode,
is eight body feet or more in width or forty body feet or more in length, or,
when erected on site, is three hundred twenty or more square feet, and which is
built on a permanent chassis and designed to be used as a dwelling with or
without a permanent foundation when connected to the required utilities, and
includes the plumbing, heating, air-conditioning, and electrical systems
contained therein; except that such term shall include any structure which meets
all the requirements of [this] paragraph except the size requirements and with
respect to which the manufacturer voluntarily files a certification required by
the Secretary of Housing and Urban Development and complies with the standards
established under [this] chapter."
"Manufactured Home Loan" means a loan secured by a Manufactured Home.
"Master Servicer" means, with respect to a Series secured by Loans, the
Person, if any, designated in the related Prospectus Supplement to manage and
supervise the administration and servicing by the Servicers of the Loans
comprising or underlying the Mortgage Assets for that Series, or the successors
or assigns of such Person.
"Maximum Floating Rate" means, as to any Multiple Class Series, the per
annum interest rate cap specified for any Floating Rate Certificates of such
Series in the related Prospectus Supplement.
"Minimum Floating Rate" means, as to any Multiple Class Series, the per
annum interest rate floor specified for any Floating Rate Certificate of such
Series in the related Prospectus Supplement.
"Minimum Principal Distribution Amount" means, with respect to a
Distribution Date for a Multi-Class Series, the amount, if any, by which (a) the
outstanding principal balance of the Certificates of such Series (before giving
effect to any payment of principal on that Distribution Date) exceeds (b) the
aggregate Asset Value of the Mortgage Assets for the Series as of that
Distribution Date.
"Minimum Mortgage Rate" means the lifetime minimum Mortgage Rate during the
life of each ARM.
"Mortgage" means the mortgage, deed of trust or other instrument securing a
Mortgage Note.
"Mortgage Assets" means the Private Mortgage-Backed Securities, Agency
Securities or Loans, as the case may be, which are included in the Trust Fund
for such Series. A Mortgage Asset refers to a specific Private Mortgage-Backed
Security, Agency Security or Loan, as the case may be.
"Mortgage Loan" means a mortgage loan (including an interest therein)
secured by Mortgaged Property including Cooperative Loans and Condominium Loans.
"Mortgage Note" means the note or other evidence of indebtedness of a
Mortgagor under the Mortgage Loan.
"Mortgage Rate" means, unless otherwise indicated herein or in the
Prospectus Supplement, the interest rate borne by each Loan.
"Mortgaged Property" means the real property securing a Mortgage.
"Multifamily Property" means any property securing a Loan consisting of
multifamily residential rental property or cooperatively owned multifamily
property consisting of five or more dwelling units.
"Multiple Class Series" means a Series of Certificates that may include,
Floating Interest Certificates, Compound Interest Certificates and Planned
Amortization Certificates, and/or Subordinate and Senior Classes embodying a
subordination feature which protects the Senior Class or Classes in the event of
failure of timely payment of Mortgage Assets.
"1986 Act" means the Tax Reform Act of 1986.
"Negatively Amortizing ARMs" means ARMs which provide for limitations on
changes in the Scheduled Payment which can result in Scheduled Payments which
are greater or less than the amount necessary to amortize such ARM by its stated
maturity at the Mortgage Rate in effect in any particular month.
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"Participation Certificate" means a certificate evidencing a participation
interest in a pool of Loans.
"Pass-Through Rate" means the rate of interest paid to the
Certificateholders in respect of the Mortgage Assets.
"Percentage Interest" means, with respect to a Certificate, the proportion
(expressed as a percentage) of the percentage amounts of all of the Certificates
in the related Class represented by such Certificate, as specified in the
related Prospectus Supplement.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust (including any beneficiary thereof),
unincorporated organization, or government or any agency or political
subdivision thereof.
"PMBS Agreement" means the pooling and servicing agreement, indenture, trust
agreement or similar agreement pursuant to which a Private Mortgaged-Backed
Security is issued.
"PMBS Issuer" means, with respect to Private Mortgage-Backed Securities, the
depositor or seller/ servicer under a PMBS Agreement.
"PMBS Servicer" means the servicer of the housing loans underlying a Private
Mortgage-Backed Security.
"PMBS Trustee" means the trustee designated under a PMBS Agreement.
"Pooling and Servicing Agreement" means the agreement relating to a Series
among the Depositor, the Master Servicer and the Trustee.
"Prepayment Period" means with respect to any Distribution Date, the period
specified in the related Prospectus Supplement for a Series.
"Principal Distribution Amount" means, unless specified otherwise in the
Prospectus Supplement for a Multiple Class Series, the sum of (a) the Accrual
Distribution Amount, if any, (b) the Minimum Principal Distribution Amount and
(c) the percentage, if any, of Excess Cash Flow specified in the related
Prospectus Supplement.
"Principal Weighted Certificates" means a Class of Certificates entitled to
a greater percentage of principal on the Loans underlying or comprising the
Mortgage Assets in the Trust Fund for the related Series than the percentage of
interest to which it is entitled.
"Private Mortgage-Backed Security" means a mortgage participation or
pass-through certificate representing a fractional, undivided interest in (i)
Loans, (ii) collateralized mortgage obligations secured by Loans or (iii) Agency
Securities.
"Proceeding" means any suit in equity, action at law or other judicial or
administrative proceeding.
"Proposed Regulations" means the proposed Treasury regulations issued under
Section 1271-1273 and 1275 of the Code.
"Qualified Insurer" means a mortgage guarantee or insurance company duly
qualified as such under the laws of the states in which the Mortgaged Properties
are located, duly authorized and licensed in such states to transact the
applicable insurance business and to write the insurance provided.
"Rating Agency" means a nationally recognized statistical rating
organization.
"RV Certificate" or "Reduced Volatility Certificates" means a Class of
Certificates on which minimum payments of principal are made in accordance with
a schedule specified in the Prospectus Supplement, the date specified in the
related Prospectus Supplement or the date on which the principal of all
Certificates of the Series having an earlier Final Scheduled Distribution Date
have been paid in full.
"Regular Interest" means a regular interest in a REMIC as described herein
under "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Tax Status as a REMIC."
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"Reinvestment Income" means any interest or other earnings on funds or
accounts that are part of the Trust Fund for a Series.
"REMIC" means a real estate mortgage investment conduit under Section 860D
of the Code.
"REMIC Administrator" means the Person, if any, specified in the related
Prospectus Supplement for a Series for which a REMIC election is made, to serve
as administrator of the Series.
"Remittance Date" means the calendar day or days of each month, as specified
in the related Prospectus Supplement for a Series, on which the Servicer is
required to withdraw funds from the related Servicer Account for remittance to
the Master Servicer.
"REO Property" means real property which secured a defaulted Loan which has
been acquired upon foreclosure, deed in lieu of foreclosure or repossession.
"Reserve Fund" means, with respect to a Series, any Reserve Fund established
pursuant to the Pooling and Servicing Agreement.
"Residual Interest" means a residual interest in a REMIC as described herein
under "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS--Tax Status as a REMIC."
"Retained Interest" means, with respect to a Mortgage Asset, the amount or
percentage specified in the related Prospectus Supplement which is not sold by
the Depositor or seller of the Mortgage Asset and, therefore, is not included in
the Trust Fund for the related Series.
"Scheduled Payments" means the scheduled payments of principal and interest
to be made by the borrower on a Mortgage Loan in accordance with the terms of
the related Mortgage Note.
"Senior Certificateholder" means the Holder of a Senior Certificate.
"Senior Certificates" means a Class of Certificates as to which the Holders'
rights to receive distributions of principal and interest are senior to the
rights of Holders of Subordinate Certificates, to the extent specified in the
related Prospectus Supplement.
"Servicer" means the entity which has primary liability for servicing Loans
if other than the Master Servicer.
"Servicer Account" means an account established by a Servicer (other than
the Master Servicer) who is directly servicing Loans, into which such Servicer
will be required to deposit all receipts received by it with respect to the
Mortgage Assets serviced by such Servicer.
"Single Family Property" means property securing a Loan consisting of one-to
four-family attached or detached residential housing, including Cooperative
Dwellings.
"Special Distribution" means, with respect to a Multiple Class Series, a
distribution (other than a regular distribution on a Distribution Date) made on
account of particular circumstances specified herein.
"Special Distribution Date" means, with respect to Multiple Class Series,
the date each month (other than any month in which a Distribution Date occurs)
on which Special Distributions may be made on Certificates of that Series
pursuant to the related Pooling and Servicing Agreement; such date shall be the
same day of the month as the day on which Distribution Dates for the
Certificates of that Series occur.
"Subordinate Certificateholder" means a Holder of a Subordinate Certificate.
"Subordinate Certificates" means a Class of Certificates as to which the
rights of Holders to receive distributions of principal and interest are
subordinated to the rights of Holders of Senior Certificates, to the extent and
under the circumstances specified in the related Prospectus Supplement.
"Subordinated Amount" means the amount, if any, specified in the related
Prospectus Supplement for a Series with a Class of Subordinated Certificates,
that the Subordinate Certificates are subordinated to the Senior Certificates of
the same Series.
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"Subordination Reserve Fund" means the subordination reserve fund, if any,
for a Series with a Class of Subordinate Certificates, established pursuant to
the related Pooling and Servicing Agreement.
"Subsidy Account" means a custodial account established by the Master
Servicer or the Servicer for a Loan into which subsidy funds contributed by the
seller of the property securing the Loan (or by another party) necessary to
maintain the scheduled level of payments due on the Loan are deposited.
"Trustee" means the trustee under a Pooling and Servicing Agreement, and its
successors.
"Trust Fund" means all property and assets held for the benefit of the
Certificateholders by the Trustee under the Pooling and Servicing Agreement for
a Series of Certificates including, without limitation, the Mortgage Assets
(except any Retained Interest), all amounts in the Certificate Account,
Collection Account or Servicer Accounts, distributions on the Mortgage Assets
(net of servicing fees), and reinvestment earnings on such net distributions and
amounts deposited in any reserve fund and the proceeds of any insurance policies
required to be maintained with respect to the Loans.
"UCC" means the Uniform Commercial Code.
"VA" means the Department of Veterans Affairs.
"VA Loans" means housing loans partially guaranteed by the VA.
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DLJ MORTGAGE ACCEPTANCE CORP.
DEPOSITOR
$82,959,390
MORTGAGE PASS-THROUGH CERTIFICATES
SERIES 1995-Q8
$ 0 CLASS S CERTIFICATES, VARIABLE RATE*
$ 30,000,000 CLASS A-1 CERTIFICATES, 7.250%
$ 26,500,000 CLASS A-2 CERTIFICATES, 7.250%
$ 15,816,992 CLASS A-3 CERTIFICATES, 7.250%
$ 5,534,047 CLASS M CERTIFICATES, 7.250%
$ 5,108,351 CLASS B-1 CERTIFICATES, 7.250%
*Based on the Notional Amount, as described herein.
___________
PROSPECTUS SUPPLEMENT
___________
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
NOVEMBER 20, 1995
